Basis of Accounting

  • Cash Basis of Accounting is a system of accounting in which entries in the book of accounts are recorded only when cash is received or paid. Credit transactions are not recorded till cash is actually received or paid for them. Income or profit is calculated with the help of a Receipts and Payments Account.
  • Advantages of cash basis of accounting are that it is simple to use and does not require technical knowledge of accountancy, it does not require the use of estimates and personal judgments, suitable for firms having most of the transactions in cash, etc.
  • Disadvantages of cash basis of accounting are that it does not give a true and fair view of profit and loss and the financial position of the business enterprise; it does not follow the matching principle of accounting and is not recognised by the Companies Act, 2013.
  • Inaccrual basis of accounting, income if earned or accrued during the period whether received or not is included in the income of that period. Expenses are recorded when they are incurred or become due and not when the cash is paid for them.
  • Accrual basis of accounting is based on the two basic accounting principles, viz., revenue recognition and matching principle. Accrual basis of accounting is scientific and rational basis of accounting, hence discloses correct profit or loss.
  • It follows the matching principle of Accounting. Accrual basis of accounting can be (or in fact is) used in all type of business enterprises.
  • Disadvantages of Accrual Basis of Accounting are that this method is not as simple as Cash basis of accounting and the accounting process is too elaborate etc. Cash basis of accounting can be differentiated from accrual basis of accounting on the basis of several points like recording of cash and credit transactions, recognised by law or not, requirement of adjustment for certain items, suitability etc.
  • Hybrid Basis of Accounting is a mixed basis of accounting. It is a mixture of cash and accrual basis of accounting.

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