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Basis of Accounting

The document compares and contrasts the cash basis of accounting and the accrual basis of accounting. Under the cash basis, entries are recorded when cash is received or paid, regardless of when the transaction occurred. Under the accrual basis, revenues and expenses are recorded when incurred, rather than when cash is paid or received. The accrual basis provides a more accurate matching of revenues and expenses to the periods in which they occur. Examples are provided to illustrate the difference between calculating profit under each method.

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Aarush Gupta
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55 views5 pages

Basis of Accounting

The document compares and contrasts the cash basis of accounting and the accrual basis of accounting. Under the cash basis, entries are recorded when cash is received or paid, regardless of when the transaction occurred. Under the accrual basis, revenues and expenses are recorded when incurred, rather than when cash is paid or received. The accrual basis provides a more accurate matching of revenues and expenses to the periods in which they occur. Examples are provided to illustrate the difference between calculating profit under each method.

Uploaded by

Aarush Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Cash Basis of Accounting

and
Accrual Basis of Accounting
Under the Cash basis

Entries in the book of accounts are made when cash is received or paid and not
when the receipt or payment becomes due.

Let us say, for example,


 if office rent for the month of December 2019, is paid in January 2020, it would
be recorded in the book of account only in January 2020.
 Similarly sale of goods on credit in the month of January 2015 would not be
recorded in January but say in April, when the payment for the same is
received.

This system is incompatible with the matching principle, which states that
the revenue of a period is matched with the cost of the same period.

Though simple, this method is inappropriate for most organizations


Under the Accrual basis

Revenues and costs are recognised in the period in which they occur rather when
they are paid.

A distinction is made between the receipt of cash and the right to receive cash and
payment of cash and legal obligation to pay cash.

Under this system, the monetary effect of a transaction is taken into account in the
period in which they are earned/incurred rather than in the period in which cash is
actually received/paid by the enterprise.

This is a more appropriate basis for the calculation of profits as expenses are
matched against revenue earned in relation thereto.
EXAMPLE
During the accounting year 2019-20 you are provided with the following information
• Total Sales ` 7,00,000 (out of which cash sales were ` 4,50,000)
• Total Expenses ` 5,00,000 (out of which ` 2,10,000 are still outstanding)
Calculate Profit for the year ended 31.3.2020 as per
1. Cash Basis of Accounting
2. Accrual basis of Accounting

Cash Basis of Accounting Accrual Basis of Accounting


Revenue = `4,50,000 Revenue = ` 7,00,000
Expense = ` 5,00,000 – 2,10,000 Expense = ` 5,00,000
So Profit = Revenue – Expense So Profit = Revenue – Expense
= 4,50,000 – 2,90,000 = 7,00,000 – 5,00,000
= ` 1,60,000 = ` 2,00,000
EXAMPLE
During the accounting year 2019-20 you are provided with the following information
• Total Revenue Earned ` 6,90,000 (out of which ` 4,70,000 were received in cash)
• Total Expenses Paid ` 4,40,000 (out of which `20,000 relate to 2020-21)
• The expenses of `30,000 are still outstanding
Calculate Profit for the year ended 31.3.2020 as per
1. Cash Basis of Accounting
2. Accrual basis of Accounting

Cash Basis of Accounting Accrual Basis of Accounting


Revenue = `4,70,000 Revenue = 6,90,000
Expense = ` 4,40,000 Expense = 4,40,000 - 20,000 + 30,000
So Profit = Revenue – Expense So Profit = Revenue – Expense
= 4,70,000 – 4,40,000 = 6,90,000 – 4,50,000
= `30,000 = ` 2,40,000

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