Cash Basis Vs Accrual Basis of Accounting – The difference

Cash Basis Vs Accrual Basis of Accounting, We all have heard about the cash basis & accrual basis of Accounting, but here we will do a detailed analysis of these two forms of Accounting. We will study about what these two forms of Accounting are, what are the differences between them & when & where are these generally followed. Difference between Cash Basis and Accrual Basis of Accounting. Now you can scroll scroll down below n check more details regarding Cash Basis Vs Accrual Basis of Accounting

Cash Basis Vs Accrual Basis of Accounting

Let us start with understanding what these two forms of Accounting are:

1. Accrual basis of accounting:

• In most of the places, we find that The Accrual Basis of Accounting is the more commonly followed Accounting System.
• Accrual Basis of Accounting is a method of recording transactions by which revenue, costs, assets and liabilities are reflected in the accounts for the period in which they accrue.
• This basis includes consideration relating to deferrals, allocations, depreciation and amortization.
• This basis is also referred to as the mercantile basis of accounting.
• Under The Companies Act 2013, all the companies are required to maintain their books of accounts according to the accrual basis of accounting.

2. Cash basis of accounting:

• There are certain entities which account income & expense in the period in which there is an actual inflow or outflow of funds & not when the right to receive or pay the same arises. Such an entity is said to follow the Cash System of Accounting.
• Cash Basis of Accounting is a method of recording transactions by which revenues, costs, assets and liabilities are reflected in the accounts for the period in which actual receipts or actual payments are made.

Must Read – Accounting Entries for Service Tax, VAT and TDS

What is the difference between these two systems?

Here is a list of various differences between the two forms:

Particulars	Accrual Basis of Accounting	Cash Basis of Accounting
When to be Accounted?	Under this system, when the right to receive a particular income is established or the duty to pay for a particular expense is certain, it is accounted in the period for which they relate.	Even if the income or the expense do not relate to the current period, still they can be provided for on Receipt/ Payment Basis.
Recognition under the Companies Act, 2013	This basis is recognized under the Companies Act, 2013.	This basis is not recognized under the Companies Act, 2013.
Income & Expense Treatment in the Books of Accounts	Under this, there may be prepaid/ outstanding expenses and accrued/ unaccrued incomes in the Balance Sheet.	Under this, there is no prepaid/outstanding expenses or accrued/ unaccrued incomes
Higher/lower Income in case of prepaid expenses and accrued income	Income Statement will show a relatively higher income	Income Statement will show lower income.
Higher/lower income incase of outstanding expenses and unaccrued income	Income Statement will show a relatively lower income.	Income Statement will show higher income.
Profit & Loss Statement	Here, the Profit & Loss statement is generally the Income & Expenditure Account.	In this case, the Profit & Loss Statement is the Receipt & Payment Account.
Which form represents a true picture of the entity?	Accrual Basis is considered to be reflect a better picture of the Income & Expenditure of the entity as compared to the Cash System of Accounting.

Recommended Articles

• Basic Principles and Golden Rules of Accounting
• What is an Account & Types of Accounts
• Accounting Standard 13 Accounting for investments
• What Is Debit Note and Credit Note
• Fund Flow Statement
• Accounting Rate of Return / Average Rate of Return