There
are two basis of accounting. One is accrued basis and another one is cash
basis. They are otherwise called merchandise basis and cash basis of
accounting.
Accrual Basis
Revenue,
expenses, and transactions are recorded in books of accounts, when they arise
or accrue under accrual basis. It follows accrual concept to record
transactions in books of accounts. The payment or receipt of cash may have done
or not but revenue, expenses, and transactions are recorded in the books of
accounts, when it becomes due. “Time never waits for human” as like the sentence
revenue, expenses, transactions never wait for its cash consideration. When
they become due, it is recorded in the books of accounts. Outstanding expenses,
prepaid expenses, accrued income, income received in advance accounts are
maintained in accrual basis of accounting only.
Under Companies Act, 1956, all companies
must prepare its accounts under accrual basis of accounting.
Profit = Accrued
incomes – accrued expenses
Illustration
Purchase has been made for Rs.25000/- in
which cash payment has been made for Rs.20000/- only. Actual purchase is
recorded as Rs.25000/- because its accrued for Rs.25000/- even though payment
has been made for Rs.20000/- only.
Cash Basis
Revenue,
expenses, transactions are recorded in the books of accounts, when cash payment
or receipt is made for such accounts. If cash received for revenue or cash paid
for expenses, they are recorded in the books of accounts. “Sun is the center of
our solar system” is the universal truth.
“Cash is the center of cash basis system” is the cash basis truth.
Profit = Cash
Received – Cash paid
Illustration
Rs.20000/- is accrued
salary payable to employees in which Rs.10000/- has been paid. The salary
expenses are only for Rs.10000/- because cash payment made for only Rs.10000/-
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