Basis of Accounting – Cash Basis and Accrual Basis

It is the duty of accountant to calculate the correct net profit or net loss of the business. For this, accounting will use any one of following basis of accounting. Accountant cannot use both basis together.

1. Cash Basis of Accounting

As per this of accounting, accountant will record any income when it will receive in cash or through bank. Accountant will also record any expense when it will pay in cash or through cheque. We will not record any income receivable or expense payable. When income receivable will receive in cash, we will record. When expense payable will pay in cash, we will record it. Net profit or Net Loss through this, will be the cash net profit or cash net profit because there will not any entry of credit sale, credit purchase and income receivable and expense payable in it. We can calculate this cash net profit or net loss through making of receipt and payment account. In this account, we include both revenue and capital expenses which we have paid in cash. We also include both revenue and capital incomes when we will receive in cash. It means, expense on buying of any fixed asset and buying of stock will include in the payment side. We also include income from sale of fixed asset and income from sales  in receipt side which we receive in cash. As per company law 1956, to calculate the net profit or net loss on the basis of cash is not recognized.

2. Accrual Basis of Accounting

As per accrual basis of accounting, we record both incomes which are received in cash or not but these  must be earned by businessman. All the expenses which are paid in cash or not but these must be due. Profit and lossaccount is made on this basis of accounting. We record both cash and credit revenue nature expenses and revenue nature incomes.

In the expense side, we include cash purchase, credit purchase, cash expenses and expenses payables. In the income side, we include cash sale, credit sale, cash incomes and income receivables. Net profit or net loss is calculated by comparing both income side and expense side. Some incomes which are in cash but these incomes are in advance. We will not include such incomes because these incomes are cash but not earned. If there are advance cash incomes in total incomes, we will deduct for calculating the net profit or net loss under this basis of accounting. Like this, if there are any advance payment which is paid but not due, we will deduct it from total expense. As per company law 1956, all company must follow the accrual basis of accounting.