Cash and Accrual Base Accounting

If you are new to this blog you have to read below these 3 posts before further reading.

     1.     What is Accounting

     2.     Standard definition of Accounting

     3.     Type / Nature of Accounts

There are two approaches to record business transaction one is Cash Base Accounting and other is Accrual.

Cash Base Accounting refer to the recording approach where we only record transaction when actual cash in or out from the business. To understand this approach suppose you sell some products to customer for Rs-10,000/-, at March 15, 2019. Customer will pay this amount in two installments after every 15 days. You received Rs-5,000/- the first payment at 30^th, March 2019. When you conclude the books of account at the end March, 2019, following balances will appear in your book of Accounts:

Income 5,000

Cash 5,000

In Cash Base Accounting there is no Receivable and Payable Accounts in Accounting Books.

In Accrual Base Accounting we record transaction at the time of Income earned and expenses occurred, regardless of actually money received or paid. Let’s see the above example again in Accrual Base Accounting approach. The books of Accounts will show the following balances:

Income 10,000

Cash 5,000

Account Receivable 5,000/-

In accounting we will follow the Accrual Base Accounting Approach.

Why we will follow Accrual Base Accounting?

Accrual base accounting gives us the more precise view of business profit and loss, because business selling and purchasing also involve the credit transactions. When we follow the cash base this transaction not recorded and misstated the balances of profit and loss account.

Summary:

Basis of Accounting	Point of Understanding
Cash Base Accounting	Transactions record when actual Cash In or Out from Business.
Accrual Base Accounting	Transactions record when Revenues earned and expenses occurred.