Chapt

er-
4

BasesofAccount
ing

Ther
ear
etwobasesofaccount
ing

1.CashBasi sofAccounting-Itisasy st
em i nwhichTr ansact
ionsar
e
recordedwhencashi stransacted,whetherr
eceivedorpaid.I
tmeans
revenueisr ecogni
sed onr eceiptofcash.Likewiseexpensesare
recordedasi ncurr
edwhent heyhav ebeenpai d.Undercashbasis
adjustmentsli
keoutst
anding/pr epai
dexpensesar enotconsi
dered.

Adv
ant
ages:

(
i) I
tisasi
mpl
esy
stem asadj
ust
ment
sar
enotr
equi
red.

(
ii
) I
tismoreobj
ect
iveasv
eryf
ew est
imat
esand Judgment
s ar
e
made.

(
ii
i) Iti
ssui
tabl
eforthoseent
erpr
iseswher
emostoft
het
ransact
ions
areoncashbasi
s.

Di
sadv
ant
ages;

(
i) I
tdoesnotgi veatr
ueandf
airv
iew ofpr
ofi
torl
ossandt
he
f
inanci
alposi
ti
on.

(
ii
) I
tdoesnotf
oll
owt
hemat
chi
ngpr
inci
ple.

(
ii
i) Thi
ssyst
em doesnotdi
ff
erent
iat
ebet
weencapi
talandr
evenue
i
tems.

2.Accr
ualBasi
sofAccounting-
ItmeansThet r
ansact
ionisrecordedatthe
ti
mewheni tisenter
edi nt
oandnotwhent hesettl
ementtakesplace.In
otherwordsunderthi
ssy stem Account
ing ent r
iesarerecorded when
i
ncomes are earned and expenses ar
ei ncurr
ed irr
especti
ve ofcash
recei
vedorpai
d.

Adv
ant
ages:

1
(
i) I
tgivesatr
ueandf
airv
iew ofpr
ofi
torl
ossandt
hef
inanci
al
posi
ti
on.

(
ii
) Itshowscompletepictureoffi
nanci
alt
ransact
ionsasitaccounts
adjust
mentslike outstandi
ng/pr
epai
d expenses and accrued/
unearnedi
ncome.

(
ii
i) I
tismor
esci
ent
if
iccompar
edt
ocashbasi
sofaccount
ing.

Di
sadv
ant
ages:

(
i) I
tismor
ecompl
i
cat
edt
hancashbasi
sofaccount
ing.

(
ii
) Theaccount
ingpr
ocessi
stooel
abor
ate.

(
ii
i) Aquickapprai
salofthepr
ofi
t/Lossi
snotpossi
blebecausemany
adj
ustmentsarerequir
edtodetermi
nethetr
uefinanci
alposi
ti
on
oft
hebusiness.

Di
ff
erencebet
weenAccr
ual
andcashbasi
sofaccount
ing

Basi
s Accrualbasi
sof Cashbasi
sofAccount
ing
accounti
ng

1.
Adj
ust
ment
s Adjustment
s ar
e Adj
ustment
s are not
consider
ed/account
ed. consider
ed/account
ed.

2.
Natur
e of Bot h cash and cr
edit Cash t ransact
ions ar
e
Tr
ansact
ion transact
ions ar
er ecor
ded
recorded.

3.
Prof
it
/Loss Correct profi
t/
Loss i
s Correctprof
it/
Lossi
s not
ascertai
ned. ascertai
ned.

4.
Legal Itis recogni
sed by Itis not r
ecogni
sed by
posi
ti
on companyact2013. companyact2013.

5.
Accept
abi
l
ityI
tismor eaccept
ableinIti s not accept
abl
e i n
busi
ness as it shows busi
ness as i
t does not

2
 corr
ect i ncome and show t
he r
equi
red
expensesbesidesasset
sinf
ormat
ion.
andli
abil
it
ies.

6.
Rel
i
abi
l
ity I
tismor
erel
i
abl
e. I
tisl
essRel
i
abl
e.

(
TheEnd)