Bases of Accounting
Cash Basis vs Accrual Basis
When to record income & expense — and which basis shows True & Fair profit?
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Bases of Accounting — Day 8
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Cash Basis vs Accrual Basis — when to record income & expense, with full numerical: Net Profit ₹1,50,000 vs ₹3,00,000. Day 8 of 50 Days Accounting Challenge 💡
▶ Watch Reel on InstagramDay 8: Bases of Accounting
In Day 7 we learned the rules (Accounting Standards). Today in Day 8, we learn one of the most fundamental questions in accounting: When do we record income and expenses? The answer depends on which “basis” you follow — Cash Basis or Accrual Basis. This choice directly impacts how much profit your books show. Let’s understand both with a complete numerical example! 💡
⚖️ The Two Bases of Accounting
Jab hum sirf “Cash aane ya jaane” par entry karte hain. Iska matlab — agar paisa actually haath mein aaya tabhi income record karenge, aur paisa haath se gaya tabhi expense record karenge.
Income ya expense ko us time record karte hain jab wo earn ya incur hota hai — chahe payment baad mein aaye ya jaaye. Cash movement se koi fark nahi padta.
📌 Example: December mein service di, payment January mein aayegi — Accrual Basis mein December mein hi income record hogi. Cash Basis mein January mein.
⏱️ When Does Entry Happen?
💵 Cash Basis — Entry Timing
📋 Accrual Basis — Entry Timing
Key Insight — Why Accrual is Better
Cash Basis ignores credit sales, outstanding expenses, and prepaid amounts — giving a distorted picture of profit. Accrual Basis captures all economic activity of the period, making it the standard used in financial reporting worldwide. India’s Companies Act mandates Accrual Basis for companies.
🔢 Numerical Example — Same Data, Different Results
📌 Given Information
💰 Cash Sales
📄 Credit Sales
💸 Total Expenses (for the year)
⏳ Outstanding Expenses (OIs)
💵 Cash Basis
Sirf cash transactions count
📋 Accrual Basis
All earned income & incurred expenses
Why Cash Basis shows Lower Profit here
Cash Basis ignores the ₹2,00,000 credit sales (income not received yet) — reducing income from ₹6L to ₹4L. But it also ignores ₹50,000 outstanding expenses (not yet paid) — reducing expense from ₹3L to ₹2.5L. Net effect: profit is ₹1,50,000 instead of ₹3,00,000. Neither is “wrong” — but Accrual shows the true picture of what was earned & spent in the period.
Connection with Previous Days
Day 3: Revenue Receipt vs Capital Receipt — in Accrual Basis, credit sales are Revenue Receipts even before cash comes in.
Day 5: Debtors (Trade Receivables) = Credit sales under Accrual Basis that are yet to be collected.
Day 7: Accounting Standards mandate Accrual Basis — AS 1 (Disclosure of Accounting Policies) requires stating which basis is followed.
📊 Quick Summary — Cash Basis vs Accrual Basis
| Feature | Cash Basis | Accrual Basis |
|---|---|---|
| Entry Trigger | Jab cash aaya / gaya | Jab earn hua / incur hua |
| Income Recorded When | Cash haath mein mila | Service di / goods becha — cash baad mein aaye |
| Expense Recorded When | Cash haath se gaya | Expense laga — cash baad mein jaaye |
| Credit Sales | Ignored (not recorded) | Recorded as income immediately |
| Outstanding Expenses | Ignored (not recorded) | Recorded as expense in the period |
| Shows True Profit? | ❌ No — incomplete picture | ✅ Yes — True & Fair financial position |
| In This Example | Net Profit = ₹1,50,000 | Net Profit = ₹3,00,000 |
| Used By | Small businesses, individuals | Companies (mandated by law), most businesses |
