Bases of Accounting

BASES OF ACCOUNTING

One of the main objectives of accounting is to ascertain the profit or loss of a business enterprise at the end of an accounting period. There are three bases of ascertaining the profit or loss:

1.     Cash Basis

2.     Accrual Basis

3.     Mixed or Hybrid Basis

Cash Basis of Accounting: Under this basis, incomes are not recorded unless they are received in cash. Similarly, expenses are recorded only when they are paid in cash. That means credit transactions are not recorded at all and are ignored till cash is actually received or paid for them. Thus Profit is merely the excess of actual cash receipts over actual cash payments. Income or Profit is calculated with the help of a Receipts and Payments A/c. This basis is useful for professional people like Lawyers, Doctors etc.

Accrual Basis of Accounting:  Under this basis, incomes are recorded when they are earned or accrued, irrespective of the fact whether cash is received or not. Similarly, expenses are recorded when they are incurred or become due and not when the cash is paid for them. Hence, Profit or Loss of a particular period is the result of matching of the revenues earned and expenses incurred during the period. Therefore, outstanding expenses, prepaid expenses, accrued incomes, incomes received in advance etc. are considered for the preparation of Financial Statements. All companies are required to maintain their accounts according to this basis of accounting under the Companies Act, 1956.

Hybrid or Mixed Basis of Accounting: This basis of accounting is the mixture of cash basis and accrual basis. Under this system, revenues and assets are recorded on cash basis whereas expenses and liabilities are recorded on accrual basis. Usually professional people such as Doctors, Lawyers etc. adopt this method and prepare Receipt and Expenditure A/c to ascertain their net income.