Basis for Accounting

There is how many elementary concept in accountancy you which must comprehend, because will very assistive you in course of accounting system later. Among other things as follows.

1. Cash Basis Accounting: All incomes are considered earned and all expenses considered expended only when they are actually received or incurred. The difference between total income and expenses represent profit. No adjustments are needed for outstanding and prepaid expenses. Similarly, accrued incomes and incomes received in advance are also not adjusted. Thus, income is recognized only when cash is received. Expense is recognized only when cash is paid. Government system of accounting is mostly on cash basis. Professionals like doctors, lawyers, brokers also prefer cash basis accounting.
2. Accrual Basis Accounting: This is also known as ‘Mercantile Basis Accounting’. In this system, accounting entries are made on the basis of amounts having become due for payment or receipt. Incomes are credited to the period in which they are earned, whether cash is received or not. Similarly, expenses and losses are debited to the period in which they are incurred, whether cash is paid or notThe profit or loss for any accounting period is the difference between the aggregates of incomes earned and expenses incurred, for that period, irrespective of cash payments or receipts. All outstanding expenses and prepaid expenses, accrued incomes and incomes received in advance are adjusted while finalizing the accounts for a relevant period. This method was initially followed by merchants, trade and industry and was therefore known as the ‘Mercantile System’.

3. Mixed or Hybrid Basis: As the name suggests, certain items are recorded on a Cash basis and others on accrual basis. For example, a trader may choose to record certain categories of sales on a Cash basis while following the Accrual system for everything else. However, the treatment of the items on Cash basis and Accrual basis must be decided upfront and followed on a strict basis.

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