4. Basis of Accounting

Basis of Accounting:1. Cash Basis of Accounting 2. Accrual Basis of Accounting

 Cash Basis of Accounting:

 Under this method only cash transactions are recorded in the books of accounts. Entries are made only if cash is received or paid.

Accrual Basis of Accounting:

Under this method all transactions are recorded in the books of accounts (Cash and Non-Cash). Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded in the books of accounts.

Source of Documents

All financial transactions are recorded in the books of accounts on the basis of source document or on the basis of some evidence. Source documents are helpful to prove that a transaction is actually made or not.

Cash Memo: Cash Memo is A bill of sale, it is a written document by a 'seller' to a purchaser,

reporting that on a specific date, a particular sum of money or other "value received",

Invoice or Bill : When goods are sold on credit, An invoice or bill is issued on the name of the buyer, indicating the products, quantities, and agreed prices for products or services, the seller has provided the buyer.

Receipt : A receipt is a written acknowledgment that a specified a sum of money has been received from the customer as an exchange for goods or services. The receipt is evidence of purchase of the goods or service.

Pay-in-Slip : Pay in slip is a form that is filled when the money is deposited by a customer in to his bank account.

Cheque: A cheque is a document (usually a piece of paper) that orders a payment of money. The

person writing the cheque, the drawer, usually has a account where the money is deposited.

Debit Note : When we return goods back to the supplier, a debit not is made on the name of

supplier, it means his account his debited. Debit Note proves that a debit entry has been made to a

debtor's or creditor's account.

Credit Note: When we receive goods back from our customer, then a credit not is made on the

name of the customer, it means customer’s account is credited.

Meaning of Voucher : Voucher is the documentary proof or evidence in support of a transaction.

For example when we purchase goods for cash, we get cash memo, and when we purchase goods

on credit, we get an invoice, when we make payment we get Receipt.

Types of Vouchers

There are two types of vouchers a) Cash Voucher b) Non Cash Voucher

Cash Vouchers: Cash vouchers are prepared for cash transactions only, when cash is received or

paid. There are two types of cash vouchers: a) Debit Vouchers b) Credit Vouchers

Debit Vouchers: Debit vouchers are prepared only for cash payments

Credit Vouchers : Credit vouchers are the opposite side of debit vouchers, Credit vouchers are prepared when we receive cash

Preparation of accounting vouchers: All business transactions recorded in the books of

accounts can be compared with the source documents. Accounts are debited or credited on the

basis of these source documents. After deciding, that what to be debited or credited, the next step

is the preparation of the vouchers.

Meaning of Accounting Equation

The Accounting Equation' is based on the double-entry book keeping system. For every debit there must be a credit. The accounting equation states that the sum of the Total assets must be equal to the sum of the liabilities.

Assets = Liabilities + Capital

Or

 Capital = Assets - Liabilities

 Or

 Liabilities = Assets - Capital

 Or

 Assets = Total Liabilities or Total Equity

 Or

 Total Assets = Internal Liabilities + External Liabilities

 

Basis of Accounting:

Cash Basis of Accounting: Under this method only cash transactions are recorded in the books of accounts. Entries are made only if cash is received or paid.

Accrual Basis of Accounting: Under this method all transactions are recorded in the books of accounts (Cash and Non-Cash). Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded in the books of accounts.

Source of Documents

All financial transactions are recorded in the books of accounts on the basis of source document or on the basis of some evidence. Source documents are helpful to prove that a transaction is actually made or not.

Cash Memo: Cash Memo is A bill of sale, it is a written document by a 'seller' to a purchaser, reporting that on a specific date, a particular sum of money or other "value received",

Invoice or Bill: When goods are sold on credit, An invoice or bill is issued on the name of the buyer, indicating the products, quantities, and agreed prices for products or services, the seller has provided the buyer.

Receipt: A receipt is a written acknowledgment that a specified a sum of money has been received from the customer as an exchange for goods or services. The receipt is evidence of purchase of the goods or service.

Pay-in-Slip: Pay in slip is a form that is filled when the money is deposited by a customer in to his bank account.

Cheque: A cheque is a document (usually a piece of paper) that orders a payment of money. The person writing the cheque, the drawer, usually has a account where the money is deposited.

Debit Note: When we return goods back to the supplier, a debit not is made on the name of supplier, it means his account his debited. Debit Note proves that a debit entry has been made to a debtor's or creditor's account.

Credit Note: When we receive goods back from our customer, then a credit not is made on the name of the customer, it means customer’s account is credited.

Meaning of Voucher: Voucher is the documentary proof or evidence in support of a transaction. For example when we purchase goods for cash, we get cash memo, and when we purchase goods on credit, we get an invoice, when we make payment we get Receipt.

Types of Vouchers

There are two types of vouchers a) Cash Voucher b) Non Cash Voucher

Cash Vouchers: Cash vouchers are prepared for cash transactions only, when cash is received or paid. There are two types of cash vouchers: a) Debit Vouchers b) Credit Vouchers

Debit Vouchers: Debit vouchers are prepared only for cash payments.

Credit Vouchers : Credit vouchers are the opposite side of debit vouchers, Credit vouchers are prepared when we receive cash

Preparation of accounting vouchers: All business transactions recorded in the books of accounts can be compared with the source documents. Accounts are debited or credited on the basis of these source documents. After deciding, that what to be debited or credited, the next step is the preparation of the vouchers.

Meaning of Accounting Equation

The Accounting Equation' is based on the double-entry book keeping system. For every debit there must be a credit. The accounting equation states that the sum of the Total assets must be equal to the sum of the liabilities.

Assets = Liabilities + Capital

                  Or

 Capital = Assets - Liabilities

                 Or

 Liabilities = Assets - Capital

                 Or

 Assets = Total Liabilities or Total Equity

               Or

 Total Assets = Internal Liabilities + External Liabilities

Please read the case study

Suppose the grocery owner pay the rent of Rs.1000 per month. Yearly rent comes out to be 1000×12 that is Rs.12,000 annually. COVID-19 affected a lot of businesses so the grocery owner could not be six

 months of rent. COVID-19 affected a lot of businesses so the grocery owner could not be six months of rent. So in the current year the grocery owner paid six months’ rent that is 6000 in cash be next year And 6000 is outstanding which will pay next year

There are 2 basis of Accounting 1) Cash basis Accounting And Accrual Basis Accounting

Cash Basis Accounting: Cash basis is the simplest form of accounting. Suppose you are a small businessman who owns a grocery shop. Under cash basis accounting all the shop owner needs to do is add all the cash coming in in one year and subtract all the cash he’s which is going out as payments. It can be a profit or loss.

Under cash basis accounting the owner will record the cash only cash payments that are he will record a rent of 6000. In cash basis accounting full 12 months’ rent is not charged here. If hundred percent of rent is not charged then I will be getting the correct profit? This is the reason companies act 2013 does not allow a company to prepare its books on the basis of cash basis accounting. Cash basis accounting is only followed by a very small business man

Accrual Basis of Accounting

Under accrual basis accounting the companies act 2013 requires the owner to charge all the incomes and expenses of 12 months so that the correct profit for 12 months can be arrived.

So here irrespective of how much cash has been paid for rent we will record the entire 12,000 as rent in arriving the profit/loss for the year.

There are 4 Accounts Relating to Accrual concept which we will study in the next chapter.

Outstanding Expenses, Prepaid expenses, Accrued Income and Unearned Income.