4. Basis of Accounting

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.