Accounting: Accounting for Business Transactions: Differences between Accrual and Cash Accounting (For CBSE, ICSE, IAS, NET, NRA 2022)

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Difference between accrual and cash basis of accounting

Table of Difference between Accrual and Cash Basis of Accounting
Basis of DifferenceAccrual Basis of AccountingCash basis of accounting
Prepaid, Outstanding and received in advance itemsThere may be outstanding expenses, prepaid expenses, accrued income and received in advance in balance sheet.There are no outstanding expenses, prepaid expenses, accrued income and income received in advance.
Effect on income of prepaid expenses and accrued incomeIncome statement will show relatively higher income if there are items of prepaid expenses and accrued income.Income statement will show relatively lower income if there are items of prepaid expenses and accrued income
Effect of outstanding expenses and unearned incomeIncome statement will show a lower income if there are items of outstanding expenses and unearned incomeIncome statement will show a higher income if there are items of outstanding expenses and unearned income
Legal PositionCompanies Act 1956 recognizes this basis of accounting.Companies Act 1956 not recognizes this basis of accounting.
Option regarding valuation of inventories and methods of depreciationBusiness unit has option to value inventories at cost or market, whichever is less of depreciation.No such option is available in regard to inventory valuation and method of depreciation.
ReliableIt is a reliable basis of accounting as it records all cash as well credit transactions. It ascertains true figures.It is not a reliable basis of accounting as only cash transactions are recorded. It fails to ascertain true figures.
UsersA business unit with a profit motive ascertains its profit or loss as per this basis.Professional people, small ventures of temporary nature, some Not- for-Profit Organizations ascertain their profit or loss as per this basis.

Double Entry Mechanism

  • To record every transaction, one account is debited and other is credited
  • ‘Every Debit has a Credit’ is its principle
  • Double entry Book-Keeping seeks money or its worth in dual aspect

Advantages

  • Operational Results
  • Financial Position
  • Possibility of Fraud
  • Systematic Record
  • Complete Record
  • Accurate Records
Double Entry Mechanism

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