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Bases of Accounting

Cash Basis and Accrual Basis

Objectives

After going through this lesson, you shall be able to understand the following concepts.

• Cash Basis of Accounting
• Accrual Basis of Accounting
• Difference between Accrual & Cash Basis

Cash Basis of Accounting    

The cash basis of accounting recognises revenue and expenses at the time of actual receipt or payment of cash.

The cash basis of accounting is less accurate than accrual basis of accounting as they affect the company’s books only when complete exchange of value has occurred. Cash basis of accounting might be easier and cheaper to maintain but the needs of users of financial statements are not satisfied due to inaccurate nature of this method.  

Example
A construction company secures a contract for construction of a stretch of Delhi Metro and will receive the payment for the same from DMRC at the completion of construction. Using cash basis of accounting, revenue would be r…

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