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CHAPTER
                      CHAPTER            Bases of Accounting

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                                  MEANING OF KEY TERMS USED IN THE CHAPTER


                       1.  Cash Basis of          It is a system of accounting according to which transactions are
                        Accounting                recorded  in  the  books  of  account  when  cash  is  transacted  whether
                                                  received or paid.
                       2.  Accrual Basis of       It is a system of accounting according to which transactions are
                        Accounting                recorded in the books of account when transaction is entered into
                                                  irrespective of cash having been received or not.
                       3.  Outstanding            They are those expenses which have been incurred during the
                        Expenses                  accounting period but have not yet been paid during the year. In the
                                                  Balance Sheet, they are shown as liability.
                       4.  Prepaid Expenses       They are those expenses which have been paid in advance. In the Balance
                                                  Sheet, they are shown as an asset.
                       5.  Accrued Income         It is an income which has been earned during the accounting period
                                                  but has not yet become due for payment and, therefore, has not been
                                                  received. In the Balance Sheet, it is shown as an asset.
                       6.  Income Received        It is an income which has been received before it has been earned,
                        in Advance                i.e., goods have been sold or services have been rendered. In the Balance
                                                  Sheet, it is shown as a liability.
                     Terms at serial numbers 3, 4, 5 and 6 will appear when accrual basis of accounting is followed.


                                                  CHAPTER SUMMARY

                     •  Bases of Accounting:  For recording financial transactions, there can be two broad
                       approaches to accounting. These are:
                       1. Cash Basis and  2.  Accrual or Mercantile Basis.
                     •  Cash Basis of Accounting: A system in which accounting entries are made only when cash
                       is transacted whether received or paid.
                     •  Accrual or Mercantile Basis of Accounting: A system in which income is recorded when
                       it is earned, whether received or not. Similarly, expense is recorded when incurred, whether
                       paid or not.
                       This basis is also known as Mercantile Basis of Accounting. Under the Companies Act,
                       2013, all companies are required to maintain the books of account according to accrual basis
                       of accounting.
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