Page 33 - ISCDEBK-XI

5.2 Double Entry Book Keeping—ISC XI
Bases of accounting mean the basis of recording transactions in the books of account. There
are three bases of accounting:
• Cash Basis of Accounting,
• Accrual Basis of Accounting, and

• Hybrid Basis of Accounting.

Cash Basis of Accounting
Cash Basis of Accounting is the basis of accounting whereby transactions are recorded
in the books of account when amount is paid or received against the transaction and not
when transaction is entered into. It means that credit transactions are not recorded in the books
of account.
Its effect on revenue is that it is recognised when amount is received whether earned or not
and not prior to it. It means accrued income and income received in advance is not determined
and accounted.
Its effect on expenses is also that they are recognised only when they have been paid and not before.
It means that outstanding expenses and prepaid expenses are not determined and accounted.
Cash System of Accounting is recognised by the Income Tax Act, 1961. However, it can be adopted by
entities other than Companies as the Companies Act, 2013 requires Companies to maintain its accounts
only on accrual basis.
Accrual Basis of Accounting

Accrual Basis of Accounting is based on the concept of realisation and expiration and follows
two basic accounting principles, viz., Revenue Recognition Principle and Matching Principle.
Its effect on income is that it is recognised when it is earned whether amount is received against
it or not. For example, sale is recognised as sale when the title in the goods is transferred
irrespective of the fact whether amount has been received against it or not. It means that
recognition of revenue and receiving amount against it are two separate aspects, i.e., transactions.
Its effect on expenses is that they are recognised as expenses when incurred irrespective of the
fact whether amount has been paid against it or not. For example, rent for the month of March,
2022 has not been paid. It will be recognised as expense in the financial year ended 31st March,
2022 because it has become due and has not been paid. In this example, Rent Account will be
debited and Rent Payable Account will be credited. When the payment is made, Rent Payable
Account will be debited and Cash Account or Bank Account will be credited.
The Companies Act, 2013 requires Companies to maintain its books of account on accrual basis.
Hybrid Basis of Accounting
It is a combination of Cash Basis of Accounting and Accrual Basis of Accounting. Under the
Hybrid Basis of Accounting (also called Mixed System of Accounting), revenues are accounted
on Cash Basis and the expenses are accounted on Accrual Basis. In actual practice, this basis
of accounting is not used since it fails to measure the income accurately.Also Hybrid Basis of
Accounting is not accepted by any authority including tax authorities.
Note: Hybrid Basis of Accounting is not the part of the Syllabus.