Bases Of Accounting

What are the Bases Of Accounting?

A basic purpose of accounting is to find out the profit earned or loss incurred from different business activities by a firm at the end of the financial year.Accountant either opt cash basis of accounting or accrual basis of accounting.

Under cash basis of accounting only cash transactions are recorded while credit transactions are ignored.Cash basis of accounting is suitable only for those business firms which have mostly transactions in cash.

The drawback of cash basis of accounting is it does not give a true picture of profit or loss and financial position of a firm.Under accrual basis of accounting only revenue items are considered for income determination and capital expenditure are ignored.Income is recorded when it is earned not when the money is actually received.

Similarly,expenses are recorded when due or incurred and not when payment are made for those expenses.In short,revenue and expenses for income determination are recorded on the basis of accounting period to which they relate or belong.Accrual basis of accounting disclose correct profit or loss of a firm.From the above it is concluded that cash basis of accounting records only cash transactions while accrual basis of accounting records both cash and credit transactions.

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