BASES OF ACCOUNTING
1) cash basis of accounting :- Cash basis accounting is an accounting method that recognizes
income and expenses only when cash is exchanged. This method is simpler than the accrual
basis accounting method, which records income and expenses when they are earned or
incurred, regardless of when money is actually exchanged.
Examples o/s exp , prepaid exp , accrued income, income received in avd
Advantages
i) It is a simple basis of accounting as adjustments for outstanding expenses, prepaid
expenses, accrued income and income received in advance is not made.
(ii) This approach is more objective as very few estimates and judgments are required
(iii) This basis of accounting is suitable for those enterprises where most of the transactions
are on cash basis.
DISADVANTAGE
i) It does not give a true and fair view of the profit or loss and the financial position ( of an
enterprise because it ignores outstanding and prepaid expenses and accrued income and
income received in advance.(ii) It does not follow the Matching Principle of accounting.
(iii) This system does not distinguish between capital and revenue items and, as a result, there
is no consistency in the profits of the two years.
2) Accrual basis of accounting :- Accrual accounting is an accounting method where revenue or
expenses are recorded when a transaction occurs vs. when payment is received or made. The
method follows the matching principle, which says that revenues and expenses should be
recognized in the same period.
Advantages
i) It is more scientific compared to Cash Basis of Accounting and hence is preferred
by accountants. (ii) This basis of accounting shows a complete picture of financial transactions
of the business as it takes into account the effect of all transactions relating to a period as well
as adjustments like outstanding expenses, prepaid expenses, accrued income and income
received in advance. (iii) This basis discloses correct profit or loss for a particular period and
also exhibite true financial position of the business on a particular day.
DISADVANTAGE(i) This system is not as simple as Cash Basis of Accounting.(ii) The
accounting process is too elaborate.iii) A quick appraisal of the profit/loss is not possible
because many adjustments are required to ascertain the true financial position of the business.
formulas
CGS= OPENING STOCK+NET PURCHASES+ALL DIRECT EXP-closing stock
GP= NET SALES-CGS (BASED ON
Short formulas
GP= NET SALES -CGS
CGS= NET SALES -GP
CGS= NET SALES -GL
OPERATING PROFIT= GP-OPERATING EXP(based on GP )
OPERATING PROFIT= NP+NON OPERATING EXP-NON OPERATING INCOME
OPERATING = NS- OPERATING COST
OPERATING COST = CGS+OPERATING EXP
OPERATING PROFIT= NS- CGS(-+)OPERATING EXP
