Basis of accounting refers to different methods or approaches followed by the business entities while reporting & recording the financial transactions into their books of accounts over an accounting period where the approaches are based on the timing of recognition of revenues & expenses and are categorized as cash basis and accrual basis.
Explanation & Difference:
Every business has to record their transaction to know their financial performances over a period of time. This has to be followed by the company in every financial year while preparing their financial statements for the period.
Two accounting methods are prescribed for the purpose of recording & reporting of the financial transactions namely cash method and accrual method of accounting. These methods are based on the timing of recognition of costs and revenues into the accounting records of the business for the period. Look at the difference between cash basis and accrual basis of Accounting.
|Basis||Cash Basis||Accrual Basis|
|Meaning||Under this system of the accounting, the revenue/expenses of the business are recorded at the time of inflow and outflow of cash against them.||Under this system of accounting the revenue & expenses of the business are recorded when they are earned & incurred respectively regardless of actual receipt/payment of cash.|
|Based on||Single entry system of accounting||Double entry system of accounting|
|Nature||Simple & easy to apply||Complex structure and not easy to understand|
|Matching concept||Not applicable||Applicable|
|Degree of accuracy||Very low because all the transactions are not reported.||High, because it reports each & every transaction as & when it occurs.|
|Expense recognition||When the cash is paid against such expense.||When that expense is incurred regardless of cash payment.|
|Revenue recognition||When the cash is received against such revenue.||When the revenue is earned regardless of cash receipt.|