Page 18 - DEBK-XI(2020)

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C H A P T E R

Bases of Accounting

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.

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.