Cash basis of Accounting

In cash basis of accounting the prevailing concept is that transactions will be entertained on the actual receipt or payment of cash. More broadly income will not be booked until it is actually received in the form of cash and expenditures related to specific period will not be recorded until they are actually paid.

For example, if in a month sales are worth of Rs.7,000 but actual receipts are $5,000, following entry will be made:

Cash / Bank            5,000
Sales income                      5,000

No entry will be passed for $2,000 because it is not materialized into cash in that month.

Total expenses in the month were $.4,000 but only $3,000 have been paid in the form of cash. Following entry will be made

Expenses            3,000
Cash / Bank                    3,000

No entry will be recorded for $1,000 because it is not actual paid off in the form of cash.

Accrual Basis of Accounting

Accrual based accounting works on the concept that income will be booked as it is earned expenditures related to specific period will be recorded as they become due.

For example, if in a month sales are worth of Rs.7,000 but actual receipts are $5,000, following entry will be made:

Cash / Bank                    5,000
Accounts Receivables    2,000
Sales income                              7,000

Total expenses in the month were $.4,000 but only $3,000 have been paid in the form of cash. Following entry will be made

Expenses            4,000
Cash / Bank                          3,000
Expenses payable                1,000

Cash basis of accounting is used in smaller organizations where no compulsions of regulations prevail but accrual based accounting is internationally accepted by investors and regulators, therefore, required to be adopted by large organizations.