For
recording business transactions, there are three approaches to accounting which
are widely accepted
(a) Cash basis
(b) Accrual basis
(c) Hybrid or Mixed basis.
As you know, all business transactions ultimately result
into realization of revenue or incurring of expense. Truly speaking, the approaches to accounting
which are to be discussed here tell how revenues and expenses are to be
recognized.
Cash basis Accounting:
Under the cash basis of accounting actual
actual cash receipts and cash payments are recorded. Credit transactions are not recorded at all
and are ignored till the cash is actually received or paid. Income is merely the difference between the
cash receipts and cash payments. The
Receipts and Payments Account prepared in case of non – trading concerns such
as a charitable institution, a club, a school, a college etc. and professional
men like lawyer, doctor, a chartered accountant etc. can be cited as the best
example of cash basis.
Accrual
Basis of Accounting:
Other
name for this is mercantile basis of accounting. In this method, incomes are recorded or
credited to the period in which they are earned irrespective of the fact that,
whether the same has actually been received or not. Similarly expenses are charged to the period
in which they relate, irrespective of the fact that they actually been paid or
not. So the difference between total
income earned and total expenses incurred, represents the profit or loss for
the period. To arrive at the correct
result of the operation, adjustments for outstanding and prepaid expenses and
actual incomes are to be made.
Hybrid
or Mixed Basis of Accounting:
Cash basis of accounting is
by far the simplex system whereas the accrual basis of accounting is scientific
and reliable. So accountants have tried
to club these advantages of the two systems and have come up mixed or hybrid
basis of accounting. Under mixed basis
of accounting both cash basis and accrual basis are followed. Incomes are recorded on cash basis whereas
expenses are taken on accrual basis. The
net income is ascertained by matching expenses on accrual basis with income on
cash basis. This is the most
conservative basis of ascertaining income because all possible expenses
relating to the period whether actually paid or not are considered whereas
income only received in cash taken into consideration. When all the expenses are taken into account,
there is reduction in taxable income and hence this system is popular among
professionals like doctors, lawyers, chartered accountants etc.
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