Financial Accounting

Accounting concepts and standards

 Financial Accounting

Accrual and Cash Basis for Accounting

Accrual Basis for accounting :- Accrual basis for accounting is a

method of recording transactions by which revenue , cash, assets and
liabilities are reflected in the accounts for the period in which they
accrue.
This basis include consideration relating to deferrals, allocations,
depreciation, and amortization.
This basis is also referred to as mercantile basis of accounting.
Under Companies Act 1956, all companies referred to maintain the
books of accounts according to accrual basis of accounting.

Cash Basis for Accounting:-cash basis for accounting is method of

recording the transaction by which revenues , costs, assets and
liabilities are reflected in the accounts for the period in which actual
receipt or actual payment are made.
 Financial Accounting

Basis of distinction Accrual Basis Cash Basis

1.Prepaid/outstanding Under this there may Under this no prepaid/

expenses/accrued be prepaid/ outstanding outstanding expenses or
income in the balance expenses and accrued/ accrued / unaccrued incomes.
sheet unaccrued income in
the balance sheet
2.Higher/lower income Income statement will Income statement will show
in case of prepaid show a relatively lower income.
expenses and accrued higher income
income
3.Higher / lower income Income statement will Income statement will show
in case of outstanding show a relatively lower higher income
expenses income
4. Recognition under This basis is The basis is not recognized
companies Act 1956 recognized under the under the companies act 1956.
Companies Act 1956
 Financial Accounting

Basis of distinction Accrual Basis Cash Basis

5.Availability of options Under this an Under this an accountant has

to an accountant to accountant has options no option to make a choice as
manipulate the accounts such.
by way of choosing the
most suitable method
out of several alternative
method of accounting
e.g.
FIFO/LIFO/SLM/WDV
 Financial Accounting

Concept of Income

The net income for the accounting period is the excess of revenues
recognized during the period over the expired cost (including
losses) during the same period.
The main feature of accounting concept of income are as under:-
1. Accounting concept of income is based on historical cost and not
on current values.
2. Income is an ex- post income. Ex- post income is the excess of
the value of the capital for the current period over that of the base
period with reference to future expected returns on current period
basis.
3. Income is measured by matching cost with revenues.
4. It ignores the unrealized gain/losses in value of fixed assets.
 Financial Accounting

Steps involved in computation of accounting income

Step-1 Define the particular accounting period for which income is

to be measured.
Step-2 Identify and measure the revenues to be recognized during
the accounting period.
Step-3 Identify and measure the expenses to be recognized during
the accounting period.
Step-4 apply the matching principle by matching cost with revenue
and ascertain the difference between the two. If revenue exceeds
the costs, the difference is termed as ‘Surplus’ or ‘Positive
Income’ or ‘Profit’. If the cost exceeds the revenues, the
difference is termed as ‘Deficit’ or ‘Negative Income’ or ‘Loss’.
Financial Accounting