11Th Accounts Book T.S Grewal Trial And Commercial

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Cash Basis of Accounting: Cash basis of accounting is a system in which transactions arerecorded when cash is received or paid.

The difference between the totalincomes and total expenses represents profit or loss of a business for the accounting period.

Thus, when Cash Basis of Accounting is followed, outstanding and prepaid expenses andincome received in advance or accrued incomes are not considered.

Accrual Basis of Accounting: Under accrual basis of accounting income is recorded as incomewhen it is earned or accrued.

Similarly, if an expense has been incurred but payment hasnot been made, it will be recorded as an expense.

Accrual Basis of Accounting is based onthe concept of realisation and expiration and follows two basic accounting principles, i.e., revenue recognition and matching principle.

Under this method net income for the period isthe result of matching revenue realised in the period and cost incurred, whether paid or not.The difference between total income and total expense incurred is the profit or loss for theperiod.

Q.2 Write any three difference between Cash Basis and Accrual Basis of Accounting.

Answer 2. The following are three differences between Cash Basis and Accrual Basis of Accounting: Q.3 What is meant by accrual basis of accounting Give two advantages of accrual basis accounting.

Answer 3. Accrual Basis of Accounting: Under accrual basis of accounting income is recorded asincome when it is earned or accrued.

Accrual Basis of accounting is based on the concept of realisation and expiration and follows two basic accountingprinciples, i.e., revenue recognition and matching principle.

Under this method net incomefor the period is the result of matching revenue realised in the period and cost incurred,whether paid or not.

The difference between total income and total expense incurred is theprofit or loss for the period.

It reflects true profit or loss during the accounting period and, therefore, has wideacceptability.

11Th Accounts Book T.S Grewal Trial And Commercial

This system is followed by most of the industrial and commercial firms.

Q.4 What is meant by Cash basis of accounting Give two disadvantages of cash basis of accounting.

Answer4. Cash Basis of Accounting: Cash basis of accounting is a system in which transactions are recorded when cash is received or paid.

The difference between the total incomes and total expenses represents profit or loss of a business for the accounting period.

Thus, when Cash Basis of Accounting is followed, outstanding and prepaid expenses and income received in advance or accrued incomes are not considered.

The following two disadvantages of cash basis of Accounting are: (i) It does not follow the matching principle of accounting.

This system does not distinguish between capital and revenue items and, as a result, there is no consistency in the profit of the two years.

Q.5 During the financial year 2018-19, Mohan had cash sales of Rs.

Rs. 60,000. His expenses for the year were Rs.

He also received consultancy fee relating to previous year Rs.

Rs. 20,000 expenses of last year.

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