Accrual vs Cash Basis of Accounting: Difference
Definition
Under the accrual (mercantile) basis, income and expenses are recorded when they are earned or incurred, whatever the payment date. Under the cash basis, they are recorded only when cash is actually received or paid.
| Term | Accrual vs cash basis of accounting |
|---|---|
| In Hindi | उपार्जन आधार बनाम नकद आधार |
| Area | Accounting |
| Search phrase | accrual basis of accounting |
| Try it | Outstanding expenses |
उपार्जन आधार बनाम नकद आधार — हिंदी में अर्थ
उपार्जन (मर्केंटाइल) आधार में आय और खर्च तब दर्ज होते हैं जब वे कमाए या किए जाते हैं, भुगतान कभी भी हो। नकद आधार में वे तभी दर्ज होते हैं जब नकद वास्तव में मिलता या दिया जाता है।
Which basis must you use in India
Companies must keep books on the accrual basis and the double entry system under section 128 of the Companies Act, 2013. For income tax, section 145 lets business income be computed on either the cash or the mercantile system, as long as it is followed regularly — so some small proprietors and professionals use the cash basis.
Most manufacturers and traders use accrual anyway: GST is payable on invoices raised, not on money collected, and banks lending against stock and debtors want accrual-based statements.
Why accrual gives the truer picture
Accrual matches revenue with the costs of earning it, so the profit of a month or year is not distorted by when a customer happens to pay. It records debtors, creditors, outstanding and prepaid expenses — the cash basis records none of these, which hides money owed to and by the business.
Example
A ₹2,00,000 job is invoiced on 25 March 2026 and paid on 20 April 2026. Accrual basis: the sale is in FY 2025-26, with a debtor of ₹2,00,000 at 31 March. Cash basis: the sale appears only in FY 2026-27.
Related tools and guides
Frequently asked questions
What is the accrual basis of accounting?
Recording income when earned and expenses when incurred, regardless of when cash moves.
Is cash basis allowed for companies in India?
No. Section 128 of the Companies Act, 2013 requires the accrual basis and double entry.
What is the mercantile system of accounting?
Another name for the accrual basis, used in the Income-tax Act.
Which is better for a small business?
Cash basis is simpler, but accrual shows true profit and what customers and suppliers owe — essential once you sell on credit.
Related terms
- Accounts receivableAccounts receivable is the money customers owe a business for goods or services already supplied on credit. It is shown as trade receivables (debtors) under current assets.
- Balance sheetA balance sheet is a statement of what a business owns (assets) and what it owes (liabilities and owners' equity) on a particular date. Total assets always equal total equity plus liabilities.
- Cash conversion cycleThe cash conversion cycle (CCC) is the number of days between paying for raw material and collecting cash from the customer for the finished goods: days inventory outstanding plus days sales outstanding minus days payables outstanding.
- Contra entryA contra entry is a transaction between cash and bank accounts of the same business — such as cash deposited into the bank or cash withdrawn for office use — where both the debit and the credit side are cash or bank.
- Contribution marginContribution margin is selling price minus variable cost. It is the amount each sale contributes first towards fixed costs and then to profit; as a percentage of sales it is called the contribution margin ratio or P/V ratio.
- Cost of goods sold (COGS)Cost of goods sold (COGS) is the direct cost of the goods a business sold in a period: Opening stock + Purchases + Direct expenses − Closing stock.