Cash basis and accrual basis of accounting
Cash basis: income is recorded only when cash is received and expenses only when cash is paid. It is simple and used by some professionals and small non-profit bodies. But it does not show the true profit of a period.
Accrual basis: income is recorded when earned and expenses when incurred, whether cash moves or not. So outstanding expenses, prepaid expenses, accrued income and income received in advance are all adjusted. It follows the matching principle and is compulsory for companies under the Companies Act, 2013.
Differences at a glance
- Timing: cash movement vs earning/incurring.
- Profit: cash basis may be higher or lower than true profit; accrual gives true profit.
- Outstanding and prepaid items: ignored in cash basis; recorded in accrual basis.
- Legal acceptance: accrual is accepted for companies; cash basis is not.
Accounting Standards (AS) and Ind AS: meaning and applicability
Accounting Standards are written statements of rules for recognising, measuring, presenting and disclosing items in financial statements. In India, the Accounting Standards Board of ICAI (set up in 1977) drafts them; the Central Government notifies them for companies. They reduce choice between methods, make statements comparable and improve trust.
Ind AS (Indian Accounting Standards) are standards converged with International Financial Reporting Standards (IFRS). They were applied in phases from 1 April 2016: first companies with net worth of ₹500 crore or more, then (from 2017) all listed companies and unlisted companies with net worth of ₹250 crore or more, along with their holding, subsidiary and associate companies. Banks, insurance companies and NBFCs follow separate timelines. Other companies and non-corporate entities keep following AS.
Why standards help
- Uniform treatment, so accounts of different firms can be compared.
- Less scope for manipulation.
- Easier audit and more confidence for investors, including foreign investors (for Ind AS).
Limits: they cannot cover every situation, they may reduce flexibility, and they must follow the law of the land.
Goods and Services Tax (GST): features
GST is an indirect tax on the supply of goods and services, in force in India from 1 July 2017 (101st Constitutional Amendment). It replaced many taxes like VAT, excise duty and service tax.
- One nation, one tax on supply (with few exceptions).
- Destination-based: tax goes to the state where goods are consumed.
- Dual GST: intra-state supply → CGST (Centre) + SGST/UTGST (State/UT) at equal rates; inter-state supply and imports → IGST.
- Input Tax Credit (ITC): tax paid on purchases is set off against tax on sales, so tax is paid only on value added.
- Registration using a GSTIN; returns filed online on the GST portal.
- Rates in slabs; since 22 September 2025 the main slabs are 5% and 18%, with a higher 40% rate for a few luxury or harmful goods, and some items exempt.
Advantages of GST
- Removes the cascading effect (tax on tax), so prices can fall.
- One common market across India; fewer check-posts, faster movement of goods.
- Simple online registration, payment and returns.
- Better tax compliance because credit is available only when the supplier also reports.
- Makes Indian goods more competitive.
Recording GST in books (simple idea)
GST on purchases is debited to Input CGST/SGST/IGST accounts (an asset — a claim on the government). GST on sales is credited to Output CGST/SGST/IGST accounts (a liability). Only the difference is paid.
Key formulas and definitions
- Accrual profit = Revenue earned − Expenses incurred
- Cash profit = Cash received from revenue − Cash paid for expenses
- GST = Taxable value × GST rate
- Intra-state: CGST = SGST = rate ÷ 2
- Inter-state: IGST = full rate
- GST payable = Output GST − Input tax credit
Worked examples
1. Revenue earned ₹2,00,000 (₹40,000 still receivable); expenses incurred ₹1,20,000 (₹15,000 unpaid). Find profit under accrual and cash basis.
Accrual: 2,00,000 − 1,20,000 = ₹80,000. Cash: (2,00,000 − 40,000) − (1,20,000 − 15,000) = 1,60,000 − 1,05,000 = ₹55,000.
2. Goods of ₹50,000 are sold within Maharashtra at 18% GST. Find CGST, SGST and total bill.
Total GST = 18% × 50,000 = ₹9,000. CGST 9% = ₹4,500; SGST 9% = ₹4,500. Bill = ₹59,000.
3. Same goods sold from Maharashtra to Gujarat. Find the tax.
Inter-state: IGST 18% = ₹9,000. Bill = ₹59,000.
4. A trader buys goods for ₹40,000 + 18% GST and sells them for ₹60,000 + 18% GST (same state). How much GST does he deposit?
Output GST = 18% × 60,000 = ₹10,800. Input credit = 18% × 40,000 = ₹7,200. Payable = ₹3,600 (CGST ₹1,800 + SGST ₹1,800) = 18% of value added ₹20,000.
5. Which basis must a private limited company use, and why?
Accrual basis, because the Companies Act requires it and it shows the true profit by matching revenue and expenses of the same period.
6. A listed company with net worth ₹120 crore — AS or Ind AS?
Ind AS, because all listed companies were brought under Ind AS in the second phase, whatever their net worth.
Common mistakes
- Charging CGST + SGST on an inter-state sale. Inter-state sales carry IGST.
- Adding input GST to the cost of goods when credit is available. It is a claim on the government, recorded separately.
- Thinking cash basis shows true profit. It ignores outstanding and prepaid items.
- Saying all companies follow Ind AS. Only the classes notified (listed and large companies, and their group companies) do; others follow AS.