Basis of Accounting Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

hi welcome to a 2p dia world today we
will learn basis of accounting it is
basically the method we use to determine
when we should record our revenues and
expenses or when we should recognize the
revenues and expenses while preparing
our account when we do any business
there is a gap between the date on which
the transaction happens and the payment
or receipt related to that particular
transaction actually being paid or
receive and because of this gap we have
to take a decision whether to recognize
or record the transaction on the date of
transaction or to record it on the date
of payment or receipts related to that
transaction therefore there are two
types of accounting or basis of
accounting one is cash basis of
accounting and the other is accrual
basis of accounting and whichever basis
we choose for our accounting we need to
disclose it in our accounts please note
that for certain types of companies or
for certain categories of companies
preparation of accounts is mandatory
only on the basis of accrual basis of
accounting so now let's understand this
cash and accrual basis of accounting one
by one in cash basis of accounting the
revenues or incomes are recognized or
recorded when received so on the date of
receipt of money that sale of goods or
services is recorded similarly the
expenses are recorded on the date of
payment let's understand it by examples
these are two examples of cash basis of
accounting an example one a shopkeeper
sales our refrigerator
on 15th of January but he receives the
money on 20th of January so if he is
following this cash basis of a
counting his entry for sales will be
done on 20th of January and not on 15th
of January in our second example a
businessman purchases a customized worse
for his factory and pays one month in
advance that is on 25th of March so it
means he will receive the bus on 25th of
April but as he is following cash basis
of accounting he will record the
purchase on 25th of March itself and it
won't be entered as advance payment for
bus rather it will be entered as
purchase of bus or addition to the asset
now let's understand accrual basis of
accounting in accrual basis revenues or
incomes are recognized when earned which
means the date on which the sale is made
or the goods are dispatched and we have
generated the sales invoice from our
accounting system on that particular day
itself our sales will be recorded
irrespective of the fact whether we
received the payment on the same date or
later
and similarly expenses are recognized or
recorded when incurred which means the
date on which we have purchased that
item or we have purchased a particular
service and we are liable to pay for it
on that particular day itself we will
record the expense in our accounts so
this is accrual basis of accounting now
let's understand it better with examples
for better understanding I have taken
the same two examples here now in
accrual basis when the shopkeeper sales
a refrigerator on 15th of January and
receives money on 20th of January the
entry for sale will be done on 15th
itself and amount to be received from
the customer will be shown as receivable
and in our second example where the
businessman had paid for bus one month
in advance that is on 25th of March so
on 25th of March and entry will be done
as advance payment for bus but the
purchase entry for the bus or the
addition to the
we'll be done only when he will receive
the bus that is on 25th of April and the
advance entry made on 25th of March will
be adjusted or squared off with this
purchase entry on 25th of April
so that's accrual basis of accounting we
have covered both the business cash and
accrual thank you