Define: Basis Of Accounting

The basis of accounting refers to the set of rules and principles that govern how financial transactions are recorded, reported, and presented in an organisation’s financial statements.

The commonly used bases of accounting include cash basis, accrual basis, modified cash basis, and tax basis.

The cash basis of accounting recognizes revenue and expenses when cash is received or paid, respectively. It does not consider accounts receivable or accounts payable.

The accrual basis of accounting recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. It takes into account accounts receivable and accounts payable.

The choice of basis of accounting depends on various factors, including the size and nature of the business, legal requirements, and reporting needs. However, some businesses may be required to use a specific basis of accounting by law or regulatory bodies.

In some jurisdictions, certain businesses may be required to use the accrual basis of accounting for tax purposes or when reporting to regulatory authorities. It is important to consult with legal and accounting professionals to ensure compliance with applicable laws and regulations.

Yes, a business can change its basis of accounting, but it should be done in accordance with applicable laws and accounting standards. Proper documentation and disclosure of the change are necessary.

The accrual basis provides a more accurate representation of a business’s financial position and performance by matching revenues with expenses in the period they occur. It also allows for better tracking of accounts receivable and accounts payable.

The accrual basis requires more complex record-keeping and may not be suitable for small businesses with limited resources. It also requires estimation and judgment in recognizing revenue and expenses, which can introduce subjectivity.

In some cases, a business may use different bases of accounting for different purposes, such as using the accrual basis for financial reporting and the cash basis for tax purposes. However, it is important to ensure consistency and proper disclosure of the basis used in each situation.