Cash Based Accounting System and Accrual Based Accounting System

Cash-based Accounting is a method where the income is recorded only when the cash is received and the expenses are recorded only when the cash is paid to the relevant body. This system does not follow the Generally Accepted Accounting Principles(GAAP)and is not a good management tool as it creates a time gap between the cause of action and the recording of the action. It is suitable for small firms and bodies which do not deal in huge amounts and deal in cash mostly. The account of Indian government is prepared through this method even though it does not give real time situation of the government bank and lacks a framework for the accounting of assets like in Accrual Basis.

Accrual Accounting method is the one which recorded the cause of action or transaction in terms of revenue or expenditure even in the absence of cash transaction. Due to the flaws in the Cash based Accounting the Government of India has decided to accept and implement the recommendations of the Government Accounting Standards Advisory Board (GASAB) in the office of the Comptroller and Auditor General to make a detailed plan on how to transit from Cash based Accounting to Accrual Based Accounting.

Major Differences Between Cash Based Accounting(CBA) and Accrual Accounting Method (AAM):

  • CBA doesn’t give real-time changes in the accounts of the holder where as AAM gives that information
  • CBA does not show the accrued liabilities which arise due to the gap between the transaction and commitment.
  • There is practically no way to track assets out of public money using CBA where as AAM provides such data too.

Accrual Accounting Method is more robust and has lesser chances of delays in payments and delivery of services as the accounts are modified immediately unlike Cash based Accounting where the time difference between the payment and the day services or goods are delivered often creates a rift, environment of uncertainty and mistrust.