ACCRUAL BASIS

 Accrual Basis :

•  Under this basis of accounting, transactions are recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and profit/ loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.
•  Hence, accrual basis is a more logical approach for profit determination compared to cash basis of accounting.
• Accrual basis exposes an enterprise to the risk of recognising an income before actual receipt. The accrual basis can therefore be misused as a tool to overstate the divisible profits and take dividend decisions based on such overstated profits which may lead to erosion of capital.
•  For this reason, Accounting Standards require that no revenue should be recognised unless the amount of consideration and actual realisation of the consideration is reasonably certain. Despite the possibility of distribution of profit not actually earned, accrual basis of accounting is generally followed because of its logical superiority over cash basis of accounting.
•  Section 128(1) of the Companies Act, 2013 makes it mandatory for companies to maintain accounts on accrual basis only. It is not necessary to expressly state that accrual basis of accounting has been followed in preparation of a financial statement. In case, any income/ expense is recognised on cash basis, the fact should be stated.