In this chapter, we have to study the two most famous basis of accounting that is cash and accrual basis. Here are the process and basis of accounting class 11 notes.
Topics Discussed
Process of Accounting
The process of accounting involves 5 steps which are as follows:
- Identification of Transactions
- Preparation of Vouchers
- Recording in books of Original Entry
- Posting to Ledger
- Preparation of Trial balance and Financial Statements
1) Identification of Transactions
Accounting deals with business transactions that are monetary. In other words, the transactions that cannot be measured and expressed in terms of money cannot be recorded in accounting. A document that provides evidence of the transaction is called the Source Document.
2) Preparation of Vouchers
Based on source documents, entries are recorded on vouchers, and then based on vouchers, recording is made in the journal or books of original entry.
3) Recording in Books of Original Entry
The books in which transactions are recorded for the first time from a voucher or a source document are called ‘Books of Original Entry’.
4) Posting to Ledger
The next step in the accounting process is to transfer all entries recorded in the journal or subsidiary books to respective accounts in the ledger.
5) Preparation of Trial Balance and Financial Statements
The last step in the accounting process is balancing ledger accounts and preparing trial balance with the help of such balances.
Basis of Accounting
| Basis | Cash Basis of Accounting | Accrual Basis of Accounting |
| Recording of Cash and Credit Transactions | Cash basis only records the cash transactions. | This basis makes a complete record of all cash as well as credit transactions. |
| Timing of recording of Incomes | As per this basis, only those incomes are recorded which have been received in cash. | As per this basis, all incomes are recorded whether cash is received for them or not. |
| Outstanding expenses, prepaid expenses, accrued incomes, and income received in advance | This basis does not take in consideration outstanding expenses, prepaid expenses, accrued incomes, and income received in advance. | This basis takes into consideration all such items. |
| Timing of recording of expenses | As per this basis, only those expenses are recorded which have been paid in cash. | As per this basis, all expenses are recorded whether cash is paid for them or not. |
| Legal Position | This basis is not recognized under the Companies Act 2013. | This basis is recognized under the Companies Act 2013. |
| Ascertainment of correct profit or loss | This basis does not ascertain correct profit or loss because it does not make a complete record of all cash and credit transactions. | This basis ascertains correct profit or loss because it makes a complete record of all cash and credit transactions. |
| Suitability | This basis is suitable for professional people like doctors, lawyers, etc. | This basis is adopted by business enterprises with a profit motive. |
Accounting Equations Class 11 Notes
Cash Basis of Accounting
Advantages of Cash Basis of Accounting
- The basis is simple, realistic, and satisfies the conservative instinct of many people.
- It does not require the use of estimates and personal judgment.
- It is suitable for those enterprises where most of the transactions are on a cash basis.
Disadvantages of Cash Basis of Accounting
- It does not give a true and fair view of the profit or loss and the enterprise’s financial position.
- There is a great possibility of manipulation of profits in cash basis of accounting.
- Companies Act 2013 does not recognize it.
Accrual Basis of Accounting
Advantages of Accrual Basis of Accounting
- It follows the matching principle of accounting.
- There is consistency in the computation of profits of different years on an accrual basis.
- It is recognized by the Companies Act 2013.
Disadvantages of Accrual Basis of Accounting
- It is not as simple as the cash basis of accounting.
- It requires the use of estimates and personal judgments.
Hybrid or Mixed Basis of Accounting
The basis of accounting is the mixture of cash basis and accrual basis. Under a hybrid basis of accounting, revenues and assets are recorded on a cash basis whereas expenses and liabilities are recorded on an accrual basis.
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