2.2 Accounting Basis

1. Cash Basis of Accounting

Income (including revenues) is recorded in the period in which cash is received and This method does not recognize income when goods are sold or services are performed on credit. 

Expenses are recorded in the period in which cash is paid. The costs of goods and services consumed during the current period, but not paid for, are recognised as expenses in a subsequent period when cash is paid. 

Profit is the excess of cash inflows from income over cash outflows for expenses. 

It used by some small business entities and professionals who conduct most of their activities in cash.

2. Accrual Basis of Accounting

According to the Framework, under the accrual basis the effects of all transactions and events are recognised in accounting records when they occur.

The financial statements of an entity are assumed to be prepared on the accrual basis, not only on cash transactions but also on obligations to pay cash in the future and on resources that represent receivables of cash in future.

Accrual-basis accounting can provide more complete information than cash-basis accounting does.

Accrual-basis accounting records both cash transactions, including：

• Collecting from customers

• Receiving cash from interest earned

• Paying salaries, rent, income tax, and other expenses

• Borrowing money

• Paying off loans

• Issuing stock

It also records such non-cash transactions as:

• Purchases of inventory on account

• Sales on account

• Accrual of interest and other expenses incurred but not yet paid

• Depreciation expense

•  Usage of prepaid insurance supplies, and other prepaid expenses