Accounting bases are important to complete the accounting process, in common accounting usage there are three bases of accounting. These accounting bases types are playing important role in accounting professionals and firms. Let we see different bases of accounting on following paragraphs.
Accounting bases are as follows-
1. Cash basis
2. Mercantile or Accrual Basis
3. Hybrid or mixed basis
Normally in accounting process any one of the above bases may be used to finalize the accounts.
1. Accounting Bases on Cash
This type of base is activity based accounting. It also known as cost based accounting. Under cash basis of accounting, all incomes are considered to be earned only when they are actually received in cash. It is also said to be direct accounting bases on the other hand expenses are considered to be incurred only when they are actually paid. The profit or loss will be determined by deducting expense from income, then only know the business is operating as profitable or not. Under this no adjustments are needed for outstanding expenses and prepaid and advance payments. Also, if income accrued or deemed to be accrued and advance receipt are also not adjusted. Hence, the income is recognized only when it is received in actual cash and expenses also recognized only when actual cash is paid.
It followed mostly by government organization, professional persons like doctors, chartered accountant, lawyers are also prefer this basis of accounting. Cash basis of accounting is very simple to follow, feasible and relevance in regard to finalize accounting process easily without and future adjustments. Hence this method of accounting is simple to understand and easy to operate/practice.
Mercantile system of accounting is system in which accounting entries are made on the basis of amounts having become due for payment or receipt. Income is recorded to the period in which they are earned, it may be whether cash is actually received or not. On the other hand expenses and losses are charged to income relating to the period in which they are incurred, whether the cash is paid or not.
Under this method of accounting the profit or loss of accounting period is the difference between incomes earned and expenses incurred, irrespective of cash payment or receipt. As per this accounting system all outstanding expenses and prepaid expenses, accrues incomes and incomes received in advance are adjusted while finalizing the accounts.
Accrual system of accounting is mostly used by all the merchants, trade and industry.
3. Hybird Basis of Accounting
Under this system of accounting some transaction are recorded on the basis of cash basis and some other expenses are recorded on the basis of mercantile system. It is mixed system of accounting since it combines both the cash basis and accrual basis of accounting. Accounting has to devise a suitable system of maintain accounts after analyzing the requirements and characteristics of the organization. As per the accounting basis the accounting books have to organize as per the needs of the system developed. Accounting information used by different group of users and the basis of accounting is important.
Originally posted 2013-10-23 07:40:39.