Basis of accounting

In accounting, a basis of accounting is a method used to define, recognise, and report financial transactions. The two primary bases of accounting are the cash basis of accounting, or cash accounting, method and the accrual accounting method. A third method, the modified cash basis, combines elements of both accrual and cash accounting.

  • The cash basis method records income and expenses when cash is actually paid to or by a party.
  • The accrual method records income items when they are earned and records deductions when expenses are incurred.
  • The modified cash basis records income when it is earned but deductions when expenses are paid out.

Both methods have advantages and disadvantages, and can be used in a wide range of situations. In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other.

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