Bases of Accounting: Cash Basis, Accrual Basis and Hybrid Basis

What are the bases of accounting?

Accounting is the work of recording of financial transactions.

Financial transactions are based on monetary value.

While recording these financial transactions, bookkeeping and accountant must know its basis.

According to old concept, there are two bases; cash basis and accrual basis.

According to new concept, there are three bases; cash basis, accrual basis and hybrid basis.

(A) Cash basis

Under cash basis of accounting, businesses organization records revenue when cash is received.

Expenses are recorded when bills are paid.

This is the easiest approach to recording financial transactions.

Smaller cash based business and smaller service organization widely use cash basis.

Generally, those business organizations use cash basis who does not have or very few inventories (closing stock, merchandise).

Organization does not record outstanding expenses in this method.

Example: cash book and cash flow statement are prepared under cash basis.

In cash basis accounting approach requires no complex measurements or estimates.

An expense is recognized only when we pay cash to vendor (supplier) is for a product or service.

Revenue is recorded only when we receive cash from a customer (debtor, client) for products sold or services rendered.

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(B) Accrual basis

Under accrual basis of accounting, business records revenue when the earning process is complete, not necessarily when cash is received.

Expenses arte recorded when expenditures are consumed or complete.

Large business organization widely uses accrual basis.

Generally, those business organizations use accrual basis who have inventories (closing stock, merchandise).

Organization records outstanding expenses in this method.

Example: final accounts and fund flow statement, accounting non-profit organization etc are prepared under accrual basis.

In accrual system, more accounts require such as accounts receivable, accounts payable, inventory, prepaid expenses and deferred revenue.

Each of these accrual accounts requires making estimates and sometimes complex computations.

(C) Hybrid Method

The hybrid method combines the accrual basis and cash basis of accounting.

For example, the accrual method could be used to account for inventory held for sales,

The cash method can be used to account for business expenses and income.

Whichever method of accounting an organization uses, it should be used consistently from year to year.

Keep in mind

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