Session 2 - Methods of Accounting

Session Plan : Methods of Accounting

Introduction (5 min): Briefly explain the concept of accounting methods and their relevance in business.

Cash Basis (10 min): Define, explain features, advantages, and limitations with examples.

Accrual Basis (10 min): Discuss concept, characteristics, benefits, and drawbacks with illustrations.

Comparison (10 min): Highlight differences between Cash and Accrual basis with practical examples.

Discussion & Q/A (10 min): Interactive recap through case scenarios and student participation.

Lecture Material : (PDF, PPT)

Methods_of_Accounting.pptx 

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

(Q1) : Text and Image based Content (PDF/Image Formats)

Methods of Accounting

Methods of accounting refer to the rules and procedures used by businesses to record financial transactions. The method chosen affects how income and expenses are recognized and reported.

There are two primary methods:

• Cash Basis Accounting

• Accrual Basis Accounting

• Hybrid method

Cash Basis of Accounting

 Meaning:

In cash basis accounting, revenue is recorded only when cash is received, and expenses are recorded only when cash is paid.

 Features:

• Simple and easy to implement

• Does not match revenues with related expenses in the same period.

• Suitable for small businesses or individuals.

• Not recognized by GAAP/Companies Act for larger businesses

 Example:

• If you receive ₹10,000 in January for sales made in December, it is recorded in January.

 Advantages:

• Easy to maintain

• Reflects actual cash position

• Useful for cash flow management

 Disadvantages:

• Ignores credit transactions

• Not suitable for financial reporting

• Doesn’t show true financial performance

Accrual Basis of Accounting

Meaning:

In accrual basis accounting, revenues are recorded when earned, and expenses are recorded when incurred, regardless of when cash is received or paid.

 Features:

• Follows the Matching Principle

• Used by most large companies

• Recognized by GAAP and Companies Act

 Example:

• If a sale is made in December for ₹10,000 but payment is received in January, it is recorded in December.

 Advantages:

• Provides accurate financial position

• Complies with accounting standards

• Suitable for long-term planning

 Disadvantages:

• More complex

• Requires adjustments and estimates

• Doesn’t show actual cash availability

Comparison Table

Basis Cash Basis Accounting Accrual Basis Accounting

Recognition When cash is received When income is earned                of Income

Recognition When cash is paid When expense is incurred            of Expense

Simplicity Simple Complex

Suitability Small firms, NGOs Companies, government-regulated entities

Compliance Not GAAP compliant GAAP and Companies Act 

Accuracy Less accurate More accurate

 Hybrid Method of Accounting (Optional Use)

Some small organizations use a hybrid method, which combines features of both:

• Records income on accrual basis

• Records expenses on cash basis
  This method is not legally recognized for corporate entities but may be used internally.

Which Method Should Be Used?

• Cash Basis: Small traders, individuals, NGOs

• Accrual Basis: Companies, government entities, professionals

• Hybrid Basis: Only for internal or informal use

✅ Quiz – Test Your Understanding

Q1. In which method is income recorded only when received?
A) Accrual Basis
B) Cash Basis ✅
C) Hybrid Basis
D) None of the above

Q2. Which method follows the matching principle?
A) Cash Basis
B) Accrual Basis ✅
C) Hybrid Basis
D) None

Q3. Accrual basis of accounting is suitable for:
A) Large companies ✅
B) Street vendors
C) Small traders
D) Farmers

(Q2) : Video Based Content (Youtube): www.youtube.com/watch?v=veQ0xBUNDSY 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform): forms.fillout.com/t/t1ZCiPDC4rus