Accounting basis is the methods used in preparing financial statements. There are two basis of accounting.
1. Accrual Basis
2. Cash Basis
In this basis, incomes are recognised when they are earned and expenses or deductions are recognized when they are incured in the fimamcial statement.
For example, an expenses on transport expenses that have not been paid by you for April. In preparing your financial statement using this method, you will recognized the expenses in the income statement and state it as a liabilty in the statement of financial possition.
In this basis, incomes are recognized when they are received and expemses are recognized when they are paid in the financial statement.
In the above example, you will not post any entry in your financial statement untill the money is paid by you. When it is paid, you will record it as expenses.
MODIFIED ACCRUAL BASIS
This is also called modified cash basis. This is a mixture of both cash and accrual basis. In this basis, incomes are recognized when they are earned and expenses are recognized when they are paid. Recently, most government organizations are applying modified cash basis for preparing their financial statements
DIFFERENCES BETWEEN ACCRUAL BASIS AND CASH BASIS
1. BY DEFITION
Accrual basis is defined as the recognision of income when they are earned and expenses when they are incured.
Cash basis, on the other hand, recognized income when they are received and expenses when they are paid.
2. BY SECTOR
Private sector companies and businesses applied accrual basis of preparing financial statements while the public sector (government, ministries, departments, agencies, etc) applies cash basis of preparing financial statements,