There are two methods of Accounting. A) Cash b) Accrual
Cash Based Accounting: Entries are made in the books only when inflow or outflow or payment in cash takes place. In cash system income is accounted for when cash is actually received and expenses are accunted for when cash is actually paid. In this no entries related to due or outstanding are shown. Most of the organizations follow this as this is easy to understand. However in this system cash generating ability is not there (present cash flows of an organisation cannot be used to predict the future ability of the organisation to generate cash flows. For this purpose separate records are maintained by some organizations such as outstanding expenses etc.
Accrual (Mercantile) System:
Fiscal recording of items pertaining to a current period which would not have appeared in the accounts until a future period in the normal course of payment or receipt in respect of the items. In this system transactions happens Irrespective of whether cash received or not. This system recognizes that if a transaction or event has occurred, its consequences cannot be avoided and must be brought to books regardless of whether cash flow has resulted or not. In this the actual receipts or payments are not taken as base and the revenues are recognized if they belong to relevant accounting period irrespective of whether cash or cash equivalent is received or not. Expenses are recognized if they are relatable to the revenues earned and accounted in the said period, irrespective of whether they are paid or not. In this depreciation, loss due to fire/theft are also included. Mostly profit-oriented organizations/companies uses this sytem.
Some information contained in this website has been collected from various sources including other websites
on the internet. While all the information is deemed to be correct, NGOPortal.org has not verified them and does not endorse the accuracy of the information
published on this website. Readers are strongly advised to verify them on their own and use the information at their own risk.