Accounting basics · for students

Accrual vs cash basis, explained the simple way.

Two ways to decide when a sale or expense enters your books. Learn the rule behind each, see a comparison table, and follow the same transaction booked twice — once accrual, once cash — so you can see exactly why the profit differs.

Reviewed July 2026
7 min read
CA Anil Agarwal & the TatvaBooks team

What is the accrual basis of accounting?

The accrual basis of accounting records income when it is earned and expenses when they are incurred — regardless of when cash actually changes hands. Raise a sales invoice today and the sale is booked today, even if the customer pays 30 days later. Receive an electricity bill today and the expense is booked today, even if you pay it next week.

The cash basis of accounting is the opposite: nothing is recorded until cash is actually received or paid. The same invoice sits outside your books entirely until the payment lands in your bank.

Both are ways of answering one question — when does a transaction enter my books? — and the answer changes what your profit looks like, even though the underlying business activity is identical.

The rule, side by side

Accrual basis follows the matching principle — it matches income to the period it was earned in, and expenses to the period they helped generate that income, giving a true picture of performance. Cash basis is simpler to maintain but can badly distort profit if payments and receipts lag behind the actual business activity.

	Cash basis	Accrual basis
When income is recorded	Only when cash is actually received.	When the sale/service is earned — cash may follow later.
When expense is recorded	Only when cash is actually paid.	When the expense is incurred — bill received, whether or not paid.
Credit sales / purchases	Ignored until cash changes hands.	Recorded immediately via Debtors / Creditors.
Matches income to the right period	No — profit swings with cash timing, not real activity.	Yes — the matching principle in action.
Who must use it	Very small traders, some professionals (where permitted).	Mandatory for all companies under the Companies Act, 2013 and for GST-registered businesses' books.

In India, the accrual (mercantile) basis is mandatory for every company under the Companies Act, 2013, and it's the basis GST-registered businesses use to keep their books — since a GST invoice creates a liability to pay tax the moment it's raised, not when the customer eventually pays you. See our GST guide for how invoicing and accrual timing interact.

Worked example — the same transaction, two different books

Say Om Enterprises, a Nashik-based trading firm, has this month:

Raised a sales invoice for ₹1,80,000 to a customer on 20 July 2026 — payment due in 30 days, not yet received.
Received an office rent bill of ₹30,000 for July, payable on 5 August 2026 — not yet paid.
Actually collected ₹90,000 in cash this month from an old customer for last month's sale.

Here is how July's profit looks, booked twice — once under each basis:

Particulars	Cash basis ₹	Accrual basis ₹
Sales for July (invoice raised, unpaid)	Not recorded	1,80,000
Cash collected this month (last month's sale)	90,000	Not recorded — already booked in June
Rent for July (bill received, unpaid)	Not recorded	(30,000)
Profit for July	90,000	1,50,000

The corresponding journal entries under accrual basis, which tie out debit to credit:

Date	Particulars	Debit ₹	Credit ₹
20 Jul	Debtors A/c Dr. To Sales A/c (Sale invoiced, payment due in 30 days)	1,80,000	1,80,000
31 Jul	Rent A/c Dr. To Outstanding Rent A/c (July rent bill received, unpaid)	30,000	30,000
	Total	2,10,000	2,10,000

Notice the totals tie out — debits ₹2,10,000 = credits ₹2,10,000. The ₹90,000 actually collected in cash isn't a fresh entry at all under accrual; it was already booked as a sale in June, so this receipt simply clears the Debtor and moves the amount into Cash/Bank. Under cash basis, that same ₹90,000 is the only thing that shows up in July — a picture that has almost nothing to do with what the business actually did that month.

Common mistakes & student tips

Don't confuse "cash basis" with "cash transactions". A cash sale (paid on the spot) is recorded identically under both bases. The difference only shows up on credit transactions.
Accrual profit ≠ cash in hand. A business can show a healthy accrual profit and still struggle for cash if Debtors are slow to pay — that's why a cash flow statement is prepared alongside, not instead of, accrual accounts.
GST timing follows accrual, not cash. GST liability arises on invoice date (or earlier, on advance receipt) — you cannot defer output tax just because the customer hasn't paid you yet.
Outstanding and prepaid items only exist under accrual. Outstanding rent, prepaid insurance, accrued interest — these adjustment entries are unique to accrual-basis books; cash basis has no concept of them.
Exam trap: if a question gives you both "invoice raised" and "amount received" dates, check which basis the question specifies before picking which date to book against.

In TatvaBooks this happens automatically

TatvaBooks maintains your books on the accrual basis by default — the basis Indian law requires. Raise an invoice and Debtors and Sales are booked immediately; the GST liability is calculated and tracked the same moment. Enter a purchase bill before you've paid it, and Creditors and the expense post correctly, with GSTR-2B reconciliation matching your input credit against what your suppliers have actually filed. You never have to remember which basis an entry belongs to — the software applies the rule for you, every time.

It's cloud-based, GST-first and free to start. See how on the cloud accounting software and GST billing software pages.

Frequently asked questions

What is the accrual basis of accounting in simple words?

Accrual basis means you record income when you earn it and expenses when you incur them — regardless of when cash actually moves. If you raise a ₹50,000 invoice today but the customer pays after 30 days, accrual accounting books the ₹50,000 as income today, with a Debtor (receivable) sitting on your balance sheet until payment arrives.

What is the cash basis of accounting?

Cash basis records income only when cash is actually received and expenses only when cash is actually paid. The same ₹50,000 invoice from the example above would not appear in your books at all until the customer's payment lands in your bank — even though the sale happened weeks earlier.

Which basis of accounting is compulsory in India?

The accrual basis (also called the 'mercantile system') is mandatory for all companies under Section 128 of the Companies Act, 2013, and it is the basis GST-registered businesses use to maintain their books and file returns. Cash basis is allowed only for a narrow set of cases — very small traders, and certain professionals under Section 44AA of the Income Tax Act who opt for it — and even then it isn't available once turnover crosses the prescribed limits.

Why does accrual accounting show a different profit than cash in the bank?

Because profit under accrual accounting includes credit sales not yet collected (Debtors) and excludes credit purchases not yet paid (Creditors) at cost/expense timing — cash basis includes neither until money actually moves. A business can be profitable on an accrual basis and still be short of cash if customers are slow to pay, which is exactly why accrual books are paired with a separate cash flow statement.

Can a small business choose either accrual or cash basis?

Only within limits. Individuals and HUFs carrying on a profession (not business) with gross receipts up to ₹50 lakh can, under Section 44AA/44ADA, sometimes maintain cash-basis-style records for tax purposes. But any entity registered under GST must still issue invoices and reconcile ITC on an accrual footing, and every company, LLP and most firms must keep accrual books — so in practice, accrual is the default almost everyone should build around.

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