What it means
Cash accounting looks only at the bank. Accrual accounting asks: which month does this income or expense belong to? Section 128 of the Companies Act requires companies to keep books on the accrual basis and by double entry, and GST works the same way: tax is due when you invoice, not when the customer pays.
Example
Kaveri Agencies, March 2027:
| Event | Cash basis | Accrual basis |
|---|---|---|
| Invoice to Annai Traders on 28 Mar, paid 20 Apr: ₹2,00,000 | April income | March income |
| March electricity bill of ₹18,000, received and paid in April | April expense | March expense |
| Rent of ₹60,000 paid in March for April | March expense | April expense (prepaid in March) |
On the accrual basis March shows the true profit for March, and the balance sheet shows ₹2,00,000 as debtors, ₹18,000 as outstanding expenses and ₹60,000 as prepaid rent.
Common mistakes
- Booking expenses only when the bill is paid, so the year-end profit is overstated.
- Forgetting year-end accruals for salary, interest and utilities.
- Treating advance receipts from customers as income.
In MyRecords
Invoices and supplier bills post when they are submitted, not when they are paid, so the books are on the accrual basis by default. Accruals and prepayments are passed as journal entries, Close books can book deferred revenue and expense, and Who owes you and Who you owe show what is due either way.