Systems of Accounting:

Learning Objectives:

1. Define and explain cash system and accrual system of accounting.

There are basically two systems of accounting:

1. Cash System of Accounting.
2. Accrual System of Accounting.

Cash system of accounting:

Definition and Explanation:

It is a system in which accounting entries are made only when cash is received or paid. No entry is made when a payment or receipt is merely due. For example, the rent for December 2009 has not been paid till January 10the 2010. Under cash basis, rent expense for the month of December will not be recorded as payment has not been made. Government system of accounting is mostly on the cash system.

Accrual System of Accounting:

Definition and Explanation:

It is a system in which accounting entries are made on the basis of amount having become due for payment or receipt. This system recognizes the fact that if a transaction or an event occurred, its consequences cannot be avoided and therefore, should be brought into book in order to present a meaningful picture of profit earned or loss suffered