AccountancyCBSE Class 11 · Theory Base of Accounting

Cash Basis and Accrual Basis of Accounting Class 11: Differences and Profit Calculation

Updated 17 October 2026 · Fact-checked

On the cash basis a transaction is recorded only when cash is received or paid; on the accrual basis revenue is recorded when earned and expenses when incurred, whether or not cash has moved. Accrual profit equals cash profit adjusted for outstanding and prepaid expenses, accrued and advance income, and credit sales and purchases of the period.

Start from cash profit, add prepaid expense and accrued income, subtract outstanding expense and advance income to reach accrual profit.

Illustration drawn for QuestionBuddy.

Understand Cash Basis and Accrual Basis of Accounting with Profit Calculation

Two bases.

Cash basis: record only on receipt or payment. Simple; used by small traders and for cash flow. It ignores amounts due or owing, so profit can be misleading.
Accrual basis: record revenue when earned (right to receive arises) and expenses when incurred (obligation arises). Required by company law and accounting standards; it applies the matching concept.

Differences. Recognition of revenue and expense (cash movement versus earning/incurring); profit (may differ from true performance versus nearer to true); assets and liabilities (debtors, creditors, prepaid and outstanding items appear only under accrual); suitability (small shops versus companies and larger firms).

Converting cash profit to accrual profit. Start with the profit on the cash basis (receipts minus payments of revenue nature) and adjust.

Add: expenses prepaid (paid in advance but belonging to the next period), income outstanding or accrued (earned, not yet received), and expenses paid for the *previous* period (outstanding at the opening).
Subtract: expenses outstanding at the end, income received in advance (belonging to the next period), and income of the previous period received this year.
For goods: add closing stock, subtract opening stock; add credit sales (increase in debtors) and subtract increase in creditors-related purchases.

Method for numericals. Prepare the accrual figure for each head (revenue, each expense) first: Accrual amount = Cash amount + closing outstanding (or opening prepaid) − opening outstanding (or closing prepaid) for expenses. For income reverse the signs. Then profit = accrual revenue − accrual expenses.

Cash Basis and Accrual Basis of Accounting with Profit Calculation: key facts

Expense, accrual from cash: Cash paid + Closing outstanding + Opening prepaid − Opening outstanding − Closing prepaid; Applied head by head.
Income, accrual from cash: Cash received + Closing accrued + Opening received in advance − Opening accrued − Closing received in advance; Reverse of expense.
Accrual profit: Accrual revenue − Accrual expenses; Matching concept.

How to answer Cash Basis and Accrual Basis of Accounting with Profit Calculation questions

Convert one head at a time and then compute profit; do not guess the direction of an adjustment.

1List cash receipts and cash payments of the period by head.
2For each expense head: adjust for outstanding and prepaid at the beginning and the end.
3For each income head: adjust for accrued and advance amounts at the beginning and the end.
4Adjust sales for credit sales and purchases for credit purchases if the question gives debtors and creditors.
5Subtract total accrual expenses from total accrual revenue.

Cash Basis and Accrual Basis of Accounting with Profit Calculation in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Rent paid in advance

Suppose Ravi paid ₹36,000 in December for the next 12 months' shop rent (December to November) and the year ends on 31 March.

How much is the rent for the year on the cash basis and on the accrual basis?

Try it first, then show the solutionSolution

Cash basis: ₹36,000 is the payment of the year.
Accrual basis: rent for December to March = 36,000 × 4/12 = ₹12,000; ₹24,000 is prepaid.

Answer: Cash basis ₹36,000; accrual basis ₹12,000 (₹24,000 prepaid).

Memory hook: Accrual charges only what was used.

Tricks to remember Cash Basis and Accrual Basis of Accounting with Profit Calculation

Short memory aids. Say each one aloud once, then use it on a question the same day.

Cash moves, books move
Cash basis records only when cash moves.
Use it when: Cash basis.
Earned and incurred
Accrual: record when earned or incurred.
Use it when: Accrual basis.

Cash Basis and Accrual Basis of Accounting with Profit Calculation: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Basis of accounting · 1 mark · MCQBoard level

Under which basis of accounting is revenue recorded when it is earned?
(a) Cash basis
(b) Accrual basis
(c) Single entry
(d) Hybrid only

Try it first, then show the solutionSolution

Accrual: earned or incurred.

Answer: (b) Accrual basis

Example 2: A clinic that records only cash · 3 marks · Short answerBoard level

A clinic records fees only when cash arrives. In the last week of the year it treated patients worth ₹25,000 who will pay next month, and it paid ₹9,000 for a year's equipment insurance that begins next month. State two ways in which its profit for the year is misstated and why. (3 marks)

Try it first, then show the solutionSolution

Fees of ₹25,000 are earned this year but not recorded, so profit is understated.
The insurance of ₹9,000 belongs to next year but is charged this year, so profit is understated again.
The accrual basis would record the fees as income now and treat the insurance as prepaid.

Answer: Profit understated by ₹25,000 and by ₹9,000, a total of ₹34,000 on these two items.

Example 3: Rent on both bases · 3 marks · Short answerHarder board level

Cash paid for rent during the year ended 31 March 2026 was ₹60,000. Rent outstanding on 1 April 2025 was ₹5,000 and on 31 March 2026 was ₹8,000. Find the rent for the year on the accrual basis. (3 marks)

Try it first, then show the solutionSolution

Accrual rent = 60,000 − 5,000 (opening outstanding, belongs to last year) + 8,000 (closing outstanding) = ₹63,000.

Answer: Rent for the year = ₹63,000.

Example 4: Profit on both bases · 4 marks · Short answerHarder board level

Hemant's cash book for the year shows sales receipts ₹4,00,000 and payments for expenses ₹2,60,000, so his profit on the cash basis is ₹1,40,000. At the year end, debtors for sales not yet received were ₹30,000, expenses outstanding were ₹12,000 and expenses prepaid were ₹5,000. There were no opening balances. Find profit on the accrual basis. (4 marks)

Try it first, then show the solutionSolution

Accrual revenue = 4,00,000 + 30,000 = ₹4,30,000.
Accrual expenses = 2,60,000 + 12,000 − 5,000 = ₹2,67,000.
Profit = 4,30,000 − 2,67,000 = ₹1,63,000.
Check: 1,40,000 + 30,000 − 12,000 + 5,000 = 1,63,000.

Answer: Accrual profit = ₹1,63,000.

Example 5: Opening and closing adjustments · 4 marks · Short answerHOTS / competency

Meena, a tutor, received ₹3,60,000 as fees in a year, including ₹30,000 for the next year. Fees due but not received at the end were ₹20,000; at the beginning fees of ₹15,000 due from last year were received this year, and ₹10,000 had been received in advance last year. Her cash expenses were ₹1,80,000, including insurance ₹6,000 prepaid for next year; outstanding expenses at the beginning ₹9,000 and at the end ₹14,000. Find her profit on the accrual basis. (4 marks)

Try it first, then show the solutionSolution

Accrual fees = 3,60,000 − 30,000 (advance of next year) + 20,000 (due at end) − 15,000 (last year's, received this year) + 10,000 (last year's advance, earned this year) = ₹3,45,000.
Accrual expenses = 1,80,000 − 6,000 (prepaid) − 9,000 (last year's outstanding) + 14,000 = ₹1,79,000.
Profit = 3,45,000 − 1,79,000 = ₹1,66,000.

Answer: Accrual profit = ₹1,66,000.

Where students lose marks in Cash Basis and Accrual Basis of Accounting with Profit Calculation

The slips examiners see most often, and what to write instead.

Mistake: Adding opening outstanding to the expense
Wrong direction for the opening balance.
Wrong working
Rent = 60,000 + 5,000 + 8,000 = 73,000.
Right working
Rent = 60,000 − 5,000 + 8,000 = 63,000.
Do this: Opening outstanding belongs to last year, so deduct.
Usually costs: 1 mark
Mistake: Ignoring prepaid expenses
Counting all cash paid.
Wrong working
Insurance = 6,000 paid.
Right working
Insurance of the year excludes the part prepaid for the next year.
Do this: Deduct closing prepaid.
Usually costs: 1 mark
Mistake: Recognising advances as income
Cash received is not always earned.
Wrong working
Fees = 3,60,000.
Right working
Fees = 3,30,000 after removing the next year's advance.
Do this: Deduct advances received.
Usually costs: 1 mark

Exam tips

Write "opening", "closing" next to each adjustment before adding or subtracting.
After finding accrual profit, check it with the profit from the cash basis plus net adjustments.
Keep expenses and incomes in separate columns; the signs are opposite.
In differences, give at least four pairs of points to get full marks.

Practice questions on Cash Basis and Accrual Basis of Accounting with Profit Calculation

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Which basis recognises a credit sale as revenue immediately?
(a) Cash basis
(b) Accrual basis
(c) Both
(d) Neither
Hint
Earned, not collected.
Answer
(b) Accrual basis
Q2 · 3 marks · Short answerHarder board level
Cash paid for salaries ₹2,40,000. Salaries outstanding: opening ₹20,000, closing ₹30,000. Find salaries for the year on the accrual basis. (3 marks)
Hint
Opening is deducted.
Answer
Salaries = 2,40,000 − 20,000 + 30,000 = ₹2,50,000.
Q3 · 3 marks · Short answerHarder board level
Cash received as commission ₹1,20,000, of which ₹15,000 is for next year. Commission accrued at the end ₹8,000. Opening accrued commission ₹6,000 was received this year. Find commission for the year on the accrual basis. (3 marks)
Hint
Reverse the expense logic.
Answer
Commission = 1,20,000 − 15,000 + 8,000 − 6,000 = ₹1,07,000.
Q4 · 4 marks · Short answerHarder board level
A firm's profit on the cash basis is ₹2,00,000. Credit sales not yet received ₹45,000; creditors for expenses ₹18,000; insurance prepaid ₹7,000; no opening balances. Find the accrual profit and say whether it is higher or lower and why. (4 marks)
Hint
Add income earned, subtract expenses owed, add prepaid.
Answer
Accrual profit = 2,00,000 + 45,000 − 18,000 + 7,000 = ₹2,34,000. It is higher because earned but uncollected income and prepaid expense are added, only partly offset by the unpaid expenses.
Q5 · 4 marks · Short answerHOTS / competency
Sunil's cash profit for the year is ₹90,000. At the beginning, rent outstanding was ₹4,000 and fees received in advance ₹6,000; at the end, rent prepaid was ₹3,000 and fees due ₹9,000. Assuming these are the only items, find the accrual profit and explain the effect of each on profit. (4 marks)
Hint
Treat each of the four items separately.
Answer
Opening rent outstanding (last year's expense paid now) +4,000; opening advance fees (earned this year) +6,000; closing rent prepaid +3,000; closing fees due +9,000. Accrual profit = 90,000 + 4,000 + 6,000 + 3,000 + 9,000 = ₹1,12,000. Each addition arises because the cash basis charged the rent or ignored earned fees in the wrong year.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Cash basis records when?Show answer
When cash is received or paid.
2.Accrual basis records when?Show answer
When revenue is earned or expense incurred.
3.Which basis follows the matching concept?Show answer
Accrual.
4.Opening outstanding expense is added or deducted?Show answer
Deducted (it belongs to last year).
5.Which basis shows debtors and creditors?Show answer
Accrual.

Cash Basis and Accrual Basis of Accounting with Profit Calculation: frequently asked questions

Which basis do companies follow?

The accrual basis.

Is cash basis wrong?

It is simple and acceptable for small traders, but it does not show the true profit of a period with credit dealings.

What is the hybrid basis?

A mix: some items on cash basis and others on accrual basis.