Accounting · Theoretical Framework

Bases of Accounting and Systems of Bookkeeping for CA Foundation

Updated 1 October 2026 · Fact-checked

Basis of accounting decides when you record income and expenses: on cash movement (cash basis) or when earned or incurred (accrual basis). Hybrid mixes both. Systems of bookkeeping decide how you record: single entry is incomplete and partial, double entry records both debit and credit of every transaction.

Understand Bases of Accounting and Systems of Bookkeeping

A basis of accounting is the rule that tells you *when* a transaction goes into the books. Two businesses can have the same sales and costs but show different profits if they use different bases.

Under the cash basis, you record a transaction only when cash is received or paid. Credit sales are ignored until the money comes in. Outstanding expenses and prepaid expenses are not shown. It is simple, but it does not match income with the expenses of the same period.

Under the accrual basis, you record income when it is earned and expenses when they are incurred, whether or not cash has moved. So you show debtors, creditors, outstanding and prepaid items. This gives a fairer profit. Accrual is one of the fundamental accounting assumptions, along with going concern and consistency. Matching of expenses with the related revenue is a separate concept; it is applied on top of the accrual basis and is not the same thing as accrual. Section 128 of the Companies Act 2013 requires companies to maintain their books of account on the accrual basis and the double entry system. Under the hybrid (mixed) basis, some items are on cash basis and others on accrual basis. For example, expenses are on accrual basis but some income, like interest or commission, is recorded when received.

A system of bookkeeping is the method of recording. In the double entry system, every transaction has two aspects: one account is debited and another is credited with an equal amount. Total debits equal total credits, so a trial balance can check arithmetical accuracy. Personal, real and nominal accounts are all maintained. Full final accounts can be prepared.

In the single entry system, there is no fixed method. Usually only a cash book and personal accounts of debtors and creditors are kept. Real and nominal accounts are often missing. A trial balance cannot be prepared, so errors are harder to find. Profit is found by comparing opening and closing capital (statement of affairs). Small traders use it. It is not a complete system, and many call it incomplete records.

Key rules to remember

Cash basis rule: Record only when cash is received or paid; No debtors, creditors, outstanding or prepaid items.
Accrual basis rule: Income when earned; expense when incurred (cash timing irrelevant); This is the accrual assumption itself. Matching related expenses with revenue of the period is a separate concept applied on top of it.
Hybrid basis rule: Part cash basis + part accrual basis; Typical case: expenses on accrual, some incomes on cash.
Double entry rule: Total debits = Total credits for every transaction; Each transaction affects at least two accounts.
Profit under single entry: Profit = Closing capital − Opening capital + Drawings − Additional capital introduced; Statement of affairs method; used when only incomplete records exist. Closing capital comes from closing assets and liabilities, so depreciation, bad debts and provisions must be adjusted when you value those assets and liabilities in the statement of affairs. If they are given as additional information after the profit is found, deduct them from the profit.

How to solve Bases of Accounting and Systems of Bookkeeping questions

Questions on this topic are either theory (differences, features, advantages) or small computations comparing profit under two bases. Use this method for both.

1Read the question and mark the key word: basis (when to record) or system (how to record).
2For a theory question, list points under fixed heads such as meaning, recording of transactions, items shown, profit accuracy and suitability.
3For a numerical question, list each item with the amount received or paid and the amount earned or incurred.
4Under accrual, adjust for outstanding and prepaid expenses and for income due and income received in advance. Under cash, take only cash actually moved.
5Compute income, expense and profit separately for each basis and show the working.
6State the result with a one-line reason for the difference between the two profits.
7For system questions, give the double entry point and the matching single entry point side by side.

Quickest way: Two-column comparison with a fixed head list

When to use it: Use for any 'distinguish between' or 'state advantages' question in the subjective paper.

Draw two columns with the heads written first: meaning, recording, items shown, profit, trial balance, suitability.
Fill one line per head in each column in a short sentence.
Add one example, such as a credit sale or an unpaid rent, to show the difference.
For a numerical question, use the formula Accrual expense = Cash paid + closing outstanding + opening prepaid − opening outstanding − closing prepaid. Adjust the reverse way for incomes where needed, then check by direct listing.

Common mistakes in Bases of Accounting and Systems of Bookkeeping

Saying accrual basis means recording when cash is received.
Students mix up the words accrual and receipt.
Fix: Remember accrual means 'earned or incurred'. Cash timing does not matter.
Treating hybrid basis as the same as accrual basis.
Both show some outstanding items, so they look alike.
Fix: In hybrid, at least some items follow cash basis. Write which items follow which basis.
Saying single entry has no records at all.
The word 'single' is read as 'one record only'.
Fix: Say it is incomplete and unsystematic. Usually a cash book and personal accounts are kept, but not real and nominal accounts in full.
Claiming a trial balance proves the books are fully correct under double entry.
Students overstate the advantage.
Fix: Write that it checks arithmetical accuracy only. Some errors, such as errors of principle or complete omission, do not affect agreement.
Including outstanding expenses in cash basis profit.
Habit from final accounts adjustments.
Fix: For cash basis, take only payments actually made in the period.
Giving a one-line answer to a difference question.
Students run short of time or points.
Fix: Give at least four to five distinct points in a comparison layout so each earns marks.

Worked examples

Example 1

For the year, a trader paid rent of ₹60,000 in cash. This includes ₹5,000 paid in advance for next year. Rent of ₹4,000 for the last month of this year is still unpaid. Find the rent expense under (a) cash basis and (b) accrual basis.

Show the solution

Cash basis: only cash paid counts, so rent expense = ₹60,000.
Accrual basis: start with cash paid ₹60,000.
Deduct the prepaid part, which belongs to next year: ₹60,000 − ₹5,000 = ₹55,000.
Add the outstanding rent, which belongs to this year: ₹55,000 + ₹4,000 = ₹59,000.

Answer: Rent expense is ₹60,000 on cash basis and ₹59,000 on accrual basis.

Example 2

Distinguish between single entry and double entry systems of bookkeeping (any four points).

Show the solution

Meaning: Single entry is an incomplete method with no fixed rules. Double entry records the two-fold effect of every transaction.
Accounts kept: Single entry keeps mainly a cash book and personal accounts. Double entry keeps personal, real and nominal accounts.
Trial balance: Cannot be properly prepared in single entry. In double entry it can be prepared to check arithmetical accuracy.
Final accounts: In single entry, profit is found by the statement of affairs method and a true balance sheet is hard to prepare. In double entry, Trading and Profit and Loss Account and Balance Sheet are prepared.
Suitability: Single entry suits very small traders. Double entry suits all types of business, especially companies.

Answer: Single entry is incomplete and cannot give reliable final accounts. Double entry is a complete system that records both aspects, allows a trial balance and gives proper final accounts.

Exam tips

For 'distinguish' questions, use a two-column layout and give at least five points. Layout itself helps earn marks.
Always add a small numeric illustration, like prepaid rent or credit sales, when comparing cash and accrual.
In advantage questions for double entry, mention complete record, arithmetical check, ease of locating errors and preparation of final accounts.
In numerical questions, show the working line for each adjustment so you get step marks even if the final figure is wrong.
Remember accrual is a fundamental accounting assumption, and Section 128 of the Companies Act 2013 requires companies to keep books on the accrual basis and double entry system. Use both points when asked why companies follow accrual.

Practice questions from Theoretical Framework

Bases of Accounting and Systems of Bookkeeping: frequently asked questions

What is the main difference between cash basis and accrual basis?

Cash basis records a transaction only when cash is received or paid. Accrual basis records income when earned and expenses when incurred, whatever the cash timing. Accrual gives a better match of income and expenses.

What is the hybrid basis of accounting?

It is a mix of cash and accrual basis. For example, expenses may be recorded on accrual basis while certain incomes are recorded only when received. It is used where full accrual is not practical.

Can a trial balance be prepared under single entry?

Not in a reliable way. Single entry does not record both aspects of every transaction and often lacks real and nominal accounts. So debits and credits cannot be matched.

What are the advantages of the double entry system?

It gives a complete record of all transactions and keeps personal, real and nominal accounts. The trial balance checks arithmetical accuracy, and errors are easier to trace. It also allows proper final accounts.