These are two different approaches to deciding WHEN a transaction gets recorded in the books. Cash Basis accounting records income and expenses only when cash actually changes hands, a sale is recorded when payment is received, an expense when it's actually paid, regardless of when the underlying goods/services were delivered or the bill was received. Accrual Basis accounting records income and expenses when they're earned or incurred, regardless of when cash actually moves, a sale is recorded when the goods/service is delivered and invoiced, even if payment comes 30 days later; an expense is recorded when the bill is received, even if it's paid next month. Accrual accounting gives a more accurate picture of a business's actual financial performance in a given period, since it matches revenue and the expenses that generated it to the same period, which is why most formal financial statements use accrual accounting, and why Indian company law mandates it outright: Section 128(1) of the Companies Act, 2013 requires every company registered under the Act, regardless of size, to maintain its books on an accrual basis under the double-entry system. Cash basis is simpler and still used by some very small businesses, proprietorships, and individuals not registered as companies, but can distort the picture of profitability if income and expense timing doesn't line up naturally.
Example: A business delivers ₹1,00,000 of goods in March but receives payment in April. Under accrual accounting, that ₹1,00,000 is recorded as March revenue. Under cash basis, it would be recorded as April revenue instead, since that's when the cash arrived.
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