It is a system of recording transactions by which revenues and costs and assets and liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made in cash. It means that a transaction is entered in the books of account only on the actual receipts of cash for an income item and payment of cash for an item of expenditure ignoring the time of its accrual or occurrence. Revenues are therefore calculated as the aggregate amount of cash received in the current year. It is immaterial whether the receipts pertain to previous year(s) or future period(s). Similarly, deductions are restricted to the actual payments of expenses in cash in the current year and it is immaterial whether the payments have been made for the previous period(s) or future period(s). No distinction is made between the revenues and expenses of the accounting period and prior o and subsequent to accounting period(s). Similarly, no distinction is made between capital expenditure and revenue expenditure or capital receipts and revenue receipts. The only basis is the receipt of the cash and the payments of cash in the current accounting period. Thus under the cash basis of accounting, the income is accounted actually when it is received and realized in cash and expenses are booked as and when they are paid. It would appear that cash basis of accounting is incompatible with the matching principle of income determination. As a result the financial statements prepared under the cash basis of accounting do not present true and fair view of the operation results and also of the financial position of an enterprise.

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