What is Accrual Accounting?
Accrual Accounting (or Accrual Basis of Accounting) is an accounting method under which financial transactions are recorded at the time the economic event occurs — when revenue is earned and expenses are incurred — irrespective of when cash is exchanged. This gives a more accurate and complete picture of a business's financial position at any given time.
Accrual accounting is the foundation of modern financial reporting and is mandated by all major accounting frameworks globally — including Ind AS, Indian GAAP (AS), IFRS and US GAAP.
Accrual Basis vs Cash Basis
| Aspect | Accrual Basis | Cash Basis |
|---|---|---|
| Revenue recognition | When earned (invoice raised / service delivered) | When cash is received |
| Expense recognition | When incurred (goods/services received) | When cash is paid |
| Matching | Revenue matched with related expenses | No matching — timing-dependent |
| Accuracy | Higher — true financial position | Lower — may misstate position |
| Complexity | More complex — requires adjusting entries | Simpler to maintain |
| Required for | All companies under Companies Act, 2013 | Small businesses, individuals (optional) |
Examples of Accrual Accounting
- Revenue Accrual: A company provides services worth ₹5 lakh in March 2025 but receives payment in April 2025. Under accrual accounting, ₹5 lakh is recorded as income in FY 2024-25.
- Expense Accrual: Salary for March 2025 paid on 5 April 2025. Under accrual accounting, it is recorded as an expense in FY 2024-25 (month it was earned by employees).
- FD Interest: Interest accrued on a Fixed Deposit is recorded every month/quarter even if the bank credits it only at maturity.
Legal Requirement in India
The Companies Act, 2013 (Section 128) and the Income Tax Act, 1961 (Section 145) both require that companies maintain accounts on the accrual basis. Under Section 145:
- Income must be computed either on cash or mercantile (accrual) basis
- Once a method is adopted, it must be consistently followed
- Switching from accrual to cash basis without approval can result in scrutiny
Accrual and GST
Under GST, the time of supply rules broadly follow accrual principles — GST is payable on the earlier of the date of invoice or date of payment (for services). This means GST liability arises even if payment has not been received.
💡 For Professionals: Doctors, lawyers, CAs and other professionals in India may use the cash basis of accounting for income tax purposes under presumptive taxation (Section 44ADA). However, if they opt out of presumptive taxation, they must maintain accrual-basis accounts and get them audited.
Frequently Asked Questions
Q: What is Accrual Accounting in simple terms?
An accounting method where revenue and expenses are recorded when they are earned or incurred respectively — regardless of when cash is actually received or paid. In the Indian context, accrual accounting is particularly relevant for businesses, individuals and professionals dealing with taxation, financial reporting and regulatory compliance.
Q: Who needs to understand Accrual Accounting?
Anyone involved in accounting in India — including business owners, salaried employees, Chartered Accountants, company secretaries, financial managers and individual taxpayers — should have a clear understanding of accrual accounting to make informed decisions and remain compliant with applicable laws.
Q: What are the key regulations governing Accrual Accounting in India?
Accrual Accounting in India is primarily governed by the relevant provisions of the Income Tax Act, 1961, the Companies Act, 2013, the GST legislation, FEMA or other applicable statutes depending on the specific context. The Central Board of Direct Taxes (CBDT), Ministry of Corporate Affairs (MCA) and Reserve Bank of India (RBI) periodically issue notifications, circulars and guidelines that further define compliance requirements related to accrual accounting.
Q: What are the consequences of non-compliance with Accrual Accounting requirements?
Non-compliance with requirements related to accrual accounting can attract significant consequences under Indian law, including monetary penalties ranging from fixed amounts to percentages of the transaction value or tax evaded, interest charges, prosecution under applicable statutes, and reputational damage. Engaging a qualified Chartered Accountant ensures that all compliance obligations related to accrual accounting are met on time.
Q: How can Casela Advisors help with Accrual Accounting?
Casela Advisors is a leading CA firm based in Mumbai with deep expertise in accounting matters, including accrual accounting. Our team of qualified Chartered Accountants provides end-to-end advisory, compliance support, return filing, and representation services. We assess your specific situation, identify opportunities, flag risks and ensure full regulatory compliance. Contact us for a free initial consultation.