Accrual vs Cash Basis Accounting for Indian Businesses

Accrual vs cash basis accounting in India — when each is allowed, impact under Section 44AD and GST timing of supply rules.

The Two Methods at Their Simplest

Cash basis records income when cash is received and expense when cash is paid — your books are essentially a fancy bank statement. Accrual basis (also called mercantile system) records income when it is earned and expense when it is incurred, regardless of when money changes hands. Accrual matches revenue with the cost of generating it in the same period, giving a far more accurate picture of profitability. For a business with credit sales, inventory or long-cycle projects, cash basis can hide losses or inflate profits dramatically.

What Indian Law Allows

Section 145 of the Income Tax Act gives the assessee a choice — either cash or mercantile — but the choice must be consistently applied. Companies have no choice; the Companies Act mandates accrual for every company registered in India. Partnership firms and proprietors can pick cash basis, but once books are audited under Section 44AB, accrual is effectively mandatory because of the Income Computation and Disclosure Standards (ICDS) which presume mercantile. Professionals are particularly likely to use cash basis for simplicity, but they then lose the ability to claim provisions and outstanding expenses.

Impact of Section 44AD Presumptive Scheme

Under Section 44AD (presumptive taxation for small business), the question of cash vs accrual largely disappears at the income tax level — you simply declare 8% (or 6% on digital receipts) of turnover as profit. However, GST law is unchanged — GST is payable on the earlier of invoice date or payment receipt date under the time-of-supply rules (Section 12 / 13 of CGST Act). So a 44AD business may report income on a cash basis for tax but must still raise tax invoices and pay GST on an accrual basis. This dual treatment is one of the most common compliance traps.

Switching Between Methods

A genuine change in accounting method requires a board resolution (for companies) or partner / proprietor minute, disclosure in the audit report, and the cumulative impact on opening balances has to be either taken to reserves (under Ind AS) or to current period P&L (under traditional Indian GAAP). The Income Tax Department can reject a change if it suspects tax avoidance — for example, switching to cash basis in a year of high outstanding receivables. Document the commercial reason and apply the new method consistently for at least three years.

Track Both Views Effortlessly in BillBabu

BillBabu records every transaction with two dates — the document date (invoice / bill date) for accrual and the realisation date (receipt / payment date) for cash basis. The P&L report has a single toggle between Accrual and Cash mode, so you can quickly see how the same period looks under each. This is invaluable at year-end — you can decide between paying advance tax on cash basis vs accrual, or you can show a banker the accrual P&L for loan eligibility while filing your ITR on cash basis if 44AD applies.

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Built for Indian small businesses. BillBabu is GST-compliant billing software that helps you create invoices, manage estimates, track payments and stay audit-ready — from your phone. Learn more about BillBabu or download the app.