Method of Accounting & Records Chapter- 11
Accrual basis of accounting [u/s 34(1), (2) and (3)]
A person while accounting for "Income from Business" shall use accrual basis when it is due to the
person and shall incur expenditure when it is payable by the person.
(A) Under accrual when revenue is recognised:
An amount shall be due to a person when the person becomes entitled to receive it even if the
time for discharge of the entitlement is postponed or the amount is payable by instalments.
(B) Under accrual when expenditure is recognised:
An amount shall be payable by a person when all the events that determine liability have
occurred and the amount of the liability can be determined with reasonable accuracy.
Example (covering both cash and accrual accounting methods): In tax year 20 23 there was
payment of Rs.100,500 on account of electricity bills however the Rs.8,005 bill for the month of June-
2023 was paid in July- 2023.
Under cash accounting system:
The payment of Rs.100,500 shall be recorded under the cash accounting system whereas there will
be no recording of June bill paid in July- 2023 in the books of account for the tax year 20 23.
Under accrual accounting system:
The electricity bill of June paid in July- 2023 shall be recorded in the books of account for the tax year
2023 along-with payment of Rs.100,500 related to first eleven months under the accrual accounting
system.- Trading liability not paid and its subsequent full or part payment [u/s 34(5) and (6)]
Non-payment of an allowed expenditure (under the head business income) after a period of three
years of the end of the tax year in which the deduction was allowed will result into inclusion of the
same in the business income in the first tax year following the end of the 3 years. However where a
person subsequently after the aforesaid disallowance pays the liability or a part of liability the person
shall be allowed a deduction for the amount paid in the tax year in which payment is made.
Important Note: The aforesaid section is not applicable on where the debit side of a liability is not a
tax expense e.g. loan payable or advance from customers.
Example: Mr. A purchased goods on credit worth Rs.5,000 in tax year 20 20. However, he paid this
amount in tax year 20 23. Explain the treatment of this transaction.
Solution:
Tax year 20 20 (the year in which expense claimed)
Amount of Rs. 5,000 shall be treated as admissible expense.
Tax year 20 22 (on expiry of said three years)
Amount of Rs. 5,000 shall be added in taxable income as it has not been paid within three years from
the tax year in which it was treated as admissible expense.
Tax year 20 23 (on payment after disallowance of expense)
Rs.5,000 shall be deducted from taxable income.- Stock in trade [u/s 35(1), (2), (3) and (4)]
For "Income from Business" the cost of stock in trade disposed of by the person in the year
shall be computed as under, namely:
Stock consumed = Opening stock + Cost of stock acquired during the year - closing stock
The opening value of stock for a tax year shall be as under:
the closing value of stock-in-trade at the end of the previous year; or
Where business has started in the year, the FMV of any stock-in-trade at the date
when such stock ventured in the business.
Valuation of inventory shall be lower of cost and NRV at the end of the year.
where NRV stands for = Net Realizable Value