Systems, basis of accounting, standards and GST basics
- Compare the double entry and single entry systems
- Calculate profit on cash basis and accrual basis and explain the difference
- Explain the meaning, need, benefits and limitations of Accounting Standards, with an overview of Ind AS and IFRS
- Understand GST, CGST, SGST and IGST and apply them to simple sales
Hello again! We now know the thirteen concepts. Today we zoom out and ask three practical questions. How are records kept: fully (double entry) or partly (single entry)? When is a transaction counted: when cash moves (cash basis) or when it is earned or incurred (accrual basis)? And who makes sure every business in India follows the same rules? That brings us to Accounting Standards, and finally to GST, the tax that appears on almost every bill you see. Chapter 3 will use all of this, so read carefully.
1. Systems of accounting
There are two systems of recording transactions: the double entry system and the single entry system.
1.1 Double entry system
The double entry system is based on the dual aspect concept: every transaction has two effects (receiving a benefit and giving a benefit), so it is recorded in at least two accounts. Every debit has a corresponding credit of equal amount.
- It is a complete system, since both aspects of every transaction are recorded.
- It is accurate and reliable; chances of fraud and misappropriation are reduced.
- Arithmetical accuracy can be checked by preparing a trial balance (Chapter 6).
- It can be used by big as well as small organisations. All companies must use it.
1.2 Single entry system
The single entry system is an incomplete system in which the two-fold effect of every transaction is not recorded. Usually only personal accounts (debtors and creditors) and the cash book are kept.
- For some transactions one aspect is recorded, for others both. There is no uniformity, so it is often called "a lack of system" or incomplete records.
- The records are incomplete, unsystematic and not reliable. A trial balance cannot be prepared from them.
- It is still used by some small traders because it is simple and flexible.
Ramu's pan shop keeps only a diary: "Mohan owes ₹450", "Paid milk supplier ₹1,200", and the cash in the drawer. That is single entry. Sharma Traders uses Tally and records every sale with its effect on stock, cash, customers and GST. That is double entry. When Ramu wants a bank loan, he struggles to prove his profit; Sharma Traders just prints its statements.
| Basis | Double entry | Single entry |
|---|---|---|
| Recording | Both aspects of every transaction | Only one aspect for many transactions |
| Accounts kept | Personal, real and nominal accounts | Mainly personal accounts and cash book |
| Trial balance | Can be prepared | Cannot be prepared |
| Reliability | Reliable, fraud easier to detect | Not reliable |
| Suitable for | All organisations | Small traders only |
2. Basis of accounting: cash vs accrual
Here the question is about timing: in which period do we recognise revenue and expenses?
2.1 Cash basis
Under the cash basis, entries are made only when cash is actually received or paid, not when the receipt or payment becomes due.
- Rent for March paid in April is recorded in April.
- A credit sale made in January is recorded only when the customer pays, say in April.
- Profit = cash receipts − cash payments of the period.
- It is simple, but it goes against the matching concept, so it is unsuitable for most organisations.
2.2 Accrual basis
Under the accrual basis, revenues and costs are recognised in the period in which they occur (are earned or incurred), whether or not cash is received or paid in that period.
- It distinguishes between receipt of cash and the right to receive cash, and between payment of cash and the legal obligation to pay.
- It follows revenue recognition and matching, so it gives the correct profit. Companies must follow it.
Cash sales ₹5,00,000; credit sales ₹2,00,000, of which ₹1,50,000 was collected. ₹30,000 was also collected from customers of last year.
Purchases: cash ₹3,00,000; credit ₹1,00,000, of which ₹80,000 was paid.
Rent is ₹10,000 per month; 11 months' rent was paid.
Find the profit on (a) cash basis and (b) accrual basis.
- (a) Cash receipts = 5,00,000 + 1,50,000 + 30,000 = 6,80,000.
- Cash payments = purchases 3,00,000 + 80,000 + rent 1,10,000 = 4,90,000. Cash-basis profit = 6,80,000 − 4,90,000 = 1,90,000.
- (b) Revenue earned = all sales of the year = 5,00,000 + 2,00,000 = 7,00,000. Last year's ₹30,000 is not this year's revenue.
- Expenses incurred = purchases 4,00,000 + rent for 12 months 1,20,000 = 5,20,000. Accrual profit = 7,00,000 − 5,20,000 = 1,80,000.
Item Cash basis (₹) Accrual basis (₹) Sales / receipts 6,80,000 7,00,000 Purchases 3,80,000 4,00,000 Rent 1,10,000 1,20,000 Profit 1,90,000 1,80,000
A coaching centre for FY 2026-27: fees earned for the year ₹2,40,000 (₹30,000 of it not yet received); an advance of ₹25,000 received for next year's batch; salaries for the year ₹1,20,000 (₹10,000 still unpaid); electricity ₹12,000 (fully paid). Find the profit on the accrual basis (in ₹).
Accrual profit = 2,40,000 − 1,32,000 = ₹1,08,000
For the same coaching centre, find the profit on the cash basis (in ₹).
Payments = (1,20,000 − 10,000) + 12,000 = 1,22,000.
Cash-basis profit = 2,35,000 − 1,22,000 = ₹1,13,000
Do not confuse "cash basis / accrual basis" (a question of timing) with "single entry / double entry" (a question of completeness of recording). A business can use double entry on an accrual basis, which is the normal case.
3. Accounting Standards
Accounting Standards are written policy documents issued by an expert accounting body (in India, the ICAI) covering the recognition, measurement, treatment, presentation and disclosure of accounting transactions in financial statements.
The concepts give broad ideas; standards turn them into detailed, uniform rules. For example, the conservatism idea "stock at lower of cost or market" is laid down precisely in the standard on valuation of inventories.
3.1 Objectives and need
- To bring uniformity in accounting policies and remove non-comparability of financial statements.
- To give a set of standard accounting policies, valuation norms and disclosure requirements.
- To improve the credibility and reliability of accounting data.
- Different businesses could otherwise choose different treatments for the same item. Standards narrow the choice to treatments that give a true and fair view.
3.2 Benefits
- They eliminate variations in accounting treatment.
- They may require disclosures beyond what law requires, useful to the public, investors and creditors.
- They make financial statements comparable, both between companies (inter) and within a company over years (intra).
3.3 Limitations
- They make the choice between alternative treatments difficult.
- They are applied rigidly and lack flexibility.
- They cannot override the law (statute). Standards must be framed within the existing laws.
Benefits = "U-D-C": Uniformity, extra Disclosure, Comparability. Limitations = "C-R-L": Choice difficult, Rigid, Law is above them.
3.4 AS, Ind AS and IFRS: a quick overview
| Set | Issued by | Who uses it |
|---|---|---|
| AS (Accounting Standards) | ICAI; notified by the Central Government for companies | Smaller companies and other businesses not covered by Ind AS |
| Ind AS (Indian Accounting Standards) | Formulated by ICAI, notified by the Ministry of Corporate Affairs | Listed companies and large companies (applied in phases from 2016-17) |
| IFRS (International Financial Reporting Standards) | International Accounting Standards Board (IASB) | Used in many countries; Ind AS are largely converged with IFRS |
A few AS you will meet again: AS 1 Disclosure of Accounting Policies, AS 2 Valuation of Inventories, AS 3 Cash Flow Statements, AS 9 Revenue Recognition, AS 10 Property, Plant and Equipment.
AS 1 treats three ideas as fundamental accounting assumptions: going concern, consistency and accrual. If a business does not follow any of them, it must disclose that fact. A neat link between Lessons 1, 2 and 3!
4. Goods and Services Tax (GST): basics
GST is a destination-based tax on the consumption of goods and services, levied at every stage from manufacture to final sale, with credit of tax paid at earlier stages (input tax credit). Only the value added at each stage is taxed, and the burden is finally borne by the consumer.
"Destination-based" means the tax goes to the government of the place where the goods or services are consumed (the place of supply). GST came into force on 1 July 2017 and replaced many taxes such as central excise, VAT, entry tax, luxury tax and entertainment tax. Hence the slogan "One Nation, One Tax".
4.1 The three components
| Component | Full form | When charged | Revenue goes to |
|---|---|---|---|
| CGST | Central Goods and Services Tax | Sale within a state (intra-state) | Central Government |
| SGST | State Goods and Services Tax | Sale within a state (intra-state), along with CGST | State Government |
| IGST | Integrated Goods and Services Tax | Sale from one state to another (inter-state) and imports | Collected by the Centre, shared with the destination state |
India is a federal country: both the Centre and the States have the power to tax. That is why GST is a dual tax: the Centre levies and administers CGST and IGST, and each state levies and administers its SGST. The Constitution was amended for this.
Same state → split in two (CGST + SGST). Different states → one Integrated tax (IGST). The total rate is the same either way.
- (i) Both parties are in UP: intra-state sale. CGST = 9% of 10,000 = 900; SGST = 9% of 10,000 = 900. Invoice total = 10,000 + 900 + 900 = 11,800.
- (ii) UP to Rajasthan: inter-state sale. IGST = 18% of 25,000 = 4,500. Invoice total = 29,500.
- GST paid on purchase (input tax) = 18% of 10,000 = 1,800.
- GST collected on sale (output tax) = 18% of 15,000 = 2,700.
- He sets off the input tax against the output tax: 2,700 − 1,800 = 900.
- Check: value added = 15,000 − 10,000 = 5,000, and 18% of 5,000 = 900.
A dealer in Gujarat sells goods worth ₹65,000 to a customer in Rajasthan. GST rate is 18%. How much IGST will be charged (in ₹)?
4.2 Characteristics of GST (as given in NCERT)
- A common law and procedure throughout the country under a single administration.
- Destination-based tax, borne at the point of consumption by the end consumer.
- A comprehensive levy on both goods and services with the benefit of input tax credit.
- A small number of tax rates.
- No scope for cess, resale tax, additional tax, turnover tax and the like.
- No multiple levies such as sales tax, entry tax, octroi, entertainment tax or luxury tax.
4.3 Advantages of GST
- Abolition of many different taxes on goods and services.
- Wider tax base and more revenue for the Centre and States, with lower administrative cost.
- Lower compliance cost and more voluntary compliance.
- Removal of the cascading effect (tax on tax).
- Better manufacturing and distribution, and competitiveness of Indian goods in export markets.
- Neutral to business models, organisational structure and location, promoting long-term economic growth.
GST rates are revised by the GST Council from time to time. From September 2025 most goods and services were brought into two main slabs, 5% and 18%, with a special higher rate for a few luxury and sin goods. In examples we use 18% (9% + 9%) as NCERT does.
5. Quick check
- IGST only
- CGST only
- CGST and SGST
- SGST and IGST
- They cannot override the law of the land
- They make accounting more flexible
- They are issued by SEBI
- They apply only to single entry records
Board tip: "Distinguish between cash basis and accrual basis" is a common 3–4 mark question. Write 3–4 points in a two-column table (meaning, recognition of revenue/expense, matching, reliability of profit, suitability) and add one small ₹ example if the question carries 4 marks.
📌 Points to remember (Quick Revision)
- Double entry records both aspects of every transaction, is complete and reliable, and allows a trial balance; single entry is incomplete (mainly personal accounts and cash book) and unreliable.
- Cash basis records only when cash is received or paid; accrual basis records revenue and expenses when earned or incurred and gives the true profit.
- Accounting Standards (issued by ICAI) bring uniformity, extra disclosure and comparability, but are rigid and cannot override law; Ind AS (converged with IFRS) apply to listed and large companies.
- AS 1 treats going concern, consistency and accrual as fundamental accounting assumptions.
- GST is a destination-based tax on consumption with input tax credit, so only value added is taxed; intra-state sales attract CGST + SGST, inter-state sales attract IGST.
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