This sounds like a technical bookkeeping choice, but it actually changes how accurate your profit figure is at any given moment — which matters the moment you're trying to get a loan, bring in an investor, or simply understand whether your business is actually making money.
Quick Summary
- Cash basis: records income/expense only when money actually moves
- Accrual basis: records income/expense when earned/incurred, regardless of payment timing
- GST liability arises on time of supply (broadly, invoice date) regardless of which accounting method your books use
Cash Basis — Simple, But Can Be Misleading
Under cash accounting, you record a sale only when payment is received, and an expense only when it's actually paid. It's simple and matches your bank balance closely — but it can paint a misleading picture. A business that delivered ₹10 lakh of work in March but gets paid in May shows zero revenue for that work in March's books, even though the business genuinely earned it that month.
Accrual Basis — Matches Income to When It Was Earned
Under accrual (mercantile) accounting, that same ₹10 lakh is recorded as revenue in March, when the work was completed and invoiced, regardless of when the client actually pays. Expenses work the same way — a bill received in March for services used in March is recorded then, even if you pay it in April. This gives a far more accurate month-to-month profitability picture.
Why This Isn't Fully Your Choice for GST
GST Follows 'Time of Supply', Not Your Bank Account
Regardless of which accounting method your internal books use, your GST liability is triggered by the 'time of supply' rules — broadly, the invoice date (or the earliest of invoice/payment/completion of service, depending on the transaction type) — not by when you actually receive payment. A business that keeps cash-basis books but doesn't separately track invoice dates for GST purposes is one of the most common sources of GST-vs-books mismatches we see at reconciliation time.
What Income Tax Law Requires
Section 145 of the Income-tax Act allows either the cash or mercantile (accrual) system, as long as it's followed consistently year to year — you can't switch back and forth to manage your tax outcome. Most businesses beyond a very small scale use accrual accounting paired with double-entry bookkeeping, since it's also what's expected for financial statements shown to banks and investors.
Our Recommendation for Growing Businesses
If you're still on cash-basis, informal bookkeeping and you're planning to apply for a loan, bring in a partner, or simply want to know your real monthly profitability, moving to accrual-based, proper double-entry bookkeeping is one of the highest-value changes you can make — well before you're forced into it by a bank's documentation requirements.
Choosing (and correctly maintaining) the right accounting method underlies everything else — your GST reconciliation, your tax audit readiness, and your loan application all depend on it. Rajput Lalit & Associates provides monthly bookkeeping on a proper accrual basis for small businesses. See our Accounting & Bookkeeping service or why monthly bookkeeping matters.
Frequently Asked Questions
Can I use cash basis for my books but still file GST correctly?
Yes, but it takes deliberate tracking — you'll need a separate invoice-date register purely for GST time-of-supply purposes, since your cash-basis books alone won't capture it. Most businesses find it simpler to just move to accrual accounting entirely rather than maintaining two parallel systems.
Which method do banks prefer when I apply for a loan?
Accrual-basis financial statements are the near-universal expectation for loan applications, CC limit assessments, and CMA data — cash-basis books are generally not accepted as sufficient on their own for this purpose.
Can I switch from cash to accrual accounting mid-year?
It's possible but needs careful handling of the transition (to avoid double-counting or omitting transactions during the changeover), and once changed, the new method needs to be followed consistently going forward — this is best done with professional guidance rather than as a DIY mid-year switch.
Does accrual accounting mean I pay tax on money I haven't received yet?
Yes, potentially — this is an important practical consequence. If you invoice in March and get paid in June, that income is still taxable in the year it was earned/accrued (March), not when cash actually arrived, which is something to plan cash flow around.
Is accrual accounting mandatory for companies?
In practice, yes — companies are required under the Companies Act to prepare financial statements on an accrual basis, so cash-basis accounting isn't really an option once you're operating as a Pvt Ltd or LLP with statutory financial statement requirements.
This article explains accounting method concepts generally applicable under Section 145 of the Income-tax Act and standard GST time-of-supply rules as of September 2026. Specific treatment can vary by transaction type and entity structure — please consult a professional for your business.