Under the cash basis, income is recorded only when cash is actually received from customers, and expenses are recorded only when cash is actually paid to suppliers or creditors.

Key points

• Revenue is recognized when cash is received, not when the sale is made
• Expenses are recognized when cash is paid, not when the expense is incurred
• This method is simple and often used by small businesses, sole proprietors, or organizations that do not sell on credit

Example

Mwanajuma runs a small shop in Arusha. In January, she sold goods worth Tsh 500,000, but only received Tsh 300,000 in cash; the remaining Tsh 200,000 was received in February. Using the cash basis:

• In January, she records income of Tsh 300,000 (only the cash received)
• In February, she records the additional Tsh 200,000 as income

Under the accrual basis, income is recorded when it is earned (when goods are delivered or services are rendered), regardless of when cash is received. Similarly, expenses are recorded when they are incurred (when goods or services are received), regardless of when cash is paid.

Key points

• Revenue is recognized when the sale is made or service is provided, even if payment is not yet received
• Expenses are recognized when the expense occurs, even if payment is not yet made
• This method provides a more accurate picture of business performance during a specific period
• It follows the matching principle: match revenues with the expenses that helped generate them

Example

Using the same example: Mwanajuma sold goods worth Tsh 500,000 in January, but only received Tsh 300,000 in January; the remaining Tsh 200,000 was received in February. Using the accrual basis:

• In January, she records income of Tsh 500,000 (the full amount earned in January)
• The Tsh 200,000 to be received later is recorded as accounts receivable (money owed by customers)

Kibaha Traders had the following transactions during March 2023:

1. Provided services to a customer on credit: Tsh 400,000 (payment received in April)
2. Received electricity bill for March: Tsh 50,000 (paid in April)
3. Paid rent for April in advance: Tsh 120,000

Required: Show how these transactions would be recorded under each basis.

Solution

Cash Basis:

• Revenue: Tsh 0 (no cash received in March)
• Expenses: Tsh 120,000 (rent paid in March)

Accrual Basis:

• Revenue: Tsh 400,000 (service provided in March)
• Expenses: Tsh 50,000 (electricity used in March)
• The rent paid in March is a prepaid expense (an asset) because it relates to April, not March.

This example shows how the accrual basis gives a truer picture of March's business activities.

The choice of basis affects:

• Profit calculation — A business may appear profitable under one method and loss-making under another
• Tax obligations — Tax authorities may require specific basis for reporting
• Decision-making — Owners and investors need accurate financial information to make decisions

Most businesses in Tanzania are required to use the accrual basis because it provides a clearer and more complete picture of financial performance.

A Form 3 student helping their parent's shop in Dar es Salaam would use this knowledge when recording daily sales. If a customer buys goods worth Tsh 50,000 on credit (to pay later), the student should understand that under the accrual basis, the income is recorded immediately as sales revenue, while the Tsh 50,000 owed is recorded as accounts receivable. This helps the family know the true profit for that day, not just how much cash was collected.