Accounting methods for income tax calculation - 1. Two permitted methods (2024)

1. Two permitted methods

The Income Tax Act permits two methods of accounting, mercantile system of accounting and cash system of accounting.

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2. Mercantile or accrual system

3. Cash system

Under cash system of accounting, transactions are only recorded when actually paid or received. In this method, the income or expense is recognised when the inflow or outflow of cash exists in reality.

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4. Where/by whom are they used?

Mercantile system is applicable for salaries, income from property and capital gains. For profits and gains of business or profession and income from other sources, one has to decide between the systems.

The Cash basis accounting method is mostly used by sole traders, proprietors and other professionals who record their income when there is an actual inflow of cash and expenses of the entity.

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5. Tax liability under both

The cash method postpones tax liability to the year of actual receipt of income, and under the mercantile method, the tax on the income has to be paid even if it has not been received.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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Accounting methods for income tax calculation - ​1. Two permitted methods (2024)

​1. Two permitted methods

​2. Mercantile or accrual system

​3. Cash system

​4. Where/by whom are they used?

​5. Tax liability under both

Accounting methods for income tax calculation - 1. Two permitted methods (2024)

1. Two permitted methods

2. Mercantile or accrual system

3. Cash system

4. Where/by whom are they used?

5. Tax liability under both