Bases of Accounting
There are three primary bases on which transactions are recognized and measured in financial accounting:

1. Accrual Basis of Accounting:
   The accrual basis of accounting recognizes transactions and events when they occur, not when cash is received or paid. This basis matches income earned with expenses incurred in the same period. The accrual basis is required under International Financial Reporting Standards (IFRS) and is widely used for general-purpose financial statements.
   • Revenue Recognition: Revenue is recognized when earned, regardless of when cash is received.
   • Expense Recognition: Expenses are recognized when incurred, not when paid.
   • Example: If goods are sold on credit, the revenue is recorded when the goods are delivered, even though cash may be received at a later date.
2. Cash Basis of Accounting:
   The cash basis of accounting records transactions when cash is exchanged, either received or paid. Under this basis, revenue and expenses are recorded only when cash is actually received or paid, without considering when the transaction occurred. This method is generally used by small businesses or entities that are not required to prepare financial statements under IFRS.
   • Revenue Recognition: Revenue is recorded only when cash is received.
   • Expense Recognition: Expenses are recorded only when cash is paid.
   • Example: A service rendered in one period but paid for in the next period will be recognized when the payment is made.
3. Break-up Basis of Accounting:
   The break-up basis (also called the liquidation basis) is used when it is clear that an entity is no longer a going concern, meaning it will not continue operating into the foreseeable future. Assets and liabilities are measured at the amount expected to be realized or settled, rather than at historical cost. This basis is typically used when a company is being wound up or liquidated.
   • Asset Valuation: Assets are valued at their net realizable value or liquidation value, rather than cost.
   • Liability Recognition: Liabilities are recognized at the amount expected to be settled.
   • Example: A company that is going out of business may sell its assets at reduced prices, so the financial statements will reflect the lower liquidation value.