ICAI Technical Guide explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Some small professional practices and service entities record income when the money arrives and expenses when they are paid. The ICAI Technical Guide on Preparation of Financial Statements under Cash Basis of Accounting, first edition, February 2024, is for non-company entities that do so. It says how the Accounting Standards are applied on that basis, which items are still recognised even though no cash moves, and which formats to follow. The Guide is recommendatory guidance of ICAI, not law and not a standard; later changes should be checked on icai.org. Preparing such statements is part of our financial statement preparation work for practices and small firms.
The Guide is written for non-company entities (section 2.1). Under the cash basis, revenue is recognised when cash is received and expenses when they are paid (section 3.2), and the Accounting Standards are followed as and to the extent they apply (section 4.3.2). Depreciation, impairment, inventory write-downs and bad debts are still recognised, because otherwise the result would mislead (section 4.3.3). Companies cannot use it: section 128(1) of the Companies Act requires books to be kept on the accrual basis. Where accrual is not followed, AS 1 requires the fact to be disclosed.
Who may use the cash basis
The Guide says that some non-company entities, mainly in the services sector, follow the cash basis, while entities that manufacture or trade usually follow accrual (sections 3.2 and 3.3). The Accounting Standards Board encourages non-company entities to use accrual, but acknowledges that the laws governing some of them allow the cash basis or are silent; as an example it names the LLP Act, which it says permits LLPs to keep books on the cash system, and it notes that tax law allows business and professional income to be computed on the cash system (section 3.4). For tax, see our income-tax guides.
| Entity | Position |
|---|---|
| Company | Books must be kept on the accrual basis and by the double entry system: section 128(1) of the Companies Act, 2013, explained in our post on section 128 |
| Non-company entity (proprietor, firm, association) | May use the cash basis where its governing law allows it or is silent, applying the Guide |
| Any entity departing from accrual | Discloses the fact (AS 1, paragraph 27); the auditor describes the basis followed, and qualifies the report where a statute requires accrual and the statements are not on it (as the Announcement reproduced in section 4.3.1 says) |
For the plain-language difference, our short note on cash against accrual accounting is a starting point.
What the Guide requires, head by head
| Section | What it provides | What it means in the books |
|---|---|---|
| 4.1.1 | In a pure cash basis transactions are recorded only on actual cash flow; the end product is a statement of receipts and payments | Income at receipt, expense at payment |
| 4.3.2, 4.3.3 | Accounting Standards apply as and to the extent applicable; recognition is on receipt and payment, subject to the definitions and recognition criteria of the Framework and the standards; measurement is at the cash paid or received | An asset is recognised when its criteria are met and cash is paid |
| 4.3.3 (non-cash items) | Entities also prepare an income and expenditure account and a balance sheet and recognise non-cash items such as depreciation, impairment, write-down of inventories and bad debts | Depreciation appears on both bases |
| 4.3.4 (i)-(xx) | Examples: revenue, grants, expenses, borrowing costs, leases, foreign currency, tax, liabilities, assets, loans and advances, policies, cash flow statements, prior period items, segments, related parties and current tax | Apply each standard in receipt and payment terms |
| 4.3.4 (xv) | Disclose all significant accounting policies in one place, and the fact that the accrual assumption is not followed | Say that the cash basis is used |
| 4.3.4 (xvi) | As printed, micro, small and medium sized entities may omit the cash flow statement; larger non-company entities following the cash basis prepare one | The Guide uses the older level wording; check the current criteria |
| 5.1 | Books record all money received, all money spent and all assets and liabilities | Keep an asset and liability record too |
| 6.2 | Entities are encouraged to follow, to the extent applicable, the formats in the ICAI notes for non-corporate entities, for LLPs and for not-for-profit entities | See our guide to the non-corporate entities format |
The Guide's size tests for the standards (Appendix A) are not restated here; see our guides on classification.
Method
- Prepare the receipts and payments account from the cash and bank book.
- Recognise income on receipt and expense on payment; record assets bought when paid.
- Add the non-cash items the Guide asks for: depreciation, impairment and inventory write-downs.
- Prepare the income and expenditure account and the balance sheet, and disclose the policy.
- If accrual is needed, adjust for receivables, payables, prepayments and accruals.
Worked example: Dr Anjali Rao's clinic
The entity and all figures in this example are invented for illustration. Depreciation at 10 per cent a year on a straight line is an assumed rate, for arithmetic only.
Dr Anjali Rao runs a clinic as a sole proprietor. Opening cash is 1,00,000, which is also her opening capital on the cash basis. During the year the clinic bought equipment for 3,00,000 on 1 October.
Receipts and payments account.
| Receipts | Amount | Payments | Amount |
|---|---|---|---|
| Opening cash | 1,00,000 | Staff salaries | 5,40,000 |
| Fees received | 18,00,000 | Rent | 2,40,000 |
| Interest received | 12,000 | Medical consumables | 2,10,000 |
| Utilities | 60,000 | ||
| Purchase of equipment | 3,00,000 | ||
| Owner's drawings | 4,20,000 | ||
| Closing cash | 1,42,000 | ||
| Total | 19,12,000 | Total | 19,12,000 |
Cash-basis income and expenditure account. Depreciation on equipment for six months: 3,00,000 x 10 per cent x 6/12 = 15,000.
| Particulars | Amount |
|---|---|
| Fees received | 18,00,000 |
| Interest received | 12,000 |
| Total income | 18,12,000 |
| Salaries | 5,40,000 |
| Rent | 2,40,000 |
| Consumables | 2,10,000 |
| Utilities | 60,000 |
| Depreciation | 15,000 |
| Total expenditure | 10,65,000 |
| Surplus (cash basis) | 7,47,000 |
Cash-basis balance sheet. Capital: 1,00,000 + 7,47,000 - 4,20,000 = 4,27,000. Assets: cash 1,42,000 and equipment 2,85,000 = 4,27,000.
The same year on accrual. Extra facts: fees receivable 1,20,000 at the start and 1,50,000 at the end; unpaid salaries 30,000 at the start and 40,000 at the end; unpaid utilities 6,000 at the start and 10,000 at the end.
| Item | Cash basis | Adjustment | Accrual basis |
|---|---|---|---|
| Fees | 18,00,000 | + (1,50,000 - 1,20,000) = 30,000 | 18,30,000 |
| Interest | 12,000 | nil | 12,000 |
| Salaries | 5,40,000 | + (40,000 - 30,000) = 10,000 | 5,50,000 |
| Rent | 2,40,000 | nil | 2,40,000 |
| Consumables | 2,10,000 | nil | 2,10,000 |
| Utilities | 60,000 | + (10,000 - 6,000) = 4,000 | 64,000 |
| Depreciation | 15,000 | nil | 15,000 |
| Surplus | 7,47,000 | + 16,000 | 7,63,000 |
The two differences are on the income side, fees earned but not yet received (up 30,000), and on the expense side, expenses incurred but not yet paid (up 14,000). Depreciation is the same on both bases, as section 4.3.3 requires.
Accrual balance sheet. Opening capital on accrual: cash 1,00,000 + fees receivable 1,20,000 - unpaid salaries 30,000 - unpaid utilities 6,000 = 1,84,000. Closing capital: 1,84,000 + 7,63,000 - 4,20,000 = 5,27,000. Closing assets: cash 1,42,000 + fees receivable 1,50,000 + equipment 2,85,000 = 5,77,000; less liabilities 40,000 + 10,000 = 50,000, giving 5,27,000.
Check. The receipts and payments account totals 19,12,000 on each side: receipts 1,00,000 + 18,00,000 + 12,000; payments 5,40,000 + 2,40,000 + 2,10,000 + 60,000 + 3,00,000 + 4,20,000 + 1,42,000. Surplus accrual 7,63,000 - surplus cash 7,47,000 = 16,000 = 30,000 - 10,000 - 4,000. Both balance sheets agree with their capital accounts (4,27,000 and 5,27,000).
Common mistakes
- Using the cash basis for a company, when section 128(1) requires accrual.
- Leaving out depreciation because no cash left, which the Guide does not allow.
- Not disclosing the cash basis as an accounting policy.
- Treating a statement of receipts and payments as a full set of statements.
- Skipping the record of assets and liabilities that section 5.1 asks for.
Need help choosing and keeping the basis of accounts?
If you run a practice or small firm and are unsure whether the cash basis is open to you, or want the statements prepared on either basis, our team can help. See our financial statement preparation service and send us your books and the governing law of your entity.
Key takeaways
- The Guide is recommendatory ICAI guidance for non-company entities, first edition February 2024.
- Cash basis: income on receipt, expense on payment, measurement at cash paid or received.
- Depreciation, impairment, inventory write-downs and bad debts are still recognised.
- Companies must keep books on accrual (section 128(1)).
- Disclose the basis and follow the formats where applicable.
Read next
- Receipts and payments account v income and expenditure account
- ICAI Guidance Note on Non-Corporate Entities
- Accounting concepts, principles and conventions
Disclaimer: Based on the Accounting Standards issued by the Institute of Chartered Accountants of India as on 1 April 2025, the Companies (Accounting Standards) Rules, 2021 as amended up to G.S.R. 169(E) of 10 March 2026, the Companies Act, 2013 and the ICAI guidance named in the article, as consulted on 4 October 2026. The worked example uses invented figures. Later amendments should be checked on icai.org and mca.gov.in. This article is general information, not legal advice; check the official text before acting.