Cash-basis accounting records income when money comes in and expenses when money goes out. Accrual-basis accounting records income when you earn it and expenses when you incur them, whether or not cash has moved. In Nepal, a company must keep its tax accounts on the accrual basis.
KhataIN Business records invoices and bills when they happen and payments when they are made, so you see both what you earned and what is in the bank.
What is cash-basis accounting?
On the cash basis you write down a sale only when the customer pays, and an expense only when you pay it. Your profit is close to "money in minus money out". It is simple and easy to check against your cash box and bank, but it can be misleading: a month in which you billed a lot but collected little looks bad, and a month in which you delayed paying suppliers looks better than it was.
What is accrual-basis accounting?
On the accrual basis you record a sale when you deliver the goods or service and issue the invoice — even if the customer pays next month. You record an expense when you receive the goods or service and the bill — even if you pay later. Unpaid amounts sit in receivables (money customers owe you) and payables (money you owe suppliers) until they are settled.
This matches each month's income with the costs of earning it, so profit is more accurate.
The same month, both ways
A café's Kartik, with all amounts excluding VAT:
- Counter sales paid in cash and QR: Rs 3,00,000
- Catering for an office, invoiced in Kartik, to be paid in Mangsir: Rs 50,000
- Received in Kartik for an Ashwin catering invoice: Rs 20,000
- Ingredients bought: Rs 1,20,000 — Rs 90,000 paid, Rs 30,000 on credit (assume all used this month)
- Paid Ashwin's electricity bill: Rs 25,000
- Kartik's electricity bill received, not yet paid: Rs 28,000
- Salaries paid for Kartik: Rs 60,000
| Item | Cash basis | Accrual basis |
|---|---|---|
| Counter sales | Rs 3,00,000 | Rs 3,00,000 |
| Kartik catering invoice | — | Rs 50,000 |
| Ashwin catering collected | Rs 20,000 | — |
| Income | Rs 3,20,000 | Rs 3,50,000 |
| Ingredients | Rs 90,000 | Rs 1,20,000 |
| Electricity | Rs 25,000 (Ashwin's bill) | Rs 28,000 (Kartik's bill) |
| Salaries | Rs 60,000 | Rs 60,000 |
| Expenses | Rs 1,75,000 | Rs 2,08,000 |
| Profit for Kartik | Rs 1,45,000 | Rs 1,42,000 |
The cash figure mixes in last month's catering money and last month's electricity bill, and leaves out the Rs 30,000 still owed for ingredients. The accrual figure shows what Kartik actually earned and cost.
The accrual entries behind it
| Transaction | Debit | Credit |
|---|---|---|
| Catering invoice issued | Receivables Rs 50,000 | Sales Rs 50,000 |
| Ingredients on credit | Purchases Rs 30,000 | Payables Rs 30,000 |
| Electricity bill received | Electricity expense Rs 28,000 | Payables Rs 28,000 |
When the office pays in Mangsir, the entry is debit Bank, credit Receivables — no new income, because it was already counted in Kartik.
What does Nepal's tax law say?
Section 22 of the Income Tax Act, 2058 deals with the method of tax accounting:
- a company must keep its accounts on the accrual basis for tax purposes;
- a natural person computing income from employment and investment uses the cash basis;
- other persons — for example a sole proprietor's business — may use either basis, unless the Inland Revenue Department says otherwise by written notice;
- changing your method needs an application to, and approval from, the Department.
Source: Income Tax Act, 2058, Section 22 — see the Acts published by the Inland Revenue Department at ird.gov.np. For how income tax works more broadly, read income tax in Nepal.
Which should you use?
- Private limited company: accrual basis.
- Sole proprietor with credit customers, credit suppliers or stock: accrual basis is strongly recommended, because the cash basis hides who owes you and whom you owe.
- Very small cash-only business with no stock and no credit: the two methods give almost the same answer, so the cash basis can be enough day to day — but check with your tax professional before choosing a method for tax.
If you are VAT-registered, VAT is charged on the invoice, not when the money arrives, so you need invoice-level records anyway. See VAT in Nepal.
Frequently asked questions
Is accrual accounting harder for a small shop?
Only slightly. You need to keep a list of unpaid customer invoices and unpaid supplier bills. Accounting software does this automatically when you record invoices and bills instead of only payments.
Can I use the cash basis for my own records and accrual for tax?
You can look at cash reports any time — a cash flow view is useful for every business. But your books and tax accounts should follow one consistent method, and a company must use the accrual basis for tax.
Does the accrual basis mean I pay tax on money I haven't received?
On the accrual basis, income is counted when it is earned, so an unpaid invoice is part of that year's income. That is why chasing receivables before the fiscal year ends matters for cash flow.
Where does stock fit in?
Under the accrual basis, goods you bought but have not sold stay in stock and only become an expense when sold, as cost of goods sold. See inventory and cost of goods sold.
Last checked: 13 November 2026. Confirm your own situation with the Inland Revenue Department or a registered tax professional.