The basis of accounting refers to the underlying rules, assumptions, and methods used to prepare financial statements. There are two main bases of accounting: cash and accrual.

Cash Basis of Accounting: Under the cash basis of accounting, transactions are recorded only when cash is received or paid out. For example, if a company sells goods, it will not record the sale until it has received payment from the customer. Similarly, it will not record an expense until it has paid for the goods or services it has received.

Accrual Basis of Accounting: Under the accrual basis of accounting, transactions are recorded when they are incurred, regardless of whether payment has been received or made. For example, if a company sells goods, it will record the sale when the goods are delivered to the customer, regardless of whether payment has been received. Similarly, it will record an expense when the goods or services are received, even if payment has not yet been made.

The accrual basis of accounting provides a more accurate picture of a company's financial position and performance because it records transactions when they are incurred, regardless of whether cash has changed hands. It is the basis of accounting used by most companies for financial reporting purposes.

In summary, the basis of accounting refers to the underlying rules, assumptions, and methods used to prepare financial statements. There are two main bases of accounting: cash and accrual, with the accrual basis of accounting being the most widely used and providing a more accurate picture of a company's financial position and performance.