Section 145(1) provides, Interalia, that income chargeable under the head “income from other sources” shall be computed in accordance with the method of accounting regularly employed by the assessee. The option is to be exercised by the assessee and the department cannot have any say in the matter. In case of an assessee adopting cash system of accounting, his income under the head “Income from other sources” is to be computed on cash basis and not on accrual basis-Juggilal Kamlapat, Bankers v CIT  101 ITR 40 (All). A brief discussion about the methods of accounting follows here under.
Systems of accounting :
Cash system :
Under this system a record is kept of actual receipts and actual payments, entries being made only when money is actually collected or disbursed. Outstanding income and expenditure both, of the business either at the commencement or at the close of the year are not taken into account. The essence of this system of accounting is that any income becomes assessable only when it is received. It may be received in cash or in kind. A payment received in kind is income even though it remains in kind and is not converted into cash.
Mercantile system :
This system is the most popular system at present and is also known as the book profit system of accounting. Under this system not only the cash receipts and disbursements are noted but all outstandings and accruals are also taken into account while closing the books. Expenses incurred but not yet paid are debited to the Profit and Loss Account and a liability in this regard is entered on the liabilities side of the Balance Sheet. Likewise, in case there are certain unrealized incomes these are entered on the credit side of the Profit & Loss account and correspondingly they are shown as an asset in the Balance Sheet. But even this system does not seem to permit the inclusion of debts which concern merely an estimated expenditure likely to be incurred in carrying out a promise which has been made in connection with a transaction that has brought in certain receipts. What is permitted as a debt is in respect of a definite liability which has accrued in a concluded form, though the actual disbursement has not yet taken place.
Mixed system of accounting :
The third system of accounting is adopted where neither cash system not mercantile system of making entires in their entirety is adopted but where both of them are employed. This, therefore, is also known as hybrid system of book keeping. The book-keeper may record any type of transaction on any basis. For example, he may adopt mercantile system of keeping accounts in recording purchases and sales while cash system may be employed by him in writing expenses and income or vice versa. The tax authorities would not have any objection even with this system in case it is regularly employed by the assessee.