Cash and Mercantile system of Accounting is as follows:
CASH BASIS OF ACCOUNTING
Under cash basis of accounting, the transactions are recorded when actual cash is received or paid. It means, the income is recognized when cash is received and the expenses are recognized when the cash is paid. It does not matter whether the cash received or paid belong to current, past or future year. Thus there is no scope to record the credit transactions. This basis of accounting is also known as Receipts basis of accounting.
ACCRUAL BASIS OF ACCOUNTING
Accrual basis of accounting is also known as Mercantile basis of accounting. It is a system where transactions are recorded when they arise. It does not matter whether the cash received or paid or not. It means the incomes are recorded in the books of the accounts when it is earned, irrespective of the fact that it is received or accrued.
EXAMPLE: Rent accrued ₹1,000. (earned but not received)
Similarly, the expenses are recorded in the books of accounts when they incurred, it does not matter whether cash is paid or outstanding for the same.
EXAMPLE: Salary outstanding. (due but not paid)
This system is most commonly used and followed by every business organisation.
DIFFERENCE BETWEEN CASH AND MERCANTILE SYSTEM OF ACCOUNTING
|BASIS OF DIFFERENCE||CASH SYSTEM OF ACCOUNTING||MERCANTILE SYSTEM OF ACCOUNTING|
|RECORDING OF TRANSACTIONS||It records only cash transactions.||It records cash as well as credit transactions.|
|RECORDING OF INCOMES||Only those incomes are recorded which are received in cash.||All the incomes are recorded whether cash is received for the same or not.|
|RECORDING OF EXPENSES||Only those expenses are recorded which are paid in cash.||All the expenses are recorded whether cash is paid for the same or not.|
|ADJUSTMENTS||No adjustments regarding Accrued Income, Income received in advance, Outstanding expenses, prepaid expenses are passed.||All adjustments regarding Accrued Income, Income received in advance, Outstanding expenses, prepaid expenses are passed.|
|CAPITAL AND REVENUE ITEMS||This system does not distinguish between capital and revenue items.||This system distinguishes between capital and revenue items.|
|LEGAL RECOGNITION||This system is not recognized by Companies Act, 2013 and Income Tax Authorities.||This system is recognized by Companies Act, 2013 and Income Tax Authorities.|
|ASCERTAINMENT OF ACCURATE PROFIT OR LOSS||This basis does not provide correct view of profit or loss because this does not make a complete record of cash or credit transactions.||This basis provides correct view of profit or loss because this makes a complete record of cash or credit transactions.|
|NON CASH ITEMS||It does not record non-cash items like depreciation etc.||It makes the record of non cash items like depreciation etc.|
|SUITABILITY||This method is suitable for professional people like doctors, lawyers etc.||This method is adopted by the business houses involved in Trading and Manufacturing business.|
|PERIOD||It records all the incomes received and expenses paid in cash whether it relates to current, past or future year.||It records the incomes and expenses related to current year only.|
|SIMPLE AND EASY||This method is simple and easy to adopt and apply.||This basis of accounting includes all the technicalities of accounts and hence difficult to apply.|
|EVIDENCE IN COURT||The records maintained as per this system cannot be accepted as an evidence in the court of law.||The records maintained as per this system is accepted as an evidence in the court of law.|