Download Module 3 : Recording Financial Transactions Lecture 2 : System of

Module 3 : Recording Financial Transactions
Lecture 2 : System of Accounting
Objectives
In this lecture you will learn the following
Cash System.
Mercantile System.
Preparation of Final Accounts.
System of Accounting
Accounting system is followed majorly in two ways :
Cash. Mercantile.
Cash system
Definition and Explanation:
It is a system in which accounting entries are made only when cash is received or paid. No entry
is made when a payment or receipt is merely due.
Government system of accounting is mostly on the cash system. For example :
The salary for December 2010 has not been paid till 5 th Jan. 2011. Under cash basis, Salary
expense for the month of December will not be recorded as payment has not been made.
Mercantile system
Definition and Explanation:
It is a system in which accounting entries are made on the basis of amount having become due
for payment or receipt.
This system recognizes the fact that if a transaction or an event occurred, its consequences
cannot be avoided and therefore, should be brought into book in order to present a meaningful
picture of profit earned or loss suffered.
The mercantile system is also known as the accrual system.
Difference between cash and mercantile system of accounting
Under cash basis accounting, Revenues are recognized and earned only when cash is received
irrespective of when and how the services were performed or goods delivered.
To put it in different terms, the cash basis of accounting takes into consideration all those
incomes/gains that have been received and expenses/losses that have been paid during the
accounting period in consideration.
Under accrual or mercantile basis accounting, Revenues are recognized and earned when
they are realized or realizable irrespective of when the cash is received.
To put it in different terms, the accrual basis of accounting, records all incomes/gains and
expenses/ losses pertaining to the accounting period under consideration, irrespective of receipt
or payment.
Preparation of Financial Statement
Particulars
Amount ( )
Cash
5,600
Trade debtors
8,400
Rent
5,500
Salaries
12,000
Trade Creditors
18,700
Insurance
4,000
Petty Expenses
3,000
Opening Stock
20,000
Sales
2,65,000
Purchases
1,80,000
Capital
1,05,900
Motor Vehicle
65,000
Machinery
54,000
Office Expenses
2,950
Repairs & Maintenance
5,000
Electricity exps.
2,550
Prepare Profit & Loss A/c and Balance Sheet from the above trial balance.
Solution
Trading & Profit & Loss A/c for the year ended 31st March ………….
Particulars
Opening Stock
Purchases
Gross Profit
Total
Particulars
20,000 Sales
1,80,000 65,000 2,65,000 Total
Salaries
5,500 Gross Profit b/d
65,000
12,000
Insurance
4,000
Petty Exps.
3,000
Office Exps.
2,950
Repairs & Maintenance
5,000
Electricity Exp.
2,250
Net Profit
2,65,000
Particulars
Particulars
Rent
2,65,000
30,300
Balance Sheet as on 31st March ………
Liabilities
Capital
Net Profit
Trade Creditors
Gross Profit
Assets
1,05,900 Motor Vehicle
30,300
Machinery
8,400 Trade debtors
65,000
Cash
65,000
54,000
20,000
5,600
1,44,600
1,44,600