There are two basis of accounting,
"Cash Basis" and "Mercantile Basis" (also called
"Accrual Basis").
- Cash Basis:
Cash basis of accounting is an old
concept. Although many small business are still using this system, for it's less complexity. Cash basis is faster and easier than
accrual basis. In this system a revenue is being
recorded after securing the cash or cash equivalent. Similarly, an expense is
being recorded only after the payment is made. There for occurrence of any
income or expenses are not recordable happenings, the only happening matters,
is the flow of money.
- Mercantile / Accrual Basis :
Mercantile Basis is more scientific
system than cash basis. It need more technical skill
to follow but it also gives more transparency over the actual financial
position of business. A business having good number of day to day transaction, should follow mercantile basis instead of cash
basis of accounting. In mercantile basis all revenues are recorded as soon the
revenue generates. Similarly all expenses are recorded once they are charged.
Farther entries are also required on payments or receipts. All private or
public limited companies are liable to maintain their books in mercantile basis
of accounting as it is a legal formality, applicable for all companies.
Non-companies, though is is not necessary, are also
recommended to follow this system for it's
greater transparency.
Examples:
Scenario-1 : In a particular business, a monthly salary expenses of
Rs. 1,50,000/- is needed to run the entire work flow. It gives salary to the
employees on 3rd day of every month by cash.The
organization follows the cash basis of accounting.
Scenario-2 : As the business grows, the number of employees, total
salary and all day to day transactions are also increased parallely.
There for the management decides to run the business on mercantile basis. They
also decides to give salary by cheque
of ICICI Bank. Total salary increased to Rs. 5,00,000.
Interpretation:
In the 1st scenario, only one entry
should be passed on 3rd day of each month. Now assume the salary for the month
of April, 2012 is to be recorded, which gets due on 30th April, 2012, but paid
on 3rd May, 2012. Here, the entry should be recorded on
as follow:
|
Date |
Particulars |
Dr. Amount (Rs.) |
Cr. Amount (Rs.) |
|
3rd May, 2012 |
Salary A/C .....
Dr.
To Cash A/C |
1,50,000 - |
- 1,50,000 |
In the 2nd scenario, two entries are
required, one on on the last day of the month, to
process the salary and another one on 3rd day of the next month, for the actual
payment. Now assume the salary for the month of April, 2013 is to be recorded,
which gets due on 30th April, 2013, but paid on 3rd May, 2013. Here, the
entries should be recorded as follow:
|
Date |
Particulars |
Dr. Amount (Rs.) |
Cr. Amount (Rs.) |
|
30th April, 2013 |
Salary A/C
.................. Dr. To Salary payable A/C
|
5,00,000 - |
- 5,00,000 |
|
3rd May, 2013 |
Salary payable A/C ..... Dr. To ICICI Bank A/C |
5,00,000 - |
- 5,00,000 |
Here, the "Salary payable
A/C" is credited on 30th April, 2013 and the same also debited on 3rd May,
2013. Hence, on 3rd May, the net effects are same for both cash and mercantile
basis but on 30th April to 2nd May, only in mercantile
basis the due amount of salary can be reflected in the books of account, where
cash basis failed to give the correct picture.
