Mercantile System of Accounting and Cash System of Accounting [Dec. 2021, 5 Marks]

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Answer Solution: Mercantile System of Accounting (Accrual basis of accounting) and Cash System of Accounting:  A transaction is recognized when either a liability is created (i.e. When goods/ services/benefits or properties are received) and/ or an asset is created (i.e. when goods/ services/benefits or properties are given).  Whether payment is made or received is immaterial in accrual basis accounting.  Accrual basis of accounting is also known as mercantile basis of accounting.  On the other hand, cash basis of accounting is system of accounting by which a transaction is recognized only if cash is received or paid, no entry is being made when a payment or receipt is merely due.  Accrual basis accounting is the only generally accepted accounting method for business entities which are supposed to operate for long period.  Cash basis accounting is suitable for short duration ventures.  All the chapters which you will study are on accrual basis only exception may be joint venture.

Mercantile System of Accounting and Cash System of Accounting [Dec. 2021, 5 Marks]

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