1 Module 3. Recording Financial Transactions Dr. Varadraj Bapat

2 Recording Financial Transactions  Cash System  Mercantile System  Preparation of Final Accounts

Dr.Varadraj Bapat3 System of Accounting  Cash  Mercantile Accounting system is followed majorly in two ways :

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 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.

Dr.Varadraj Bapat12 Preparation of Financial Statement ParticularsAmt. ( ` ) Cash5600 Trade debtors8400 Rent5500 Salaries12000 Trade Creditors18700 Insurance4000

Dr.Varadraj Bapat13 ParticularsAmt. ( ` ) Petty Expenses3000 Opening Stock20000 Sales Purchases Capital Motor Vehicle65000 Machinery54000

Dr.Varadraj Bapat14 ParticularsAmt. ( ` ) Office Expenses2950 Repairs & Maintenance5000 Electricity exps.2550 Prepare Profit & Loss A/c and Balance Sheet from the above trial balance.

Dr.Varadraj Bapat15 Solution Trading & Profit & Loss A/c for the year ended 31 st March …………. Particulars ` ` Opening Stock Sales Purchases Gross Profit65000 Total265000Total265000

Dr.Varadraj Bapat16 Particulars ` ` Rent 5500 Gross Profit b/d Salaries Insurance 4000 Petty Exps Office Exps.2950 Repairs & Maintenance5000 Electricity Exp.2250 Net Profit30300

Dr.Varadraj Bapat17 Balance Sheet as on 31st March ……… Liabilities ` Assets ` Capital105900Motor Vehicle Net Profit30300 Machinery54000 Trade Creditors 8400Trade debtors Cash