SYSTEMS OF ACCOUNTING
The following are the main systems of recording business transactions:
(a) Cash System. Under this system, actual cash receipts and actual cash payments are recorded. Credit transactions are not recorded at all until the cash actually received or paid. The Receipts and Payments Account prepared in case 20 of non-trading concerns such as a charitable institution, a club, a school, a college, etc. and professional men like a lawyer, a doctor, a chartered accountant etc. can be cited as the best example of the cash system. This system does not make a complete record of financial transactions of a trading period as it does not record outstanding transactions like outstanding expenses and outstanding incomes. The system is based on a record of actual cash receipts and actual cash payments will not be able to disclose correct profit or loss for a particular period and will not exhibit true financial position of the business on a particular day.
(b) Mercantile (Accrual) system. Under this system all transactions relating to a period are recorded in the books of account i.e., in addition to actual receipts and payments of cash income receivable and expenses payable are also recorded. This system gives a complete picture of the financial transactions of the business as it makes a record of all transactions relating to a period. The system is based on a complete record of the financial transactions discloses correct profit or loss for a particular period and also exhibits true financial position of the business on a particular day.
Accounting can be understood as the language of financial decisions. It is an ongoing process of performance measurement and reporting the results to decision makers. The discipline of accounting can be traced back to very early times of human civilization. With the advancement of industry, modern day accounting has become formalized and structured. A person who maintains accounts is known as the account. The information generated by accounting is used by various interested groups like individuals, managers, investors, creditors, government, regulatory agencies, taxation authorities, employee, trade unions, consumers and the general public. Depending on purpose and method, accounting can be broadly three types; financial accounting cost accounting and management accounting. Financial accounting is primarily concerned with the preparation of financial statements. It is used on certain well-defined concepts and conventions and helps in framing broad financial policies. However, it suffers from certain limitations.
The following are the main systems of recording business transactions:
(a) Cash System. Under this system, actual cash receipts and actual cash payments are recorded. Credit transactions are not recorded at all until the cash actually received or paid. The Receipts and Payments Account prepared in case 20 of non-trading concerns such as a charitable institution, a club, a school, a college, etc. and professional men like a lawyer, a doctor, a chartered accountant etc. can be cited as the best example of the cash system. This system does not make a complete record of financial transactions of a trading period as it does not record outstanding transactions like outstanding expenses and outstanding incomes. The system is based on a record of actual cash receipts and actual cash payments will not be able to disclose correct profit or loss for a particular period and will not exhibit true financial position of the business on a particular day.
(b) Mercantile (Accrual) system. Under this system all transactions relating to a period are recorded in the books of account i.e., in addition to actual receipts and payments of cash income receivable and expenses payable are also recorded. This system gives a complete picture of the financial transactions of the business as it makes a record of all transactions relating to a period. The system is based on a complete record of the financial transactions discloses correct profit or loss for a particular period and also exhibits true financial position of the business on a particular day.
Accounting can be understood as the language of financial decisions. It is an ongoing process of performance measurement and reporting the results to decision makers. The discipline of accounting can be traced back to very early times of human civilization. With the advancement of industry, modern day accounting has become formalized and structured. A person who maintains accounts is known as the account. The information generated by accounting is used by various interested groups like individuals, managers, investors, creditors, government, regulatory agencies, taxation authorities, employee, trade unions, consumers and the general public. Depending on purpose and method, accounting can be broadly three types; financial accounting cost accounting and management accounting. Financial accounting is primarily concerned with the preparation of financial statements. It is used on certain well-defined concepts and conventions and helps in framing broad financial policies. However, it suffers from certain limitations.