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RECORDING OF BUSINESS TRANSACTION – BASIS OF ACCOUNTING

There are three different Basis systems of accounting for recording of business transaction. They are (i) cash basis accounting, (ii) mercantile basis or Accrual basis of accounting, and (iii) mixed-basis of accounting.

(i) Cash Basis of Accounting

Under this system of accounting, actual cash received and actual cash payments are recorded. Credit transactions are not recorded at all until the cash is actually received or paid. Non trading concerns such as charitable institution, a club, a college etc and a professional man like a lawyer, a doctor, a chartered accountant etc maintains accounts under this system only. This basis of accounting is not a complete record of financial transactions of a trading period, because all outstanding transactions are not recorded.

(ii) Mercantile Basis of Accounting or Accrual Basis of Accounting

According to mercantile system of accounting, entries are made not only for actual receipt or payment of cash but also for the amount having been due for payment or receipt. Simply, both cash transactions and credit transactions are recorded and even non-trading concerns follow this type of accounting. Financial transaction discloses correct profit or loss for a particular period and also exhibits true financial position of the business on a particular day.

Normally, trading orgainsations, to prepare final account for the purpose of finding out profit or loss during a particular period, use the mercantile system of accounting.

(iii) Mixed System of Accounting

Under this basis of accounting, both cash system and mercantile system are followed. Simply, combination of cash system and mercantile system is called mixed system. Some of the records are maintained under the cash system and remaining others are maintained under mercantile system.

Apart from the basis of accounting, following are the methods of accounting to be followed in a normal practice. They are (i) Single entry method and (ii) Double entry method.