Accounting – Systems of Accounting
Last few posts, I covered the basic concepts of accounting. If you have any questions, you can shoot them out through the comment section on the posts.
Today let me talk about the systems of accounting. Initially in my posts, I had mentioned two basic systems, the single entry system and the double entry system. But this is not what I wish to talk about today.
The two systems I wish to discuss today are:
- Cash System
- Mercantile System
We have actually discussed both in some way or the other in earlier posts.
The cash system presumes that all transactions will be recorded only when cash is exchanging hands for the transaction. In some types of businesses, this can very well be adopted, like small service entities. Here the business owner does not really need to declare to the world his business statistics. So he will record transactions only when he gets or pays cash. He may keep a separate record of his receivables / payables as a list. Normally he will not need external funding, will not have requirements for high value assets, panning a large number of years.
The mercantile system records transactions when they are due, whether these are associated with cash exchange or not. When I say cash, it includes bank transactions as well. Also, it accounts for accruals and allocation for the accounting period. This is the main system used worldwide and results in proper representation of the business standing and operations.
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