Systems Of Accounting

The following are the main systems of recording business transactions.

  1. Cash System:

under this system actual cash receipts and actual cash payments are recorded. Credit transactions are not recorded at all until the cash is actually received or paid.government system of accounting is mostly on the cash system. Non-trading concerns like Educational institutions,clubs,hospitals,etc.,

and professional people like a doctors, lawyer a charted accountant etc.,record their income on cash system and prepare receipts and payments accounts.

The only advantage of this method of accounting is that is very simple since it does not require adjustment entries on the periodical account at closing date.But the great disadvantage of this method is that it fails to express profit or loss accurately since it does not incorporate the necessary adjustments.This method is found unsuitable where there are numerous transactions.

2. Accrual or Mercantile Basis Of Accounting:

This method is commonly adopted by business concerns.Under this method  not only the cash receipts and disbursements are noted but all out standings and accruals are also taken into account while closing the books. Expenses incurred but not yet paid are debited to the Profit and Loss Account and a liability in this regard is entered on the liabilities side of the Balance Sheet. Likewise, in case there are certain unrealized incomes these are entered on the credit side of the Profit & Loss account and correspondingly they are shown as an asset in the Balance Sheet. But even this system does not seem to permit the inclusion of debts which concern merely an estimated expenditure likely to be incurred in carrying out a promise which has been made in connection with a transaction that has brought in certain receipts. What is permitted as a debt is in respect of a definite liability which has accrued in a concluded form, though the actual disbursement has not yet taken place.