METHODS OF ACCOUNTING

The main object of accounting is to know the result of a business house. There are three accounting methods or systems to find out the business results, which are summarized below:

1.      Accrual or Mercantile System

2.      Cash System

3.      Hybrid System or Mixed System

Accrual or Mercantile System of Accounting:

This system of accounting is based on the Accrual concept. In this system,

• All the revenues are recognised when they are earned, not when are received in cash, and

• Expenses are matched against such revenue or the expenses should be recognised when they are incurred, not when they are paid

For example, suppose a building is taken on rent for the purpose of business of 1^st February. The rent is paid only for 10 months. The financial year ends on 31^st December. In such a situation, if mercantile system of accounting is followed, then the total rent for rent for eleven months should be shown in the profit and loss account, irrespective of the actual amount paid for rent during the year.

Cash System of Accounting:

Under this system of Accounting,

• All the revenues are recognized, when they are received in cash, not when they are earned, and

• Similarly, the expenses are recognized, when they are paid in cash, not when they are incurred.
  

In the case of above example, if the cash system of accounting is followed, then the rent for only 10 months shall be shown in the profit and loss account.

Thus under this system, only cash receipt and payments are recorded. No treatment is done for outstanding and prepaid items.

Hybrid System of Accounting: 

This system is mixture of cash system and mercantile system. Under this system of accounting,

•  Some items of Incomes are accounted on cash system and other on mercantile system, and
  

• Some items of Expenses are accounted on Cash system and other on mercantile system.
  

However, it is to be noted that practically this system is not adopted by any business house, because section 145 of Income tax Act, 1961 does not allow any person to maintain accounts on hybrid system. This section permits only mercantile system or cash system.