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vicky (Querist)
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25 October 2010 Sir,

Please tell me the difference in Mercentile System of Accounting & Accrual Basis of Accounting.

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CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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25 October 2010 Both are same.

Revenue Recognition
Revenues are

* realized when goods and services are exchanged for cash or receivables (debtors).
* realizable when assets received in exchange for goods and services are readily convertible to cash or receivables (debtors).
* earned when the duties to be entitled to compensation are performed.

Recognising revenue implies the act that would make the organisation consider that they have earned the revenue involved in the transaction. Based on when the revenue is recognised there are two types of accounting systems (1) Cash Basis of Accounting and (2) Accrual Basis or Mercantile System of Accounting
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1.
Cash Basis Accounting
Under cash basis accounting revenues are recognized and earned only when cash is received irrespective of when and how the services were performed or goods delivered.

To put it in different terms, the cash basis of accounting asks you to take into consideration all those incomes/gains that have been received in cash or other assets and expenses/losses that have been paid out in cash or other assets during the accounting period in consideration.
2.
Accrual or Mercantile Basis Accounting
Under accrual or mercantile basis accounting, revenues are recognized and earned when they are realized or realizable irrespective of when the cash is received.

To put it in different terms, the accrual basis of accounting asks you to take into consideration all those incomes/gains and expenses/losses pertaining to the accounting period for which you are trying to ascertain the profits and losses irrespective of whether the incomes are received in cash or not and the expenses are paid out in cash or not.
3.
Hybrid System of Accounting
This is not a system of accounting on its own. It is a combination of the Cash Basis Accounting and Accrual Basis Accounting. This system is based on the concept of conservatism.

Under the hybrid system of accounting, incomes are recognised as in Cash Basis Accounting i.e. when they are received in cash and expenses are recognised on accrual basis i.e. during the accounting period in which they arise irrespective of when they are paid.

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