Distinguish between the Cash Basis and the Accrual (Mercantile) Basis of Accounting.

Exercises · Q7

Q. Distinguish between the Cash Basis and the Accrual (Mercantile) Basis of Accounting.

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Basis	Cash Basis	Accrual (Mercantile) Basis
When income is recorded	Only when cash is actually received	When earned, whether or not cash is received
When expense is recorded	Only when cash is actually paid	When incurred, whether or not cash is paid
Outstanding/accrued/prepaid items	Ignored entirely	Recognised (outstanding expenses, accrued income, prepaid expenses, income received in advance)
Accuracy of the profit figure	Less accurate — can be distorted by the mere timing of a receipt or payment	More accurate — matches income earned against the expense incurred to earn it
Simplicity	Simple to maintain	Requires more adjusting entries, more complex
Who typically uses it	Small traders, individual professionals, some not-for-profit organisations	Almost all businesses; mandatory for companies under law

Q.Distinguish between the Cash Basis and the Accrual (Mercantile) Basis of Accounting.