Mercantile system of accounting that allows a business to record income and expenses when they are made or accepted and not at the moment that money changes hands. This technique adheres to the matching principle of accounting and helps in providing a clear and comprehensive representation of the financial position of a company. A mercantile system of accounting (if you want to know) is a method that registers transactions when they occur, not when money is exchanged. This differs from the cash system, where income and expenses are recorded only when the money is actually received or spent. 1
The mercantile system of accounting is the common method used by businesses as it provides a true view of profits and of financial position. Such data are generated through Bookkeeping, and the process of booking entries into accounts is commonly done following the Mercantile System of Accounting.
What is Mercantile System of Accounting?
Students and businesses rely on the mercantile system of accounting to tell them how to maintain records, and knowing the fundamentals will go a long way toward increasing those profits. This approach is referred to as accrual accounting, as well. It captures every transaction — whether dollars have come in or not. It helps to know the correct profit and loss for a period.
Meaning of Mercantile System of Accounting
In mercantile system of accounting you need to record the income during the time it is earned. So if you sell goods today and get paid next month, you still book the sale today. Likewise, you log expenses when they occur, not when you pay for them. This further aids in understanding the actual position of the business.
It follows two main rules:
- Record income when earned.
- Record expenses at the time they are incurred.
When money comes, or goes, does not matter. When you earned or when you spent is what matters. This provides an accurate and complete picture of the business. This is a system that matters to both large and small businesses that require an accurate perspective of their financial standing. This method is also accepted by government laws and tax systems.
Example:
For example, if you are a supplier and you delivered goods having a value of ₹1,00,000 in March. The purchaser has agreed to pay in the month of April. In mercantile system of accounting, you recognize the ₹1,00,000 sale in March, even if payment comes later.
The system goes a long way toward matching costs with associated revenues, and that is why it gives a more accurate picture of profit. This is the method most widely used in India for preparing financial statements.
Cash and Mercantile System of Accounting
It is critical to be familiar with both the cash and mercantile system of accounting before selecting any method. Most small businesses operate on cash basis. But the mercantile method is what has companies who want better control and legal compliance.
Cash-Based Accounting and Mercantile Based Accounting
Under the cash system of accounting, businesses only record money when they actually receive or pay it. This is very trivial and do not require much records. But it provides only a truncated view of the business.
Conversely, a mercantile system of accounting records transactions when they occur independent of cash movement. This is better for long-term financial planning.
| Basis | Cash System | Mercantile System |
| Recording time | Cash is received or paid | Income earned, expense incurred |
| Accuracy | Less | More |
| Legal Acceptance | Not acceptable for big companies | Accepted legally |
| Complexity | Simple | Complex |
| Calculation of Profit | Show wrong profit | Show correct profit |
| Used by | Individuals, small business | Large business, companies |
Cash or Mercantile System of Accounting– Which is Best?
Whether to adopt a cash or mercantile system of accounting is a decision to be made based on business size and business type. For a tiny business with low volume of transactions, cash basis accounting may be sufficient. However, if the business is substantial or has to comply with tax regulations and accounting principles, the mercantile method is preferred.
Indian companies are required to maintain accounts on the mercantile basis under the Companies Act and the Income Tax Act. It also helps in calculating accurate tax and reflects genuine income of business.
Therefore, to answer if one asks what a mercantile system of accounting below is what to say: The mercantile system of accounting is the most practical and accurate system of business monitoring in terms of daily operational performance of a company.
Mercantile System of Accounting with Examples
Having examples are a good way to elucidate the academic. Common examples of the mercantile system of accounting can help in remembering how this system functions. This is a tool used to align income and expenses to the appropriate period.
Example 1 – Sale Transaction
Let’s assume a company sells goods worth ₹2,00,000 in December and gets payment in January. In mercantile accounting, the business records the sale in December, not January.
Example 2 – Expense Incurred
In March a company consumes electricity and receives the bill in April. The payment is due in May. This is a March expense so it will go on in March itself. This allows the cost to align with the month in which the power was consumed.
Example 3 – Loan Interest
One company applies for a loan; every month it needs to pay off the interest on that loan. Whether or not interest is later paid, however, each month the company will record interest as an expense when it becomes due.
Benefits of Using Examples
These mercantile system of accounting with examples helps to explain that this method records the transactions as and when they happen. This is really helpful for calculating profit accurately. Using this method, organizations can report less or more profit and can lead to issues with taxation and reporting.
The accounting principles are also followed in mercantile system such as:
- Accrual concept
- Matching principle
- Revenue recognition concept
It helps businesses improve their financial decisions and present the proper picture of assets and liabilities.
This is the method that teachers in schools and colleges ask students to maintain their journal entries. This is a critical topic for exam. Real Business examples should be involved in this system. Students should study and understand this system here.
Difference Between Cash and Mercantile System of Accounting
When asking difference between cash and mercantile system of accounting, most of the students and businessmen get confused. While both are slates to record accounting, they differ in transaction processing.
Time of Recognition
For cash system income or expense is recorded when money is received or paid. When income is earned or an expense is due, this is recorded on mercantile system.
Example for Comparison
Assume, for example, that a business takes an order in January, provides goods in February and receives money in March.
When sale is recorded under the cash system – March. The sale is recorded in February under mercantile system.
Financial View
Cash basis may not reflect pending expenses or revenues. What is mercantile system in this system you will get a complete picture of how much money you owe and how much is due.
Legal Use
Laws are such that government only accepts mercantile system from companies. This is what financial statements and income tax filing are done in.
Profit Reporting
Cash method can report mistaken profits. The lucrative method shows the real image of income and assets. This is a description of the difference between cash and mercantile system of accounting in a tabular form:
| Features | Cash System | Mercantile System |
| Income Recognition | When received | When earned |
| Expense Recognition | Paid | Incurred |
| Financial Position | Not show all dues | Show true financial position |
| Accounting Standard Compliance | No | Yes |
| Legal Acceptance | Limited | Full acceptance |
| Reporting Period Accuracy | Less | More |
This is a distinction that Indian students should be well-aware of. It helps them get the accounting system correct, whether in business or in exams.
Relevance to ACCA Syllabus
ACCA introduces the mercantile system of accounting, which is then developed into a deeper stream through FR. Basics of transactions recording when the obligations arise and not when they become payable. Understanding how transactions are recorded when incurred, not paid, is essential to be able to create Financial Statements that meet with the International Financial Reporting Standards (IFRS)
Mercantile System of Accounting ACCA Questions
Q1. In mercantile system at what time expense is to be recorded?
A. On payment date
B. When invoice is received
C. Time of incurrence of obligation
D. When goods are delivered
Answer: C. At the time obligation is incurred
Q2. Which is a defining characteristic of the mercantile system?
A. Cash travel data only
B. Income and expenses are matched with cash flow
C. Matches revenue and expenses with the period incurred
D. Employs a single-entry system
Answer: C. Matches revenues and expenses to the period incurred
Q3. What is the most impacted financial statement by accrual accounting?
A. Bank reconciliation
B. Financial position statement
C. Income statement
D. Cash flow statement
Answer: C. Income statement
Q4. When does credit sales is recorded under mercantile system?
A. Not recorded until payment
B. It becomes recorded once the cash is received
C. Subject to sale agreed
D. When invoice is issued
Answer: D. Recorded when invoice is issued
Q5. What theory underpins the mercantile system?
A. Going concern
B. Accrual
C. Prudence
D. Consistency
Answer: B. Accrual
Relevance to US CMA Syllabus
CMA Exam Part 1: Financial Planning, Performance and Analytics include mercantile system of accounting. This understanding is crucial for managers who wish to undertake cost management, budgeting, and performance measurement on the basis of real-time financial data.
Mercantile System of Accounting US CMA Questions
Q1. The mercantile system helps in measuring much better the….
A. Market share
B. Cash flow only
C. Performance & Profitability
D. Future sales trends
Answer: C. Profitability and performance
Q2. CMA ensures appropriate recording of expenses through accrual accounting
A. Only on bank clearance
B. When cash is paid
C. When benefits are used
D. After reconciliation
Ans: C. At the time when benefits are utilized.
Q3. Revenue is recognized under the mercantile system:
A. Based on market demand
B. After payment is received
C. When earned
D. When management approves
Answer: C. When earned
Q4. Which of the following is true of the mercantile system?
A. It delays the timing of financial reporting
B. It enhances accuracy in decision-making
C. It ignores expense timing
D. It does not require journal entries
Ans: B. data enhances for better decision-making
Q5. Accrual-based data is preferable in budgeting as:
A. It avoids tax payments
B. It only tracks actual payments
C It is a measure of performance over time
D. It lowers account balances
Ans: C As it considers performance across the years
Relevance to US CPA Syllabus
You are required to know about mercantile system of accounting in CPA exam FAR (Financial Accounting and Reporting) section. GAAP’s standard method of accounting is called accrual accounting, which is why this topic is essential for financial statement preparation.
Mercantile System of Accounting US CPA Questions
Q1. What is required for financial reporting under US GAAP?
A. Cash system
B. Hybrid method
C. Mercantile (accrual) system
D. Cash-plus system
Answer: C. Mercantile (accrual) system
Q2. In accrual accounting, we record interest expense:
A. When loan is paid
B. When interest is due
C. At loan closing date
D. At interest rate change
Answer: B Interest due
Q3. All of the following statements are true, EXCEPT:
A. Accrual system reflects actual financial situation
B. Accrual basis recognizes only cash flows
C. Expenses are matched to related revenues
D. Fully Accrual System In Support Of GAAP Reporting
Answer: B. Accrual basis recognizes only cash flows
Q4. Which transactions are recorded in the mercantile?
A. Those with cash receipts only
B. Only those affecting bank
C. All of which create liabilities or assets
D. None, other than the ones that are cash-based
Answer: C. Anything that creates liabilities or assets
Q5. Deferred revenue is:
A. Cash received in advance of future services
B. An accrued liability
C. A contingent asset
D. Revenue already earned
Ans: A. Cash received for future services
Relevance to CFA Syllabus
Read the CFA curriculum, particularly Level I (Financial Reporting and Analysis), on how the mercantile system (versus cash) allows investors to see better the performance. It not only affects financial ratios but also the analysis of revenues and sustainability of earnings.
Mercantile System of Accounting CFA Questions
Q1. What is the reason for analysts’ preference for accrual-based statements?
A. Show current bank status
B. Demonstrate operating performance without regard to cash flow
C. Assess only what has already been done
D. Simplify audit
Answer B. Report operational performance independently of cash flow
Q2. Accrual basis follows the(accounting method)
A. For revenue recognized when payment is made
B. Matching principle
C. Tax recognition only
D. Cash flow-led reporting
Answer: B. Matching principle
Q3. Which item would be shown under accrual but not under the cash system?
A. Depreciation expense
B. Cash sales
C. Dividend payment
D. Cash in hand
Ans: A. Depreciation expense
Q4. Mercantile system provides:
A. Long-term capital planning
B. Real-time market value
C. Clear Transparency of Earnings Quality
D. Only budget forecasts
Ans: C. Transparent earnings quality
Q5. CFA analyst adjustments: In assessing companies, CFA analysts make adjustments to:
A. Cash deficits
B. Accruals in the performance of earnings quality
C. Management bonuses
D. Asset liquidation
Ans: B: Accruals for earnings quality assessment
