Question 1 OR (c)

Note on the mercantile basis of accounting

4 marks

Time to write: About 8 minutes
Topic: Conceptual framework items
Notes: Crux notes

Question

Question 1 OR (c) · 4 marks

Write a short note on the mercantile (accrual) basis of accounting.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

short noteA note opens with the meaning, then two or three key points. No long introduction.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Meaning: recognise when earned/incurred, not on cash movement 2 marks 3 min
2 Consequences (outstanding/prepaid/accrued/advance) and contrast with cash basis 2 marks 3 min
Check: every ask answered, key terms underlined 1 min

Easy marks

Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Under the mercantile (accrual) basis, revenues and costs are recognised as they are earned or incurred: recorded in the financial statements of the periods to which they relate: and not as money is received or paid. Accrual is one of the three fundamental accounting assumptions (with going concern and consistency), so it is one of the assumptions that financial statements are presumed to follow without the fact having to be stated.

Consequences of the mercantile basis:

Outstanding expenses (incurred but not yet paid) are charged and shown as liabilities; prepaid expenses are carried forward as assets.
Accrued income (earned but not yet received) is credited and shown as a receivable; income received in advance is treated as a liability.
Profit therefore reflects the income earned and expenses incurred in the period, giving a truer measure of performance than the cash basis. For example, if ₹1,00,000 of fees is earned in the year but only ₹60,000 is received, the mercantile basis credits the full ₹1,00,000 as income of the year (the ₹40,000 unreceived being a debtor), whereas the cash basis would record only ₹60,000.

It is contrasted with the cash basis, which records income and expenses only on actual receipt and payment.

Where the 4 marks sit

#	Component	Marks
1	Meaning: recognise when earned/incurred, not on cash movement	2
2	Consequences (outstanding/prepaid/accrued/advance) and contrast with cash basis	2
	Total	4

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