Finding Income under Mercantile System from income under Cash System.
Income/Profits dependent on basis of accounting
The basis of accounting followed i.e. cash basis or mercantile basis would decide whether the transactions relating to outstanding expenses, prepaid expenses, pre received incomes and receivable incomes are recorded or not. Thus, the basis of accounting influences the balance in the ledger accounts representing incomes and expenses which are nominal accounts.
Since the figure of profit is dependent on the incomes/expenses, we can say that the figure of profit would vary depending on the method of accounting being followed by the organisation.
Finding Income under a System given Income under the other
Outstanding expenses, expenses prepaid, pre-received incomes, incomes receivable are to be brought into books in changing the accounting system from Cash to Mercantile or written off from the books in changing from mercantile to cash from a particular point of time.
Information relating to Outstanding expenses, expenses prepaid, pre-received incomes, incomes receivable is to be adjusted in finding the income under one system given the income under the other system of accounting. Such an adjustment would influence the respective income or expense also.
For making the adjustment, we assume that the change is incorporated at the beginning of the period for which the income is being ascertained and is sustained through out the period. Say if we have to find the income under mercantile basis given income under cash basis for an accounting period, we assume that the conversion from cash basis to mercantile basis has to be made at the beginning of the accounting period.
Adjusting Expenditure
Opening Outstandings and Prepaids
Bring the outstanding and prepaid expenses at the beginning of the accounting period into books.Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)P/L Adjustment a/c To Outstanding Expenses a/cDr 18,200
18,200Prepaid Expenses a/c To P/L Adjustment a/cDr 15,425
15,425This will result in the Outstanding Expenses a/c and Prepaid Expenses a/c getting created at the beginning of the accounting period.
Since the outstandings and prepaids relate to the previous accounting periods, any profit or loss on account of bringing them into books should not affect the current period profits. To ensure this the profit or loss on such transactions is credited or debited to Profit and Loss adjustment a/c.
Outstanding Expenses a/c and Prepaid Expenses a/c though created in the current period relate to the previous accounting periods. They are created anew at the beginning of the accounting period to represent the accounts that would have been created at the end of the previous accounting period and brought forward to the current period.
Consider the Outstanding expenditure and Prepaid expenditure accounts are used only for the purposes of balance sheet i.e. after bringing down the balances through an opening entry they are closed by transfer to the relevant expenditure account.
Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)Outstanding Expenses a/c To Expenses a/cDr 18,200
18,200Expenses a/c To Prepaid Expenses a/cDr 15,425
15,425Closing Outstandings and Prepaids
Record the closing outstandings and prepaids as would be done normally.Since we are assuming the Outstanding Expenses a/c and Prepaid Expenses a/c are being created and maintained only for the purpose of final accounting, the total outstanding and prepaid at the end of the accounting period, irrespective of whether it belongs to the current period or the previous periods, has to be recorded.
Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)Expenses a/c To Outstanding Expenses a/cDr 45,300
45,300Prepaid Expenses a/c To Expenses a/cDr 23,750
23,750
The effect of all these transactions on the Expenditure a/c would give an idea of the adjustment to be made.
DrCr | |||||
---|---|---|---|---|---|
Date | Particulars | Amount | Date | Particulars | Amount |
01/01/_5 – 31/12/_5 | To Prepaid Expenses – To Outstanding Expenses | 15,425 – 45,300 | 01/01/_5 – 31/12/_5 | By Outstanding Expenses By P/L a/c By Prepaid Expenses | 18,200 – 23,750 |
– | – |
A debit to Expenditure a/c implies increase in expenditure and a credit implies a decrease in expenditure.
Particulars | Amount | Amount |
---|---|---|
Expenditure paid in Cash during the Current Period + Opening Prepaid Expenses Closing Outstanding Expenses − Opening Expenses Outstanding Closing Expenses Prepaid Expenditure incurred in the current period | 15,425 45,300 18,200 23,750 | 2,48,000 60,725 3,08,725 41,950 2,66,775 |
Logic
- The cash paid during the current period towards expenses includes payments for previous period outstandings (opening outstanding expenses) as well as the expenses prepaid (closing prepaid expenses) for the subsequent periods.
These are to be deducted to obtain the cash paid towards the current period expense.
- Expenditure related to the current accounting period has been paid in the previous period (opening prepaid expenses) and is still outstanding at the end (closing outstanding expenses).
These have to be added to cash paid towards the current period expense to obtain the total expenditure relatable to the current accounting period.
A debit to Expenditure a/c implies increase in expenditure which will result in a reduction of profit and a credit implies reduction of expenditure which will result in an increase in profit. So, the same adjustment is used in ascertaining the adjusted income also.
Particulars | Amount | Amount |
---|---|---|
Income under Cash basis of accounting + Opening Prepaid Expenses Closing Outstanding Expenses − Opening Expenses Outstanding Closing Expenses Prepaid Income under Mercantile System of accounting | 15,425 45,300 18,200 23,750 | – 60,725 – 41,950 – |
Adjusting Income
Opening Pre-receiveds and Receivables
Bring the receivable and pre-received incomes at the beginning of the accounting period into books.Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)P/L Adjustment a/c To Pre-received Incomes a/cDr 8,125
8,125Receivable Incomes a/c To P/L Adjustment a/cDr 6,850
6,850This will result in the Pre-received Incomes a/c and Receivable Incomes a/c getting created at the beginning of the accounting period.
Since the pre-receiveds and receivables relate to the previous accounting periods, any profit or loss on account of bringing them into books should not affect the current period profits. To ensure this the profit or loss on such transactions is credited or debited to Profit and Loss adjustment a/c.
Pre-received Incomes a/c and Receivable Incomes a/c though created in the current period relate to the previous accounting periods. They are created anew at the beginning of the accounting period to represent the accounts that would have been created at the end of the previous accounting period and brought forward to the current period.
Consider the Pre-received Income and Receivable Income accounts are used only for the purposes of balance sheet i.e. after bringing down the balances through an opening entry they are closed by transfer to the relevant income account.
Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)Pre-received Incomes a/c To Incomes a/cDr 8,125
8,125Incomes a/c To Receivable Incomes a/cDr 6,850
6,850Closing Outstandings and Prepaids
Record the closing pre-receiveds and receivables as would be done normally.Since we are assuming the Pre-received Incomes a/c and Receivable Incomes a/c are being created and maintained only for the purpose of final accounting, the total pre-received and receivable at the end of the accounting period, irrespective of whether it belongs to the current period or the previous periods, has to be recorded.
Journal in the books of M/s ___ for the period from ____ to ____ Particulars Amount
(Dr)Amount
(Cr)Incomes a/c To Pre-received Incomes a/cDr 3,750
3,750Receivable Incomes a/c To Incomes a/cDr 5,245
5,245
The effect of all these transactions on the Income a/c would give an idea of the adjustment to be made.
DrCr | |||||
---|---|---|---|---|---|
Date | Particulars | Amount | Date | Particulars | Amount |
01/01/_5 – 31/12/_5 | To Receivable Incomes To P/L a/c To Pre-received Incomes | 6,850 – 3,750 | 01/01/_5 – 31/12/_5 | By Pre-received Incomes – By Receivable Incomes | 8,125 – 5,245 |
– | – |
A credit to Income a/c implies increase in income and a debit implies a decrease in income.
Particulars | Amount | Amount |
---|---|---|
Income received in Cash during the Current Period + Opening Pre-received Incomes Closing Receivable Incomes − Opening Receivable Incomes Closing Pre-received Incomes Income incurred in the current period | 8,125 5,245 6,850 3,750 | 1,32,500 13,370 1,45,870 10,600 1,35,270 |
Logic
- The cash received during the current period towards incomes includes receipts for previous period receivables (opening receivable incomes) as well as the incomes pre-received (closing pre-received incomes) for the subsequent periods.
These are to be deducted to obtain the cash received towards the current period income.
- Income related to the current accounting period has been received in the previous period (opening pre-received incomes) and is still receivable at the end (closing receivable incomes).
These have to be added to cash received towards the current period incomes to obtain the total income relatable to the current accounting period.
A credit to Income a/c implies increase in income which will result in an increase of profit and a debit implies reduction of income which will result in a decrease in profit. So, the same adjustment is used in ascertaining the adjusted income also.
Particulars | Amount | Amount |
---|---|---|
Income under Cash basis of accounting + Opening Pre-received Incomes Closing Receivable Incomes − Opening Receivable Incomes Closing Pre-received Incomes Income under Mercantile System of accounting | 8,125 5,245 6,850 3,750 | – 13,370 – 10,600 – |
Statement for Finding Income under Mercantile System
The adjustment relating to Incomes and expenses together would give the total adjustments needed for deriving the income under mercantile system from income under cash basis.
Particulars | Amount | Amount |
---|---|---|
Profit/Income under Cash Basis Accounting + Opening Expenses Outstanding Opening Incomes Pre-received Closing Expenses Prepaid Closing Incomes Receivable − Opening Expenses Prepaid Opening Incomes Receivable Profit/Income under Mercantile/Accrual Basis Accounting Closing Expenses Outstanding Closing Incomes Pre-received | 18,200 8,125 23,750 5,245 15,425 6,850 45,300 3,750 | 2,48,000 55,320 3,03,32049,775 2,53,545 |
Statement for Finding Income under Cash System
Particulars | Amount | Amount |
---|---|---|
Profit/Income under Mercantile/Accrual Basis Accounting + Opening Expenses Prepaid Opening Incomes Receivable Closing Expenses Outstanding Closing Incomes Pre-received − Opening Expenses Outstanding Opening Incomes Pre-received Profit/Income under Cash Basis Accounting Closing Expenses Prepaid Closing Incomes Receivable | 15,425 6,850 45,300 3,750 18,200 8,125 23,750 5,245 | 2,53,545 49,775 3,03,32055,320 2,48,000 |