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Cash system vs. mercantile system

Satish K Sekhar.ACCA (Service) (303 Points)

16 January 2014

Hi Friends

My company prepare financial statements under mercantile system to comply with company Act and compute Income tax under cash system of accounting. Two sets of accounting therefore are prpared every year to facilitate this to accommodate these systems.

We secured a verdict in our favour at the tribunal agains the objection raised by the department during scrutiny.

We are now planning to switch to mercantile system of accouting for computation of income tax as well. since we found there is no additional benefit in continuing the system rather than duplicaing the job. We have TDS every year by the clients way higher than the actual tax liability.

What do you think the implications are . incase we do this from FY 2013-14?

I am looking for a very detailed and experrt answer.

Thanks

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3 Replies

(Guest)

as per clause 11 of form 3CD of tax audit report, details of deviation in the method of accounting applied during the year and its effect on profit / loss is to be given.

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Satish K Sekhar.ACCA (Service) (303 Points)
Replied 17 January 2014

Thank you for the information dude!! Please dont get me wrong.. This basic information I think each members of this web ie 1215719 in last count would defenitly know.

Is it possible for you or any one to go little deeper to understand how complex the switch may be for the organisation, for Eg. There may be additonal tax liability to be recognised by considering the sundry debtors not accounted for as sales in previous years etc...

Thank you for the understanding

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 18 January 2014

Suggestive List of tasks to convert from cash basis to accrual basis accounting, follow these steps:

Add accrued expenses. Add all expenses for which the company has received a benefit but has not yet paid the supplier or employee. This means you should accrue for virtually all types of expenses, such as wages earned but unpaid, direct materials received but unpaid, office supplies received but unpaid, and so forth.
Subtract cash payments. Subtract cash expenditures made for expenses that should have been recorded in the preceding accounting period. This also means reducing the beginning retained earnings balance, thereby incorporating these expenses into the earlier period.
Add prepaid expenses. Some cash payments may relate to assets that have not yet been consumed, such as rent deposits. Review expenditures made during the accounting period to see if there are any prepaid expenses, and move the unused portion of them into an asset account. If you choose to do the same for expenditures made in prior periods, you must adjust the beginning retained earnings balance to remove the expenses that are now being shifted into a prepaid expenses asset account.
Add accounts receivable. Record accounts receivable and sales for all billings issued to customers and for which no cash has yet been received.
Subtract cash receipts. Some sales originating in a prior period may have been recorded within the current accounting period based on the receipt of cash in that period. If so, reverse the sale transaction and record it instead as a sale and account receivable in the preceding period. This will require an adjustment to the beginning retained earnings account.
Subtract customer prepayments. Customers may have paid in advance for their orders, which would have been recorded as sales under the cash basis of accounting. You should instead record them as short-term liabilities.