Cash Mercantile/Accrual, Hybrid Systems/Bases of Accounting
- The financial gain (earned or unearned) accruing over a given period of time
- The entire amount of income before any deductions are made
- The amount of money taken by a business in a particular period
- To handle or do business to the amount of
Some points worthy of note
- The terms Revenue and Sales (or Turnover) can be interchangeably used only when sales are expressed in terms of value and not in terms of quantity.
- Gross Revenue and Net Revenue are terms which are indicative of Gross Sales and Net Sales after setting off sales returns
- Revenue would be meaningful only when it is expressed in relation to a period.
Say the revenue is 5 crores would not make much sense unless we express the period involved. Saying the revenue for the last month is 5 Crores does sound meaningful.
Depending on the nature of the organisation and the type of activity it is involved in the revenue streams are varied
- Sale or Products, Providing Services are the activities most common to business organisations.
- Taxes, Duties, Fees etc are the major sources of revenue for Governments.
- Donations, Grants, Subscriptions, etc are some of the sources of revenue for non-profit organisations.
Top Line and Bottom Line
Top LineRevenue is often referred to as top line since it is the first item that we consider in preparing the income statements or accounts. On the Credit Side of the Trading account we find sales generally towards the top as the first or second item.
| To Opening Stock|
To Gross Profit
To Net Profit
|By Gross Profit||8,63,150|
Bottom LineSimilarly Net Profit (revenue left after deducting all expenses) is termed Bottom Line. In the Profit and Loss account, Net Profit/Loss is the last item and appears towards the end.
Income StatementAn income statement is a statement with a vertical flow containing the same information contained in the Trading and Profit & Loss a/c. The form of the statement is designed to be suitable for financial analysis.
Even in an income statement we start by considering the gross sales (i.e. gross revenue) and end with arriving at the net profit.
- realized when goods and services are exchanged for cash or receivables (debtors).
- realizable when assets received in exchange for goods and services are readily convertible to cash or receivables (debtors).
- earned when the duties to be entitled to compensation are performed.
Cash Basis Accounting
To put it in different terms, the cash basis of accounting asks you to take into consideration all those incomes/gains that have been received in cash or other assets and expenses/losses that have been paid out in cash or other assets during the accounting period in consideration.
Accrual or Mercantile Basis Accounting
To put it in different terms, the accrual basis of accounting asks you to take into consideration all those incomes/gains and expenses/losses pertaining to the accounting period for which you are trying to ascertain the profits and losses irrespective of whether the incomes are received in cash or not and the expenses are paid out in cash or not.
Hybrid System of Accounting
Under the hybrid system of accounting, incomes are recognised as in Cash Basis Accounting i.e. when they are received in cash and expenses are recognised on accrual basis i.e. during the accounting period in which they arise irrespective of when they are paid.
What Basis/system to follow?
The traditional accounting systems used to adopt the cash basis of accounting. Organisations which are to abide by the various regulations imposed by the various acts under which they are regulated are mostly required to adopt the Mercantile System of Accounting which is supposed to reveal the information relating to the organisation in a more appropriate manner than the cash basis of accounting.