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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Which statement correctly distinguishes the cash system of accounting from the mercantile (accrual) system?

The mercantile or accrual system records income when earned and expenses when incurred, whether or not cash is received or paid. The cash system records only actual cash movements, so outstanding and prepaid items do not arise. That is why the first statement is correct.

  1. AUnder the mercantile system, income and expenses are recorded when they are earned or incurred, whether or not cash has movedCorrect
  2. BUnder the cash system, credit sales are recorded as revenue when the sale is made
  3. CUnder the mercantile system, only cash receipts and payments are entered in the books
  4. DUnder the cash system, outstanding expenses and prepaid expenses are shown in the balance sheet

Explanation

The mercantile system recognises revenue and expenses on accrual, regardless of cash flow. The cash system records only actual receipts and payments, so it has no outstanding or prepaid items and no credit-sale revenue until cash is collected.

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