Introduction

When a partnership is maintained on a cash basis, the partners record transactions only when cash is received or paid. However, in a mercantile basis, transactions are recorded when they occur, regardless of whether cash has been exchanged. In this scenario, the partnership accounts of X and Y, sharing in the ratio of 3:2, were maintained on a cash basis since its formation in 2015. Now, the partners have decided to switch to a mercantile basis.

Reasons for Switching to Mercantile Basis

The partners may have decided to switch to a mercantile basis for several reasons, including:

1. Accurate Financial Reporting: By recording transactions when they occur, the partnership can provide more accurate and up-to-date financial information. This can help in making informed business decisions and understanding the true financial position of the partnership.

2. Compliance with Accounting Standards: In some jurisdictions, partnerships are required to maintain their accounts on a mercantile basis to comply with accounting standards and regulations.

3. Better Management of Receivables and Payables: Maintaining accounts on a mercantile basis allows the partners to track and manage their receivables and payables more efficiently. They can keep a record of outstanding invoices and payments due, which helps in monitoring cash flow and minimizing the risk of bad debts.

4. Enhanced Decision Making: With a mercantile basis, the partners have access to real-time financial data, enabling them to make timely and informed decisions. They can analyze the profitability of different projects, evaluate the performance of the partnership, and plan for future growth.

Changes in Accounting Methods

Switching from a cash basis to a mercantile basis requires certain changes in the accounting methods. The following adjustments need to be made:

1. Accruals and Prepayments: Accruals and prepayments are adjustments made to reflect income or expenses that have been earned or incurred but have not yet been recorded. Accrued income and expenses are recognized before the actual cash transaction takes place, while prepayments are expenses paid in advance. These adjustments help in matching revenues and expenses with the period in which they are earned or incurred.

2. Provision for Bad Debts: Under a mercantile basis, the partnership needs to estimate and provide for any potential bad debts. This provision is made to account for the possibility of not receiving full payment from customers. It helps in reflecting the true financial position of the partnership and ensures that the accounts are not overstated.

3. Depreciation: Depreciation is the systematic allocation of the cost of an asset over its useful life. Under a mercantile basis, the partnership needs to calculate and record depreciation on its fixed assets. This adjustment helps in spreading the cost of the asset over its useful life and reflecting its diminishing value over time.

4. Adjustment for Stock: If the partnership maintains stock, an adjustment needs to be made to reflect the change in the value of the stock. This adjustment helps in accurately valuing the stock and determining the cost of goods sold.

5. Provision for Expenses: The partnership may need to make provisions for expenses that are expected to occur in the future, such as legal expenses or warranty claims. These provisions help in matching expenses with the period in which they are incurred and ensure that the accounts reflect the true financial position of the partnership.

Conclusion

Switching from a cash