1.16  Query:   

Hybrid system of accounting, meaning of.

1. A firm is engaged in the business of hire purchase financing and general money lending. Finance is provided for by the firm, for purchase of heavy vehicles and the firm also carries on general money lending business. The sources of capital of the firm are the capital contributed by partners and borrowings made from friends and relatives.  The method of accounting consistently followed by the firm for various transactions is as follows:

Nature of Income/Expenditure                       Method of accounting followed

Receipts:

1.         Hire from hire-purchase finances                                   Cash/receipt basis

2.         Interst from money lending                                            Accrual/mercantile basis

Expenditure:

1.         Interest on capital and borrowings                                 Accrual/mercantile basis

2.         Other administrative expenditure                                   Cash/payment basis

2. As per the querist, hybrid method of accounting is one of the recognised methods, according to para 2.61 of the publication titled ‘Monograph on Compulsory Maintenance of Accounts’ issued by the Institute of Chartered Accountants of India. As per para 2.6.4 of the same publication, if the accounts are prepared on the basis of cash and accrual methods, e.g., if income is accounted on cash/receipts basis and expenditure is accounted on accrual/mercantile basis, it is called hybrid (mixed) system of accounting. Accordingly, in view of the querist the method of accounting followed by the concerned firm can be called as hybrid or mixed system of accounting.

3. However, the querist has stated, recently a different version is developed in some quarters, in respect of the concept of hybrid or mixed system of accounting. According to this view, hybrid system of accounting would mean that different system of accounting for different sources of income or different income earning activities. It does not mean that cash basis for receipts and mercantile basis for payments in respect of one source of income and expenditure thereof.

4. The querist has sought opinion of the Committee as to whether the method of accounting followed by the concerned firm is hybrid system of accounting or not. If not, is the concept being developed recently as explained in para 3 above correct?

                                                                     Opinion                                             June 17, 1994

1.The Committee notes that “Besides the cash system and the mercantile system, there are innumerable other systems of accounting which may be called hybrid or heterogeneous – in which certain elements and incidents of cash and mercantile systems are combined.”*

2. The Committee is accordingly of the view that ‘hybrid’ system of accounting is a system under which some events and transactions relating to the operations of an enterprise are accounted for on cash basis and the other events and transactions are accounted for on mercantile basis. For example, income from business operations may be accounted for on cash basis, and expenses on accrual or mercantile basis. The Committee is also of the view that system of accounting followed by an enterprise would be determined for the enterprise as a whole and not for the various units of such enterprise.

3. On the basis of the above, The Committee is of the opinion that the system of accounting being followed by the concerned firm is hybrid system of accounting.

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*CIT v. A Krishnaswami Muddaliar (1964), 53 ITR 122, 130 (SC) as reproduced in Income-tax Law by Chaturvedi and Pithisaria, Volume III.