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CASH AND ACCRUAL BASIS OF ACCOUNTING REVIEWER
Cash Basis of accounting is a system that recognizes revenue when cash is received and expenses when cash is paid while Accrual basis of accounting recognizes revenue when earned rather than when cash is received and recognizes expenses as it is incurred rather than when cash is paid. CASH BASIS VS ACCRUAL BASIS OF ACCOUNTING Items Cash Basis Accrual Basis Sales Cash sales, collection of trade accounts receivable, Cash sales, credit sales
collection of trade notes receivable Income other than Sales Includes only those collected during the period Includes those items earned during the period Purchases Cash purchases, payment of trade accounts payable, payment of trade notes payable, payment in advance to suppliers Cash purchases, purchases on account Expenses, in general Includes only those expenses that are paid Includes those items that are incurred regardless of when paid Depreciation Depreciation is typically provided except when the cost of equipment was treated as expense Depreciation is typically provided Bad Debts No bad debts expense is recognized since cash basis does not recognize receivables. Although some problems may give an indication that the accounts written off were charged to bad debts expense Doubtful accounts are treated as bad debts T-ACCOUNTS APPROACH In order to compute for the cash payments or collections for certain account, the T-account approach will be used on the following:
- Accounts receivable/notes receivable/advances from customers
- Allowance for doubtful accounts
- Accounts payable/notes payable/advances to suppliers
- Merchandise inventory
- Property, plant, and equipment
- Accumulated depreciation
- Rent receivable/Unearned rent income
- Prepaid rent/Rent payable
Illustrative Problem #1: Computation of Collections The following data were reported by Hydrogen Company during the current year: Accounts receivable - January 1 100, Accounts receivable - December 31 150, Notes receivable - January 1 210, Notes receivable - December 31 120, Advances from customers - January 1 40, Advances from customers - December 31 55, Sales return and allowances 3, Sales discounts 1, Uncollectible accounts written off during the current year 4, Sales - accrual basis 500, REQUIRED: Determine the gross sales under the cash basis of accounting. SOLUTION: Accounts receivable/ Notes receivable - trade/ Advances from customers Beginning balance - AR 100,000 Ending balance - AR 150, Beginning balance - NR 210,000 Ending balance - NR 120, Ending balance - Advances 55,000 Beginning balance - Advances 40, Sales on account 500,000 Sales return and allowances 3, Recoveries of accounts previously written off Sales discounts 1, Collections including recoveries 547, Write-off 4, Total 865,000 Total 865, Illustrative Problem #2: Computation of Bad Debts Expense The following data were reported by Helium Company during the current year: Allowance for doubtful accounts - January 1 20, Allowance for doubtful accounts - December 31 30, Uncollectible accounts written off during the current year 5, Recoveries of accounts previously written off 1, REQUIRED: Compute for the total bad debts expense during the current year.
SOLUTION:
Allowance for doubtful accounts Ending balance 30,000 Beginning balance 20, Accounts written off 5,000 Doubtful accounts expense 14, Recoveries of accounts previously written off 1, Total 35,000 Total 35, T-account Accounts payable/ Notes payable - trade/ Advances to suppliers Ending balance - AP Beginning balance - AP Ending balance - NP Beginning balance - NP Beginning balance - Advances Ending balance - Advances Payments Purchases on account (gross) Purchase return and allowances Purchase discounts Total Total NOTE: When there are no notes receivable and advances from customers, the T-account of the Account payable is Accounts payable/ Notes payable - trade/ Advances to suppliers Ending balance - AP Beginning balance - AP Payments Purchases on account (gross) Purchase return and allowances Purchase discounts Total Total T-account Merchandise Inventory Beginning balance Ending balance Net purchases Cost of sales Total Total
SOLUTION:
Accounts payable/ Notes payable - trade/ Advances to suppliers Ending balance - AP 150,000 Beginning balance - AP 100, Payments 500,000 Purchases on account (gross) 554, Purchase return and allowances 3, Purchase discounts 1, Total 654,000 Total 654, Merchandise Inventory Beginning balance 210,000 Ending balance 120, Net purchases 570,000 Cost of sales 660, Total 780,000 Total 780, NOTE: For the computation of net purchases: Gross purchases on account + Cash purchases = Total gross purchases Total gross purchases - Purchase return and allowances - Purchase discounts = Net purchases T-account Property, plant and equipment Beginning balance Ending balance Cost of asset acquired Cost of asset derecognized Total Total T-account Accumulated depreciation Ending balance Beginning balance Accumulated depreciation of asset derecognized Depreciation expense Total Total Illustrative Problem #5: Computation of Cost of Machine Acquired and Sold Boron Co. provided you the following information in relation to its property, plant and equipment account: January 1 December 31 Machinery P135,000 P150, Accumulated depreciation 50,000 45,
Additional information: a. Depreciation is 10% per annum. As a company policy, newly acquired assets are depreciated for a whole year at the year of purchase and no depreciation is provided for assets disposed at the year of disposal. b. At the start of the year, a fully depreciated machine without scrap value was sold for P5,000, at the same date, a new machine was acquired. REQUIRED: Compute the cost of the machine acquired and the historical cost of the machine sold. SOLUTION: Accumulated depreciation Ending balance 45,000 Beginning balance 50, Accumulated depreciation of asset derecognized 20, Depreciation expense (150,000 * 10%) 15, Total 65,000 Total 65, Machinery Beginning balance 135,000 Ending balance 150, Cost of asset acquired 35,000 Cost of asset sold 20, Total 170,000 Total 170, NOTE: Since the machine sold is fully depreciated at the time of sale, its cost is equal to its accumulated depreciation. T-account (Deferred/Accrued Revenue) Rent Receivable/Unearned Rent Income Beginning balance - Rent receivable Ending balance - Rent receivable Ending balance - Unearned rent income Beginning balance - Unearned rent income Income Collections Total Total Illustrative Problem #6: Computation of Rent Income The following data were reported by Carbon Company during the current year: Rent receivable - January 1 100, Rent receivable - December 31 150, Unearned rent income - January 1 60,
The following T-accounts are to be used for Single Entry Method: T-account Capital Ending balance Beginning balance Withdrawal Additional investment Net loss Net income Total Total NOTE: When the owner withdrew merchandise inventories or other non-cash assets, the drawings account should be debited to an amount equal to the cost, not the selling price or fair value of the merchandise or non-cash asset withdrawn. T-account Retained Earnings Ending balance Beginning balance Prior period error Prior period error Net loss Net income Total Total Illustrative Problem #8: Computation of Net Income or Loss The following data were reported by Oxygen Company during the current year: Capital - January 1 100, Capital - December 31 400, Cost of merchandise withdrawn by Oxygen 60, Sales value of merchandise withdrawn by Oxygen 80, Principal amount of notes payable paid by Oxygen with her personal checking account REQUIRED: How much is the net income (or loss) during the year?
SOLUTION:
Capital Ending balance 400,000 Beginning balance 100, Withdrawal 60,000 Additional investment 200, Net loss Net income 160, Total 460,000 Total 460,
T-account Statement of Financial Position/Net Assets Increase in assets Decrease in assets Decrease in liabilities Increase in liabilities Dividends declared Increase in share capital Increase in share premium Net loss Net income Total Total NOTE: It follows the basic rule in making journal entry that an account is increased through its normal balance while it is decreased at the other side of the normal balance, for example, increase in asset is debited which is the normal balance of an asset while decrease is credited which is at the other side of the normal balance. Illustrative Problem #9: Computation of Net Income or Loss Changes in the accounts of Fluorine Company for the current year are as follows: January 1 December 31 Total assets 2,000,000 3,000, Total liabilities 800,000 1,100, Share capital 1,500, Share premium 450, Retained earnings?? During the current year, the company issued 80,000, P10 par share capital for P15 per share. Dividends paid on December 31 of the current year amounted to P750,000. REQUIRED: How much is the net income (or loss) during the year? SOLUTION: Statement of Financial Position/Net Assets Increase in assets 1,000,000 Decrease in assets Decrease in liabilities Increase in liabilities 300, Dividends declared 750,000 Increase in share capital (80,000 * 10) 800, Increase in share premium (80,000 * 5) 400, Net loss Net income 250, Total 1,750,000 Total 1,750,
