CASH BASIS, ACCRUAL BASIS and SINGLE ENTRY METHOD

GENERAL CONCEPTS

CASH Basis ACCRUAL Basis

Sales Cash sales + collection from customers Cash sales + sales on account

Income other than Items received are considered as Items earned are considered as
sales income regardless of when earned income regardless of when
received

Purchases Cash purchases + payments to trade Cash purchases + purchase on

creditors account

Expense, in general Items paid are treated as expense Items incurred are treated as
regardless of when incurred expenses regardless of when paid

Depreciation Provided normally Provided normally

Bad debts NO bad debts are recorded because Doubtful accounts are treated as
trade receivables are not recognized bad debts

CONVERSION FROM CASH TO ACCRUAL BASIS:

Cash sales Pxx

Sales on Account
Trade A/R and N/R (end) Pxx
Collection of Trade A/R and N/R xx
Sales Returns, discounts and allowances xx
A/R and N/R written off xx
Trade N/R discounted (N/R directly credited) xx
Total Pxx
Trade A/R and N/R (beg) (xx) xx
ACCRUAL Basis – SALES Pxx

Cash Purchases Pxx

Purchases on Account
Trade A/P and N/P (end) Pxx
Payment of Trade A/P and N/P xx
Purchase returns, discounts and allowances xx
Total Pxx
Trade A/P and N/P (beg) (xx) xx
ACCRUAL Basis – PURCHASES Pxx

INCOME Other than Sales EXPENSES Other than Purchases

Income received – CASH basis Pxx Expenses Paid – CASH basis Pxx
Deferred Income – beginning xx Prepaid Expenses – beginning xx
Accrued income – end xx Accrued Expenses – end xx
Total Pxx Total Pxx
Deferred Income – end (xx) Deferred Expense – end (xx)
Accrued income – beginning (xx) Accrued Expense – beginning (xx)
INCOME – ACCRUAL Basis Pxx EXPENSES – ACCRUAL Basis Pxx

ILLUSTRATIVE PROBLEM 1
AMB Company, began operations on January 1, 2019 and maintained the accounting records
on a cash basis. The company provided the following trial balance on December 31, 2020:
Cash 320,000
Furniture and Fixtures 1,200,000
Bols, Capital, January 1 1,500,000
Sales 5,300,000
Purchases 3,050,000
Salaries expense 1,750,000
Payroll taxes 110,000
Insurance expense 90,000
Utilities expense 150,000
Living expense 130,000
Total 6,800,000 6,800,000

Additional Information:
1. Accounts receivable
January 1 1,600,000 December 31 P2,600,000
Analysis of accounts receivable account revealed that an allowance for doubtful
accounts of P400,000 should be provided.

2. Accounts payable
January 1 200,000 December 31 P300,000

3. Inventory based on physical count.

January 1 600,000 December 31 P750,000

4. On May 1, the entity paid P90,000 to renew insurance policy for one year. The premium
on the previous policy which expired on April 30 was P75,000.

5. Accrued expenses
January 1 December 31
Utilities 10,000 15,000
Payroll taxes 20,000 30,000
6. The furniture and fixture is acquired on January 1, 20219. It is depreciated on a straight
line basis using 10-year life with no salvage value.
7. The entity is being sued for P4,000,000. The coverage under the comprehensive
insurance policy is limited to P2,500,000. The attorney believed that an unfavorable
outcome is probable and that a reasonable estimate of the settlement is P3,000,000. The
liability is expected to be settled in the following year.
 8. The salaries included P40,000 per month paid to the owner. The owner also received
P2,500 per week for living expenses.

REQUIRED: Under the ACCRUAL basis of accounting, prepare the following:

1. Adjusting entries on December 31, 2020.
2. Income statement for the year ended December 31, 2020.
3. Statement of Financial Position as of December 31, 2020.

SUGGESTED ANSWERS

ADJUSTING ENTRIES
1 Sales 1,600,000
Bols, Capital 1,600,000
To adjust for unrecorded accounts receivable on
Dec. 31, 2019 collected in 2020 and credited to sales.

Accounts Receivable 2,600,000

Sales 2,600,000
To adjust for unrecorded sales on account during 2020.

Doubtful accounts expense 400,000

Allowance for Doubtful accounts 400,000
To record doubtful accounts expense.

2 Bols, Capital 200,000

Purchases 200,000
To adjust for unrecorded accounts payable on
Dec. 31, 2019 paid in 2020 and debited to purchases.

Purchases 300,000
Accounts Payable 300,000
To adjust for unrecorded purchases on account during 2020.

3 Inventory - end 750,000

Income summary 750,000
To set up ending inventory on Dec. 31, 2020.

Inventory - beg 600,000

Bols, Capital 600,000
To set up ending inventory on Dec. 31, 2019.

4 Prepaid Insurance 30,000

Insurance expense 5,000
Bols, Capital (P75,000 x 4/12) 25,000
To adjust insurance expense.

5 Bols, Capital 30,000

Utilities Expense 10,000
 Payroll taxes 20,000
To adjust for unrecorded expenses on Dec. 31, 2019
paid in 2020 and debited to expenses.

Utilities Expense 15,000

Payroll taxes 30,000
Accrue Utilities Expense 15,000
Accrued Payroll taxes 30,000
To adjust for unrecorded expenses during 2020.

6 Bols, Capital 120,000

Depreciation Expense 120,000
Accumulated depreciation 240,000
To record depreciation for 2019 and 2020.

7 Loss on lawsuit 500,000

Estimated liability on lawsuit 500,000
To record provision for loss on lawsuit.

8 Bols, Drawing 610,000

Salaries expense 480,000
Living expenses 130,000
To adjust expenses during 2020.

INCOME STATEMENT
ABM Company
Income Statement
For the Year Ended December 31, 2020

Sales Note 1 6,300,000

Cost of Goods Sold Note 2 (3,000,000)
Gross Profit 3,300,000
Expenses Note 3 (2,650,000)
Net Income 650,000

Statement of Financial Position

 ABM Company
Statement of Financial Position
As of December 31, 2020

Current Assets
Cash 320,000
Accounts Receivable (net) Note 4 2,200,000
Inventory 750,000
Prepaid Insurance Note 5 30,000 3,300,000

Noncurrent Assets
Furniture and Fixtures (net) Note 6 960,000
Total Assets 4,260,000

Current Liabilities
Accounts Payable 300,000
Accrued Expenses Note 7 545,000 845,000

Bols, Capital Note 8 3,415,000

Total Liabilities and Capital 4,260,000

SUPPORTING COMPUTATIONS

NOTE 1
Sales - cash basis 5,300,000
A/R - December 31 2,600,000
A/R - January 1 (1,600,000)
SALES - ACCRUAL basis 6,300,000

NOTE 2
Purchases - ACCRUAL basis 3,150,000
Inventory - January 1 600,000
Inventory - December 31 (750,000)
COGS - ACCRUAL basis 3,000,000

Purchases - cash basis 3,050,000

A/P - December 31 300,000
A/P - January 1 (200,000)
PURCHASES - ACCRUAL basis 3,150,000

NOTE 3 Supporting Schedules for Notes

Salaries expense (A) 1,270,000 (A) Salaries per book 1,750,000
Payroll taxes (B) 120,000 Drawings (40,000 x 12) (480,000)
Insurance expense (C) 85,000 Adjusted Salaries 1,270,000
Utilities expense (D) 155,000
Loss from lawsuit (E) 500,000 (B) Payroll taxes per book 110,000
Doubtful accounts 400,000 Accrued taxes – Dec. 31 30,000
Depreciation expense 120,000 Accrued taxes – Jan. 1 (20,000)
EXPENSES - ACCRUAL basis 2,650,000 Adjusted Payroll taxes 120,000

(C) Previous policy (P75,000 x 25,000

NOTE 4 4/12)
New policy (P90,000 x 60,000
Accounts receivable 2,600,000 8/12)
Allowance for doubtful accounts (400,000) Insurance expense 85,000
Net Realizable Value 2,200,000
(D) Utilities per book 150,000
NOTE 5 Accrued utilities – Dec. 31 15,000
Insurance paid in 2020 90,000 Accrued utilities – Jan. 1 (10,000)
Expired (8/12) (60,000) Adjusted Utilities 155,000
Prepaid (Unexpired )(4/12) 30,000
(E) Reasonable estimate 3,000,000
NOTE 6 Insurance coverage (2,500,000)
Cost 1,200,000 Loss from lawsuit 500,000
Accumulated Depreciation
(P1.2M - 0)/10 x 2 (240,000)
Book Value 960,000

NOTE 7
Accrued utilities - Dec. 31 15,000
Accrued taxes - Dec. 31 30,000
Estimated Liability from lawsuit 500,000
Total 545,000

NOTE 8
Capital – Jan. 1 1,500,000
Unrecorded – Jan. 1
A/R 1,600,000
A/P (200,000)
Inventory 600,000
Prepaid insurance 25,000
Accrued expenses (30,000)
Depreciation (120,000)
Adjusted Capital – Jan. 1 3,375,000
Net income 650,000
Drawings (610,000)
Capital – Dec. 31 3,415,000
ILLUSTRATIVE PROBLEM 2
KHAYLA Company provided the following data for the current year:
Cash sales 2,500,000 Inventory – January 1 500,000
Sales on account 850,000 Inventory – December 31 600,000
Cash purchases 1,700,000 Accrued expenses – December 31 20,000
Credit purchases 400,000 Prepaid expenses – December 31 30,000
Expenses paid 750,000 Equipment – December 31 1,000,000
A/R – January 1 250,000 Interest received 40,000
A/R – December 31 300,000 Interest receivable – January 1 10,000
A/P – January 1 150,000 Interest receivable – December 31 20,000
A/P – December 31 200,000

On July 1 of the current year, an equipment was acquired for P200,000. The terms are
P50,000 down and the balance to be paid one year after. The useful life of the equipment
is 10 years with no residual value.

REQUIRED: Under the CASH basis of accounting, how much should be reported as:
1. sales 3. Cost of goods sold (COGS) 5. net income
2. purchases 4. Depreciation expenses

SUGGESTED ANSWERS
1 Cash Sales 2,500,000 2 Cash Purchases 1,700,000
Collections from customers 800,000 Payments of A/P 350,000
SALES – CASH basis 3,300,000 PURCHASES – CASH basis 2,050,000

Sales on account 850,000 Credit purchases 400,000

A/R – Jan. 1 250,000 A/P – Jan. 1 150,000
A/R – Dec. 31 1 (300,000) A/P – Dec. 31 1 (200,000)
Collections from customers 800,000 Collections from customers 350,000

3 Purchases – Cash basis 2,050,000 4 Depreciation – Jan. 1 Equipment 80,000

Inventory – January 1 500,000) (P1M – P200,000)/10
Inventory – December 31 (600,000) Depreciation – July 1 Equipment 10,000
COGS – CASH basis 1,950,000 (P200,000/10) x 6/12
Depreciation expense 90,000
5 Sales 3,300,000
COGS (1,950,000)
Gross Profit 1,350,000
Interest received 40,000
Expenses paid (750,000)
Depreciation expense (90,000)
Net Income 550,000