Basis for Accounting: Accrual Basis

Under this method you report income in the year it is earned, and

deduct expenses in the year they are incurred. Thus, with the accrual

method it doesn’t matter when income (money) is actually collected or

expenses paid. The right to receive income, not its actual receipt,

triggers the requirement to include an item in your taxable income for

the year.

Typically, it includes an amount as income for the month in which

(1) all events that fix the right to receive the income have occurred,

and (2) it can determine the amount with reasonable accuracy. Under

this rule, you report an amount in your gross income on the earliest

of the following dates:

 when you receive payment

 when the amount is due to you

 when you earn the income

In detail, the accrual basis of accounting for Cotton World

Dormitory will be:

Types of Transaction Treatment

Unearned Rent Income

 One (1) Month Deposit and Income received but not yet earned

Advance

Rent Income Already earned.

Expenses incurred but not yet Recognize unpaid expenses as

paid (e.g., utilities payable) liability in the period in which
it was incurred.
Salaries and Wages Expense (cash Immediately recognize expenses as

basis) payment is made

Illustration:

Cotton World Dormitory received a deposit and advance payment for

the month of October and November totaled Php 5,000.00 and Utilities
Payment for Php 960.00 from its new boarder.

Entry:

Cash Php 5,000.00

Unearned Rent Income 5,000.00

To record the payment for October and November

Utilities Expense Php 960.00

Utilities Payable 960.00

To record the expenses for utilities

On October, Sweettie consumed the rent payment she made.

The entity made a payment for the utilities incurred for the
month.

Entry:

Unearned Rent Income Php 2,500.00

Rent Income 2,500.00

Utilities Payable Php 480.00

Cash 480.00