44 VERDEFLOR, SOPHIA MARIE D.
BSAC2
CHAPTER 14: CASH AND ACCRUAL
BASIS
Methods of Accounting
Cash basis – Income is recognized when
received regardless of when earned, and
expense is recognized when paid regardless
of when incurred. This does not recognize
accounts receivable, accounts payable,
accrued income, deferred income, accrued
expense and prepaid expense.
Accrual basis – Income is recognized when
earned regardless of when received and
expense is recognized when incurred
regardless of when paid. Thus, this
recognizes the items mentioned above on
cash basis method of accounting.
Comparison of cash basis and accrual
basis
Formulas:
Computation of sales
Cash sales
Sales on account:
Trade accounts and notes receivable, end
Collection of trade accounts and notes
receivable
Sales returns, discounts and allowances
Accounts and notes receivable written off
Trade notes receivable discounted (NR
directly credited)
Total
Less: Trade accounts and notes receivable,
beginning
Total sales – accrual basis
Note: This approach is to add back all items that
decreased trade receivables to the ending balance of
accounts receivable and notes receivable. The items
that decreased receivables normally include:
a. Collections from customers
b. Sales returns, allowances and discounts
c. Accounts and notes receivable written off
d. Notes receivable discounted – when the
notes receivable account is credited upon
discounting
Computation of purchases
Cash purchases
Purchases on account:
Trade accounts and notes payable, end
Payment of trade accounts and notes payable
Purchases returns, discounts, and allowances
Total
Less: Trade accounts and notes payable,
beginning
Total purchases – accrual basis
Note: This approach is to add back all items that
decreased trade payables to the ending balance of
accounts payable and notes payable. The items that
decreased trade payables normally include:
a. Payment of accounts payable
b. Payment of trade notes payable
c. Purchase returns
d. Purchases allowances
e. Purchase discounts
Computation of income other than sales
Income received – cash basis
Add: Deferred income – beginning
Accrued income – ending
Total
Less: Deferred income – ending
Accrued income – beginning
Income for the current year – accrual basis
Deferred income (or unearned income or
precollected income) – income already received but
not yet earned; it is a liability account. Examples are
unearned rental income and unearned interest
income.
Accrued income – is income already earned but not
yet received; it is an asset account. Examples are
accrued interest receivable, accrued rental receivable
or accrued royalties receivable.
Computation of expenses
44 VERDEFLOR, SOPHIA MARIE D. BSAC2

Expenses paid – cash basis

Add: Prepaid expenses – beginning
Accrued expenses – ending
Total
Less: Prepaid expenses – ending
Accrued expenses – beginning
Expenses – accrual basis

Prepaid expenses – expenses paid in advance but not

yet incurred; it is an asset account. Examples are
prepaid insurance, prepaid taxes, prepaid rent,
prepaid interest, and prepaid salaries.

Accrued expenses – expenses already incurred but

not yet paid; it is a liability account.

CHAPTER 15: SINGLE ENTRY

Definition: A system of record keeping in

which transactions are not analyzed and
recorded in the double entry framework.

Bare essentials – representation of the

records maintained under the single entry
system.

Cashbook – the major record under the

single entry system. It is maintained
showing all receipts and disbursements.

Single entry method

Net assets approach or capital

maintenance approach – is the single entry
method of determining net income or loss.
44 VERDEFLOR, SOPHIA MARIE D. BSAC2

Formula for proprietorship or partnership b. Accounts receivable and notes

receivable – summarized from unpaid
Capital, end of the year sales invoices and promissory notes
Add: Withdrawals
Total c. Merchandise on hand, supplies and
Less: Capital, begging of year other inventories – could be counted
Additional investments and their cost determined from purchase
Net income (loss) invoices
d. Property, plant and equipment – by
Formula for corporation
reference to deeds of sale and other
Retained earnings, end documents evidencing ownership of title
Add: Dividends declared or paid e. Accounts payable and notes payable –
Other items that decrease retained earnings from purchase invoices, memoranda,
but not profit or loss
Total correspondence and even consultation
Less: Retained earnings, beginning with creditors
Other items that increase retained earnings f. Ownership equity or capital –
but not profit or loss difference between the value assigned to
Net income (loss)
assets and liabilities
 Capital is the excess of total assets over
total liabilities.
 Increases in assets and decreases in
liabilities increase net asses while increases
in liabilities and decreases in assets decrease
net assets.

Preparations of financial statements

Preparation of income statement – involves

computation of individual revenue and
expense balances by reference to the cash
receipts and disbursements and the changes
in assets and liabilities.

Note: The formulas used in converting cash basis

to accrual basis used in the previous chapter are
useful in this case.

Preparation of statement of financial position –

involves inventorying, counting and verification
procedures to determine the nature and amount
of most of the assets and liabilities. For instance:

a. Cash – by count and by examining

banks statements