COLLEGE OF COMMERCE

BACHELOR OF SCIENCE IN ACCOUNTANCY

MODULE 8PACKET
AE 17- INTERMEDIATE ACCOUNTING 3
CASH AND ACCRUAL BASIS

Welcome to Module 8
In this module, we will discuss the concept of cash basis and accrual basis of accounting. You are
therefore expected to read in advance the topics pertaining cash and accrual basis of accounting so that
you will be able to familiarize yourself with the requisites in preparing the financial statements using both
bases. At this point, you are expected to be competently knowledgeable of the basic accounting
specifically related to the journal entries or journalization as this is a basic requirement in preparing
financial statements under the cash and accrual basis of accounting. It is important that during the
discussion, you mustactively participate by giving examples of transactions under the cash accounting
method and illustrate how to convert financial statements that are prepared using cash basis to accrual
basis of accounting. The suggested formulas and computations in deriving the balances of the accounts
to be presented in a cash basis or accrual basis of accounting must be well understood.

Our understanding of the financial statements will be challenged by the way we will be able to prepare
them using both bases more importantly the accounting treatment for account balances when an entity
chooses to shift from cash basis to accrual basis of accounting. This challenge will be translated into
application where you will be required to prepare financial statements using both methods.
When you see this symbol that is shown across the printed discussion, thisrepresents an important
point for discussion or appreciation/appraisal to be rendered by the student through either the
understanding of the specific topic, illustration, giving an example or providing a solution for a certain
case or scenario. At the end of this module, you will be answering multiple choice questions and straight
problems focusing on the application of principles in cash basis and accrual basis of accounting in
preparing financial statements.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Friday from 8am to 11am and 1pm to 4pm

LEARNING OUTCOMES:
By the end of this module, the students will be able to:
1. Understand and discuss what is cash basis of accounting
2. Be able to describe the differences between cash basis and accrual basis of accounting
3. Adept and familiar with the computations required in converting financial statements prepared under
cash basis to accrual basis of accounting.
4. Prepare adjustments related to theconversion of the cash basis financial statements to accrual basis
financial statements
5. Prepare the financial statements using cash basis and accrual basis of accounting.

ASSESSMENT PLAN:
1. Graded recitation through interactive participation in a question and answer format during discussion

2020-2021 Module Packets for AE 15 and ELEC 1 (Intermediate Accounting) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines Page 1 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

2. Problem solving games (points awarded to the first 5 students who can submit the correct answer
and solution)
3. Individual Submission and discussion of home-learning tasks through research online
4. Summative examinations in multiple choice question format

LEARNING PLAN/SCHEDULE OF ACTIVITIES

STRATEGIES/DESCRIPTION/TOPICS/ TIME TO
ACTIVITIES
COURSE CONTENT COMPLETE
A. Assigned Reading 1. Read the definition and the nature of cash and 0.5 hours
 Read accrual basis of accounting.
1. Conceptual 2. Discuss your understanding of and illustrate the 2.0 hours
Framework on journal entries used in recording transactions
recognition of assets relating to cash basis and accrual basis of
2. Basic Accounting on accounting.
the chapter relating 3. Prepare financial statements using cash basis
to assets and converted to accrual basis of accounting.
3. Intermediate
Accounting on the
recognition,
classification,
measurement and
presentation of
noncurrent asset and
noncurrent asset
held for sale
B. Lecture discussion CASH BASIS AND ACCRUAL BASIS
1. Read Chapter 8 of IA3 1. Discuss the concept of cash basis and accrual 0.5 hours
2. Watch Video basis including the rationale in preparing
financial statements using these bases.
3. Interactive participation
2. Describe the differences between cash basis
thru Q&A and accrual basis 1.0 hour
4. Graded recitation 3. Discuss and illustrate the following: 3.0 hours
a. Adjustment of cash basis statements to
accrual basis statements
b. Computation of sales
c. Computation of purchases
d. Computation of income other than sales
e. Computation expenses
4. Solve problems related to cash basis and 2.0 hours
accrual basis of accounting
C. Synthesize the main points 1. Teacher summarizes the main points 1.5 hours
a. Graded recitation discussed.
 Students will be required to recite by sharing 1.0 hour
their understanding/learnings specifically

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 2 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

pointing out the important aspects that have

just been discussed regarding cash basis and
accrual basis of accounting.
2. Solve problems related to cash basis and
2.0 hours
accrual basis of accounting.
3. This will validate the achievement of learning
outcomes.
D. Assignment 1. Prepare comparative financial statements using 2.0 hours
cash and accrual basis of accounting
2. Answer all questions and solve all problems
from the textbook.
E. Summative Quiz 1. Take multiple question quiz for (to be 2.0 hours
announced)

REFERENCES

1. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Conceptual framework and accounting

standards. 2019 edition. Manila : GIC Enterprises & Co., Inc. FIL 657.0218 V173c 2019
2. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume one.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 1
3. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume two.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 2
4. Valix, C. T., Peralta, J. F. &Valix, C. A. M. (2019). Intermediate accounting : volume three.
2019 revised edition. Manila : GIC Enterprises & Co., Inc. FIL 657.044 V173c 2019 v. 3
5. Cabrera, M. E. B. & Cabrera, G. A. B. (2019). Financial accounting and reporting
fundamentals. 2019-2020 edition. FIL 657.48 C117f 2019
6. Millan, Zeus Vernon B. Intermediate Financial Accounting III. Baguio City: Bandolin
Enterprise 2016

COURSE CONTENT DISCUSSION

8.1 CASH AND ACCRUAL ACCOUNTING

 What are the methods of accounting?

a. Cash basis
 How is cash basis used when recording transactions?
 Income is recognized when received regardless of when earned, and expense is
recognized when paid regardless of when incurred.
 What about the other accounts, how are they treated when using cash basis?

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 3 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 This approach does not recognize accounts receivable, accounts payable, accrued
income, deferred income, accrued expense and prepaid expense.

b. Accrual basis
 How is accrual basis used when recoding transactions?
 Income is recognized when earned regardless of when received and expense is
recognized when incurred regardless of when paid.
 What about the other accounts, how are they treated when using accrual basis?
 This approach recognizes accounts receivable, accounts payable, accrued income,
deferred income, accrued expense and prepaid expense.

 What are the differences between cash basis and accrual basis in regard to the recording different
transactions?
 Below is a comparison of the treatment in recognizing certain transactions using cash and
accrual basis of accounting:

TRANSACTION ITEM CASH BASIS ACCRUAL BASIS

Sales Cash sales collection of trade
receivables
Purchases Cash purchases plus
payments of trade creditors
Income other than sales Items received are
considered as income
regardless of when earned
Expenses, in general Items paid are treated as
expenses regardless of when
incurred
Depreciation Depreciation is provided
normally
Bad debts No bad debts are recorded
because trade receivables
are not recognized
Sales on account
Cash purchases plus
purchases on account
items earned are considered
as income regardless of when
received
Items incurred are treated as
expenses regardless of when
paid
Depreciation is provided
normally
Doubtful accounts are treated
as bad debts

 Below is an illustration on how the different accounts are treated under the cash basis and
accrual basis of accounting:

Illustration
ABC Company reported the following data which constitute a condensed description of the
business for the first year of operations ending December 31, 2019.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 4 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Cash sales 500,000

Sales on account 3,000,000
Collections from customers 2,800,000
Cash purchases 300,000
Purchase on account 2,000,000
Payments to trade creditors 1,600,000
Salaries paid 650,000
Office supplies paid 200,000
Other expenses paid 50,000
Interest received 40,000
Equipment 400,000

The equipment was acquired on January 1 and has an estimated useful life of 10 years with no
residual value.

The following amounts are properly determined on December 31:

Accrued salaries payable 70,000
Office supplies unused 50,000
Accrued interest receivable 10,000
Doubtful accounts 90,000
Ending inventory 400,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 5 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Comparative income statement

ABC Company
Income statement
Year ended december 31, 2019

CASH BASIS ACCRUAL BASIS

Sales 3,300,000 3,500,000
Less: Cost of goods sold
Purchases 1,900,000 2,300,000
Inventory - December 31 (400,000) (400,000)
Cost of goods sold 1,500,000 1,900,000
Gross income 1,800,000 1,600,000
Interest income 40,000 50,000
Income 1,840,000 1,650,000
Less: Expenses
Salaries expense 650,000 720,000
Office supplies expense 200,000 150,000
Other expenses 50,000 50,000
Doubtful accounts 90,000
Depreciation 40,000 40,000
Total Expenses 940,000 1,050,000
Net income 900,000 600,000

 Below are the related computations of the amounts presented in the income statement.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 6 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Cash basis Accrual basis

1. Cash sales 500,000 500,000
Sales on account 3,000,000
Collection from customers 2,800,000
Total sales 3,300,000 3,500,000

2. Cash purchases 300,000 300,000

Purchases on account 2,000,000
Payments to trade creditors 1,600,000
Total purchases 1,900,000 2,300,000

3. Interest received 40,000 40,000

Accrued interest receivable 10,000
Interest income 40,000 50,000

4. Salaries paid 650,000 650,000

Accrued salaries payable 70,000
Salaries expense 650,000 720,000

5. Office supplies paid 200,000 200,000

Office supplies unused (50,000)
Office supplies expense 200,000 150,000

6. Depreciation(400,000 /10) 40,000 40,000

 What are the suggested formulas or computations in order to covert the financial statements
prepared from cash basis to accrual basis?

a. Computation of sales formula

Cash sales xx
Sales on account
Trade accounts and notes receivable, end xx
Collection of trade accounts and notes receivable xx
Sales returns, discounts and allowances xx
Accounts and notes receivable written off xx
Trade notes receivable discounted (NR directly credited) xx xx
Total xx
Less: Trade accounts and notes receivable, beginning (xx)
Total sales - accrual basis xx

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 7 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 Important notes on the computation of sales:

 Usually, the data concerning the cash sales and the collections from customers are
given.
 The substance of the formula is the reconstruction of the accounts and notes
receivable because the total accounts and notes receivable would present sales on
account.
 The 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:
1) collections from customers
2) sales returns, allowances and discounts
3) accounts and notes receivable written off
4) notes receivable discounted - when the notes receivable account is credited upon
discounting.
 The beginning balances of accounts receivable and notes receivable are deducted
because these items pertain to the preceding year and constitute sales of the prior
year and that they might have been collected during the current year or some maybe
the subject of returns, allowances and discounts.

b. Computation of purchases formula

Cash purchases xx
Purchases on account:
Trade accounts and notes payable, end xx
Payment of trade accounts and notes payable xx
Purchases returns, the discount allowances xx xx
Total xx
Less: trade accounts and notes payable, beginning xx
Total purchases - accrual basis xx

 Important notes on the computation of purchases

 Usually, the data pertaining to cash purchases and payments of trade payables are
given.
 The substance of the formula is the reconstruction of the accounts and notes payable
because the total accounts and notes payable would represent the total purchases on
account.
 The approach is to add back all items that decreased the trade payables to the ending
balance of accounts payable and notes payable.
 The items that the crease trade payables normally include:
a. Payment of accounts payable
b. Payment of trade notes payable
c. Purchase returns
d. Purchase allowances
e. Purchase discount

 The beginning balances of accounts and notes payable are deducted because these
items pertain to the preceding year and constitute purchases of the preceding year.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 8 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

 The beginning balances of accounts and notes payable might have been paid during
the current year or some may be subject of discounts, returns and allowances.

c. Computation of income other than sales

Income received - cash basis xx
Add: Deferred income – beginning xx
Accrued income - ending xx xx
Total xx
Less: Deferred income – ending xx
Accrued income – beginning xx xx
Income for the current year - accrual basis xx

 Important notes on the computation of income other than sales:

1) The deferred income - beginning is added because this is received in the preceding
year and earned in the current year.
2) The deferred income - ending is deducted because this is received in advance in the
current year and to be earned only in the next year.
 What is deferred income?
 Deferred income or an earned income or pre collected income is income
already received but not yet earned.
 What is the classification of deferred income on the financial statement?
o It is a liability account.
 What are examples deferred income?
o Unearned rental income
o Unearned interest income.
3) Accrued income - beginning is deducted because this is already recognized as income
in the preceding year although it is received only in the current year.
4) Accrued income - ending is added because this is already earned in the current year
although not yet received. It is to be received next year.
 What is accrued income?
 Accrued income is income already earned but not yet received.
 What is the classification of accrued income on the financial statement?
o It is a receivable and therefore classified as an asset.
 What are examples of accrued income?
o Accrued interest receivable
o Accrued rental receivable
o Accrued royalties receivable

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 9 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

d. Computation of Expenses paid

Expenses paid - cash basis xx
Add: Prepaid expenses – beginning xx
Accrued expenses – ending xx xx
Total xx
Less: Prepaid expenses – ending xx
Accrued expenses – beginning xx xx
Expenses - accrual basis xx

 Important notes on the formula that involves prepaid expenses and accrued expenses:
1) Prepaid expenses - beginning is added because this is paid in the preceding year and
only expense in the current year.
2) Prepaid expenses - ending is deducted because this is paid in the current year and to
be expensed next year.
 What is a prepaid expense?
 Prepaid expenses paid in advance but not yet incurred and therefore are
assets.
 What are examples of prepaid expenses?
o Prepaid insurance
o Prepaid taxes
o Prepaid rent
o Prepaid interest
o Prepaid salaries

3) Accrued expenses - beginning is deducted because this is incurred in the preceding

year although only paid in the current year.
4) Accrued expense - ending is added because this is incurred in the current year and to
be paid next year.

Illustration
Bacolod Company began operations on January 1, 2018. During the year ended December 31,
2019, the accounting records have been maintained on a double entry basis but the cash basis of
accounting has been employed. The entity provided the following trial balance prepared from
these records on December 31, 2019:

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 10 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Debit Credit
Cash 1,800,000
Land 730,000
Equipment 3,000,000
Purchases 3,000,000
Expenses 790,000
Interest expense 180,000
Note payable 1,500,000
Sales 5,500,000
Share capital 2,000,000
Earnings 500,000
TOTALS 9,500,000 9,500,000

The entity decided to convert the accounting records to the accrual basis on December 31, 2019.

Additional information
1. Accounts receivable
December 31, 2019 500,000
December 31, 2018 350,000

2. Included in sales was P100,000 deposited by a customer for merchandise to be delivered

in 2019.

3. Accounts payable
December 31, 2019 450,000
December 31, 2018 400,000

4. Expenses include P30,000 one-year insurance dated May 1, 2019.

5. The note payable of P1,500,000 is a one-year note issued and discounted at 12% on
November 1, 2019.

6. It is estimated that 5% of the outstanding accounts receivable on December 31, 2019 may
prove uncollectible.

7. Accrued expenses
December 31, 2019 75,000
December 31, 2018 60,000

8. Inventory
December 31, 2019 600,000
December 31, 2018 450,000

9. The equipment was acquired on January 1, 2018. The estimated life is 10 years.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 11 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

Adjustments are necessary on December 31, 2019 for the preparation of the accrual basis
financial statements.

Adjusting Entries – December 31, 2019

1. Sales 350,000
Retained Earnings 350,000
Unrecorded accounts receivable on December 31, 2018 collected in 2019 and
credited to sales.

Accounts Receivable 500,000

Sales 500,000
Unrecorded accounts receivable on December 31, 2019.

2. Sales 100,000
Advances from customer 100,000
Customer deposit erroneously credited to sales

3. Retained Earnings 400,000

Purchases 400,000
Unrecorded accounts payable on December 31, 2018 paid in 2019 and debited to
purchases.

Purchases 450,000
Accounts Payable 450,000
Unrecorded accounts payable on December 31, 2019.

4. Prepaid insurance (30,000 x 4/12) 10,000

Expenses 10,000
Unexpired premium from January 1, 2020 to May 1, 2020

5. Prepaid interest 150,000

Interest expense 150,000

6. Doubtful accounts (5% x P500,000) 25,000

Allowance for doubtful accounts 25,000

7. Expenses 75,000
Accrued expenses 75,000
Accrued expenses on December 31, 2019

Retained earnings 60,000

Expenses 60,000
Unrecorded accrued expenses on December 31, 2018 paid in 2019 and charged to
expenses.

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 12 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

8. Inventory – December 31, 2019 600,000

Profit and Loss 600,000
Unrecorded inventory on December 31, 2019

Inventory – December 31, 2018 450,000

Retained Earnings 450,000

9. Retained earnings 300,000

Depreciation 300,000
Accumulated Depreciation 600,000
Depreciation for 2019 and unrecorded depreciation for 2018.
(P3,000,000 divided by 10 years, equals P300,000 per year)

Computation of Sales
Sales per book 5,500,000
Add: Accounts receivable – December 31, 2018 500,000
Total 6,000,000
Less: Accounts receivable – December 31, 2019 350,000
Advances from customer – 12/31/2019 100,000 450,000
Sales 5,550,000

Computation of purchases
Purchases per book 3,000,000
Add: Accounts Payable – December 31, 2019 450,000
Total 3,450,000
Less: Accounts payable – December 31, 2018 400,000
Purchases 3,050,000

Computation of expenses
Expenses per book 790,000
Add: Accrued expenses – December 31, 2019 75,000
Total 865,000
Less: Accrued expenses – December 31, 2018 60,000
Prepaid Insurance – December 31, 2019 10,000 70,000
Expenses 795,000

Computation of Retained Earnings

Retained Earnings per book 500,000
Add: Unrecorded accounts receivable - 12/31/2018 350,000
Unrecorded inventory – 12/31/2018 450,000 800,000
Total 1,300,000
Less: Unrecorded accounts payable – 12/31-2018 400,000
Unrecorded accrued expenses – 12/31/2018 60,000
Unrecorded 2018 depreciation 300,000 760,000
Corrected retained earnings – January 1, 2019 540,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 13 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

BACOLOD COMPANY
Income Statement
Year Ended December 31, 2019

Sales 5,550,000
Cost of goods sold:
Inventory – January 1 450,000
Purchases 3,050,000
Goods available for sale 3,500,000
Inventory – December 31 (600,000) 2,900,000
Gross income 2,650,000
Expenses
Expenses 795,000
Doubtful accounts 25,000
Depreciation 300,000
Interest expense 30,000 1,150,000
Income 1,500,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 14 of 15
 COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY

BACOLOD COMPANY
Statement of Financial Position
December 31, 2019

Assets
Current assets:
Cash 1,800,000
Accounts receivable 500,000
Allowance for doubtful accounts (25,000)
Inventory 600,000
Prepaid insurance 10,000
Prepaid interest 150,000 3,035,000
Noncurrent assets:
Land 730,000
Equipment 3,000,000
Accumulated Depreciation (600,000) 3,130,000
Total assets 6,165,000

Liabilities and Equity

Current liabilities:
Accounts payable 450,000
Advances from customer 100,000
Accrued expenses 75,000
Note payable 1,500,000 2,125,000

Equity:
Share capital 2,000,000
Retained earnings 2,040,000 4,040,000
Total liabilities and equity 6,165,000

Corrected retained earnings – January 1 640,000

Net income for the year 1,500,000
Retained earnings – December 31 2,040,000

2020-2021 Module Packets for AE 17 (Intermediate Accounting 3) | College of Commerce |

University of San Agustin, Iloilo City, 5000, Philippines Page 15 of 15