MODULE 3: CASH AND ACCRUAL BASIS

I. Description

This module discusses the cash basis ad accrual basis of accounting as well as the use of T-
accounts to solve problems.

II. Objectives

After completing the module, the students are expected to:

ü Describe cash basis and accrual basis of accounting

ü Compare the two processes

ü Apply Cash basis of accounting in business transactions

ü Apply Accrual basis of accounting in business transactions

ü Use and apply T-accounts approach in problem solving

ü Translate accrual income to cash basis income and vice versa

III. Duration

Start: Week 3

End: Week 3

IV. Learning Contents

A. DEFINITION

Cash Basis accounting is a system that recognizes revenue when cash is received and
expenses when cash is paid.

Accrual Basis accounting is a system that recognizes revenue when earned and expenses
as it is incurred.
 Transaction Cash Basis Accrual Basis
Sales Cash sales Cash Sales

Collection of Trade AR and NR Sales on Account

Other Income Collection during the period Earned during the period
Purchases Cash purchase Cash Purchases

Payment of AP and NP Purchase on Account

Payment in advance to
supplier
Expenses Only expenses paid Incurred expenses (cash and
payable)
Depreciation Typically provided Typically provided
Bad Debts none Doubtful accounts

B. GUIDELINES IN USING T-ACCOUNTS

1. Plot the given data in the T-account.

2. The beginning balance is placed in the balance of the account and the ending balance
on the other side.

3. Compute the total debit and credit

4. The difference between the total debit and total credit is the squeezed figure.

V. References

· Auditing and Assurance Concepts and Applications by Darrell Joe O. Asuncion, Mark
Alyson B. Ngina and Raymund Francis A. Escala

· Auditing and Assurance, Concepts and Applications by Ma. Elenita Balatbat Cabrera and
Gilbert Anthony B. Cabrera