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LEARNING MATERIAL
INTRODUCTION:
The very heart of the accounting process is the analysis of the dual
effect of each transaction on the basic accounting model “Assets = Liabilities
+ Capital”. All transactions are normally analyzed and recorded in terms of
debits and credits. This is the essence of the double entry system of
bookkeeping. However, where the records are incomplete, they are said to be
maintained on a single entry basis.
In this module, we will understand more how are records maintained
under the single entry system and how are financial statements being
prepared using the single entry system.
Presentation of Content
1
SINGLE ENTRY METHOD
The computation procedure followed in determining net income or loss
is simply to compare the capital or retained earnings at the beginning of
the year with that at the end of the same year after taking into
consideration withdrawals or dividends and additional investment
o Any increase in capital or retained earnings is net income
o Any decrease in capital or retained earnings is net loss
The single entry method of determining net income or loss is also known
as “net assets approach” or “capital maintenance approach”
Illustration 1
An entity provided the following data for the current year:
January 1 December 31
Total assets P2,000,000 P3,000,000
Total liabilities P1,200,000 P1,800,000
Additional investments P 600,000
Withdrawals P 900,000
2
Computation
The net income for the current year is computed as follows:
Illustration 2
An entity provided the following information in relation to retained earnings
for the current year:
During the current year, the entity issued shares capital with par value of
P2,000,000 and fair value of P2,500,000 as 10% stock dividend. At year-end,
the entity declared a cash dividend of P3,000,000.
Computation
The net income for the current year is computed as follows:
**The stock dividend is recognized at fair value because it is less than 20%
Illustration 3
An entity provided the following changes in account balances during the
current year:
Increase (Decrease)
Cash P1,500,000
Accounts receivable P 500,000
3
Merchandise inventory P2,000,000
Prepaid expense (P 100,000)
Land P5,000,000
Accounts Payable (P1,100,000)
Bonds Payable P4,000,000
Share capital P4,000,000
Share premium P1,000,000
Dividend of P1,500,00 was paid during the year and that no other
transactions affected the retained earnings. In this example, the retained
earnings and shareholders’ equity at the beginning and end of the year cannot
be determined.
Thus, the procedure is to determine the effect of the changes in assets and
liabilities on net assets whether the change in the asset or liability increaser
or decreases the net assets.
Computation
Effect on net assets
Increase Decrease
Increase in cash P1,500,000
Increase in A/R P 500,000
Increase in inventory P2,000,000
Decrease in prepaid expense P 100,000
Increase in land P5,000,000
Decrease in A/P P1,100,000
Increase in B/P P4,000,0000
Total P10,100,000 P4,100,000
4
Net increase in net assets (P10,100,000-P4,100,000) P6,000,000
Dividend paid P1,500,000
Total P7,500,000
Increase in share capital P4,000,000
Increase in share premium P1,000,000 (P5,000,000)
Net income P2,500,000
**The dividend paid is added back to net assets because it decreased net
assets but not representing profit or loss
**The increase in share capital and increase in share premium are deducted
because they increased net assets but not representing profit or loss