CASH AND ACCRUAL BASIS / SINGLE ENTRY

Cash Vs. Accrual Method of Accounting

Cash Basis Accrual Basis

1. Revenue is recognized in the period that revenue was
received in cash even if the product or service is
delivered to the customer at another period.
2. Expense is recognized in the period that expense was
disbursed in cash even if the benefit is used up at
another period.
3. Not PFRS because the realization and the
matching principle is ignored
1. Based on the two concepts: the realization and
matching principle
2. Revenue is recognized in the period it is earned without
regard to the time of receipt of cash.
3. Expense is recognized in the period it is incurred
without regard to the time of payment of cash
4. Net income provides a realistic of a firm profitability for
a given time period, since both revenue and expense
are recognized in the same period in which of the
operating activities that caused them occurred.

Cash basis Accrual basis

Sales Cash sales plus collection of trade
receivables.
Purchases Cash purchases plus payments to trade
creditors.
Income other than Amounts received are considered as
sales income regardless of when earned.
Expenses, in general Amounts 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.
Cash sales plus sales on account.
Cash purchases plus purchases on account.
Amounts earned are considered as income regardless of when
received.
Amounts incurred are treated as expenses regardless of when
paid.
Depreciation is provided normally.
Doubtful accounts are treated as bad debts.

Bookkeeping System

Definition: Bookkeeping is the systematic and chronological recording of transactions and events in books of accounts. It is also
known as the recording phase of accounting.

Purpose: Basis for determining financial position and operating results.

System of Bookkeeping
• Double entry bookkeeping - a system of bookkeeping which views a transaction as having two-fold effect on accounting
values, ( a value received and a value parted with and which reflects these two-fold effects in the accounting period.)
• Single entry bookkeeping - a system of bookkeeping whereby, as a general rule only cash and personal accounts are
recognized only.

System of recording transactions:

Principles Transactions Accounts Books Financial statement
involved and events presentation
recorded
1. - PFRS ( 1. Duality Records every Assets, Journal, Special Financial statements are
Double transaction 2. Equality type of Liabilities, Journal, Ledger, prepared using a systematic
entry approach) accountable Equity, Income Subsidiary processing data; known as
events and Expenses Ledger and the accounting process,
other important income (loss) is computed
books using the direct matching
principle
2. Single - Not PFRS 1. Recognized Records only Cash, Accounts Cash Books, and Income (loss) and a
entry (capital only one transactions Receivable, Subsidiary statement of assets and
maintenance phase of involving cash and Accounts Ledger liabilities is prepared using
approach) transaction personal accounts Payable, and (personal the analysis or indirect
Equity accounts) approach or inventory
method.

Accounting Review: Cash/Accrual; Single Entry

Computation of sales, purchases, expenses and income other than sales under cash basis, and accrual basis.

CASH/ACCRUAL AND SINGLE ENTRY

a. Increase in Accounts/Notes Receivable – trade, means there were more sale on account than collection (thus, Add the
increase to cash basis to get the accrual basis sales or Deduct the increase from the accrual basis to get the cash basis sales)

b. Decrease in Accounts/Notes Receivable – trade, means that there were more collection that sales on account (thus, Add the
decrease to the accrual basis to get cash basis sales or deduct the decrease from the cash basis to get the accrual basis sales)

c. Increase in Accounts/Notes Payable – trade, means that there were more purchases on account than payments to suppliers
(thus, Add the increase to the cash basis purchases (payments made) to get the accrual basis purchases or Deduct the increase from
the accrual basis purchases to get the cash basis purchases)

d. Decrease in Accounts/Notes Payable – trade, means that were more payments to suppliers (cash basis purchases) than
accrual basis purchases (thus, Add the decrease to the accrual basis purchases to get cash basis purchases or the total payments
made or Deduct the decrease from the cash basis purchases to get the accrual basis purchases.

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Accounts Receivable/Notes Receivable-Trade Advances from Customers Advances to Suppliers Accounts payable/Notes payable-Trade

Beg. Balance(AR/NR) Beg.Balance

xxx (ADV) Beg.
xxxBalance (Adv.) Beg. Balance(AP/NP)

Sales on Account (Accrual basis) xxx Collections ( Cash basis) xxx Payments ( cash basis) Purchase on account (accrual basis)

Sales allowances Purchase

xxx discounts

Dishonored notes Sales returns * Purchase

xxx returns*

Sales discount lost (net method) Sales discounts (gross method) Purchase allowancexxx

Recovery of prev. write offs ** xxx

Write offs

End Balance (ADV) End

xxxBalance(AR/NR) End
xxx
Balance(AP/NP) End Balance (Adv.)

xxx xxx xxx xxx

* excluding refunded sales return to customers *excluding refunded purchase returns from suppliers
** included in the analysis only if collections included the said recovery

Dishonored notes: not paid as of maturity date, transfer to accounts receivable (Face value of the note + interest +protest fee)

For CASH – ACCRUAL PROBLEMS related to item of income and expenses (e.g. rental income and expense, royalty
income and expense and other similar items)

Accrued income/Unearned income Prepaid expense / Accrued expense

Beg. Balance (Unearned
Beg. Bal (Acc Income) income) Beg. Balance (Prepaid exp) Beg. Balance (Accrued exp)
Collection of cash ( Cash Payment of cash (Cash
Recognize income (accrual basis) Recognize Expense (accrual
basis) basis) basis)
End Balance ( accrued
End Bal. (Unearned income) End Bal. (Acc. Income) expense) End Balance (Prepaid exp)

Xxx Xxx Xxx Xxx

Note: if the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning and ending
balances, simply place in the beginning balance if it is net decrease (since this indicates that the beginning is higher than ending
balance) or place in the ending balance if it is net increase (since this indicates that ending balance is higher than the beginning
balance).

Interest income/ expense (with amortization of discount or premium)

Interest payable and amortization of bonds (if applicable)

Beg. xxx
Cash paid for interest xxx Interest expense xxx
Amortization of discount on bonds payable xxx Amortization of premium on bonds payable xxx
End xxx
xxx xxx

Interest receivable and amortization of bonds (if applicable)

Beg. xxx
Amortization of premium on bond investment xxx Amortization of discount on bond investment xxx
Interest income xxx Cash received for interest xxx
End xxx
xxx xxx

Depreciation expense

Accumulated Depreciation
Ending balance xxx Beginning xxx
Accumulated depreciation – sold xxx Depreciation xxx
xxx xxx

Machinery – net
Beginning xxx Ending Xxx
Acquisition xxx Depreciation xxx
Revalued xxx CV – sold xxx
xxx xxx

Bad debt expense

Allowance for doubtful account
Ending xxx Beginning xxx
Write-off xxx Bad debt expense xxx
xxx Recovery xxx
xxx xxx

Single entry formula for net income

Cash and Accrual Basis and Single Entry-Batch May 2020 Page 2 of 8
 • Equity ending minus equity beginning equals net increase or decrease in equity plus items deducted from equity but not
profit or loss (dividends, withdrawals, errors) minus items added to equity but not profit or loss (issue of share capital or
Additional investment, donated capital, errors) equals net income or loss.

What is the "single entry formula" in determining net income or loss?

The procedure in determining net income or loss is simply to compare the capital or retained earnings at the beginning of the
year and capital or retained earnings at the end of the same year, after taking into consideration withdrawals or dividends and
additional investments. The difference is either net income or net loss.

Any increase in capital or retained earnings is net income and any decrease in capital or retained earnings is net loss. The
single entry formula of determining net income or loss is also known as "net assets approach" or "capital maintenance
approach".

Formula for proprietorship or partnership:

Capital, end of the year xx
Add: Withdrawals xx
Total xx
Less: Capital, beginning of year xx
Additional investment xx xx
Net income (loss) xx

Formula for corporation:

Retained earnings, end xx
Add: Dividends declared or paid xx
Other items that decrease retained earnings but
not included in profit or loss xx
Total xx
Less: Retained earnings, beginning xx
Other items that increase retained earnings but
not included profit or loss xx
Net income (loss) xx

If the balance of retained earnings is not available, the net income or loss may be determined as follows:
Shareholders' equity - end xx
Add: Dividends declared or paid xx
Other items that decrease equity but not included in profit or loss xx
Total xx
Less: Shareholders' equity - beginning xx
Other items that increase equity but not included in profit or loss xx xx
Net income (loss) xx

REVIEW QUESTIONS
1. (Accrual Basis) Sales salaries paid during 20x1 were P60,000. Advances to salesmen were P1,100 on January 1, 20x1, and
P800 on December 31, 20x1. Sales salaries accrued were P1,360 on January 1, 20x1, and P1,380 on December 31, 20x1. Show the
computation of sales salaries on an accrual basis for 20x1.
A. P60,320 B. P61,320 C. P64,560 D. P65,670

2. (Accrual Basis) The records for Todd Inc. showed the following for 20x1:
Jan. 1 Dec. 31
Accrued expenses P1,800 P2,150
Prepaid expenses 720 870
Cash paid during the year for expenses, P42,500
Show the computation of the amount of expense that should be reported on the income statement.
A. P43,700 B. P45,700 C. P42,700 D. P46,700

3. (Accrual Basis) The records for Kiley Company showed the following for 20x1:
Jan. 1 Dec. 31
Unearned revenue P1,600 P2,160
Accrued revenue 1,260 920
Cash collected during the year for revenue, P70,000

Show the computation of the amount of revenue that should be reported on the income statement.
A. P79,100 B. P79,800 C. P59,100 D. P69,100

4. (Cash Basis) Revenue on the income statement was P125,800. Accounts receivable were P4,500 on January 1 and P3,540 on
December 31. Unearned revenue was P1,050 on January 1 and P1,670 on December 31.
Show the computation of revenue for the year on a cash basis.
A. P126,480 B. P127,480 C. P127,380 D. P124,560

Cash and Accrual Basis and Single Entry-Batch May 2020 Page 3 of 8
5. (Single entry) Changes in the accounts of Noel Co. for 20x6 are as follows:
Increase / (Decrease)
Cash P500,000
Accounts receivable (4,600,000)
Allowance for bad debts (460,000)
Merchandise inventory 4,800,000
Investment in associate 3,000,000
Property, plant and equipment 2,400,000
Accumulated depreciation 800,000
Notes payable 2,600,000
Bonds payable (2,800,000)
Discount on bonds payable (600,000)
Ordinary share capital 3,900,000
Share premium 200,000
Revaluation surplus 2,600,000
Treasury shares 320,000

Additional information:
• On December 31, 20x6, Noel Co. declared cash dividends amounting to P500,000 and share dividends amounting to
P800,000. Also during the year, the company appropriated retained earnings for the retirement of bonds amounting to
P100,000.
• During the year, Noel obtained a bank loan of P2,000,000 and paid off loan amortization of P1,600,000 and interest of
P100,000. Interest of P180,000 is accrued on December 31, 20x6. There was no interest payable at the end of 20x5. In
20x6, Noel Company acquired treasury shares from its existing shareholders.

Compute for the net loss during the year.

A. P1,200,000 B. P1,300,000 C. P1,100,000 D. P1,000,000

Problem 6: (Comprehensive Problem) An analysis of incomplete records of Laban Corporation produced the following
information applicable to 20x9:
ACCOUNTS INCREASES
Cash P4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000
Prepaid insurance 200,000
ACCOUNTS DECREASES
Inventory 1,000,000
Equipment 100,000
Notes receivable – trade 600,000
Accrued salaries payable 300,000

Summary of cash transactions were as follows:

RECEIPTS
Cash sales P3,000,000
Collections on accounts receivable 30,000,000
Collections notes receivable –trade 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 500,000
DISBURSEMENTS
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000
Additional information:
Total purchase returns and allowances amounted to P800,000
Total sales returns and allowances amounted to P1,200,000.

Required: Determine the audited balances of the following:

1. Net sales
A. P35,800,000 B. P36,600,000 C. P36,200,000 D. P37,000,000

2. Net purchases
A. P17,900,000 B. P17,400,000 C. P17,700,000 D. P17,000,000

3. Cost of sales
A. P18,000,000 B. P18,700,000 C. P18,400,000 D. P18,900,000

4. Depreciation expense
A. P100,000 B. P900,000 C. P800,000 D. P1,000,000

5. Net income
A. P5,000,000 B. P5,200,000 C. P5,150,000 D. P5,900,000

Cash and Accrual Basis and Single Entry-Batch May 2020 Page 4 of 8
 CASH AND ACCRUAL BASIS

1. An entity reported sales revenue of P4,600,000 in the income statement for the current year.
January 1 December 31
Accounts receivable P1,000,000 P1,300,000
Allowance for doubtful accounts 60,000 110,000
Advances from customers 200,000 300,000

The entity wrote off uncollectible accounts totaling P50,000 during the current year. Under cash basis, what amount should be
reported as sales revenue for the current year?
A. P4,900,000 B. P4,250,000 C. P4,350,000 D. P4,400,000

AR, beg 1,000,000 1,300,000 AR, end

ADV, end 300,000 200,000 ADV, beg
Sales on account 4,600,000 50,000 Writeoff
4,350,000 Collection
5,900,000 5,900,000
Allowance for doubtful
Beg. 110,000 60,000 End
Writeoff 50,000 100,000 BDE
160,000 160,000

2. During the current year, an entity reported gross cash sales of P3,000,000 with related returns and allowances of P100,000 and
gross credit sales of P5,000,000 with related discount of P400,000. On January 1, customers owed the entity P1,000,000 and
on December 31, customers owed the entity P1,500,000. The entity used the direct writeoff method for bad debts. No bad
debts were recorded in the current year. Under cash basis, what amount of sales revenue should be reported for the current
year?
A. P7,000,000 B. P8,000,000 C. P7,500,000 D. P8,500,000

AR, beg 1,000,000 1,500,000 AR, end

Sales on account 5,000,000 400,000 Sales discount
4,100,000 Collection
6,000,000 6,000,000

C ash sales 3,000,000

C ollection 4,100,000
Returns and allowances (100,000)
Sales - cash basis 7,000,000

Use the following information for the next two (2) questions:

An entity provided the following data for the current year:

January 1 December 31
Accounts receivable P1,200,000 P1,350,000
Accounts payable 1,500,000 1,850,000

During the current year, accounts written off amounted to P100,000. Sales returns totaled P250,000, of which P50,000 was paid to
customers. Purchase returns amounted to P400,000, of which P100,000 was received from suppliers. Cash receipts from customers
after P500,000 discounts totaled P8,000,000 while cash payments to trade creditors after discounts of P200,000 amounted to
P5,000,000.

3. What is the amount of gross sales under accrual basis?

A. P9,500,000 B. P8,950,000 C. P8,200,000 D. P8,850,000

4. What is the amount of gross purchases under accrual basis?

A. P5,250,000 B. P5,950,000 C. P5,400,000 D. P5,850,000

AR, beg 1,200,000 1,350,000 AR, end

100,000 Woff
Sales on account 8,950,000 200,000 Sales return
8,000,000 C ollection
500,000 Sales discount
10,150,000 10,150,000

AP, end 1,850,000 1,500,000 AP, beg

Payment 5,000,000
Purchase discount 200,000 5,850,000 Purchases on account
Purchase return 300,000
7,350,000 7,350,000

5. During the current year, the entity paid suppliers P4,900,000 and reported the following balances:
December 31 January 1
Inventory P2,600,000 P2,900,000
Accounts payable 750,000 500,000

What amount should be reported as cost of goods sold in the income statement for current year?

Cash and Accrual Basis and Single Entry-Batch May 2020 Page 5 of 8
 A. P4,350,000 B. P4,850,000 C P4,950,000 D. P5,450,000

Inventory, beg. 2,900,000 2,600,000 Inventory end

Purchases 5,150,000 5,450,000 CGS
8,050,000 8,050,000

AP, end' 750,000 500,000 AP, beg

Payment 4,900,000 5,150,000 Purchases on account
5,650,000 5,650,000

6. An entity borrowed money under various loan agreement involving notes requiring interest payments at maturity. During the
current year, the entity paid interest totaling P6,000,000. The statement of financial position included the following:
January 1 December 31
Prepaid interest P500,000 P1,500,000
Interest payable 2,000,000 2,500,000

What amount of interest expense should be reported for the current year?
A. P5,500,000 B. P4,500,000 C. P7,500,000 D. P6,500,000

PI, beg 500,000 1,500,000 PI, end

IP, end 2,500,000 2,000,000 IP, beg
Amortization bond discount Amortization bond premium
Interest paid 6,000,000 5,500,000 Interest expense
9,000,000 9,000,000

Interest income/ expense (with amortization of discount or premium)

Interest payable and amortization of bonds (if applicable)

Beg. xxx
Cash paid for interest xxx Interest expense xxx
Amortization of discount on bonds payable xxx Amortization of premium on bonds payable xxx
End xxx
xxx xxx

Interest receivable and amortization of bonds (if applicable)

Beg. xxx
Amortization of premium on bond investment xxx Amortization of discount on bond investment xxx
Interest income xxx Cash received for interest xxx
End xxx
xxx xxx

7. An entity assigned some of its patents to other entities under a variety of licensing agreements. The following data are gathered
for the current year:
January 1 December 31
Unearned royalties P600,000 P400,000
Royalties receivable 900,000 850,000

During the current year, the entity received royalty remittance of P2,000,000. What amount should be reported as royalty
income for the current year?
A. P1,950,000 B. P2,150,000 C. P2,200,000 D. P2,250,000

Royalties receivable, beg 900,000 850,000 Royalties receivable, end

Unearned end 400,000 600,000 Unearned, beg
Royalty income 2,150,000 2,000,000 C ollection
3,450,000 3,450,000

8. An entity maintains the accounting records on the cash basis but restates the financial statements to the accrual basis. The
entity had P6,000,000 in cash basis net income for the current year. The entity provided the following information:
January 1 December 31
Accounts receivable P2,000,000 P4,000,000
Accounts payable 3,000,000 1,500,000

Under accrual basis, what amount should be reported as net income for current year?
A. P2,500,000 B. P5,500,000 C. P6,500,000 D. P9,500,000

Net income, accrual basis 9,500,000 9,500,000

AR, beg 2,000,000
AR, end (4,000,000) Increase AR (2,000,000)
AP, beg (3,000,000) Decrease AP (1,500,000)
AP, end 1,500,000
Net income, cash basis 6,000,000 6,000,000

9. An entity maintains its books on a cash basis. During the current year, the entity collected P50,000,000 from customers and
paid P42,000,000 in expenses.
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 January 1 December 31
Accounts receivable P2,000,000 P1,700,000
Prepaid expenses 200,000 300,000
Advances from customers 500,000 900,000
Accrued expenses 1,000,00 800,000
Accounts payable 1,400,000 2,500,000
Depreciation for current year 500,000

What is the accrual basis net income?

A. P6,500,000 B. P6,000,000 C. P8,000,000 D. P7,500,000

Net income, accrual basis 6,000,000 6,000,000

Depreciation expense 500,000 Depreciation expense 500,000
- Gain on disposal
+ Loss on disposal
AR, beg 2,000,000 Decrease, AR 300,000
AR, end (1,700,000)
PE, beg 200,000
PE, end (300,000) Increase, Prepaid (100,000)
Adv from customer, beg (500,000)
Adv from customer, end 900,000 Increase, Adv. 400,000
Accrued expenses, beg (1,000,000) Decrease, Accrued (200,000)
Accrued expenses, end 800,000
Accounts payable, beg (1,400,000)
Accounts payable, end 2,500,000 Increase AP 1,100,000
Net income, cash basis 8,000,000 8,000,000

SINGLE ENTRY

10. An entity provided the following increases in account balances that occurred during the current year:
Assets P9,000,000
Liabilities 3,000,000
Share capital 5,000,000
Share premium 500,000

Except for a P2,000,000 divided payment, the year’s earnings and a P200,000 prior period error from understatement of ending
inventory, there were no other changes in retained earnings for the year. What is the net income for the current year?
A. P2,500,000 B. P2,300,000 C. P2,700,000 D. P6,000,000

Assets Liabilities + Capital

9,000,000 3,000,000
2,000,000 5,000,000
500,000
200,000
2,300,000
11,000,000 11,000,000

11. An entity reported shareholders’ equity of P8,000,000 on December 31. The entity revealed the following transactions during
the current year:
An adjustment of retained earnings for prior year under depreciation P300,000
Gain on sale of treasury shares 500,000
Dividend declared, of which P500,000 was paid 1,500,000
Net income for current year 3,000,000

The share capital balance of P5,000,000 remained unchanged during the year. What is the balance of retained earnings on
January 1?
A. P1,300,000 B. P2,500,000 C. P1,700,000 D. P7,000,000

SHE, December 31 8,000,000

Less: Share capital (5,000,000)
Less: Share premium TS (500,000)
Retained earnings, December 31 2,500,000

RE, January 1 1,300,000

Prior period adjustment (300,000)
Net income 3,000,000
Dividends (1,500,000)
RE, December 31 2,500,000

12. An entity revealed the following changes in the accounts for the current:
Increase (Decrease)
Cash P1,000,000
Accounts receivable 2,000,000
Allowance for doubtful account 100,000
Inventory 2,200,000

Cash and Accrual Basis and Single Entry-Batch May 2020 Page 7 of 8
 Equipment (1,500,000)
Accounts payable 500,000
Bonds payable (2,000,000)
Loan payable 3,000,000
Accrued interest payable 100,000

During the current year, the entity issued 10,000 ordinary shares of P100 par value for P150 per share. Dividend of P4,000,000
was paid in cash during the year. Equipment with fair value of P500,000 was donated by a shareholder during the year.

The entity borrowed P3,000,000 from the bank and made interest payment of P200,000. The bank loan is unpaid at year-end
and the interest payable at year-end was P100,000. There is no interest payable at the beginning of year.

What is the net income for the current year?

A. P2,000,000 B. P6,000,000 C. P4,000,000 D. P4,500,000

Assets Liabilities + Capital

1,000,000
2,000,000
100,000
2,200,000
1,500,000
500,000
2,000,000
3,000,000
100,000
1,000,000
500,000
4,000,000
500,000
4,000,000
11,200,000 11,200,000

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