CASH and ACCRUAL BASIS OF ACCOUNTING

Cash Basis – Income is recognized when received regardless of when earned, and expense is recognized
when paid regardless of when incurred.

Accrual Basis – Income is recognized when earned regardless of when received, and expense is recognized
when incurred regardless of when paid.

I. Sales Revenue Computations

Cash Basis Accrual Basis

Cash sales (Received & earned) xxx xxx

Credit sales (Recognition of A/R) - xxx

Collections from credit sales (A/R) xxx -

Total sales xxx xxx

Accounts and Trade Notes Receivable

Beginning Balance XXX
Credit Sales XXX
XXX Collections (excluding recoveries)
XXX Write offs
XXX Sales discount
XXX Sales returns
Recovery of w/offs XXX Collections from recoveries
XXX Note receivable discounted
Ending Balance XXX

Illustration:

MAGNETO Corp. uses the cash basis of accounting. MAGNETO collected P2,800,000 from its customers
during the year. MAGNETO had P200,000 in Accounts Receivable at the beginning of the year, and P360,000
in Accounts Receivable at the end of the year. The company also had P80,000 and P100,000 of allowance for
bad debts at the beginning and at the end of the year, respectively.

Questions:

1. What is MAGNETO’s Sales Revenue under the accrual basis of accounting?

2. What is MAGNETO’s Sales Revenue under the accrual basis of accounting assuming that the company
wrote-off P60,000 of its accounts during the year and recovered P20,000 from previously written-off
accounts?
3. What is MAGNETO’s Sales Revenue under accrual basis of accounting assuming that the company had
sales discount amounting to P100,000 and sales returns (all before collection) amounting to
P140,000?

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Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
II. Total Purchases Computations

Cash Basis Accrual Basis

Cash purchases (Paid & incurred) xxx xxx

Credit purchases (Recognition of A/P) - xxx

Payments for credit purchases (A/P) xxx -

Total sales xxx xxx

Accounts and Trade Notes Payables

XXX Beginning Balance
XXX Credit Purchases
Payments to suppliers XXX
Purchase discount XXX
Purchase returns XXX
XXX Ending Balance

Illustration:

CYCLOPS Company uses cash basis of accounting. The company made P2,000,000 in payments to its
suppliers during the year. CYCLOPS’ beginning inventory was P80,000, and its ending inventory was
P140,000. Moreover, CYCLOPS had a beginning Accounts Payable of P200,000 and an ending Accounts
Payable of P280,000.

Questions:

1. What is CYCLOPS’ accrual basis purchases for the year?

2. What is CYCLOPS’ cost of goods sold for the year?

III. Other Income Computations

Cash Basis Accrual Basis

Income earned & also received during the same period xxx xxx

Accrued income, beginning xxx -

Accrued income, end - xxx

Unearned income, beginning - xxx

Unearned income, end xxx -

Total income for the year xxx xxx

2
Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
Illustration:

Under the accrual basis, rental income of JUBILEE Company for the calendar year 2022 is P2,400,000.
The company had a balance of P200,000 in its Unearned Rental Income at the beginning of the year and
P300,000 at the end of the year. It also had a balance of P120,000 in its Accrued Rental Income at the
beginning of the year and P90,000 at the end.

Required: Compute for the rental income under the cash basis of accounting.

IV. Expenses Computations

Cash Basis Accrual Basis

Expenses incurred & also paid during the same period xxx xxx

Accrued expense, beginning xxx -

Accrued expense, end - xxx

Prepaid expense, beginning - xxx

Prepaid expense, end xxx -

Total expenses for the year xxx xxx

Illustration:

ROGUE Co. acquires patent rights from other enterprises and pays advance royalties in some cases,
and in others, royalties are paid within 90 days after year-end. During 2022, ROGUE remitted royalties of
P1,800,000. The following data are included in ROGUE’s December 31 balance sheets:

December 31, 2021 December 31, 2022

Prepaid royalties P 330,000 P 270,000

Royalties payable 480,000 450,000

Required: What amount should ROGUE report as royalty expense in its income statement for the year ended
December 31, 2022?

3
Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
QUIZZER

PROBLEM 1

COLOSSUS Company maintains its accounting records on the cash basis but restates its financial statements
to the accrual basis. COLOSSUS had P15,000,000 in cash basis net income for 2022. The following
information pertains to the company’s operations:

2022 2021

Accounts receivable P 5,000,000 P 2,000,000

Accounts payable 4,000,000 3,000,000

Under the accrual method, what net income should COLOSSUS report for 2022?

PROBLEM 2

J -GREY Company acquired rights to a patent. J -GREY remits royalties earned and due on October 31 of each
year. Additionally, on the same date, J -GREY pays on advance estimated royalties for the next year. J -GREY
adjusts prepaid royalties at year-end. Information for 2022 is:

Jan. 1 Prepaid royalties P 1,300,000

Oct. 31 Royalty payments (charged to expense) 2,200,000

Dec. 31 Year-end adjustment to expense 500,000

J -GREY should report prepaid royalties on December 31, 2022 at

PROBLEM 3

RAVEN Company debits all insurance premiums paid to prepaid insurance. The company makes monthly
charges to insurance expense with credits to prepaid insurance. Data for 2022 are:

Prepaid insurance, Dec. 31, 2021 P 800,000

Charges to insurance expense 3,200,000

Unexpired insurance premiums, Dec. 31, 2022 1,000,000

What was the total amount of insurance premiums paid?

4
Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 4

RAVEN Company is engaged in small trading business. The company maintains limited records. The following
balances are subtracted from the company’s records for the year 2022:

January 1 December 31
Accounts receivable P 150,000 P 100,000
Accounts payable 200,000 100,000
Accounts receivable written off 5,000
Cash received from customers 2,100,000
Cash paid to trade creditors 1,400,000
Sales discounts 15,000
Sales returns and allowances 10,000
Notes receivable-trade 50,000 100,000
Purchase discounts 20,000
Purchase returns 5,000

Question 1: What is the amount of gross sales?

Question 2: What is the amount of gross purchases?

PROBLEM 5

The selected balance sheet information for the BEAST Company at November 30, and December 31, 2022, is
presented below. All sales to customers were made on credit.

November 30 December 31

Debit Credit Debit Credit

Accounts receivable P 20,000 P 6,000

Prepaid insurance 10,000 15,000

Inventory 14,000 12,000

Accounts payable P 24,000 P 30,000

Wages payable 10,000 6,000

The following cash flow information is also available:

 Cash collected from credit customers amounted to P160,000.

 Cash paid for insurance amounted to P10,000.
 Cash paid to suppliers of inventories amounted to P70,000. The accounts payable account pertains to
purchase of inventories.
 Cash paid to employees for salaries amounted to P20,000.

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Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
Required: Determine the following, under the accrual basis of accounting:

1. Sales revenue
2. Cost of sales
3. Insurance expense
4. Wages expense

PROBLEM 6

The XMEN Corporation began operation in 2022. The company purchases computer equipment from
manufacturers and then sells to retail stores. During 2022, the bookkeeper used a check register to record all
cash receipts and cash disbursements. No other journals were used. The following is a recap of the cash
receipts and disbursements made during the year.

Cash receipts:

Sales of share capital P100,000

Collections from customers 640,000

Borrowed from a local bank on April 1, note signed requiring

principal and interest at 12% to be paid on March 31, 2022 80,000

Total cash receipts P 820,000

Cash disbursements:

Purchase of merchandise P 440,000

Payment of salaries 160,000

Purchase of equipment 60,000

Purchase of rent on building 28,000

Miscellaneous expenses 20,000

Total cash disbursements P 708,000

You are called in to prepare the financial statements at December 31, 2022. The following additional
information were provided to you:

 Customers owed the company 44,000 at year end. Of this amount, it was anticipated that P6,000
would probably not be collected. There were no actual bad debt write-offs in 2022.
 At year-end, P60,000 was still due to suppliers of merchandise purchased on credit.
 At year-end, merchandise inventory costing P100,000 still remained on hand.
 Salaries owed to employees at year-end amounted to P10,000.
 On December 1, P6,000 in rent was paid to the owner of the building used by XMEN. This represented
rent for the months of December through February.
 The equipment, which has a 10-year life and no salvage value, was purchased on January 1, 2022.
Straight-line depreciation is used.

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Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
Required: Determine the adjusted balances of the following:

1. Sales revenue
2. Cost of sales
3. Salaries expense
4. Rent expense
5. Net income

PROBLEM 7

STORM Company is in retailing business. The company kept very limited records and most of the company’s
transactions are summarized in cash records. STORM Company presented you the following information:

Total cash receipts from customers, based on cash records P 576,000

Proceeds from a bank loan (note payable-non trade) 100,000

Total cash payments to suppliers, based on cash records 299,000

Total cash payments for other operating expenses 144,000

Credit memos issued, for returns and allowances 50,000

Total refund for goods received as returns, based on cash records 25,000

Sales discount 40,000

Credit memos received, for returns 45,000

Total refund for goods returned to suppliers, based on cash records 15,000

Purchase discounts 30,000

Further investigation revealed the following:

Decrease in accounts receivable P 150,000

Increase in accounts payable 200,000

Increase in notes receivable 50,000

Increase in notes payable-trade and non-trade 10,000

Accounts written off during the year 25,000

Cash recovered from previous write-offs 5,000

Increase in merchandise inventory 131,000

Required: Compute for the following:

1. Accrual basis gross sales

2. Accrual basis gross purchases
3. Correct net sales
4. Correct cost of sales
5. Correct gross profit

7
Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 8

Presented below are the movements in the account balances of HAVOC Corporation as of the year ended
2022.

Account Increases
Cash 4,200,000
Accounts Receivable 1,400,000
Accounts Payable 400,000
Prepaid Insurance 200,000

Account Decreases
Inventory 1,000,000
Equipment 100,000
Notes Receivable 600,000
Accrued Salaries payable 300,000

Summary of cash transactions were as follows:

RECEIPTS
Cash sales 3,000,000
Collections on AR 30,000,000
Collections on NR 2,400,000
Interest on NR 200,000
PRA 500,000

DISBURSEMENTS
Cash Purchases 1,000,000
Payments on AP 16,500,000
SRA 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other Expenses 1,500,000
Dividends 1,000,000

Additional Information:
a. total PRA amounted to P 800,000.
b. total SRA amounted to P 1,200,000.

Determine the following:

1. Net Sales
2. Net Purchases
3. Cost of Sales

PROBLEM 9

Your audit of ANGEL Company revealed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The company’s
collections were deposited weekly. No record was kept of cash in the bank, nor was a record kept of
sales. Accounts receivable were recorded only by keeping copy of tickets, and these copies were given
to the customers when paying their accounts.

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Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
 The company started its operations on January 2, 2022 and issue common stock, 216,000 shares with
P100 par, for the following considerations:
Cash P 1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000

An analysis of the bank statements showed total deposits, including original cash investment, of
P12,600,000. The balance in the bank statement on December 31, 2022, was P900,000, but there
were checks amounting to P180,000 dated in December nut not paid but the bank until January 2023.
Cash on hand on December 31, 2022 was P450,000 including customers’ deposit of P135,000.

During the year, ANGEL borrowed P1,800,000 from the bank and repaid P450,000 and P90,000
interest.

Disbursements paid in cash during the year were as follows: Utilities, P360,000; Salaries, P360,000;
Supplies, P720,000, and; Dividends, P540,000.

An inventory of merchandise taken on December 31, 2022 showed P2,718,000 of merchandise.

Tickets for accounts receivable totaled P3,240,000 but P180,000 of that amount may prove
uncollectible.

Unpaid supplier invoices for merchandise amounted to P1,260,000.

Equipment with a cash price of P1,440,000 was purchased in early January of one-year installment
basis. During the year, checks for the down payment and all maturing installments totaled
P1,602,000. The equipment has a useful life of 5 years.

REQUIRED: Determine the following:

1. Payments for merchandise purchases in 20202

2. Collections from customers in 2022
3. Total sales on accrual basis in 2022
4. Total purchases on accrual basis in 2022
5. Cost of goods sold in 2022
6. Net income for the year ended December 31, 2022

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Cash and Accrual Basis of Accounting
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks