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.

RECEIVABLE

Beg. Balance
Sales on Account Collections
Recoveries of previous write-offs Sales discounts
Sales returns and allowances
Write-offs
END Balance

Note: Recoveries are included in the analysis only if collections are included in the said recovery

Illustrative Problem: ZETA Company reported sales revenue of P4,600,000 in the income statement for
the year ended December 31, 2021. The entity wrote off uncollectible accounts totaling P50,000 during
the current year.

2020 2021
Accounts receivable 1,000,000 1,300,000
Allowance for uncollectible accounts 60,000 110,000
Advances from customers 200,000 300,000
Under cash basis, what amount should be reported as sales for the current year?

ACCOUNTS RECEIVABLE/ ADVANCES FROM CUSTOMERS

Beg. Balance – AR 1,000,000 Beg. Balance – Advances frm customers 200,000

Sales on Account 4,600,000 Collections XXXX
Recoveries of previous write-offs Sales discounts
Sales returns and allowances
Write-offs 50,000
END Balance – AR 1,300,000 END Balance – Advances 300,000

SOLUTION: 1,000 + 4,600 +300 -1300 – 200 – 50 = 4,350,000

ALTERNATIVE SOLUTION:

Beg. Balance – AR 1,000,000 Beg. Balance – Advances frm customers 200,000

Sales on Account 4,600,000 Collections 4,350,000
Recoveries of previous write-offs Sales discounts
Sales returns and allowances
Write-offs
50,000
END Balance – Advances 300,000 END Balance – AR 1,300,000
5,900,000 5,900,000

EXERCISE 1: Jacqueline Company began the current year with accounts receivable of P1,000,000 and
allowance for doubtful accounts of P50,000. During the current year, the following events occurred:

Accounts written off - 100,000

Cash Sales – 500,000

Sales on account – 3,000,000

Doubtful accounts expense – 200,000

At the end of the current year, the entity showed a balance in accounts receivable of P1,700,000.

Under cash basis, what amount should be reported as sales?

Beg. Balance 1,000,000

Sales on Account 3,000,000 Collections 2,200,000
Recoveries of previous write-offs Sales discounts
Sales returns and allowances
Write-offs 100,000
END BALANCE 1,700,000

SALES, CASH BASIS = 2,200,000 + 500,000 = 2,700,000

PAYABLES

Beg. Balance
Payments Purchases on Account
Purchase Discounts
Purchase Returns and Allowances

END Balance
ILLUSTRATIVE PROBLEM:

The following data were reported by LITHIUM Company during the current year:

Accounts payable – Jan 1 100,000

Accounts payable – Dec 31 150,000
Notes payable – Jan. 1 210,000
Notes payable – Dec 31 120,000
Advances TO supplier – Jan 1 40,000
Advances TO supplier – Dec 31 55,000
Purchase returns and allowance 3,000
Purchase discounts 1,000
Payment 500,000
Required: Determine the gross purchase under the accrual basis of accounting.

Beg. Balance – AP 100,000

Beg. Balance – Advances to supplier 40,000 Beg. Balance – NP 210,000
Payments 500,000 Purchases on Account xxx
Purchase Discounts 1,000
Purchase Returns and Allowances
3,000
END Balance – AP 150,000 End Balance – Advances 55,000
END Balance – NP 120,000
Total 814,000 814,000
ANSWER: 449,000

EXERCISE 2: Mall Company reported the following balances at the end of each year:

2021 2020
Inventory 2,600,000 2,900,000
Accounts Payable 750,000 500,000

The entity paid suppliers P4,900,000 during the year ended December 31, 2021. Under accrual basis,
what amount should be reported as COGS sold in 2021?

Beg. Balance 500,000

Payments 4,900,000 Purchases on Account 5,150,000
Purchase Discounts
Purchase Returns and Allowances
END Balance 750,000
5,650,000

COGS = 2,900,000 +5150,000 – 2,600,000 = 5,450,000

INCOME OTHER SALES

Income Received – cash basis Xx

Add: Deferred income – beg (LIABILITY) Xx
Accrued income -end ( ASSET/Receivable) Xx
Less: Deferred income -end Xx
Accrued income -beg. Xx (xx)
Income for the current year – accrual Xx

EXPENSES

Expenses paid – cash basis Xx

Add: Prepaid expenses – beg (ASSET) Xx
Accrued expenses -end (LIABILITY) Xx
Less: Prepaid expenses -end Xx
Accrued expenses -beg. Xx (xx)
Expenses for the current year – accrual Xx

EXERCISE 3:
You were able to gather the following in connection with our audit of the Wowie Corp. for the year
ended December 31, 2021:
December 31, 2020 December 31, 2021
Accounts receivable 6,400,000 4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory(PREPAID 35,000 75,000
EXPENSE)
Accrued advertising expense 14,250 40,000
(ACCRUED)
Prepaid insurance 25,000 0
Unexpired insurance 0 41,000
During the year:

 Amount collected from customers, P10,000,000

 Total payments to suppliers of merchandise, P13,618,000
 Total payments to suppliers of merchandise of prior years, P4,632,000
 Wages paid, P3,050,000
 Advertising paid, P300,000
 Insurance premium paid, P125,000

Requirements:
 1. Total sales for 2021 under accrual basis
2. Total purchases for 2021 under accrual basis
3. Accrual wages expense for 2021
4. Accrual advertising expense for 2021
5. Accrual insurance expense in 2021

1. SALES ON ACCOUNT

Beg. Balance 6,400,000

Sales on Account 7,600,000 Collections 10,000,000
Recoveries of previous write-offs Sales discounts
Sales returns and allowances
Write-offs
END BALANCE 4,000,000

2. PURCHASES, ACCRUAL

Beg. Balance
Payments(13,618-4,632) 8,986,000 Purchases on Account 11,607,000
Purchase Discounts
Purchase Returns and Allowances
END Balance 2,621,000

3. WAGES EXPENSE - ACCRUAL

Expenses paid – cash basis 3,050,000

Add: Prepaid expenses – beg
Accrued expenses -end 125,000
Less: Prepaid expenses -end Xx
Accrued expenses -beg. Xx (85,000)
Expenses for the current year – accrual 3,090,000

4. ADVERTISING EXPENSE - ACCRUAL

Expenses paid – cash basis 300,000

Add: Prepaid expenses – beg 35,000
Accrued expenses -end 40,000
Less: Prepaid expenses -end 75,000
Accrued expenses -beg. 14,250 (89,250)
Expenses for the current year – accrual 285,750

5. INSURANCE EXPENSE, PAID

Expenses paid – cash basis 125,000

Add: Prepaid expenses – beg 25,000
Accrued expenses -end
Less: Prepaid expenses -end (41,000)
Accrued expenses -beg.
Expenses for the current year – accrual 109,000

EXERCISE 4: Carey Company assigns patent rights for which royalties are received. During 2021, the
entity received royalty remittance of P2,500,000.

The following data are available at year-end:

2020 2021
Royalties receivable (ACCRUED INCOME) 750,000 800,000
Unearned royalties (DEFERRED INCOME) 450,000 650,000
Under accrual basis, what amount should be reported as royalty revenue for the current year?

Income Received – cash basis

Add: Deferred income – beg
Accrued income -end
Less: Deferred income -end
Accrued income -beg.
Income for the current year – accrual

EXERCISE 5: Seaside Company provided the following data for the current year:

Operating expenses:

Depreciation 1,000,000
Insurance 700,000
Salaries 1,500,000
Total operating expenses 3,200,000

December 31 January 1
Prepaid insurance 200,000 150,000
Accrued salaries payable 100,000 120,000
What amount was paid for operating expenses?
ANSWER: 2,270,000