CASH BASIS AND ACCRUAL BASIS

ACCRUAL BASIS - focuses on the occurrence of transaction.

INCOME- recognized when earned.

EXPENSE - recognized when incurred.

CASH BASIS - focuses on the occurrence of receipt/payment.

INCOME- recognized when received.

EXPENSE- recognized when paid.

CASH ACCRUAL

SALES Cash sales xx Cash sales xx

Cash collected xx Sales on acc. xx
Advances rec. xx

PURCHASES Cash purchases xx Cash purchases xx

Payments(AR,NR) xx Purchases on acc. xx
Advance payments xx

COGS Cash basis purchases Accrual basis purchases

adjusted for changes adjusted for changes in
in beg. & end. beg. & end. inventory
inventory

OTHER ITEMS Income items are Income items are

OF INCOME those received in those earned.
cash.
OTHER ITEMS Expense items are Expense items are
OF EXPENSE those paid in those incurred.
cash.

INCOME TAX ITE is recognized ITE is recognized

EXPENSE only for payments considering DTE(benefit).
made.

DEPRECIATION Provided normally. Provided normally.

BAD No bad debts Bad debts are recognized

DEBTS because there is for receivables whose
no AR. collection is doubtful.

AMORTIZATION No disc./prem. is The effective interest

OF DISC./ recognized. Int. income/ method is used for
PREM. ON exp is recognized for financial instruments
FINANCIAL cash collections or measured at amortized
INSTRUMENTS payments. cost.

FV GAINS/ Not recognized. Recognized.

LOSSES ON
ASSETS &
LIABILITIES

OTHER Not recognized. Recognized.

COMPREHENSIVE
INCOME
ACCTG. PROBLEM: CASH BASIS TO ACCRUAL BASIS

CONVERSION: cash to accrual

CASH BASIS SALES:

a. (+) Credit sales made during the period but are not yet
collected.
b. (-) Cash receipts on advances for sales not yet
earned/made.

ACCRUAL BASIS PURCHASE:

a. (+) Credit purchases made during the period but
are not yet paid.
b. (-) Cash payments on advances for purchases not
yet received.

ACCRUAL BASIS COGS:

-computed using the accrual basis purchases adjusted by

the change in inventories during the period.

CASH BASIS INCOME:

-adjusted for changes in accrued income and unearned income

during the period.

CASH BASIS EXPENSE:

-adjusted for changes in accrued expenses and prepaid assets

during the period.

OTHER ITEMS OF INCOME AND EXPENSES

 ILLUSTRATIONS:

SOLUTION:
Cash sales- gross P500,000 Net cash sales P 495,000
Sales Return from cash sales (5,000) Credit sales 1,151,000
NET CASH SALES P495,000 SRD (15,000)
Collections on receivables 1,000,000 NET SALES -accrual basis P1,631,000
NET SALES - cash basis P1,495,000

TRADE AR/NR
CR. sales 1,151 T Collections 1M
AR, beg. 600 T SRD 15T
Recoveries 4T W-O 10T
NR disc. 30T
Receivables,
end 700T
SOLUTION:
Cash purchases-gross P 300,000 Net cash purchases P 285,000
PRD from cash purchases (15,000) Credit purchases 705,000
NET CASH PURCHASES P 285,000 PRD (5,000)
Cash payments on payments 1,000,000 NET PURCHASES-accrual P 985,000
NET PURCHASES-cash basis P1,285,000

TRADE AP/NP
Trade AP 500T
PRD 5T AP, beg. 700T
Trade NP
Cash payments 1M CR. pur. 705T
(decreased by) 200T
AP, end. 400T
SOLUTION:
INCOME under
Rental payments received P1,000,000
cash basis.

*ACCRUED RENT INCOME is an ASSET (rent rec.).

*UNEARNED RENT INCOME is a LIABILITY.

ACCRUED/UNEARNED RENT INCOME *** Rental Income -accrual xxx

Jan1-ARInc. 400T Jan1-URInc. 3ooT Unearned,beg. (xxx)
Unearned,end. xxx
Rent Inc. -accrual 600T Rental payments rec. 1M Accrued, beg. xxx
Accrued,end. (xxx)
Rental Income-cash xxx
Dec31-URInc. 500T Dec31-ARInc. 200T

ACCRUED/UNEARNED INC.

Jan1-ARI 400T Jan1. -URI 300T

Rent Inc. Rent Inc.

-accrual 600T (rental rec.) 1M

Dec31-URI 500T Dec31-ARI 200T