| chapter = cas and Aca Bass | CHAPTER 5 CASH AND ACCRUAL BASIS ‘ToPIC OVERVIEW: ‘This chapter discusses cash basis and accrual basis of accounting as we, the use of accounts to solve problems. ly LEARNING OBJECTIVES: ‘After studying tis chapter, you should beable to: ‘Describe cash basis and accrual basis of accounting ‘Compare and contrast cash and accrual bass of accounting, Apply cash basis in accounting for business transactions. ‘Apply accrual basis in accountng for business transactions. Use and apply the T-accounts approach in solving problems. ‘Translate accrual income to cash basis income and vice versa. paeene Cash Basis Accounting ‘aah basis accounting a syst Tat renga Fevenue When GG received and expenses when cash is paid. 7 Accrual Basis Accounting ‘Tisan accounting system that recognlaes revenue when earned rather ‘when cash i received and recognizes expenses as it is incurred rather tt when cash is pald. ‘Comparison of Cash Basis and Accrual Bais Accounting tems of Comparison Cash Basis, Accrual Basis ales includes Tncludes: + Cashsales ‘+ Cashsales Collection of trade| + Credit sales (sale co accounts receivable account) ‘+ Collection oftrade notes receivable Tncome other [Includes only those | Tachades those tens thansales | collected during the period_| earned during the period Purchases | Includes the following: includes: ‘© Cash purchase Cash purchases ‘+ Payment of trade | Purchase on acount accounts payable ‘+ Payment of trade notes payable 7% cote = apter5~ Cash and Accrual Bass = Payment in advance to ales ee) sages | Roemer tated [are ered reerdest * _of when paid asian | Daprcon apy Deprecaten 5 ATT prone exept when the | rode fost of equipment was treated as expense No bad debts expense i recognized since cash bass does ot recognize receivables, Although some problem may give an Indleation thatthe accounts written off were charged to [bad debrs expense, | ___ ‘ACCOUNTS APPROACH Tater to comput forthe cash payments or collections for certain account, tn orpgested thatthe T-account approach wl be used onthe following: 1) accounts recelvable/natesreelvables/advances from customers; 3} Allowance for doubtful accounts; 2} Accounts payable notes payable/advance to supplier 4) Merchandise inventory: 5) Property, plantand equipment, 6) Accumulated depreciation; ‘7, Rent receivable/Unearmed rent income: 8) Prepaid rent/Rent payable; 9) Capital; 10) Retained earnings, 11) Netassets. Guidelines in using T-account approach ‘When using Taccount, the procedures are: 1 Plot the given data in the T-account. ‘To facilitate computation, the beginning balance Is placed in the normal balance ofan account and the ending balance will be atthe other side of its normal balance (eg the normal Dalance ofthe accounts receivable is ‘debit so the beginning balance wil be placed at the deblt side while the ‘ending balance will be placed at the credit side) 3. Compute the total debit and the total credit. tThediferencebetween he total debian thts ed sthe squeezed gure Doubtful aesounts are Bad debts treated as bad debts. 2 aChapter 5 cash and Accrual Basis For example, le’ use -account of accounts receivable, notes receivable an advances from supplier below. “ ‘When computing for sales on account, plot the given data on the Tac sgetthe sum of the credits (his isthe total ofthe balance end ofthe account, and notes receivable, beginning balance ofthe advances from customer sas returns and allowance, sales discounts and eollection and accounts i off then deduct the sum of the debits ths includes the begining balances of the accounts and notes receivable, balance end ofthe advances frog ‘customers and recoveries). The difference isthe squeezed figure inthe debt ‘ide which is the sles on account ‘The same procedures are tobe applied when computing forthe collections from customers. Get the sum of the debits (this includes the begining balances ofthe accounts and notes receivable, balance end ofthe advance from customers and recoveries and sales on account) and deduct the sum af the credits (this isthe total of the balance end ofthe accounts and notes receivable, beginning balance of the advances from customer sales returns andallowance, sales discounts andaccounts writen off) The difference sthe ‘squeezed figure in the credit side which isthe total amount of collections from customers. ‘T-ACCOUNT: ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND ‘ADVANCES FROM CUSTOMER ‘Accounts receivable/Notes receivable trade/Advances from ‘customers, Beg. balance AR XXX Balance end- AR Beg, balance - NR Xx |x Balance end- NR Balanceend-Advances XX XX Beg. balance - Advances Sales on account Xx J 0 Sales returns andallowance* Recoveries XX |XX Sates discounts xX Collections including xx_Write-of. Fe a Total = “Included only those sales returns and allowance that are deducted fom the accounts receivable. Ifthe sales returns and allowances arise from cath refund to customer, It should not be included in the taccount of the receivables. When there are no notes receivable and advances from customers, the T- ‘account ofthe Account receivable is: ey popes 5 co and Aca Bass g ‘T-ACCOUNT: ACCOUNTS RECEIVABLE Talancrend-AR Sales returns andallowance* Sales discounts Collections recoveries Wrteort Including ‘T-ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS tS to a ges Total Xx —————————— ‘The format ofthe T-accounts was derived from the following journal entries: 1. Torecord sales on account ‘Dr Cr ‘Accounts receivable x Sales x 2. Torecord receipt of note from sales on account Notes receivable x Sales x 3. Torecord sales return froma customer Sales returns and allowance x ‘Accounts receivable x 4. Torecord collection within the discount period Cash Sales discount ‘Accounts receivable x 5. Torecord accounts written off Allowance for doubtful accounts x ‘Accounts receivable x 6 To record re-establishment of accounts previously written off ‘Accounts receivable x ‘Allowance for doubtful accounts BE ~ a(Chapter 5 ~ Cash and Acerual Basis ner 5 = Cash and Accrual Bass a To record collection of accounts previously writen off g 4,000_Writeoff 7 ash x 865,000 665,000 ‘Accounts receivable x Fora _____——#65.000 965,000 8. Torrecord advances received from customers on: Computation of Bad debts a x nustriing ata were reported by Helium Company during the current ‘Advances from cstomers ne the an To record delivery of goods to customers with advances Yvan for dub counts} 2 mow Advances rom customers x ‘Alowance fr doubt accounts Deceber 00 Sake rs Alon accounts weten of drng the current year Uaceeries of accounts previously writen off 11000 410. To record the provision for bad debts during the year emutred: Comput forthe total bad debts expense during the current year? Bad debts x Nowance let ION: 7 All “ au bts x | soLuri “Allowance for bad debts Observe that in the journal nies, fr empl sles on accu 7 30000] 22000 BoginngTalna Scoot wate ip eacom a hee | EE pro Fel receivable, that same amount is also debited ‘Wee 1,000 _Recoveries | $s! ILLUSTRATION: Computation of Collections | Total 35000 _ 35,00 ‘The following data were re n Company during the cure year ned were reported by Hydrogen Company dhrng he care ‘T-ACCOUNT: ACCOUNTS PAYABLE, NOTES PAYABLE AND ‘ADVANCES TO SUPPLIER ‘Accounts receivable January 1 100,000 ES ae a ve Say aaa Accounts recelvable- December 31 150,000 Notes receivable January 1 210,000 Notes receivable - December 31, ae Sapa sete ae heen emt ame TIRE aansntaton Po bepoas- at Aaa teense Renee 2 Nea EE ce So ah ttes B See Bo Meee z tnsiettrounswnenotaregbeceeter YL ames Recerca peasy as = _ Senecio ave the Account payable is: “Accounts recelvable/Notes receivable trade/Advances from ‘T-ACCOUNT: ACCOUNTS PAYABLE TRADE customers Beg-balance-AR 100,000] 150,000 Balance end-AR Beg.balance-NR 210,000 | 120,000 Balance end-NR Payments Balance end- Advances 55,000] 40,000 Beg, balance Advances Purchase returns andallow. XX XX Purchases (gross) Sales on account 500.000] 3000 Salesret andallowance Purchase discounts x Recoveries =] 1.000. Sales discounts Balance end= AP. x Se ang sevano recoeis Se = =‘Chapter § ~ Cash and Accrual Basis The accounts were drive fom he follow ved from thefolowing journal entries 1, Torecord purchase on account 7 Purchases a ‘Accounts payable 1% 2 Tore sone ort fr purchase on acount raves x Notes payable ~ 3. Torecordretun of merchants to super ‘Accounts payable 7 xX Purchase ets and allowances x 4. Torecrdpeyment within thedsoun period Accounts payabe Py Porehase dicount x Gath B 5. Torecord advance to sips Advances to suppers cd cash x & Torecord receipt of gods from suppers rig rom advonces Purchases x ‘Advances to supplies x ‘T-ACCOUNT: MERCHANDISE INVENTORY ST en CHAnSe mevenToRy ||| Merchandise Invento "Beg. Balance XXX Balance end Net Purchases xx Px costof sates es Total X= 10 ——————— t@__ Not In using this T-account, aside from the journal entries it follows the following formula inthe computation ofthe cost of sales: Merchandise inventory, beginning ‘Add: Net purchases ‘Total goods avallabe for sale Less: Merchandise inventory, end Cost of sales Net purchase is computed. follows: Gross purchases ‘Add: Freight: Less: Purchase discount Purchase allowance ry wpe fpbenben 5 = Cash and Accrual Basis — 3 et — rmefggsion of T-accounts ofthe Workin-Process and Raw Materials. ccrapter sTRATION: Computation of Purchases ae aya juny 10000 counter peers S000 Accum fanny zos00 ses Deca 32 ‘ow Notes Feo suppers january 1 ‘40000 bane ee lees becemer21 $5000 Nee ed allowane ino Pcs scm too eet soto sear: Determine the rss purchases under the ae tas of see Selon Pas [Wats Payable [Advances to Supplons — '500,000 3,000 11000 49,000 100,000 210,000 ‘55,000 449,000 ‘Beg balance - AP Beg, balance - NP alance end - Advances Purchases (gross) Famers Purchase ret andallw. Purchase discount Bp balance Advances Eanecend-AP 150000 Batanend=NP 10,000 oa 14000 Grav Fos _____s.000 “sr000 ILLUSTRATION: Computation of ostof Sales ‘Re llowing data were reported by Beryl Company during the current yar ‘Accounts payable - January 1 100,000 ‘Accounts payable - December 31 150,000 Merchandise inventory-January1 210,000 ‘Merchandise inventory ~Dec.31 120,000 Purchase returns and allowance 3,000 Purchase discounts 3,000 Payment 500,000 Cash purchases 20,000{er Chapter 5 ~ Cash and Accrual Basis Required: SoLUTioN: ___Recounts Payable (AP) / Wotes Payable (wP)___—~ '500,000 | 100,000 Beg balance AP How much is the total cost of sles under the accrual basis Payments Purchase ret. andallow. 3,000 = Beg. balance -NP Purchase discount 4,000 | $54,000 Purchases (gross) Balance end AP 150,000 Balance end NP Total eel 654.000 654.000 "Merchandise taventory Sapo Beginningbalance 210,000 120,000 Ending balance Net purchases ‘570,000 | 660,000_Cost of sales Total 780,000" 760,000 Computation ofthe net purchases: ‘Gross purchases on account 554,000 ‘Add cash purchases 20,000. Total 374,000 Less: Purchase returns and allowances 3.000 Purchase discount 4000 Net purchases T-ACCOUNT: PROPERTY, PLANT AND EQUIPMENT Property, Plantand Equipment ‘Beginning balance WX JOC Cost of asset derecopnized Cost of asset acquired 206 }0¢_ Balance end a Total ex eee T-ACCOUNT: ACCUMULATED DEPRECIATION “Accumulated Depreciation x Beginningbalance “Accum. depreciation of asset cpapterS — Cath and Accrual Bass counts were derived from the following journal entries: ‘THe Tr record cosh acquisition of PPE * ope = Cash x To record derecognition 9 0 dnation retirement) of PPE cash (eeumlated depreciation x Lesson sale x train on sale x PPE x ION: Computation o Cost of Machin Aequred and sold Ted youth along normatn elation ts Prone, Boron ees acu oyor__12/01 7138000 FISO000 Maat 50,000 45,000 ‘cumulated deprecation onal information: Aitomeciaton i 10% per annum. As company poli, newly acqured bepie depreciated fora whole yar a the yar of purchase and M0 See itin provided frases dlsposed atthe year of dspsal ty ‘etic ofthe yeaa ly deprecated machine widhout erp value isolator #500, atthe same date, anew machine was aque. Required: Based on above data, answer the following: 1) How much isthe cost ofthe machine acquired? 2}, Howrmuch isthe historical cost ofthe machine sold? SOLUTION ines Teginningbalance 135,000 Cont of asset 20,000 derecognized Costofassetacquired 35,000 | 150,000_Balance end Total 770,000170,000- “Accumulated Depreciation Sa — ae acon Ber oonomsm aa Sie) sce . Serato ag) SO PEGS Total X= Balance end 45,000 86 875 ~ Cash and Accrual Basis ‘T-ACCOUNT: RENT RECEIVABLE / UNEARNED RENT INCOME, rT Rent receivable/Unearned rent income Dep balances Rentreceivable XX [xx Balance end ~ Rent recelvabe Balance end=Uneamedrent ¥X]}XX_ Beg-balance-Uneared rent Income xx Hx colectons a Toal To Soe eee See “his T-account i also appiabe to interest receivable /anearmed in income, royalty recsvable/unearned royalty Income and other defray assets. ‘The accounts were derived from the following journal entries 1. Torecordolectionofrent cash x Uearned rent income/Rent receivable x 2. Torecord adjusting entry ofthe rencincome ‘Unearnedrentincome cs Rentincome x 3 Torecord accrual ofrentreevable Renerecsvabe x Rentineome x MLUSTRATION: Computation ofRent Income ‘The following data were reported by Carbon Company during the cue year Rentrecelvable January 1 100,000 Rent reelvable-December 31 150,000 Unearned rent income january 1 60,000 ‘Unearned ent income -December’31 50,000 Collection ofrent 500,000 ‘Required: How much is the total rent Income under the accrual basso! accounting? SOLUTION: ‘Rent Receivable (RR) / Unearned Rent income (URI capt 5 — Cosh and ena ass ______ Prepaid Rent/Rent payable Tce Prepardasset XX [XX Balance end - Prepaid asset > Wome medi’ S| stim kona ‘Total XX = XX +e: This T acount sao applicable to prepaid salaries /slaries payable accounts were derived rom theolowing journal entries: The Teco payment of retin advance Prepatrene/Ren payable a ah m ro record adjusting entry forthe expired portion ofrent Renexpense a Prepaid rent x 3, Torecord accrual of rent expense Rent expense x Rent payable x ILLUSTRATION: Computation of Rent Expense ‘The following data were reported by Nitrogen Company during the current year Prepaid rent - January 1 100,000 Prepaid rent - December 31 150,000 Rent payable - January 1 60,000 Rent payable - December 31 50,000 Payment ofrent 500,000 Required: How much is the total rent expense under the accrual basis of accounting? SOLUTION: Prepaid Rent (PR) Beginningbalance ~PR 100,000 Rent Payable (RP) 750,000 Balance end- PR Beginning balance-RR 100,000 | 150,000 Balance end- RR Balance end RP 50,000 | 60,000 Beg. balance - RP Balance end - URI 50,000 | 60,000. Beg. balance -URI Payment of rent 500,000 | 440,000_Rent expense Rent income 860,000 | 500,000 Collections Total £650,000 650,000 Total 710,000 710,000 :5 = Cash and Accrual Bass, Chapter 5 ~ Cash and Accrual Basis | "PACCOUNT: CAPITAL | To capital Tx ]PxX Beginning balance Withdrawal Balance end Xx JK Additional investment Netloss Xx [xx _Net income Total X= 1x ‘nx Wath als cteetestiacdaliecsia eaaae owen gme wry ees reer ne “ett sau oun hd bed ac ‘withdrawn, hase Tatas esbedoal data aaa eT geome rd ne ri Bs e - x 2 | eect ete sees x Seta dace ale x = [foetal etgccaben ona He x coll 2 T fireaadaclal ada das etn 2 a 2 tat aaa a ‘T-ACCOUNT: RETAINED EARNINGS Balance end Prior period error Dividends declared Netloss Total Ke root ares sns were drive om the lowing journal entis: acecord declaration of dividends : x Retained earnings i” jvidends payable (cash, stocks property ete) et income to retained earings 2, Toclose neti a fncome surmary 7 Retained earnings To clase net loss to retained earings Retained earnings Income summary xx ION: Computauon of Net Income or Loss ne ‘data were reported by Oxygen Company during the current The follow yr ital -fanvary 3 100,000 GFhtal-December 31 ‘00000 CaP eerchandise withdrawn by Oxygen 604 Ce alu of merchandise withdraw by Oxygen 80000 Sales a ut of Notes Payable paid By Oxygen with her Peron checking acount 200,000 Retarmonths onthe notes payable sso pad by Oxygen ‘oe Interest rate of notes payable paid by Oxygen Required: How much isthe netincome (or loss) during the year? SOLUTION: Capital Balance end) 7007000 | 100,000 Beginning balance Withdrawalat cost 60,000 | 212,000 Additional investment Netloss =| 149,000 _Netincome TTorl_________#60,000_ 460,000 Tres 4605000460000 ‘T-ACCOUNT: NET ASSETS ‘Statement of Financial Position / Net Assets, Tnereare inaseet RX PIC Decrease in asset Decrease in ibilties xX xX Increase in labiliies Dividends declared XX [XX Increase in share capital Netloss xX ]}xXx Increase in share premium xX_Netincome Total x SS a1(Chapter 5 - Cash and Accrual Basis Note: "Pt cunts a a mtg oul ny account is inereased through its normal balance while it is decreas ‘iveerscrar green ie oe i dese vi henna a ae a cretico nm eeeernaeaures ofan ner 5 = Cash and Accrual Basis os roves are Ziooin) jonds payable on Bonds ye bonds payable (600,000) Distnary share capital 3,900,000 ordinary sa 200,000 Share re 2600,000 ke 520.000 ILLUSTRATION 1: Computation of Net Income or Lass Changes in the accounts of Fluorine Company forthe current year fellows: pesdaiaehirsanias Jan. Dec.31 Total Assets 2,000,000 3,000,000 Total liabilities "800,000 1,100,000 Share capital, 4,500,000 Share Premium ‘450,000 Retained earnings 2 7 During caret yen. he company sued 000,10 par share, IS per sare Dividendpaid on December 3 ofthe cure ears ‘to P750,000, 7 vata Asti aca ee Caden mote + 070.000 and 20% share dividends tobe issued next year amounting tO 2oe ico during the yer the company appropriated retained 700000 he erent of bande anouring 100000 caring year, Neon chained a bank on of 2,000.00 and pld of During te Jeon af PLODOOD and interes of #10000, Interest of van aets accrued on Deceber 21 201, Tere was ho iret yon ne and of 2020 In 2021, Neon Company acquired easy Beer sensing shareholders required: Compute for the netloss during the year Reqd ow muchis th net income rls) dung the yeu? on soumo a et increase in asset (Cash ‘Decrease in asset Tareas aS LP nPPe) 5,760,000 Increase in NP, Net 2m) 1,000,000 Decrease in asset Decrease in liabilities : value of BP (2.6M- Decrease in liabilities onoo0 !nerease nabs a 400,000 2.8m+600,000) {2.1n-200000) en 00.000 | 3900,000 increase in share capital Dntessaiee —saon| anone esa Cash uses $0008 [ ssonna Raum gato) Cea he Se et ctincome Netloss 1,600,000 | 2,600,000 Ser aoe vorgog, ne noes pte ILLUSTRATION 2: Computation of Net Income or Loss 000 @M- 16M) insase Se eee en ae Cash 500,000 Total 980,000 8,980,000 ‘oer agian Senge Merde ines eno backs eh rtd eromes th ttt pale ay eran verry ‘00000 Pose aerate toesmentinasorate 3000 + Dosa anteaters dada Roper plantandeu 0000 Pept neat ya artes he nied coo 2 An equity account). 3