Cash, Accrual, And Single

“CASH BASIS AND ACCRUAL BASIS” and “SINGLE ENTRY” John Laurence Domingo June Kean Garcia

Cash Basis and Accrual Basis • • • •

Cash basis versus accrual basis Computation of sales Computation of purchases Computation of income other than sales • Computation of expenses • Adjustments of cash basis statements to accrual basis statements

Methods of Accounting • Cash Basis – income is recognized when received, and expense is recognized when paid. • Accrual Basis – income is recognized when earned, and expense is recognized when incurred.

Cash Basis vs Accrual Basis Item

Cash Basis

Accrual Basis

Sales

Cash sales plus collection of trade receivables

Cash sales plus sales on account

Purchases

Cash purchases plus payments to trade creditors

Cash purchases plus purchases on account

Income other than sales

Items received are considered as income regardless of when earned

Items earned are considered as income regardless of when received

Expenses, in general

Items paid are treated as expenses regardless of when incurred

Items incurred are treated as expenses regardless of when paid

Depreciation

Depreciation is provided normally

Depreciation is provided normally

Bad debts

No bad debts are recorded because trade receivables are not recognized

Doubtful accounts are treated as bad debts

Computation of Sales

Computation of Purchases

Computation of Income other than Sales

Computation of Expenses in general

Adjustments of Cash Basis to Accrual Basis Statement All adjustments for the previous year should be debited to the capital account (if sole proprietorship or *partnership) or to the retained earnings account if a corporation. *In case of partnership, all adjustements to their capital accounts must be in accordance with their profit and loss sharing ratio.

Single Entry • Single entry system • Single entry method of determining net income or loss • Preparation of financial statements from single entry records

Methods of Bookkeeping • Double-Entry Method – method of recording business transactions in terms of the dual effect on the accounting elements. • Single-Entry Method – method of recording business transactions without analyzing or considering the dual effect of each transaction on the accounting elements.

Single Entry System This is a system of record keeping in which transactions are not analyzed and recorded in the double entry framework. Records maintained under the single entry basis are said to be incomplete.

Single Entry System Cashbook – shows the cash receipts and disbursements but without specific debits or credits. Only a description of the receipt or disbursement is made. With respect to accounts receivable and payable, only a list of customers and creditors is made with their corresponding balances.

Single Entry System

• • • • •

Records maintained under the single entry system: Cash Accounts Receivable Accounts Payable Property, plant and equipment Taxes paid

Single Entry System Single entry problems: • Single entry method of determining net income or loss • Preparation of income statement • Preparation of balance sheet

Single Entry Method (Detrmining Net Income or Loss) Net Assets or Capital Maintenance Approach This is the single entry method of determining net income or loss. This is done by comparing the capital or retained earnings at the beginning of the year and capital or retained earnings at the end of the year after taking into consideration withdrawals or dividends and additonal investments.

Single Entry Method (Detrmining Net Income or Loss) Net Assets or Capital Maintenance Approach Any increase in capital or retained earnings is net income and any decrease in capital or retained earnings is net loss.

Net Assets/Capital Maintenance Approach

Preparation of Financial Statements Income Statement – under the single entry system, this can be prepared by computing for individual revenue and expense balances by reference to the cash receipts and disbursements and the changes in net assets and liabilities. The formulas used in converting cash basis to accrual basis of accounting are useful in this case.

Preparation of Financial Statements

Preparation of Financial Statements Balance Sheet – under the single entry system, this involves inventorying, counting and verification procedures to determine the nature and amount of most of the assets and liabilities.

Preparation of Financial Statements Cash – could be determined by count and by examining bank statements. Accounts and Notes Receivable – could be summarized from unpaid sales invoices and promissory notes. Merchandise on hand, supplies and other inventories – could be counted and their cost determined from purchase invoices.

Preparation of Financial Statements Cost of Property, Plant and Equipment – could be established by reference to deeds of sale and other documents evidencing ownership of title. Accounts and Notes Payable – could be summarized from purchase invoices, memoranda, correspondences and even consultation with creditors. Owner's Equity/Capital – difference between the value assigned to assets and liabilities.