Constructive Acctg. Report.....SINGLE ENTRY and ERROR CORRECTION

A system of record keeping in which transactions are not analyzed and recorded in the double entry framework.

Under single entry system, system, the records maintained are represented only by the so-called “bare essentials” and normally these include a record of  cash, accounts receivable, accounts payable, property, property, plant and equipment, and taxes paid.

The major record under the single entry system is the cashbook. The cashbook is maintained showing all receipts and disbursements. And because in a single entry no specific accounts for the receipts and disbursements are debited or credited, only a description thereof is made.

Among others, the single entry problems include: Single entry method of determining net income or loss

•

Preparation of income statement

•

Preparation of statement of financial position

•

The computation procedure followed in determining net income or loss is simply to compare the capital or retained earnings at the beginning of the year and capital or retained earnings at the end of the same year after taking into consideration withdrawals or dividends and additional investments.

The difference is either net income or net loss. Any increase in capital or retained earnings is net income and any decrease in capital or retained earnings is net loss.

another name for single entry method of determining net income or loss

PROPRIETORSHIP or PARTNERSHIP (net income or loss )

Capital, end of the year Add: Withdrawals

xx xx

Total Less:: Capital, beginning of the year Additional investment Net income (loss)

xx xx xx

xx xx

CORPORATION (net income or loss )

Retained earnings, end Add: Dividends declared or paid Other items that decreased retained earnings but not profit or loss Total Less: Retained earnings, beginning Other items that increased retained earnings but not profit or loss Net income (loss)

xx xx xx xx xx xx xx

It should be remembered that decreases

in

liabilities

increases in assets and 

increase

the

net

assets

while

increases in liabilities and decreases in assets decrease net  assets.

All increases are added and all decreases are deducted except the changes in the following items: Merchandise inventoryin the computation of cost of sales PPEin the computation of depreciation Prepaid expensesin the computation of expenses Deferred or unearned income- in the computation of income other than sales

Cash Accounts receivable Merchandise inventory Prepaid expenses Land Accounts payable Bonds payable Share capital Share premium

Increase (Decrease) 1,500,000 500,000 2,000,000 (100,000) 5,000,000 (1,100,000) 4,000,000 4,000,000 1,000,000

Effects on net assets Increase Decrease Increase in cash Increase in A/R Increase in merchandise inventory Decrease in prepaid expenses Increase in land Decrease in A/P Increase in B/P

1,500,000 500,000 2,000,000

Total

10,100,000

100,000 5,000,000 1,100,000 4,000,000

Net increase in assets Add: Dividends paid Total Less: Increase in share capital 4,000,000 Increase in share premium 1,000,000

Net income

4,100,000 6,000,000 1,500,000 7,500,000

5,000,000 2,500,000

M

Preparation of financial statements The preparation of the income statement involves the computation of individual revenue and expense balances by reference to the cash receipts and disbursements and the changes in assets and liabilities. The formulas used in converting cash basis to accrual basis of accounting are useful in this case. These formulas involve the computation of SALES, PURCHASES, INCOME OTHER THAN SALES and EXPENSES IN GENERAL.

Computation for Depreciation Carrying amount of PPE, beginning Add: Cost of property acquired

xx xx

Total

xx

Less: Carrying amount of PPE, ending Carrying amount of property sold

Depreciation

xx xx

xx

xx

The preparation of the statement of financial position involves inventorying, counting and verification procedures to determine the nature and amount of most of the assets and liabilities. For example, cash could be determined by count and by examining bank statements. Accounts receivable 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.

The cost of property, plant and equipment could be established by reference to deeds of sale and other documents evidencing ownership of  title. Accounts payable and notes payable could be determined from purchase invoices, memoranda, correspondence and even consultation with creditors. Ownership equity or capital would be the difference between the value assigned to assets and liabilities.

LONG PROBLEMS

LANCER STORE

Dec. 31, 2011

Jan. 1, 2011

Total Assets: Total Liabilities:

6,880,000 (1,600,000)

6,000,000 (2,120,000)

Capital Balance:

5,280,000

3,880,000

Capital, Dec. 31 Add: Withdrawal Total Less: Capital, Jan 1 Investment Net Income

5,280,000 400,000 5,680,000 3,880,000 600,000

(4,480,000) 1,200,000

SALES Notes receivable, end Accounts receivable, end Collection of A/R Collection of N/R Sales return Sales Discount Accounts written off-bad debts Total Less: Notes receivable, beg. 400,000 Accounts receivable, beg. 1,600,000 Sales on account Cash sales Total sales

1,200,000 2,000,000 3,000,000 960,000 320,000 100,000 120,000 7,700,000 2,000,000 5,700,000 800,000 6,500,000

Interest expense Interest paid Add: Accrued interest payable, end Less: Accrued interest payable, beg Interest expense

160,000 40,000 (80,000) 120,000

Rent income Rent received Add: Unearned Interest income, beg Less: Unearned interest income, end Rent income

80,000 120,000 (40,000) 160,000

Gain on sale Selling price Less: Carrying amount Gain on sale

120,000 (100,000) 20,000

PURCHASES Notes payable, end Accounts payable, end Payment of N/P Payment of A/P Purchase returns Total Less: Notes payable, beg 720,000 Accounts payable, beg 1,200,000 Purchases on account Cash purchases

480,000 1,040,000 1,520,000 1,280,000 80,000 4,400,000 (1,920,000) 2,480,000 600,000

Total purchases

3,080,000

Depreciation Equipment, beg Add: Equipment acquired Total Less: Equipment, end Carrying amount of equipment sold Depreciation

1,200,000 400,000 1,600,000 1,120,000 100,000

1,220,000 380,000

Net sales Sales Sales return Sales discount Net sales

6,500,000 (320,000) (100,000) 6,080,000

Cost of Sales Merchandise inventory, beg Purchases 3,080,000 Less: Purchase allowances (80,000) Goods Available for sale Less: Merchandise inventory, end Cost of sales

1,600,000 3,000,000 4,600,000 (960,000) 3,640,000

Other Income Rent income Gain on sale Total other income

160,000 20,000 180,000

Lancer Store Income Statement Year Ended December 31, 2011 Net Sales Cost of Sales Gross income Other income Total income Expenses: Expenses Depreciation Bad debts Interest expense Net income

6,080,000 (3,640,000) 2,440,000 180,000 2,620,000 800,000 380,000 120,000 120,000

(1,420,000) 1,200,000

COMPLEX COMPANY Cash in bank per book Outstanding checks Adjusted cash in bank Cash on hand Total cash-12/31/11

250,000 (50,000) 200,000 125,000 325,000

Initial cash investment 500,000 Proceeds of loan 500,000 Collections of accounts receivable(SQUEEZE)2,500,000 Total deposits 3,500,000 Customers’ deposits 75,000 Collections of accounts receivable(SQUEEZE) 600,000 Total 675,000 Disbursement in cash (550,000) Cash on hand-12/31/11 125,000

Accounts receivable-12/31/11 Collections deposited Collections not deposited Total sales

900,000 2,500,000 600,000 4,000,000

Total deposits Total disbursement in check (SQUEEZE) Cash in bank-12/31/11

3,500,000 (3,300,000) 200,000

Payment of loan Interest on loan Payment on equipment Interest on equipment Payment in accounts payable(SQUEEZE) Total disbursement in check

125,000 25,000 400,000 45,000 (2,705,000) 3,300,000

Accounts payable-12/31/11 Payment of accounts payable Total purchases

350,000 2,705,000 3,055,000

Complex Company Income Statement Year Ended December 31, 2011 Sales Cost of Sales: Purchases Inventory-12/31/11 Gross Income Expenses: Utilities Salaries Supplies Taxes Doubtful accounts Depreciation-building Depreciation-equipment Interest expense Net income

4,000,000 3,055,000 (755,000)

100,000 100,000 175,000 25,000 50,000 300,000 80,000 70,000

(2,300,000) 1,700,000

(900,000) 800,000

Complex Company Statement of Financial Position December 31, 2011 Assets Current Assets: Cash Accounts receivable Inventory Non-current Assets: Building Equipment Land Total Assets

325,000 850,000 755,000 4,200,00 320,000 1,500,000

1,930,000

6,020,000 7,950,000

Liabilities and Equity Current Liabilities: Accounts payable Advances from customers Non-current liability: Notes payable Total liabilities Equity: Share capital Share premium Retained earnings Total liabilities and equity

350,000 75,000

425,000 375,000 800,000

6,000,000 500,000 650,000

7,150,000 7,950,000

Prior period errors These are omissions from and misstatements in the entity’s financial statements for one or more periods arising from a failure to use or misuse of reliable information that: a.)

Was available when financial statements for these periods were authorized for issue.

b.)

Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of these financial statements

Treatment of prior period errors PAS 8 provides that an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by: a.)

Restating the comparative amounts for the prior period presented in which the error occurred.

a.)

Restating the opening balances of assets, liabilities, and equity for the earliest prior period presented if the error occurred before the earliest period presented.

Types of errors a.)

Statement of financial position errors

b.)

Income statement errors

c.)

Combined statement of financial position and income statement errors

Statement of financial position errors

Statement of financial position errors affect the statement of  financial position or real accounts only, meaning, the improper classification of an asset, liability and capital account. In such a case, an entry is simply made to reclassify the account balances.

Income statement errors Income statement errors affect the income statement or nominal accounts only, meaning, the improper classification of  revenue and expense accounts. These errors have no effect on the statement of financial position and on net income. Thus, a reclassifying entry is necessary only if the error is discovered in the same year it is committed. Otherwise, if the error is discovered in a subsequent year, no reclassifying entry is necessary because the nominal accounts for the current year are correctly stated.

Combined statement of financial position and income statement errors These errors affect both the statement of financial position and income statement because they result in a misstatement of net  income. Combined statement of financial position and income statement errors are classified as counterbalancing errors and noncounterbalancing errors.

Counterbalancing errors

Counterbalancing errors are errors which, if not detected, are automatically counterbalanced or corrected in the next accounting period. In other words, these errors will be offset or corrected over two periods or these errors correct themselves over two periods.

Effects of counterbalancing errors 1. The income statements for two successive periods are incorrect  2. The statement of financial position at the end of the first   period is incorrect  3. The statement of financial position at the end of the second   period is correct 

Counterbalancing errors normally misstates the following: 1. 2. 3. 4.

Inventory including purchases and sales Prepaid expenses Accrued expenses Deferred income A di

Noncounterbalancing errors Noncounterbalancing errors are errors which, if not detected, are not automatically counterbalanced or corrected in the next accounting period. In other words, if the net income of one year is understated or overstated, the net income of subsequent year is not affected.

Effects of noncounterbalancing errors The income statement of the period in which the error is committed is incorrect but the succeeding income statement is not affected The statement of financial position of the year of error and succeeding statement of financial position are incorrect until the

The best example of a noncounterbalancing error is the misstatement of depreciation