The document discusses the cash and accrual basis of accounting. The cash basis recognizes income when received and expenses when paid, while the accrual basis recognizes income when earned and expenses when incurred. It provides examples of how different accounting items like sales, purchases, and depreciation are treated under each method. Sample problems then demonstrate applications of calculating accounts under the cash and accrual bases.
The document discusses the cash and accrual basis of accounting. The cash basis recognizes income when received and expenses when paid, while the accrual basis recognizes income when earned and expenses when incurred. It provides examples of how different accounting items like sales, purchases, and depreciation are treated under each method. Sample problems then demonstrate applications of calculating accounts under the cash and accrual bases.
The document discusses the cash and accrual basis of accounting. The cash basis recognizes income when received and expenses when paid, while the accrual basis recognizes income when earned and expenses when incurred. It provides examples of how different accounting items like sales, purchases, and depreciation are treated under each method. Sample problems then demonstrate applications of calculating accounts under the cash and accrual bases.
The document discusses the cash and accrual basis of accounting. The cash basis recognizes income when received and expenses when paid, while the accrual basis recognizes income when earned and expenses when incurred. It provides examples of how different accounting items like sales, purchases, and depreciation are treated under each method. Sample problems then demonstrate applications of calculating accounts under the cash and accrual bases.
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CASH AND ACCRUAL BASIS
Understanding the cash and accrual basis of accounting.
Methods of Accounting
Cash Basis – Income is recognized when received regardless of when earned, and expense is recognized when paid regardless of when incurred. – This approach does not recognize accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expense.
Accrual Basis – Income is recognized when earned regardless of when received, and expense is recognized when incurred regardless of when paid. Cash Basis VS Accrual Basis Item Cash Basis Accrual Basis Sales Cash sales Cash sales + Collection of trade receivables + Sales on account Purchases Cash purchases Cash purchases + Payments to trade creditors + Purchases on account Income other than Items received are considered as Items earned are considered as income sales income regardless of when earned. regardless of when received. Expense, in general Items paid are treated as expenses Items incurred are treated as expenses regardless of when incurred. regardless of when paid. Depreciation Depreciation is provided normally. Depreciation is provided normally.
Bad debts No bad debts are recorded because Doubtful accounts are treated as bad trade receivables are not recognized. debts. CASH AND ACCRUAL BASIS SAMPLE PROBLEMS APPLICATIONS SAMPLE PROBLEM 1: REQUIREMENTS:
Under the cash basis of accounting, compute for
the following: 1. Sales 2. Purchases 3. Cost of goods sold 4. Depreciation 5. Net income Amount of Sales:
Sales on account 850,000
Accounts receivable – Jan 1. 250,000 Accounts receivable – Dec. 31 (300,000) Collections from customers 800,000 Cash Sales 2,500,000 Total Sales – Cash Basis 3,300,000 Amount of Purchases:
Credit Purchases 400,000
Accounts payable – Jan 1. 150,000 Accounts payable – Dec. 31 (200,000) Payments of Accounts payable 350,000 Cash Purchases 1,700,000 Total Purchases – Cash Basis 2,050,000 Cost of Goods Sold:
Inventory - Jan. 1 500,000
Purchases – Cash Basis 2,050,000 Goods available for sale 2,550,000 Inventory – Dec. 31 ( 600,000) Cost of Goods Sold 1,950,000 DEPRECIATION:
Depreciation on Equipment on January 1:
800,000/10 years 80,000 Depreciation on Equipment acquired on July 1: 200,000/10 years x 6/12 10,000 TOTAL DEPRECIATION 90,000 Net Income: Sales 3,300,000 Cost of Goods Sold ( 1,950,000) Gross Income 1,350,000 Expenses paid ( 750,000) Depreciation ( 90,000) Interest received 40,000 Net Income – Cash Basis 550,000 SAMPLE PROBLEM 2: CTTO Com p an y p rovid ed th e followin g d ata:
De ce m be r 3 1 , 2 0 2 1 De ce m be r 3 1 , 2 0 2 2 Accou n ts receivable 1,200,000 1,350,000 Accou n ts p ayable 1,500,000 1,850,000
In 2022, accou n ts written off am ou n ted to P100,000. Sales retu rn s totaled P250,000, of which P50,000 was p aid to cu stom er. Cash receip ts from cu stom ers after P500,000 sales d iscou n ts am ou n ted to P8,000,000. Cash p aym en ts to trad e cred itors totaled P5,000,000 after p u rch ase d iscou n ts of P200,000. Pu rch ase retu rn s am ou n ted to P400,000, of wh ich P1 00,000 was received from su p p lier. REQUIREMENTS:
Under the accrual basis of accounting, compute
for the following: 1. Gross Sales 2. Net Sales 3. Gross Purchases 4. Net Purchases Gross Sales Accounts receivable – Dec. 31, 2022 1,350,000 Accounts written off 100,000 Sales returns 200,000 Cash receipts from customers 8,000,000 Sales discounts 500,000 Total 10,150,000 Accounts receivable – Dec. 31, 2021 (1,200,000) GROSS SALES 8,950,000 Net Sales Gross Sales 8,950,000 Sales returns ( 250,000) Sales discounts ( 500,000) Net Sales 8,200,000 Gross Purchases Accounts payable – Dec. 31, 2022 1,850,000 Purchase returns 300,000 Payments to the trade creditors 5,000,000 Purchase discounts 200,000 Total 7,350,000 Accounts payable – Dec. 31, 2021 (1,500,000) GROSS PURCHASES 5,850,000 Net Purchases Gross Purchases 5,850,000 Purchase returns ( 400,000) Purchase discounts ( 200,000) NET PURCHASES 5,250,000 SAMPLE PROBLEM 3: Harlett Company reported that all insurance premiums paid are debited to prepaid insurance. The entity made monthly estimated charges to insurance expense with credit to prepaid insurance. Prepaid insurance – Jan. 1, 2021 210,000 Charges to insurance expense during 2021 875,000 Prepaid insurance – Dec. 31, 2021 245,000 What was the insurance premium paid during 2021? (875,000 + 245,000 – 210,000) = 910,000 SAMPLE PROBLEM 4: On February 1, Tory began a service proprietorship with an initial cash investment of P200,000. The proprietorship provided P500,000 of service in February and received full payment in March. The proprietorship incurred expenses of P300,000 in February which were paid in April. Tory drew P100,000 during March. For the two months ended March 31, prepared under the cash basis, what amount should be reported as capital? Capital – February 1 200,000 Cash basis income for Feb. & March 500,000 Total 700,000 Withdrawals during March (100,000) CAPITAL – March 31 600,000 SAMPLE PROBLEM 5: During 2021, Rookie Company acquired patent right and remitted royalties of P3,000,000. The entity reported prepaid royalties of P550,000 and P450,000, royalties payable of P800,000 and P750,000, respectively, on December 31, 2020 and 2021. What amount should be reported as royalty expense for 2021? Royalties paid 3,000,000 Prepaid royalties – 2020 550,000 Prepaid royalties – 2021 ( 450,000) Royalties payable – 2020 750,000 Royalties payable – 2021 ( 800,000) Royalty expense for 2021 3,050,000
