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