Cash To Accrual And Single Entry System

CASH TO ACCRUAL BASIS The following methods are commonly used in practice in accounting for income and expenses:  Cash basis – income is recognized when received regardless of when earned, and expense is recognized when paid regardless of when incurred. In other words, this approach does not recognize accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expenses. Advantages: 1. Simple and less costly 2. Reliability since estimates and judgement is not required Disadvantages 1. Not useful in evaluating performance because  It does not reflect the results of all profit-directed activities which took place during the period;  Cash receipt and payments and the related accomplishments and effort occur in different periods. 2. Doesn’t present the financial position or operating result of an enterprise in conformity with generally accepted accounting principles.  Accrual basis- income is recognized when earned regardless when cash is received and expense is recognized when incurred regardless of when paid. Thus, the essence of this approach is the recognition accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expenses. Table 1: Comparison of cash basis and accrual basis Cash Basis Cash sales plus collection of trade Sales receivables. Cash purchases plus payment to trade Purchases creditors. Income other Amount received is considered as income than sales regardless when earned. Expenses, in Amounts paid is treated as expense general regardless of when incurred. Depreciation Depreciation is provided normally. No bad debts are recognized because Bad debts trade receivables are not recognized.

Accrual Basis Cash sales plus sales on account. Cash purchases plus purchases on account. Amount earned are considered as income regardless when it is received. Amount incurred are considered as expense regardless when it is paid. Depreciation is provided normally. Doubtful accounts are treated as bad debts.

Conversion from Cash Basis to Accrual Basis  Increase in Accounts/ Notes Receivable- trade (A,N/R, ending > A,N/R, beginning) , means there were more sales on account than collection (thus, Add the increase to cash basis to get accrual basis sales or deduct increase from the accrual basis to get the cash basis sale) Accrual basis sales Increase in Accounts/ Notes Receivable Cash basis sales

XX (XX) XX

or

Cash basis sales Increase in Accounts/ Notes Receivable Accrual basis sales

CASH TO ACCRUAL AND SINGLE ENTRY SYSTEM

XX XX XX

1-NAB

 Decrease in Accounts/ Notes Receivable- trade (A,N/R, ending < A,N/R, beginning), means that there was more collection than sales on account (this, Add the decrease to the accrual basis to get the cash basis sales or deduct the decrease from the cash basis to get the accrual basis sales) Accrual basis sales Decrease in Accounts/ Notes Receivable Cash basis sales

XX XX XX

or

Cash basis sales Decrease in Accounts/ Notes Receivable Accrual basis sales

XX (XX) XX

 Increase in the Accounts/ Notes Payable- trade (A,N/P, ending > A,N/P, beginning) , means that there were more purchases on account than payments to suppliers (thus, add the increase to the cash basis purchases (payments made) to get the accrual basis purchases or Deduct the increase from the accrual basis purchases to get the cash basis purchases) Accrual basis purchases Increase in Accounts/ Notes Payable Cash basis purchases

XX (XX) XX

or

Cash basis purchases Increase in Accounts/ Notes Payable Accrual basis purchases

XX XX XX

 Decrease on Accounts/ Notes Payable- trade (A,N/P, ending < A,N/P, beginning), means that there were more payments to supplies (cash basis purchases) than accrual basis purchases (thus, add the decrease to the accrual basis purchases to get the cash basis purchases or the total payments made or Deduct the decrease from the cash basis purchases to get the accrual basis purchases). Accrual basis purchases Decrease in Accounts/ Notes Payable Cash basis purchases

XX XX XX

or

Cash basis purchases Decrease in Accounts/ Notes Payable Accrual basis purchases

XX (XX) XX

 The conversion of data from cash basis to accrual basis focuses on the recognition of accruals and deferrals, since these are the items that are usually taken under the accrual basis that are not considered under cash basis. Computation for converting cash basis data to accrual would include the following: Cash receipts representing revenue Accrual revenue, beginning of the period Accrual revenue, end of the period Unearned revenue, beginning of the period Unearned revenue, end of the period Revenue under accrual basis Cash payments representing expense Accrual expenses, beginning of the period Accrual expenses, end of the period Prepaid Expenses, beginning of the period Prepaid Expenses, end of the period Expense under accrual basis

XX (XX) XX XX (XX) XX XX (XX) XX XX (XX) XX

CASH TO ACCRUAL AND SINGLE ENTRY SYSTEM

2-NAB

Other solution guides: Accounts Receivable/ Notes Receivable Beginning balance (AR/NR) Cash collections (Cash basis) Sales on account (accrual basis) Sales discounts Recovery of prev. write offs ** Sales returns* Sales allowances Write offs Ending balance (AR/NR) *excluding refunded sales returns to customers ** included in the analysis only if collections included the said recovery Accounts Payable/ Notes Payable Payments (Cash basis) Beginning balance (AP/NP) Purchase discounts Purchases on account (accrual basis) Purchase returns * Purchase allowances Ending balance (AP/NP) *excluding refunded purchase returns from suppliers Accrued Revenue Beginning balance Collections (cash basis) Recognized income (accrual basis) Ending balance Unearned Revenue Recognized income (accrual basis) Beginning balance Collections (cash basis) Ending balance

Beginning balance Payment of cash (cash basis) Ending balance

Payment of cash (cash basis)

Prepaid Expense Recognized expense (accrual basis)

Accrued Expense Beginning balance Recognized expense (accrual basis) Ending balance

Note: If the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning and ending balances, simply place in the beginning balance is it net decrease (since it indicates that the beginning is higher than the ending balance) or place in the ending balance if it is net increase (since this indicates that the ending balance is higher than the beginning balance).

CASH TO ACCRUAL AND SINGLE ENTRY SYSTEM

3-NAB

SINGLE ENTRY ACCOUNTING SYSTEM Bookkeeping System Definition: Bookkeeping is the systematic and chronological recording of transactions and events in the books of accounts. It is also known as the recording phase of accounting. Purpose: Basis for financial position and operating results. Table 2: Bookkeeping vs Accounting Bookkeeping Recording part of accounting Mechanical, routinary, repetitive Follows method prescribed by accounting

Accounting Broader field Analytical, judgmental, conceptual Determines accounting principles and methods

Systems of Bookkeeping 1. Single entry bookkeeping- as system of bookkeeping whereby, as a rule, only cash and personal accounts are recognized. It is a system that is not double entry. The system may range from mere narrative transactions to one that approximates but does not completely adopt double entry system. Characteristics:  Accounting equation is disregarded  Usually one effect of each transaction is recognized  Typically, only cash is recording and personal accounts are maintained  No trial balance  Data needed for preparation of financial statement is incomplete  Net income is determined by reconstructing revenue and expenses or comparing beginning and ending capital. Advantages:  Recordkeeping is simple  Recordkeeping is economical Disadvantages:  Double entry automatic check is missing  Accounting record is incomplete  Internal control is weak  Preparation of financial statement is difficult 2. Double entry bookkeeping – a system of bookkeeping which views a transaction as having two-fold effect on accounting values that provides automatic check on certain bookkeeping errors. Underlying concept or theory  Concept of accounting equation (A= L+C)  Concept of duality Accounting record:  Source documents  Books of original entry (journal)  Books of final entry (ledgers)  Worksheets

 Financial statements

CASH TO ACCRUAL AND SINGLE ENTRY SYSTEM

4-NAB

Table 3: Distinction between Double Entry and Single Entry Double Entry 1. Duality Principles Involved 2. Equality

Accounts recognized Books used

Records every type of accountable events Assets, liabilities, equity, revenues and expenses Journal and ledger

Single Entry Recognizes only one phase of transactions. Records only transactions involving cash and personal accounts. Cash, accounts receivable, accounts payable, equity Cash book, subsidiary ledger

Financial statement preparation

Financial statements are prepared in a systematic processing data; known as the accounting process, income (loss) is computed using the matching principle.

Income (loss) and statement of assets and liabilities are prepared using the analysis or indirect approach.

Transactions and events recorded

Capital Maintenance Approach  The capital maintenance concept measure profit as the amount of capital that the enterprise can distribute to its owners and be as well off at the end of the period as it was in the beginning. Thus, profit is the net change in capital after excluding the effects of transactions with the owners.  The net income occurs only after the capital used from the beginning of the period is maintained. Increase in assets Decrease in assets Increase in liabilities Decrease in liabilities Issuance of share capital Other items that increase SHE but no profit or loss * Other items that decrease SHE but no profit or loss * Dividends Net profit (loss)

XX (XX) (XX) XX

XX/ (XX) (XX) (XX) XX XX XX (XX)

* Items may include:  Changes in the revaluation surplus related to PPE (in line with IAS 16)  Actuarial gains and losses (in line with IAS 19)  Gains and losses arising from translating the financial statements in foreign operations.  The effective portion of gains and losses on hedging instruments in a cash flow hedge  Gains and losses on remeasuring FVTOCI (in line with IFRS 9)  For financial liabilities designated through fair value through profit or loss; fair value change is attributable to change in the liability’s credit risk (IFRS 9)

*** END OF HANDOUT*** #HGAWFA3

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CASH TO ACCRUAL AND SINGLE ENTRY SYSTEM

5-NAB