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Accounting
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Cash and Accrual Basis
Chapter 9
Methods of Accounting
Cash Basis
and
Accrual Basis
Accounting Methods
Cash Basis
Records revenue
when received.
Records expenses
when paid.
Accrual Basis
Records revenue
when earned.
Records expenses
when incurred.
Cash
Basi
sThis approach does
not recognize accounts receivables, accounts payable, accrued income, deferred income, accrued expense, and prepaid expense.
Acc
rual B
asi
s
The essence of this approach is the recognition of accounts receivables, accounts payable, accrued income, deferred income, accrued expenses and prepaid expenses.
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 receive are considered as income regardless of when earned
Items earned are considered as income regardless of when received.
Items Cash Basis Accrual Basis
Expenses Items paid are treated as expenses regardless when incurred
Items incurred are treated as expenses regardless when paid
Depreciation Depreciation is provided normally
Depreciation is provided normally
Bad Debts No bad debts are recorded because receivables are not recognized
Doubtful accounts are treated as bad debts
Accounting problem
Conversion from CASH basis to ACCRUAL basis of accounting
Computation of Sales
Cash sales xxSales on account:
Trade accounts and notes receivables, end xxCollection of trade accounts and notes receivable xxSales returns, discounts, and allowances xxAccounts and notes receivable written off xxTrade notes receivable discounted
(Note Receivable directly credited) xxTotal xxLess: Trade accounts and notes receivable, beg xx xx
Total sales- accrual basis xx
Computation of purchases
Cash purchases xxPurchases on account:
Trade accounts and notes payable, end xxPayment of trade accounts and notes payable xxPurchases returns, discounts, and allowances xxTotal xxLess: Trade accounts and notes payable, beg xx xx
Total purchases- accrual basis xx
Income other than sales
Income Received – cash basis xxAdd: Deferred income – beginning xx
Accrued income- endingxxTotal xxLess: Deferred income– ending xx
Accrued income– beginning xx xxIncome for the current year – accrual basis xx
Expenses in general
Expenses paid– cash basis xxAdd: Prepaid expenses– beginning xx
Accrued expenses- ending xxTotal xxLess: Prepaid Expenses – ending xx
Accrued expenses – beginning xxxxExpenses – accrual basisxx
Problems
Cash and Accrual Method Illustrations
Problem 9-3 ABC Corporation
Required: Prepare a comparative income statement using the cash basis and accrual basis of accounting.
ABC Corporat ionIncome Statement
Year ended December 31, 2011
Cash Basis Accrual Basis
Sales 3,200,000 3,350,000Cost of Sa les:
Merchandise Inventory, Jan. 1 500,000 500,000
Purchases 2,050,000 2,100,000Tota l 2 ,550,000 2,600,000Merchandise Inventory,Dec.31 (600,000) (600,000)Cost of Sa le 1,950,000 2,000,000
Gross Income 1,250,000 1,350,000Interest Income 40,000 30,000Tota l Income 1,290,000 1,380,000Less: Expenses
Expenses pa id in cash 750,000 750,000
Accrued Expenses - 20,000Prepaid Expenses - (30,000)Depreciat ion 50,000 50,000Tota l Expenses 800,000
790,000Net Income 490,000 590,000
Computations:
Cash Basis Accrual Basis>>Sales:
Sales on Cash 2,500,000 2,500,000Sales on account - 850,000Col lect ions from costumers 700,000* -Total Sales 3,200,000 3,350,000
*Col lect ions from costumers:Accounts Receivable, Jan. 1 250,000Sales on account 850,000Accounts Receivable, Dec. 31 (400,000)
Total 700,000
Cash Basis Accrual Basis>> Purchases:
Cash Purchases 1,700,000 1,700,000Credit Purchases - 400,000Payments to creditors 350,000** -Total Purchases 2,050,000 2,100,000
**Payments to Creditors:Accounts Payable, Jan. 1 150,000Credit Purchases 400,000Accounts Payable, Dec. 31 (200,000)Total 350,000
Cash Basis Accrual Basis>> Interest Income:
Interest received 40,000 40,000Accrued interest
receivable, beg - (10,000)Total 40,000 30,000
>> Depreciation:(800,000/10) 80,000 80,000(200,000/10* 6/12) 10,000 10,000
Problem 9-4 Aris MarvalRequired:
1. Income Statement
2. Statement of financial position
3. Adjusting entries to convert the records to accrual basis of accounting
Journal Entries2011Dec 31 Retained Earning 125,000
Accumulated Depreciation 125,000#
Depreciation 250,000Accumulated Depreciation 250,000
#
Interest Expense 90,000Accrued Interest Expense 90,000
#
Professional Fees 500,000Retained Earnings 500,000
#
Journal Entr ies:
2011Dec.31 Accounts Receivable 750,000
Profess ional Fees 750,000#
Rent Expense 100,000Accrued Rent Payable 100,000
#
Offi ce Suppl ies 300,000Reta ined Earnings 300,000
#
Offi ce Suppl ies Expense 50,000Offi ce Suppl ies 50,000
#
ARIS MARVALIncome Statement
Year ended December 2011
Professional Fees 5,250,000Expenses:
Rent Expense 1,300,000Suppl ies Expense 850,000Interest Expense 90,000Depreciat ion 250,000Other expenses 750,000 3,240,000
Net Income 2,010,000
Computat ions:
>>Profess ional Fees:Profess ional fees pa id in cash
5,000,000Profess ional fees on account:
Accounts Receivable,2011 750,000Accounts Receivable,2012 (500,000) 250,000
Tota l Profess ional fees-accrual 5,250,000
>>Rent Expense:Rent Expense paid in cash 1,200,000Accrued Rent Expense
100,000Tota l Rent Expense-accrual 1,300,000
Computat ions:
>>Offi ce Suppl ies expense:Unused offi ce suppl ies,2011 250,000Acquired Offi ce suppl ies 800,000Unused Offi ce suppl ies,2010 (300,000)
Tota l Offi ce suppl ies expense-accrual 850,000
>>Interest Expense:(1,000,000 x 12% x 9/12) 90,000
>>Depreciat ion:(2 ,500,000/10)
250,000
ARIS MARVALSta tement o f Financ ia l Pos i t i on
As o f December 31 , 2011
ASSET
Cash 1 ,500 ,000Accounts Rece ivab le 750 ,000Offi ce Supp l i es 250 ,000Furn i tu re and Equ ipment 2 ,500 ,000Accumula ted Deprec ia t i on ( 375 ,000) 2 ,125 ,000 4 ,625 ,000
L IAB IL IT IES
Notes Payab le 1 ,000 ,000Accrued In te res t Payab le 90 ,000Accrued Rent Expense 100 ,000 1 ,190 ,000
CAP ITAL
Ba lance , J an . 1 1 ,600 ,000Add: Net I ncome 2,010 ,000
Reta ined Earn ings 675 ,000Tota l 4 ,825 ,000Less : Wi thdrawa l ( 850 ,000) 3 ,435 ,000
4 ,625 ,000
Computations:
>>Accumulated Depreciat ion:Depreciat ion, July-Dec.2010(2,500,000/10 x 6/12) 125,000Depreciat ion, Jan.-Dec. 2011(2,500,000/10) 250,000
Total 375,000
>>Retained Earnings:Professional fees 500,000Depreciat ion (125,000)Offi ce suppl ies 300,000
Total 675,000
Problem 9-4 Zamboanga Required:
1. Adjusting entries to convert the records to accrual basis of accounting
2. Income Statement
3. Statement of financial position
Adjust ing Entr ies:
1. Sa les 200,000Reta ined Earnings 200,000
#
Accounts Receivable 250,000Sales 250,000
#
2. Reta ined Earnings 40,000Sales 40,000
#
3. Reta ined Earnings 350,000Purchases 350,000
#
Purchases 280,000Accounts Payable 280,000
#
4. Retained Earnings 70,00Expenses 70,000
#
Expenses 100,000Accrued Expenses 100,000
#
5. Inventory- Dec 31,2010 150,000Retained Earnings 150,000
#
Inventory – Dec 31,2011 210,000Profit or Loss 210,000
#
6. Advances to Supplier 100,000Purchases 100,000
#
7. Retained Earnings 10,000 Depreciation –Equipment 20,000
Accumulated Depreciation 30,000#
8. Retained Earnings 300,000 Depreciation – Building 300,000
Accumulated Depreciation 600,000#
9. Doubtful Accounts 25,000Allowance for doubtful accounts 25,000
#
10. Interest expense 36,000Accrued Interest Payable 36,000
#
Computation :Depreciation
Depreciation for 2010Equipment acc. July 1 200,000/5x 6/12 10,000Depreciation for 2011
200,000/5 20,000Total 30,000
Doubtful Accounts 250,000 x 10% 25,000
Accrued Interest expense900,000x 12%x4/12 36,000
ZAMBOANGA COMPANYSta tement o f Financ ia l Pos i t i on
December 31 , 2011
ASSETSCurrent Asse ts :Cash 1 ,500 ,000Accounts Rece ivab le 250 ,000Less : A l l owance fo r Doubt fu l Accounts 25 ,000 225 ,000Invento ry 210 ,000 2 ,035 ,000Non- current Asse ts :
Equ ipment 200 ,000Less : Accumula ted Deprec ia t i on (30 ,000) 170 ,000
Bu i ld ing 1 ,500 ,000Less : Accumula ted Deprec ia t i on (600 ,000) 900 ,000
Land 800 ,000 1 ,870 ,000TOTAL ASSETS 3 ,905 ,000
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIESCurrent l iabi l i t ies:Accounts Payable 280,000Accrued Expenses 100,000 380,000
Non-current l iabi l i t ies;Mortgage payable 900,000Accrued Interest payable 36,000 936,000
SHAREHOLDERS’ EQUITYShare capital 2,000,000
Retained Earnings, end 589,000 2589,000
T O TA L L I A B I L I T I E S a n d S H A R E H O L D E R S ’ E Q U I T Y 3,905,000
Note 1 Trade and other Receivables
Accounts Receivable 250,000Allowance for doubtful accounts ( 25,000)Net realizable value 225,000Advances to suppliers 100,000
total 325,000
Note 2 Equipment 200,000Accumulated Depreciation ( 30,000)Carrying Amount 170,000
Note 3 Building 1,500,000Accumulated Depreciation (600,000)Carrying Amount 900,000
Zamboanga CompanyIncome Statement
Year ended December 2011
Sales 4,090,000Less: Cost of Sales
Inventory ,beg 150,000Add: Purchases 1,830,000Goods Avai lable for sale 1,980,000Less: Inventory, end 210,000
1,770,000Gross Income2,320,000Expenses:
Expenses 1,530,000Doubtful accounts 25,000Depreciat ion 320,000 Interest Expense 36,000 1,911,000
Net Income 409,000
Computation of sales
Sales per book 4,000,000Add: Accounts Receivable, end 250,000Total 4,250,000Les: Accounts Receivable, beg 200,000 Credit adjustment to sales 40,000Sales 4,090,000
Computation of Purchases
Purchases per book 2,000,000Add: Accounts Payable , end 280,000Total 2,280,000Less: Accounts payable, beg 350,000 Advances to supplier 100,000Purchases 1,830,000
Computation of Expenses
Expenses per book 1,500,000Add: Accrued Expenses, end 100,000Total 1,600,000Less: Accrued Expenses, beg 70,000Expenses 1,530,000
Computation of Retained Earnings
Retained Earnings per book 600,000Add: Unrecorded Accounts Receivable, 2010 200,000 Unrecorded inventory 150,000 Profit or loss Adjustment 210,000Total 1,160,000Less: Error in recording sales 40,000 Unrecorded Accounts payable 350,000 Unrecorded Accrued Expense 70,000 Unrecorded Depreciation- equipment 10,000 Unrecorded Depreciation – building 300,000Retained Earnings 390,000