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

7/28/2019 Constructive Acctg. Report.....SINGLE ENTRY and ERROR CORRECTION

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

Under single entry system, the records maintained arerepresented only by the so-called bareessentialsand normallythese include a record of cash, accounts receivable, accountspayable, 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 anddisbursements. And because in a single entry no specific accountsfor the receipts and disbursements are debited or credited, only adescription thereof is made.


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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


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

The difference is either net income or net loss. Any increase in capital or retainedearnings 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


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PROPRIETORSHIP or PARTNERSHIP(net income or loss )

Capital, end of the year xxAdd: Withdrawals xx

Total xxLess:: Capital, beginning of the year xx

Additional investment xx xx

Net income (loss) xx


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CORPORATION(net income or loss )

Retained earnings, end xx

Add: Dividends declared or paid xxOther items that decreased retained earnings

but not profit or loss xx

Total xx

Less: Retained earnings, beginning xx

Other items that increased retained earningsbut not profit or loss xx

Net income (loss) xx


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It should be remembered that increases in assets anddecreases in liabilities 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 inventory- in the computation of cost of salesPPE- in the computation of depreciation

Prepaid expenses- in the computation of expensesDeferred or unearned income- in the computation of income

other than sales


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Increase

(Decrease)Cash 1,500,000

Accounts receivable 500,000Merchandise inventory 2,000,000

Prepaid expenses (100,000)Land 5,000,000

Accounts payable (1,100,000)Bonds payable 4,000,000

Share capital 4,000,000

Share premium 1,000,000


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Effects on net assets

Increase DecreaseIncrease in cash 1,500,000

Increase in A/R 500,000Increase in merchandise inventory 2,000,000

Decrease in prepaid expenses 100,000

Increase in land 5,000,000

Decrease in A/P 1,100,000

Increase in B/P 4,000,000

Total 10,100,000 4,100,000

Net increase in assets 6,000,000

Add: Dividends paid 1,500,000Total 7,500,000Less: Increase in share capital 4,000,000

Increase in share premium 1,000,000 5,000,000

Net income 2,500,000


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M

Preparation of financial statements

The preparation of the income statement involves the computation of individualrevenue and expense balances by reference to the cash receipts anddisbursements and the changes in assets and liabilities.

The formulas used in converting cash basis to accrual basis of accounting areuseful in this case. These formulas involve the computation of SALES,PURCHASES, INCOME OTHER THAN SALES and EXPENSES IN GENERAL.


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Computation for Depreciation

Carrying amount of PPE, beginning xxAdd: Cost of property acquired xx

Total xx

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

Depreciation xx


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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 inventoriescould be counted and their cost determined from purchase

invoices.


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The cost of property, plant and equipment could be

established by reference todeeds of sale and other documents evidencing ownership oftitle.

Accounts payable and notes payable could bedetermined from purchase invoices, memoranda,correspondence and even consultation with creditors.

Ownership equity or capital would be the difference

between the value assignedto assets and liabilities.


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LONG PROBLEMS


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LANCER STORE

Dec. 31, 2011 Jan. 1, 2011

Total Assets: 6,880,000 6,000,000

Total Liabilities: (1,600,000) (2,120,000)

Capital Balance: 5,280,000 3,880,000

Capital, Dec. 31 5,280,000

Add: Withdrawal 400,000Total 5,680,000Less: Capital, Jan 1 3,880,000

Investment 600,000 (4,480,000)Net Income 1,200,000


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SALESNotes receivable, end 1,200,000

Accounts receivable, end 2,000,000Collection of A/R 3,000,000Collection of N/R 960,000Sales return 320,000

Sales Discount 100,000Accounts written off-bad debts 120,000Total 7,700,000Less: Notes receivable, beg. 400,000

Accounts receivable, beg. 1,600,000 2,000,000Sales on account 5,700,000Cash sales 800,000Total sales 6,500,000


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Interest expense

Interest paid 160,000Add: Accrued interest payable, end 40,000

Less: Accrued interest payable, beg (80,000)Interest expense 120,000

Rent incomeRent received 80,000

Add: Unearned Interest income, beg 120,000Less: Unearned interest income, end (40,000)Rent income 160,000

Gain on sale

Selling price 120,000Less: Carrying amount (100,000)Gain on sale 20,000


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PURCHASESNotes payable, end 480,000Accounts payable, end 1,040,000Payment of N/P 1,520,000Payment of A/P 1,280,000

Purchase returns 80,000Total 4,400,000Less: Notes payable, beg 720,000

Accounts payable, beg 1,200,000 (1,920,000)Purchases on account 2,480,000Cash purchases 600,000

Total purchases 3,080,000


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DepreciationEquipment, beg 1,200,000Add: Equipment acquired 400,000Total 1,600,000

Less: Equipment, end 1,120,000Carrying amount of equipment sold 100,000 1,220,000

Depreciation 380,000


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Net sales

Sales 6,500,000Sales return (320,000)

Sales discount (100,000)Net sales 6,080,000

Cost of Sales

Merchandise inventory, beg 1,600,000Purchases 3,080,000Less: Purchase allowances (80,000) 3,000,000Goods Available for sale 4,600,000Less: Merchandise inventory, end (960,000)Cost of sales 3,640,000

Other Income

Rent income 160,000Gain on sale 20,000Total other income 180,000


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Lancer StoreIncome Statement

Year Ended December 31, 2011

Net Sales 6,080,000Cost of Sales (3,640,000)Gross income 2,440,000Other income 180,000

Total income 2,620,000Expenses:

Expenses 800,000Depreciation 380,000Bad debts 120,000Interest expense 120,000 (1,420,000)

Net income 1,200,000


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COMPLEX COMPANY

Cash in bank per book 250,000Outstanding checks (50,000)Adjusted cash in bank 200,000Cash on hand 125,000Total cash-12/31/11 325,000

Initial cash investment 500,000Proceeds of loan 500,000Collections of accounts receivable(SQUEEZE)2,500,000Total deposits 3,500,000

Customers deposits 75,000

Collections of accounts receivable(SQUEEZE) 600,000Total 675,000Disbursement in cash (550,000)Cash on hand-12/31/11 125,000


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Accounts receivable-12/31/11 900,000Collections deposited 2,500,000Collections not deposited 600,000

Total sales 4,000,000

Total deposits 3,500,000Total disbursement in check (SQUEEZE) (3,300,000)Cash in bank-12/31/11 200,000

Payment of loan 125,000Interest on loan 25,000Payment on equipment 400,000Interest on equipment 45,000Payment in accounts payable(SQUEEZE) (2,705,000)Total disbursement in check 3,300,000

Accounts payable-12/31/11 350,000Payment of accounts payable 2,705,000Total purchases 3,055,000


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Complex CompanyIncome Statement

Year Ended December 31, 2011

Sales 4,000,000Cost of Sales:

Purchases 3,055,000Inventory-12/31/11 (755,000) (2,300,000)

Gross Income 1,700,000

Expenses:Utilities 100,000Salaries 100,000Supplies 175,000Taxes 25,000Doubtful accounts 50,000

Depreciation-building 300,000Depreciation-equipment 80,000Interest expense 70,000 (900,000)

Net income 800,000

Comple Compan


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Complex Company

Statement of Financial Position

December 31, 2011

Assets

Current Assets:

Cash 325,000Accounts receivable 850,000

Inventory 755,000 1,930,000

Non-current Assets:

Building 4,200,00

Equipment 320,000

Land 1,500,000 6,020,000Total Assets 7,950,000

Liabilities and Equity

Current Liabilities:

Accounts payable 350,000

Advances from customers 75,000 425,000

Non-current liability:

Notes payable 375,000Total liabilities 800,000

Equity:

Share capital 6,000,000

Share premium 500,000

Retained earnings 650,000 7,150,000

Total liabilities and equity 7,950,000


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Prior period errors

These are omissions from and misstatements in theentitys financial statements for one or more periods

arising from a failure to use or misuse of reliableinformation that:

a.) Was available when financial statements for theseperiods were authorized for issue.

b.) Could reasonably be expected to have been obtainedand taken into account in the preparation andpresentation of these financial statements


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Treatment of prior period errors

PAS 8 provides that an entity shall correct material prior perioderrors retrospectively in the first set of financial statementsauthorized for issue after their discovery by:

a.) Restating the comparative amounts for the prior periodpresented in which the error occurred.

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


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Types of errors

a.) Statement of financial position errors

b.) Income statement errors

c.) Combined statement of financialposition and income statementerrors


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Statement of financial position errors

Statement of financial position errors affect the statement of

financial position or real accounts only, meaning, the improperclassification of an asset, liability and capital account.

In such a case, an entry is simply made to reclassify the

account balances.


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Income statement errors

Income statement errors affect the income statement ornominal accounts only, meaning, the improper classification ofrevenue and expense accounts.

These errors have no effect on the statement of financialposition and on net income. Thus, a reclassifying entry isnecessary only if the error is discovered in the same yearit iscommitted.

Otherwise, if the error is discovered in a subsequent year, noreclassifying entry is necessary because the nominal accountsfor the current year are correctly stated.


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Combined statement of financial

position and income statement errors

These errors affect both the statement of financial position andincome statement because they result in a misstatement of netincome.

Combined statement of financial position and incomestatement errors are classified as counterbalancing errors and

noncounterbalancing errors.


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Counterbalancing errors

Counterbalancing errors are errors which, if not detected, areautomatically counterbalanced or corrected in the next

accounting period.

In other words, these errors will be offset or corrected over twoperiods or these errors correct themselves over two periods.


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Counterbalancing errors normally misstatesthe following:

1. The income statements for two successive periods are

incorrect2. The statement of financial position at the end of thefirst

period is incorrect3. The statement of financial position at the end of the second

period is correct

Effects of counterbalancing errors

1. Inventory including purchases and sales2. Prepaid expenses3. Accrued expenses4. Deferred income

5. Accrued income


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Noncounterbalancing errors

Noncounterbalancing errors are errors which, if not detected, arenot automatically counterbalanced or corrected in the nextaccounting 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 iscommitted is incorrectbut the succeeding income statement isnot affectedThe statement of financial position of the year of error andsucceeding statement of financial position are incorrectuntil theerror is corrected


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The best example of a noncounterbalancing error is the

misstatement of depreciation


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Documents

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