LESSON: SINGLE ENTRY SYSTEM AND CASH TO accrual basis: includes cash purchases and

ACCRUAL BASIS purchases on account.

Single Entry System – a system of record keeping d. Expenses, in general

in which transactions are not analyzed and
cash basis: includes only those expenses that are
recorded in the double entry framework. (using the
paid.
dual effect of transactions in the different financial
statement elements) accrual basis: includes those items that are
incurred regardless when paid.
- computation in determining net income or loss is
simply to compare the capital or retained earnings e. Depreciation
at the beginning of the year and capital or retained
cash basis: depreciation is typically provided
earnings at the end of the same year after taking
except when the cost of equipment was treated
into consideration drawings or dividends and
as expense.
additional investment.
accrual basis: depreciation is typically provided.
Cash Basis Accounting – a system that recognizes
revenue when cash is received and expenses when f. Bad Debts
cash is paid. (not a generally accepted accounting
cash basis: no bad debts expense is recognized
principle)
since cash basis does not recognize receivables;
Accrual Basis Accounting – an accounting system although some problems may give an indication
that recognizes revenue when earned rather than that the accounts written off were charged to bad
when cash is received and recognizes expenses as debts expense.
it is incurred rather than when cash is paid.
accrual basis: doubtful accounts are treated as
bad debts.
Comparison of Cash Basis and Accrual Basis of
Accounting:
I. T-accounts of Accounts Receivable, Notes
a. Sales Receivable, Advances from Customers:

cash basis: includes cash sales, collection of AR/NR/Advances from Customers

trade accounts receivable, and collection of trade Beg. Balance – AR End. Balance – AR
notes receivables. Beg. Balance – NR End. Balance – NR
End. Balance – Adv. Beg. Balance – Adv.
accrual basis: includes cash sales and credit (1 – 2 – 9) Sales on (3) Sales Returns and
sales. (sales on account) Account Allowances*
(6) Recoveries (4) Sales Discount
b. Income other than Sales
(4 – 7 - 8) Collection

cash basis: includes only those collected during including Recoveries

the period. (5) Write-Off

Total Debits Total Credits

accrual basis: includes those items earned during * - included only those sales returns and allowances that are deducted from
the accounts receivable; if the sales returns and allowances arise from cash
the period.
refund to customer, it should not be included in the t-account of the
receivables.
c. Purchases
II. T-accounts of Allowance for Doubtful Accounts:
cash basis: includes cash purchases, payment of
trade accounts payable, payment of trade notes Allowance for Doubtful Accounts
payable, and payment in advance to suppliers. End. Balance Beg. Balance
 (5) Write-Off (10) Doubtful Accounts (9) To record delivery of goods to
Expense customers with advances
(6) Recoveries Advances from Customers XX
Total Debits Total Credits Sales XX

 Journal Entries of Transactions Affecting the (10) To record the provision for
Accounts: (I-II) doubtful accounts during the year
Doubtful Accounts Expense XX
Dr. Cr.
Allowance for Doubtful Accounts XX
(1) To record sales on account ✓ - observe that in the journal entries, for example sales on account, the
Accounts Receivable XX accounts receivable is debited, so in the t-accounts, the same amount is
also debited.
Sales XX

(2) To record receipt of note from III. T-accounts of Accounts Payable, Trade Notes
sales on account Payable, Advances to Suppliers:
Notes Receivable XX
Sales XX AP/NP/Advances to Suppliers
End. Balance – AP Beg. Balance – AP
(3) To record sales return from a End. Balance – NP Beg. Balance – NP
customer Beg. Balance – Adv. End. Balance – Adv.
(3) Purchase Returns (1 – 2 – 6) Purchases on
Sales Returns and Allowances XX
Accounts Receivable XX and Allowances Accounts
(4) Purchase Discount
(4 – 5) Payments
(4) To record collection within the
Total Debits Total Credits
discount period
Cash XX
 Journal Entries of Transactions Affecting the
Sales Discount XX
Accounts: (III)
Accounts Receivable XX
Dr. Cr.
(5) To record accounts written-off (1) To record purchase on account
Allowance for Doubtful Accounts XX Purchases XX
Accounts Receivable XX Accounts Payable XX

(6) To record re-establishment of (2) To record issuance of note for

accounts receivable previously purchase on account
written-off Purchases XX
Accounts Receivable XX Notes Payable XX
Allowance for Doubtful Accounts XX
(3) To record return of merchandise
(7) To record collection of accounts to supplier
previously written-off Accounts Payable XX
Cash XX Purchase Returns and Allowances XX
Accounts Receivable XX
(4) To record payment within the
(8) To record advances received discount period
from customers Accounts Payable XX
Cash XX Purchase Discount XX
Advances from Customers XX Cash XX
 Total Debits Total Credits
(5) To record advances to suppliers
Advances to Suppliers XX  Journal Entries of Transactions Affecting the
Cash XX Accounts: (V)

Dr. Cr.
(6) To record receipt of goods from
suppliers arising from advances (1) To record collection of rent
Purchases XX Cash XX
Advances to Suppliers XX Unearned Rent/Rent Receivable XX

IV. T-accounts of Merchandise Inventory: (2) To record adjusting entry of the

rent income
Merchandise Inventory Unearned Rent XX
Beg. Balance End. Balance Rent Income XX
Net Purchases Cost of Sales
Total Debits Total Credits (3) To record accrual of rent income
✓ - the t-account presented is applicable to finished goods inventory of a
Rent Receivable XX
merchandising company.
Rent Income XX
✓ - this t-account is also applicable to interest receivable/unearned interest,
royalty receivable/unearned royalty, and other deferred assets.
 Notes: In using this t-account, aside from the
journal entries, it follows the following formula in
computing for: VI. T-accounts of Prepaid Rent, Rent Payable:

a. Net Purchases Prepaid Rent/Rent Payable

Beg. Balance – Prepaid End. Balance – Prepaid
Gross Purchases XXX
Rent Rent
Freight In XXX
End. Balance – Rent Beg. Balance – Rent
Purchase Returns (XXX)
Payable Payable
Purchase Allowances (XXX)
(1) Payment of Rent (2 – 3) Rent Expense
Purchase Discount (XXX)
Total Debits Total Credits
Net Purchases XXX
 Journal Entries of Transactions Affecting the
b. Cost of Sales
Accounts: (VI)
Merchandise Inventory – beg. XXX
Dr. Cr.
Net Purchases XXX
(1) To record payment of rent in
Total Goods Available for Sale XXX
advance
Merchandise Inventory – end. (XXX)
Prepaid Rent/Rent Payable XX
Cost of Sales XXX
Cash XX
V. T-accounts of Rent Receivable, Unearned Rent
(2) To record adjusting entry for
Income:
expired portion of rent
Rent Receivable/Unearned Rent Rent Expense XX
End. Balance – Beg. Balance – Prepaid Rent XX
Unearned Rent Unearned Rent
Beg. Balance – Rent End. Balance – Rent (3) To record accrual of rent exp.
Receivable Receivable Rent Expense XX
(2 – 3) Rent Income (1) Collection of Rent Rent Payable XX
✓ - this t-account is also applicable to prepaid salaries/salaries payable.
VII. T-accounts of Property, Plant, and Equipment, the owner
Accumulated Depreciation: Cash XX
Capital XX
PPE
Beg. Balance End. Balace
(2) To record withdrawal by the
(1) Acquisition (2) Derecognition
owner*
Total Debits Total Credits
Drawings XX
Cash or any other appropriate acc. XX
Accumulated Depreciation
End. Balance Beg. Balace
(3) To close the drawings to the
(2) Derecognition (3) Depreciation Exp.
capital account
Total Debits Total Credits
Capital XX
Drawings XX
 Journal Entries of Transactions Affecting the
Accounts: (VII) (4) To close the net income to the
capital account
Dr. Cr. Income Summary XX
(1) To record cash acquisition of Capital XX
PPE
PPE XX (5) To close the net loss to the
Cash XX capital account
Capital XX
(2) To record derecognition of PPE Income Summary XX
(e.g., sale, donation, retirement) * - when the owner withdrew merchandise inventory or other non-cash
assets, the drawings account should be debited to an amount equal to the
Cash XX
cost, not the selling price or fair value of the merchandise or non-cash asset
Accumulated Depreciation XX withdrawn.
Loss on Sale XX
Gain on Sale XX
PPE XX IX. T-account of Retained Earnings:

(3) To record adjusting entry for Retained Earnings

depreciation expense End. Balance Beg. Balace
Depreciation Expense XX Prior Period Error Prior Period Error
(1) Dividends Declared (2) Net Income
Accumulated Depreciation XX
(3) Net Loss

Total Debits Total Credits

VIII. T-account of Capital Account:
 Journal Entries of Transactions Affecting the
Capital
Accounts: (VIII)
End. Balance Beg. Balace
(3) Withdrawal (1) Investment Dr. Cr.
(5) Net Loss (4) Net Income (1) To record declaration of
Total Debits Total Credits dividends
Retained Earnings XX
 Journal Entries of Transactions Affecting the Dividends Payable (e.g., cash, XX
Accounts: (VIII) stock, property, etc.)
Dr. Cr.
(2) To close net income to retained
(1) To record investment made by
earnings
 Income Summary XX - according to Philippine Standards on Auditing No.
Retained Earnings XX 240, error refers to an unintentional misstatement
in financial statements including the omission of an
(3) To close net loss to retained amount or a disclosure, including:
earnings
Retained Earnings XX (1) a mistake in gathering or processing data from
Income Summary XX which financial statements are prepared;

(2) an incorrect accounting estimate arising from

IX. T-account of Net Assets: oversight or misinterpretation of facts;

Net Assets (3) a mistake in the application of accounting

Increase in Asset Decrease in Asset principles relating to measurement, recognition,
Decrease in Liability Increase in Liability classification, presentation or disclosure.
Dividends Declared Increase in Share Cap.
Net Loss Increase in Share
Fraud - the intentional act by one or more
Premium
Net Income individuals among management, those charged
Total Debits Total Credits with governance, employees, or third parties,
✓ - this t-account follows the basic rule in making journal entry that an involving the use of deception to obtain an unjust or
account is increased through its normal balance while it is decreased at the
other side of the normal balance, for example, increase in asset is debited
illegal advantage.
which is the normal balance of an asset while decrease in asset is credited
which is at the other side of the normal balance.
I. Errors Affecting Net Income and Retained
Earnings:

a. If sales are overstated: (direct relationship)

- net income will be overstated.

- retained earnings will be overstated.

b. If cost of sales are overstated: (inverse

relationship)

- net income will be understated.

- retained earnings will be understated.

c. If expenses are overstated: (inverse

relationship)

- net income will be understated.

- retained earnings will be understated.

II. Errors Affecting Cost of Sales:

Merchandise Inventory – beg. XXX

Net Purchases XXX
Total Goods Available for Sale XXX
LESSON: CORRECTION OF ERRORS Merchandise Inventory – end. (XXX)
Cost of Sales XXX
 (b) could reasonably be expected to have been
obtained and taken into account in the
a. If beginning inventory is overstated:
preparation and presentation of those financial
- cost of sales will be overstated. statements.

- net income will be understated. - such errors include the effects of mathematical
mistakes, mistakes in applying accounting
b. If net purchases is overstated:
policies, oversights or misinterpretations of facts,
- cost of sales will be overstated. and fraud.

- net income will be understated.

 Accounting Treatment of Prior Period Errors
c. If ending inventory is overstated:
- according to PAS 8 par 42, “an entity shall
- cost of sales will be understated.
correct material prior period errors retrospectively
- net income will be overstated. in the first set of financial statements authorized
for issue after their discovery by:

III. Errors Affecting Working Capital: (current (a) restating the comparative amounts for the
assets less current liabilities) prior period(s) presented in which the error
occurred;
a. If current assets are overstated:
(b) if the error occurred before the earliest prior
- working capital will be overstated. (direct
period presented, restating the opening balances
relationship)
of assets, liabilities and equity for the earliest
b. If current liabilities are overstated: prior period presented.

- working capital will be understated. (inverse - retrospective restatement: correcting the

relationship) recognition, measurement, and disclosure of
amounts of elements of financial statements as if
a prior period error had never occurred. (if
IV. Types of Errors
comparative statements are presented, the prior
i. As to Period of Occurrence: year statements are restated to correct the error)

1. Current Period Errors – errors committed - limitations on retrospective restatement:

during the current period; if discovered after the
i. a prior period error shall be corrected by
reporting date but before the financial statements
retrospective restatement except to the extent
are authorized for issue, it should be corrected as
that it is impracticable to determine either the
adjusting events after the reporting period.
period-specific effects or the cumulative effect
of the error.
2. Prior Period Errors – omissions from, and
ii. when it is impracticable to determine the
misstatements in, the entity’s financial statements
period-specific effects of an error on
for one or more prior periods arising from a failure
comparative information for one or more prior
to use or misuse of reliable information that:
periods presented, the entity shall restate the
(a) was available when financial statements for opening balances of assets, liabilities and
those periods were authorized for issue; equity for the earliest period for which
retrospective restatement is practicable (which
may be the current period).
 iii. when it is impracticable to determine the i. deferred expense (or prepayments under the
cumulative effect at the beginning of the current expense method)
period of an error on all prior periods, the entity
ii. deferred income (or pre-collection under the
shall restate the comparative information to
revenue method)
correct the error prospectively from the earliest
date practicable. iii. accrued expenses

iv. accrued revenues

ii. As to Elements Affected: - overstatement or understatement of the

following:
1. Income Statement Errors – errors affecting only
the income statement accounts and may include i. sales not recorded in the first year and
improper classification of revenues or expenses. subsequently recorded the following year (or
vice versa)
- a company must make a reclassification entry
when it discovers the error in the error year. ii. purchases not recorded in the first year and
subsequently recorded the following year (or
- if the error discovered pertains to a prior year
vice versa)
error, the company should restate the income
statement of the prior year for comparative iii. error affecting ending inventory
purposes.

- since these errors involve two nominal accounts,

net income and retained earnings during the
period are unaffected.

2. Statement of Financial Position Errors – affect

only the presentation of assets, liabilities, or
stockholders’ equity accounts.

- when the error is discovered in the error year, the

company reclassifies the item to its proper
position.

- if the error in a prior year is discovered in a

subsequent period, the company should restate
the statement of financial position of the prior 3.2. Non-Counterbalancing Errors: do not offset
year for comparative purposes. in the next accounting period; therefore,
companies must make correcting entries, even if
3. Combined IS and SFP Errors – errors affecting
they have closed the books.
both the statement of financial position and
income statement; can be classified as: i. prepayments under the asset method
3.1 Counterbalancing Errors: errors that will ii. precollection under the liability method
offset or be corrected over two accounting
periods; examples include: iii. error in recording depreciation

- omissions of the following: iv. improper capitalization of expense

v. improper expensing of capital expenditures

vi.. error in recording of proceeds of sale of an
asset (e.g. PPE) as other income