CASH TO ACCRUAL BASIS

CONCEPTS OUTLINE:
1. Cash basis accounting
2. Accrual basis accounting
3. Comparison of Cash Basis and Accrual Basis accounting
4. T-accounts approach
5. Guidelines in using T-account approach
6. T-accounts of Accounts Receivable / Notes Receivables / Advances From
7. T-accounts of Allowance for Bad Debts
8. T-accounts of Accounts Payable / Notes Payable / Advances To
9. T-accounts of Merchandise Inventory
10. T-accounts of Property, Plant and Equipment
11. T-accounts of Accumulated Depreciation
12. T-accounts of Rent Receivable / Unearned Rent Income
13. T-accounts of Prepaid Rent/Rent Payable
14. T-accounts of Capital
15. T-accounts of Retained Earnings
16. T-accounts of Net Assets

BASIC CONCEPTS
A. Definition of Cash Basis of Accounting
B. Definition of Accrual Basis of Accounting
C. Comparison of Cash Basis and Accrual Basis of Accounting
Cash to Accrual Basis
− Cash Basis Accounting is a system that recognizes revenue when cash is received and
expenses when cash is paid.
Accrual Basis Accounting
− It is an accounting system that recognizes revenue when earned rather than when cash is
received and recognizes expenses as it is incurred rather than when cash is paid.
Comparison of Cash Basis and Accrual Basis Accounting
Items of Comparison Cash Basis Accrual Basis
Includes: Includes:
 Cash Sales  Cash Sales
Sales  Collection of Trade  Credit Sales
Accounts Receivable (sale on account)
 Collection of Trade
Notes Receivable
 Includes only those  Includes those items
Income Other Than Sales collected during the earned during the
periods period
Includes the following: Includes:
 Cash Purchases  Cash Purchases
 Payment of Trade  Purchase on
Purchases Accounts Payable Payable Account
  Payment of Trade
Notes Payable
 Payment in Advance
To Suppliers
 Includes only those  Includes those items
Expenses, In General expenses that are that are incurred
paid regardless of when
paid
 Depreciation is  Depreciation is
typically provided typically provided.
Depreciation except when the cost
of equipment was
treated as expense
 No bad debts  Doubtful accounts
expense is are treated as bad
recognized since debts.
cash basis does not
Bad Debts recognize
receivables. Although
some problem may
give an indication that
the accounts written
off were charged to
bad debts expense.

SUBTOPIC 2A

T-ACCOUNT: ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND ADVANCES FROM

SUPPLIER
Accounts Receivable / Notes Receivable Trade / Advances From Customers
Beginning Balance AR XX Balance End – AR XX
Beginning Balance - NR XX Balance End – NR XX
Balance End - Advances XX Beginning Balance – Advances XX
Sales on Account XX Sales Returns and Allowance* XX
Recoveries XX Sales Discounts XX
Collections including Recoveries XX
Write-off XX
TOTAL =
*Included only those sales returns and allowance that are deducted from the accounts receivable.
If the sales returns and allowances arise from cash refund to customer, it should not be included in
the t-account of the receivables. When there are no notes receivable and advances from customers,
the T-account of the Account receivable is:
T-ACCOUNT: ACCOUNTS RECEIVABLE
Accounts Receivable
Beginning Balance AR XX Balance End – AR XX
Sales on Account XX Sales Returns and Allowance* XX
Recoveries XX Sales Discounts XX
Collections including Recoveries XX
Write-off XX
TOTAL =

SUBTOPIC 2B

T-ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS

Allowance for Doubtful Accounts
Accounts Written Off XX Beginning Balance XX
Balance End XX Doubtful Accounts Expense XX
Recoveries XX
TOTAL =

SUBTOPICS 3A

T-ACCOUNT OF ACCOUNTS PAYABLE, NOTES PAYABLE AND ADVANCES TO SUPPLIER

Accounts Payable / Notes Payable Trade / Advances To Supplier

Payments XX Beginning Balance - AP XX
Purchase Returns and Allowance XX Beginning Balance - NP XX
Purchase Discount XX Balance End - Advances XX
Beginning Balance - Advances XX Purchases XX
Balance End - AP XX
Balance End - NP XX

TOTAL =

SUBTOPICS 3B

T-ACCOUNT: MERCHANDISE INVENTORY

Merchandise Inventory
Beginning Balance XX Balance End XX
Net Purchases XX Cost of Sales XX
TOTAL =
NOTES:
 In using this T-account, aside from the journal entries, it follows the following formula in the
computation of the cost of sales:
Merchandise inventory, Beginning XX
Add: Net Purchases XX
Total Goods Available for Sale XX
Less: Merchandise Inventory, End (XX)
Cost of Sales XX
  Net purchases are computed as follows:
Gross Purchases XX
Add: Freight-In XX
Less: Purchase Discount XX
Purchase Allowance XX
Purchase Returns XX (XX)
Net Purchases XX
 The T-account presented is applicable to finished goods inventory of merchandising
company.
SUBTOPICS 4

T-ACCOUNT: RENT RECEIVABLE / UNEARNED RENT INCOME

Rent Receivable / Unearned Rent Income
Beginning Balance - Rent Receivable XX Balance End - Rent Receivable XX
Balance End - Unearned Rent Income XX Beginning Balance - Unearned Rent I. XX
Collections XX
TOTAL =
NOTE:
 This T-account is also applicable to Interest Receivable / Unearned Interest Income, Royalty
Receivable / Unearned Royalty Income and Other Deferred Assets.

SUBTOPICS 5

T-ACCOUNT: PREPAID RENT / RENT PAYABLE

Prepaid Rent / Rent Payable
Beginning Balance - Prepaid Asset XX Balance End - Prepaid Asset XX
Balance End - Accrued Liability XX Beginning Balance - Accrued Liability XX
Payments XX Expense XX
TOTAL =

NOTE:
 This T-account is also applicable to Prepaid Salaries / Salaries Payable.

SUBTOPICS 6A

T-ACCOUNT: PROPERTY, PLANT AND EQUIPMENT

Property, Plant and Equipment
V

Beginning Balance XX Cost of Asset Derecognized XX

Cost of Asset Acquired XX Balance End XX
TOTAL =

SUBTOPICS 6B

T-ACCOUNT: ACCUMULATED DEPRECIATION

Accumulated Depreciation
Accumulated Depreciation Beginning Balance XX
of Asset Derecognized XX
Balance End XX Depreciation Expense XX
TOTAL =
SUBTOPICS 7A

T-ACCOUNT: CAPITAL AND RETAINED EARNINGS

Capital
Withdrawal XX Beginning Balance XX
Balance End XX Additional Investment XX
Net Loss XX Net Income XX
TOTAL =
NOTE:
 When the owner withdrew merchandise inventories or other non-cash assets, the drawings
account should be debited to an amount equal to the cost, not the selling price or fair value
of the merchandise or non-cash asset withdrawn.

T-ACCOUNT: RETAINED EARNINGS

Retained Earnings
Balance End XX Beginning Balance XX
Prior Period Error XX Prior Period Error XX
Dividends Declared XX Net Income XX
Net Loss XX
TOTAL =

SUBTOPICS 7B

T-ACCOUNT: NET ASSETS

Statement of Financial Position / Net Assets
Increase in Asset XX Decrease in Asset XX
Decrease in Liabilities XX Increase in Liabilities XX
Dividends Declared XX Increase in Share Capital XX
Net Loss XX Increase in Share Premium XX
Net Income XX
TOTAL =
NOTE:
 This T-account follows the basic rule in making journal entry that an 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 which is the normal balance of an asset while
decrease is credited which is at other side of the normal balance.

T-ACCOUNTS APPROACH
− In order to compute for the cash payments or collections for certain account, it is suggested
that the T-account approach will be used on the following:
1. Accounts Receivable / Notes Receivables / Advances From Customers;
2. Allowance for Doubtful Accounts;
3. Accounts Payable / Notes Payable / Advances To Supplier;
4. Merchandise Inventory;
5. Property, Plant and Equipment;
6. Accumulated Depreciation;
7. Rent Receivable / Unearned Rent Income;
 8. Prepaid Rent / Rent Payable;
9. Capital;
10. Retained Earnings;
11. Net Assets

CORRECTION OF ERRORS
Errors
− According to Philippine Standards on Auditing No. 240, “Error refers to an unintentional
misstatement in financial statements including the omission of an amount or a disclosure,
including:
1. A mistake in gathering or processing data from which financial statements are
prepared;
2. An incorrect accounting estimate arising from oversight or misinterpretation of facts;
3. A mistake in the application of accounting principles relating to measurement,
recognition, classification, presentation or disclosure."
Fraud
− Fraud refers to the intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of deception to obtain
an unjust or illegal advantage.
Prior Period Errors
− Prior Period Errors are omissions from, and misstatements in, the entity's financial
statements for one or more prior periods arising from a failure to use or misuse of reliable
information that:
a. Was available when financial statements for those periods were authorized for issue;
b. Could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements.
− Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.
Accounting Treatment of Prior Period Error
− According to PAS 8 par 42, "an entity shall correct material prior period errors retrospectively
in the first set of financial statements authorized for issue after their discovery by:
a. Restating the comparative amounts for the prior period(s) presented in which the
error occurred; or
b. If the error occurred before the earliest prior period presented, restating the
opening balances of assets, liabilities and equity for the earliest prior period presented.
 Limitations on Retrospective Restatement
− A prior period error shall be corrected by retrospective restatement except to the
extent that it is impracticable to determine either the period-specific effects or the
cumulative effect of the error.
− When it is impracticable to determine the period-specific effects of an error on
comparative information for one or more prior periods presented, the entity shall
restate the opening balances of assets, liabilities and equity for the earliest period
for which retrospective restatement is practicable (which may be the current period).
− When it is impracticable to determine the cumulative effect at the beginning of the
current period of an error on all prior periods, the entity shall restate the comparative
information to correct the error prospectively from the earliest date practicable.
Basic Concepts in Correction of Errors
Errors affecting Net Income Effect in the Net Income Relationship
If Sales are Overstated Overstated Direct
If Cost of Sales is Overstated Understated Inverse
If Expenses are Overstated Understated Inverse
Errors affecting Cost of Sales Effect in Cost of Sales Relationship
If Beginning Inventories Overstated Overstated Direct
If Net Purchases are Overstated Overstated Direct
If Ending Inventories are Overstated Understated Inverse

Working Capital
− Working Capital is the capital of a business that is used in its day-to-day trading operations,
computed as the current assets minus the current liabilities.
Errors affecting Working Capital Effect in Working Capital Relationship
If the Current Assets are Overstated Overstated Direct
If the Current Liabilities are Overstated Understated Inverse

TYPES OF ERRORS
1. Balance Sheet or Statement of Financial Position Errors
2. Income Statement Errors
3. Combined Statement of Financial Position and Income Statement Errors
a. Counterbalancing Errors
b. Non-counterbalancing Errors
SUBTOPICS 2.1A
Balance Sheet or Statement of Financial Position Errors
− Statements of Financial Position or Balance Sheet Errors affect only the presentation of
an asset, liability, or stockholders' equity account.
− 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 year for comparative purposes.
SUBTOPICS 2.2B
Income Statement Errors
− Income Statement Errors are errors affecting only the income statement accounts and may
include improper classification of revenues or expenses.
− A company must make a reclassification entry when it discovers the error in the error year.
− If the error discovered pertains to a prior year, the company should restate the income
statement of the prior year for comparative purposes.
− Since these errors involve two nominal accounts, net income and retained earnings during
the period are unaffected.
SUBTOPICS 2.3C
Combined Statement of Financial Position and Income Statement Errors
− Errors affecting both the statement of financial position and income statement can be
classified as:
1. Counterbalancing errors and
2. Non-counterbalancing errors
1. Counterbalancing Errors
− Counterbalancing errors are errors that will offset or be corrected over two accounting
periods. Examples include the following:
Omissions of the following:
1. Deferred Expense (or Prepayments under the Expense Method.)
2. Deferred Income (Precollection under the Revenue Method.)
3. Accrued Expenses
4. Accrued Revenues
Overstatement or Understatement of the following:
5. Sales not recorded in the first year and subsequently recorded the following
year (or vice versa).
6. Purchases not recorded in the first year and subsequently recorded the
following year (or vice versa).
7. Error affecting ending inventory.
2. Non-Counterbalancing Errors
− Non-counter balancing errors do not offset in the next accounting period. Therefore,
companies must make correcting entries, even if they have closed the books.
Examples:
1. Prepayments under the Asset Method
2. Precollection under the Liability Method
3. Error in recording depreciation
4. Improper capitalization of expense
5. Improper expensing of capital expenditures
6. Error in recording of proceeds of sale of an asset (e.g. PPE) as other income

AUDIT OF CASH
Definition of Cash
− Cash includes money and other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit. It includes cash on hand, demand
deposits and other items that are unrestricted for use in the current operations.
1. Cash on Hand (CUTCMoBa)
C Customer's checks awaiting deposit
U Undeposited cash collections (currencies such as bills and coins)
T Traveler's check
C Cashier's / Official / Treasurer's / Manager's checks
Mo Postal Money Orders
(a demand credit instrument issued and payable by a post office)
 Ba Bank Drafts
(a written order addressed to the bank to pay an amount of money
to the order of the maker)

2. Cash In Bank
 Current Account / Checking Account / Demand Deposit /
A. Commercial Deposit
 Generally non-interest bearing
 Withdrawable by checks against bank
 Savings Deposit (Savings Account-SA)
B.  Generally non-interest bearing
 Depositor is issued an ATM card or passbook
 Withdrawable in ATM station or within the bank

3. Cash Fund for Current Operations (CP2RIntPeDiT2)

C Change Fund
Payroll Fund
P Purchasing Fund
(for purchasing of inventories)
R Revolving Fund
(fund that is used for limited or specific purpose set by management)
Int Interest Fund
Pe Petty Cash Fund
(for small and miscellaneous disbursements)
Di Dividend Fund
Travel Fund
T
Tax Fund
− Fund for Noncurrent Operations
are part of noncurrent assets and should not be included as part of cash.
Examples are as follows: (P2ACIS)
Pension Fund − Generally noncurrent investment but if the related liability
is current, the fund is included as cash.
Preferred − Noncurrent investment unless the preferred share has a
P Redemption Fund mandatory redemption and if redeemable within one (1)
year from the reporting period - part of current investment
within three (3) months from the reporting period - part of
current investment
Acquisition of − Always noncurrent even if expected to plant and be
A Property, Plant and disbursed next year
Equipment
C Contingent Fund − Noncurrent investment
I Insurance Fund − Noncurrent investment
S Sinking Fund − Noncurrent investment, if the related bonds payable is
Z
current, the fund is included as cash.
NOTE:
− Classification of cash fund as current or noncurrent should be parallel to the classification
applied to the related liability.
− Thus, an entity should reclassify such noncurrent asset if the related liability becomes current.

CASH EQUIVALENTS
− Cash equivalents are short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present insignificant risk of changes
in value because of changes in interest rates. [PAS 7.6]
 Items that may qualify as cash equivalents include the following:
1. Time Deposit
2. Money Market Instrument or Commercial Paper
3. Treasury Bills, Treasury Notes and Treasury Bonds
4. Redeemable Preference Shares with Mandatory Redemption Period
If the above Treatment
items are:
 Originally invested / acquired for more than
three months before maturity date.
a. Remaining term is three months or Short-Term Investment
1. less from the reporting date
b. Remaining term is more than three Short-Term Investment
months but within one year
c. Remaining term is more than one year Long-Term Investment
2.  Originally invested / acquired for three Cash Equivalents
months or less before maturity date

NOTE:
− If an item cannot be included as cash equivalent because it did not qualify the cut-off time
period (i.e. three months), it will always be classified as investments (short term or long term)
depending on the period up to maturity.
− The reckoning period for time deposit is its duration since time deposit generally does not
have secondary market. For other securities with secondary market, the reckoning period
would be three months from acquisition date until maturity date.
− If the problem is silent with regard to:
1. Treasury Note and Bonds — assumed non-current investment
2. Cash In Money Market Account — cash and cash equivalent
3. Time Deposit — cash and cash equivalent
ITEMS REMARKS
1. Cash − Measured at face value
2. Cash in Foreign − Should be translated to Philippine Peso using the closing rate
Currency or spot rate at the reporting date.

3. Deposit in Foreign a. Unrestricted — part of cash

Bank b. Restricted — if material, classified separately among
noncurrent assets as receivables

4. Cash in Closed Bank / − Measured at estimated realizable value and be included

Banks in Bankruptcy among noncurrent assets if the amount recoverable is lower
than face value.
 Definition:
− Negative balance in the cash in bank account.
Treatment:
− If the company is maintaining two accounts in
a. Different Banks — Current Liability or may be
netted against other bank if
5. Bank Overdraft immaterial.
− netted against other account if
it is part of cash management.
[PAS 7.8]
b. Same Bank — maybe netted against the account
with positive amount but cannot be
offset against restricted account.
Definition:
− Is minimum checking account balance that must be
maintained in connection with a borrowing agreement with
a bank.
Treatment:
a. Not Legally Restricted — part of cash
b. Legally Restricted — if the related loan is:
1. Short-Term — presented as "cash held as
6. Compensating compensating balance" (current
Balance receivable)
2. Long-Term — presented as "cash held as
compensating balance"
(noncurrent receivable)
Note:
− If the problem is silent with regard to compensating
balance, it is assumed not legally restricted.
Effect of Compensating Balance on:
1. Yield Rate (Lender) — increase
2. Effective Rate (Borrower) — increase
(Effective Rate) = Net Interest Expense
Net Proceeds
7. Undelivered / − Reverted back to cash by a
Unreleased Check Cash xx
A/P xx
8. Stale Checks / Definition:
Checks Long − Checks not encashed by the payee with a relatively long
Outstanding period of time.
− Under current banking practice, checks are considered
stale if not encashed within 6 months from its date.
Treatment:
− Stale checks are reverted to cash by a
Cash xx
Accounts Payable xx (if material)
Misc. Income xx (if not material)
Definition:
9. Postdated Checks − Checks dated after the reporting date
 Treatment:
a. For Company own PDC — reverted to cash
Cash xx
Accounts Payable xx
b. Customer's Check — will still remain as receivable
10. IOUs (I owe you) − Included as part of receivable
− Generally cannot be classified as cash equivalents
11. Equity Securities because equity securities do not have a maturity date (with
the exception of redeemable preference shares)
− Preference shares with specified redemption date
 Acquired three months before redemption date
12. Redeemable
— Cash Equivalents
Preference Shares
 Acquired for more than three months before
redemption date — Current Investment
13. Callable Preference − Not classified as cash equivalents.
Shares − It is part of shareholder's equity on the part of issuer and
part of long-term investment of the holder.
Definition:
 NSF — no sufficient funds
 DAUD — drawn against uncleared deposits
14. NSF/DAUD/DAIF
 DAIF — drawn against insufficient funds
Treatment:
− Reverted back as part of receivables.
15. Expense Advances − Receivable or prepaid expense
(e.g. travel advances)
16. Temporary − Either FVTPL or FVTOCI but never to be included as part
Investments In of cash & cash equivalents
Shares Of Stocks
Definition:
− Difference between the amount of line of credit applied for
17. Unused Credit Line and approved by a bank and the amount actually
borrowed.
Treatment:
− Disclosed in the notes
Definition:
− A warrant for the payment of money into or from public
18. Treasury Warrants treasury.
Treatment:
− Included as part of cash.
Definition:
− Restricted amount held in trust for another party, e.g., a
19. Escrow Deposit deposit required by a court of law for a pending case.
Treatment:
− Part of other current/noncurrent asset and reported as
liability
20. Unrecorded Cash − Record the disbursements by:
Disbursements A/P or other appropriate account xx
Cash xx
21. Unrecorded Cash − Record the collection by:
Collections / Cash xx
Receipts Accounts receivable or other appropriate account xx
Definition:
− A savings certificate entitling the bearer to receive interest.
− A CD bears a maturity date, a specified fixed interest rate
and can be issued in any denomination.
− CDs are generally issued by commercial banks and are
22. Certificate of Deposit
insured by the PDIC.
(CD) For Time
Deposits − The term of a CD generally ranges from one month to five
years.
Treatment:
a. Invested three months before maturity — Cash
Equivalents
b. Invested for more than three months — Investment
(short or long-term)
23. Postage Stamps On − Should be reported as office supplies or as a prepaid
Hand expense
24. Bank Overdraft − Bank overdraft that was netted or deducted from cash in
Netted From Cash In bank but should be presented as current liability and
Bank should be added back to compute for the correct balance
of cash in bank.