Week 001

Cash to Accrual
Accounting
Week001: Cash to Accrual Accounting

Learning Targets
1. Understand and define the cash basis and
accrual basis accounting
2. Describe the differences between the cash
basis and accrual basis accounting
3. Prepare necessary entries and adjustments
in converting the cash basis financial
statements to accrual basis financial
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statements
Week001: Cash to Accrual Accounting

TWO METHODS USED IN ACCOUNTING

CASH BASIS ACCOUNTING

ACCRUAL BASIS ACCOUNTING
Week001: Cash to Accrual Accounting

TWO METHODS USED IN ACCOUNTING

CASH BASIS ACCOUNTING
An accounting system which recognizes revenues and
expenses only when cash is exchanged. Businesses
account for their income and expenses when they actually
receive payment or when they actually pay for an expense.

Income is recognized when received regardless of when

it is earned, and expenses is recognized when paid
regardless of when it is incurred.
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Week001: Cash to Accrual Accounting

TWO METHODS USED IN ACCOUNTING

Accrual Basis
An accounting system which recognizes revenues when
earned and expenses as incurred.

Income is recognized when earned regardless of when

it is received, and expenses is recognized when incurred
regardless of when such expenses are paid.

The accrual basis of accounting is advocated under both

generally accepted accounting principles (GAAP) and https://images.squarespace-
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Week001: Cash to Accrual Accounting

In Summary: Cash vs Accrual Accounting:

CASH BASIS ACCRUAL BASIS

REVENUE RECEIVED EARNED

EXPENSES PAID INCURRED

Week001: Cash to Accrual Accounting

Formative Example:

Jobilee has cash of P2,700 at the end of the day when all of his fried chickens were sold. He
paid P1,400 earlier that day for those dressed chickens. Upon recalling all his
transactions for the day, his friends passed by his cart and consumed P100 worth of
chicken. His friends promised to pay him tomorrow. In addition, he has not paid the
breading and oil from Aling Doray’s store amounting to P400

What is the income under the cash basis accounting?

What is the income under the accrual basis accounting?
Week001: Cash to Accrual Accounting

Formative Example: Answer

Answer: Cash Receipts………………………………………………………P2700

Less: Cash Disbursement……………………………………..(1400)
Income…. under cash basis…………………………………….1,300

Income is computed only based on cash received and disbursed regardless of the
amount of sales made and expenses incurred. This method is commonly used to easily
record transactions but is not allowed to be used when preparing financial statements
Week001: Cash to Accrual Accounting

Formative Example: Answer

Answer: Cash Receipts………………………………………………………P2700

Add: Credit Sales………….………………………………………….100
Total Sales:…………………………………………………………….2800
Less: Cash Disbursement……………………………………..(1400)
Accrued Expenses…………………………………………(400)
Total Revenue……………………………………………………….1,800

Income is computed by deducting all expenses incurred for the period

whether paid or not from the total sales made whether for cash or credit.
This method is the acceptable basis in preparing financial statements
Week001: Cash to Accrual Accounting

Important Formulas for

Cash to Accrual Accounting
At some instances, accounting record are maintained on a cash basis accounting
system.
At the end of the accounting period, adjustments are made for accruals and
prepayments in order to convert a cash basis records to accrual records.
Thus, in order to convert such the following computational formulas will be https://mi-blogs.s3.amazonaws.com/mi-live/blog/wp-
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Week001: Cash to Accrual Accounting

Sales Computation (Accrual)

Cash Sales Php xxx

Sales on Account:
Trade accounts and notes receivable, end xxx
Collection of trade accounts and notes receivable xxx
Sales Return, discounts, and allowances xxx
Accounts and notes receivable written off xxx

Total xxx

Less: Trade accounts and notes receivable, beg xxx xxx

Total sales- Accrual Basis Php xxx

Week001: Cash to Accrual Accounting

Purchases Computation (Accrual)

Cash Purchases Pxxx

Purchases on Account:
Trade accounts and notes payable, end xxx
Payment of trade accounts and notes payable xxx
Purchase returns, discounts and allowances xxx

Total xxx

Less: Trade accounts and notes payable, beg xxx xxx

Total Purchases-Accrual Basis xxx

Week001: Cash to Accrual Accounting

Income other than sales computation

Income Received- Cash Basis Pxxx

Add: *Deferred Income- Beginning xxx

*Accrued Income- Ending xxx

Total xxx

Less: Deferred Income- Ending xxx

Accrued Income- Beginning xxx xxx

Income for the current year- accrual basis Pxxx

Week001: Cash to Accrual Accounting

Expenses Computation

Expenses paid- Cash Basis Pxxx

Add: *Prepaid Expenses- Beginning xxx

*Accrued Expenses- Ending xxx

Total xxx

Less: Prepaid Expenses- Ending xxx

Accrued Expenses- Beginning xxx xxx

Expenses for the current year- accrual basis Pxxx

Week001: Cash to Accrual Accounting

Deferred Income Income already received but not yet earned.

-Unearned income or pre Classification: Liability Account
collected income Example: Unearned rental income, and unearned interest
income

Remember:
The deferred income-beg is added because this is received in
Conceptual the preceding year and earned in the current year. While
deferred income- ending is deducted because this is received in

understanding: advance in the current year and to be earned only the next year.

Accrued Income Income already earned but not yet received.

Deferred income Classification: Assent Account (Receivable)
Example: Accrued Interest receivable, accrued rental, accrued

vs Accrued Income royalties receivable

Remember:
The accrued income beginning is deducted because this is already
recognized as income in the preceding year although it is received
only in the current year while accrued income- ending is added
because this is already earned in the current year although not yet
received. (It is to be received next year)
Week001: Cash to Accrual Accounting

Prepaid Expenses Expenses paid in advance but not yet incurred.

Classification: Assets
Example: Prepaid Insurance, Prepaid Rent, Prepaid interest
Remember:
Conceptual The Prepaid expenses-beginning is added because this is paid in
the preceding year and only expensed in the current year, while the

understanding:
Prepaid expense- ending is deducted because this is paid in the current
year and to be expensed next year.
Accrued Expenses Expenses already incurred but not yet paid.
Prepaid Expenses Classification: Liabilities
Example: Accrued Payable, accrued interest payable
vs Accrual Remember:

Expenses Accrued expenses- beginning is deducted because this is incurred in

the preceding year although only paid in the current year while
accrued expenses- end is added because this is incurred in the
current year and to be paid next year.
Week001: Cash to Accrual Accounting

References
• Millan, Z. V. (2022). Intemediate Accounting 3. Bandolin Publishing House.
• Nenita Robles, & Empleo, P. (2019). The Intermediate Accounting Volume 1.
Millennium Books, Inc.
• Valix, C., Peralta, J., & Valix, C. (2020). Intermediate Accounting Volume 3. GIC
Enterprises & Co., Inc.