Module 8

CASH TO ACCRUAL ACCOUNTING AND SINGLE-ENTRY SYSTEM

Overview:
Although predicting future cash flows is the primary goal of many users of financial
reporting, the model best able to achieve that goal is accrual accounting. A competing model is
cash-basis accounting. Each model produces a periodic measure of performance that could be
used by investors and creditors for predicting future cash flows. In this module, we will be
discussing about the cash and accrual basis of accounting and the underlying concept about
single-entry system.

Module Objectives:
After successful completion of this module, you should be able to:
 understand the features of a single-entry system of accounting and differentiate from
double entry system; and
 compute revenue and expense items on an accrual basis taken from the records of
entities using cash basis accounting and single-entry system.

Course Materials:

CASH TO ACCRUAL BASIS

Under cash basis of accounting, income is recognized when received regardless of
when earned, and expense is recognized when paid regardless of when incurred. In other
words, this approach does not recognize accounts receivable, accounts payable, accrued
income, deferred income, accrued expense and prepaid expenses. The measure is the
difference between cash receipts and cash payments from transactions related to providing
goods and services to customers during a reporting period. This basis is simple, less costly and
more reliable since estimates and judgement is not required. However, it is not useful in
evaluating performance because it does not reflect the results of all profit-directed activities
which took place during the period and cash receipt and payments and the related
accomplishments and effort occur in different periods. Moreover, it doesn’t present the financial
position or operating result of an enterprise in conformity with generally accepted accounting
principles.
On the other hand, accrual basis of accounting recognizes income when earned
regardless when cash is received and recognizes expense when incurred regardless of when
paid. Thus, the essence of this approach is the recognition accounts receivable, accounts
payable, accrued income, deferred income, accrued expense and prepaid expenses.

Comparison of cash basis and accrual basis

Cash Basis Accrual Basis
Sales Cash sales plus collection of trade Cash sales plus sales on account.
receivables.
Purchases Cash purchases plus payment to Cash purchases plus purchases
trade creditors. on account.
Income other Amount received is considered as Amount earned are considered as
than sales income regardless when earned. income regardless when it is
received.
 Cash Basis Accrual Basis
Expenses, in Amounts paid is treated as expense Amount incurred are considered
general regardless of when incurred. as expense regardless when it is
paid.
Depreciation Depreciation is provided normally. Depreciation is provided normally.
Bad debts No bad debts are recognized because Doubtful accounts are treated as
trade receivables are not recognized. bad debts.

Conversion from Cash Basis to Accrual Basis

 Increase in Accounts/ Notes Receivable- trade (A,N/R, ending > A,N/R, beginning) ,
means there were more sales on account than collection (thus, Add the increase to cash
basis to get accrual basis sales or deduct increase from the accrual basis to get the cash
basis sale)
Accrual basis sales XX Cash basis sales XX
Increase in Accounts/ Notes Increase in Accounts/ Notes
Receivable (XX) or Receivable XX
Cash basis sales XX Accrual basis sales XX

 Decrease in Accounts/ Notes Receivable- trade (A,N/R, ending < A,N/R,

beginning), means that there was more collection than sales on account (this, Add the
decrease to the accrual basis to get thejh cash basis sales or deduct the decrease from
the cash basis to get the accrual basis sales)
Accrual basis sales XX Cash basis sales XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Receivable XX or Receivable (XX)
Cash basis sales XX Accrual basis sales XX

 Increase in the Accounts/ Notes Payable- trade (A,N/P, ending > A,N/P, beginning)
, means that there were more purchases on account than payments to suppliers (thus,
add the increase to the cash basis purchases (payments made) to get the accrual basis
purchases or Deduct the increase from the accrual basis purchases to get the cash
basis purchases)
Accrual basis purchases XX Cash basis purchases XX
Increase in Accounts/ Notes Increase in Accounts/ Notes
Payable (XX) or Payable XX
Cash basis purchases XX Accrual basis purchases XX

 Decrease on Accounts/ Notes Payable- trade (A,N/P, ending < A,N/P, beginning),
means that there were more payments to supplies (cash basis purchases) than accrual
basis purchases (thus, add the decrease to the accrual basis purchases to get the cash
basis purchases or the total payments made or Deduct the decrease from the cash basis
purchases to get the accrual basis purchases).
Accrual basis purchases XX Cash basis purchases XX
Decrease in Accounts/ Notes Decrease in Accounts/ Notes
Payable XX or Payable (XX)
Cash basis purchases XX Accrual basis purchases XX
 The conversion of data from cash basis to accrual basis focuses on the recognition of
accruals and deferrals, since these are the items that are usually taken under the
accrual basis that are not considered under cash basis.

Computation for converting cash basis data to accrual would include the following:

Cash receipts representing revenue XX

Accrual revenue, beginning of the period (XX)
Accrual revenue, end of the period XX
Unearned revenue, beginning of the period XX
Unearned revenue, end of the period (XX)
Revenue under accrual basis XX

Cash payments representing expense XX

Accrual expenses, beginning of the period (XX)
Accrual expenses, end of the period XX
Prepaid Expenses, beginning of the period XX
Prepaid Expenses, end of the period (XX)
Expense under accrual basis XX

Other computation guides:

Accounts Receivable/ Notes Receivable

Cash collections (Cash
Beginning balance (AR/NR) basis)
Sales on account (accrual basis) Sales discounts
Recovery of prev. write offs ** Sales returns*
Sales allowances
Write offs
Ending balance (AR/NR)
*excluding refunded sales returns to customers
** included in the analysis only if collections included the said recovery

Accounts Payable/ Notes Payable

Payments (Cash basis) Beginning balance (AP/NP)
Purchases on account (accrual
Purchase discounts basis)
Purchase returns *
Purchase allowances
Ending balance (AP/NP)
*excluding refunded purchase returns from suppliers

Accrued Revenue
Beginning balance Collections (cash basis)
Recognized income (accrual basis)
Ending balance
 Unearned Revenue
Recognized income (accrual basis) Beginning balance
Collections (cash basis)
Ending balance

Prepaid Expense
Beginning balance Recognized expense (accrual basis)
Payment of cash (cash basis)
Ending balance

Accrued Expense
Payment of cash (cash basis) Beginning balance
Recognized expense (accrual basis)
Ending balance

SINGLE ENTRY ACCOUNTING SYSTEM

Bookkeeping System
Bookkeeping system is the systematic and chronological recording of transactions and
events in the books of accounts. It is also known as the recording phase of accounting.

Bookkeeping vs. Accounting

Bookkeeping Accounting
Recording part of accounting Broader field
Mechanical, repetitive Analytical, judgmental, conceptual
Follows method prescribed by Determines accounting principles and
accounting methods

Systems of Bookkeeping
1. Single-entry bookkeeping- as system of bookkeeping whereby, as a rule, only cash
and personal accounts are recognized. The system may range from mere narrative
transactions to one that approximates but does not completely adopt double entry
system. The use of the single-entry system is simple and economical. However, the
accounting record will be incomplete and the double entry automatic check (debit is
equal to credit) is missing. Below are some other characteristics of single-entry system:
 Accounting equation is disregarded
 Usually one effect of each transaction is recognized
 Typically, only cash is recording, and personal accounts are maintained
 Trial balance cannot be prepared
 Data needed for preparation of financial statement is incomplete
 Net income is determined by reconstructing revenue and expenses or comparing
beginning and ending capital.

2. Double-entry bookkeeping – a system of bookkeeping which views a transaction as

having two-fold effect on accounting values that provides automatic check on certain
bookkeeping errors. This system uses the concept of accounting equation (Assets=
Liabilities +Equity).
Summary of Distinction between Double Entry and Single Entry
Double Entry Single Entry
Principles Involved 1. Duality Recognizes only one phase of
2. Equality transactions.
Transactions and events Records every type of accountable Records only transactions
recorded events involving cash and personal
accounts.
Accounts recognized Assets, liabilities, equity, revenues Cash, accounts receivable,
and expenses accounts payable, equity
Books used Journal and ledger Cash book, subsidiary ledger
Financial statement Financial statements are prepared Income (loss) and statement of
preparation in a systematic processing data; assets and liabilities are
known as the accounting process, prepared using the analysis or
income (loss) is computed using indirect approach.
the matching principle.

Financial Capital Maintenance Approach

Under this concept a profit is earned only if the financial (or money) amount of
the net assets at the end of the period exceeds the financial (or money) amount of net
assets at the beginning of the period, after excluding any distributions to, and
contributions from, owners during the period.
Increase in assets XX
Decrease in assets (XX)
Increase in liabilities (XX)
Decrease in liabilities XX XX/ (XX)
Issuance of share capital (XX)
Other items that increase SHE but no profit or loss * (XX)
Other items that decrease SHE but no profit or loss * XX
Dividends XX
Net profit (loss) XX (XX)
* Items may include:
 Changes in the revaluation surplus related to property, plant and equipment
(in line with IAS 16)
 Actuarial gains and losses (in line with IAS 19)
 Gains and losses arising from translating the financial statements in foreign
operations.
 The effective portion of gains and losses on hedging instruments in a cash flow
hedge
 Gains and losses on remeasuring FVTOCI (in line with IFRS 9)