Accounting Methods

Cash Basis

Accrual Basis

Records expenses when paid.

Records revenue when received.

Records revenue when earned.

Records expenses when incurred.

Item Sales

Cash Basis Cash Sales plus collection of trade receivables Cash purchases plus payments to trade creditors Items receive are considered as income regardless of when earned

Accrual Basis Cash sales plus sales on account

Purchases

Cash purchases plus purchases on account

Income other than sales

Items earned are considered as income regardless of when received.

Items Expenses

Cash Basis Items paid are treated as expenses regardless when incurred Depreciation is provided normally

Accrual Basis Items incurred are treated as expenses regardless when paid Depreciation is provided normally

Depreciation

Bad Debts

No bad debts are recorded because receivables are not recognized

Doubtful accounts are treated as bad debts

Computation of Sales Cash sales Sales on account: Trade accounts and notes receivables, end xx Collection of trade accounts and notes receivable xx Sales returns, discounts, and allowances xx Accounts and notes receivable written off xx Trade notes receivable discounted (Note Receivable directly credited) xx Total xx Less: Trade accounts and notes receivable, beg xx Total sales- accrual basis xx

xx xx

Computation of purchases Cash purchases Purchases on account: Trade accounts and notes payable, end Payment of trade accounts and notes payable Purchases returns, discounts, and allowances Total Less: Trade accounts and notes payable, beg Total purchases- accrual basis xx xx xx xx xx xx

xx xx

ABC Corporation Income Statement Year ended December 31, 2011 Cash Basis Accrual Basis

Sales Cost of Sales: Merchandise Inventory, Jan. 1 Purchases Total Merchandise Inventory,Dec.31 Cost of Sale Gross Income Interest Income Total Income Less: Expenses Expenses paid in cash Accrued Expenses Prepaid Expenses Depreciation Total Expenses Net Income

3,200,000
500,000 2,050,000 2,550,000 (600,000) 1,950,000 1,250,000 40,000 1,290,000 750,000 50,000 800,000 490,000

3,350,000
500,000 2,100,000 2,600,000 (600,000) 2,000,000 1,350,000 30,000 1,380,000 750,000 20,000 (30,000) 50,000 790,000 590,000

Computations:
Cash Basis 2,500,000 700,000* 3,200,000 Accrual Basis 2,500,000 850,000 3,350,000 250,000 850,000 (400,000) 700,000

>>Sales: Sales on Cash Sales on account Collections from costumers Total Sales

*Collections from costumers: Accounts Receivable, Jan. 1 Sales on account Accounts Receivable, Dec. 31 Total

> > P u r c hases: C ash P u rc hases C red i t P u rc hases P ay m ents t o c red i t ors T o t al P u rc hases

C ash B asi s 1 ,7 0 0 ,0 0 0 -

A c c r u al B asi s 1 ,7 0 0 ,0 0 0 4 0 0 ,0 0 0

3 5 0 ,0 0 0 ** 2 ,0 5 0 ,0 0 0 2 ,1 0 0 ,0 0 0

**Pay m ent s t o C redi t ors: Ac c o unts P ay ab l e, J an. 1 C red i t P u rc hases Ac c o unts P ay ab l e, D ec . 3 1 T o t al

1 5 0 ,0 0 0 4 0 0 ,0 0 0 ( 2 0 0 ,0 0 0 ) 3 5 0 ,0 0 0

> > I nt er est Inc o m e: I nt erest rec ei v ed A c c ru ed i nt er est rec ei vab l e, b eg T o t al > > D epr ec i at io n: ( 8 0 0 ,0 0 0 /10 ) ( 2 0 0 ,0 0 0 /10 * 6 /1 2 )

C ash B asi s 4 0 ,0 0 0 4 0 ,0 0 0 8 0 ,0 0 0 1 0 ,0 0 0

A c c r u al B asi s 4 0 ,0 0 0 ( 1 0 ,0 0 0 ) 3 0 ,0 0 0 8 0 ,0 0 0 1 0 ,0 0 0

Journal Entries 2011 Dec 31 Retained Earning 125,000 Accumulated Depreciation #

125,000

Depreciation 250,000 Accumulated Depreciation 250,000 # Interest Expense 90,000 Accrued Interest Expense 90,000 # Professional Fees Retained Earnings # 500,000

500,000

Journal Entries:
2011 Dec.31 Accounts Receivable Professional Fees # Rent Expense Accrued Rent Payable # Office Supplies Retained Earnings # Office Supplies Expense Office Supplies #

750,000 750,000

100,000 100,000

300,000 300,000

50,000

50,000

ARIS MARVAL Income Statement Year ended December 2011

Professional Fees Expenses: Rent Expense Supplies Expense Interest Expense Depreciation Other expenses Net Income

5,250,000 1,300,000 850,000 90,000 250,000 750,000

3,240,000 2,010,000

Computations:
>>Professional Fees: Professional fees paid in cash 5,000,000 Professional fees on account: Accounts Receivable,2011 750,000 Accounts Receivable,2012 (500,000) 250,000 Total Professional fees-accrual 5,250,000

>>Rent Expense: Rent Expense paid in cash Accrued Rent Expense Total Rent Expense-accrual

1,200,000 100,000 1,300,000

Computations:
>>Office Supplies expense: Unused office supplies,2011 Acquired Office supplies Unused Office supplies,2010 Total Office supplies expense-accrual

250,000 800,000 (300,000) 850,000

>>Interest Expense: (1,000,000 x 12% x 9/12)

90,000

>>Depreciation: (2,500,000/10)

250,000

ARIS MARVAL Statement of Financial Position As of December 31, 2011 ASSET Cash Accounts Receivable Office Supplies Furniture and Equipment Accumulated Depreciation 1,500,000 750,000 250,000 2,125,000 4,625,000

2,500,000 ( 375,000) LIABILITIES

Notes Payable Accrued Interest Payable Accrued Rent Expense Balance, Jan. 1 Add: Net Income Retained Earnings Total Less: Withdrawal

CAPITAL

1,000,000 90,000 100,000 1,600,000 2,010,000 675,000 4,825,000 ( 850,000)

1,190,000

3,435,000 4,625,000

Computations: >>Accumulated Depreciation: Depreciation, July-Dec.2010 (2,500,000/10 x 6/12) Depreciation, Jan.-Dec. 2011 (2,500,000/10) Total >>Retained Earnings: Professional fees Depreciation Office supplies Total

125,000
250,000 375,000

500,000 (125,000) 300,000 675,000

Adjusting Entries: 1. Sales Retained Earnings # Accounts Receivable Sales # 2. Retained Earnings Sales # 3. Retained Earnings Purchases # Purchases Accounts Payable # 200,000 200,000 250,000 250,000 40,000

40,000

350,000 350,000 280,000 280,000

4. Retained Earnings Expenses # Expenses Accrued Expenses # 5. Inventory- Dec 31,2010 Retained Earnings # Inventory Dec 31,2011 Profit or Loss # 6. Advances to Supplier Purchases #

70,00

70,000

100,000

100,000

150,000

150,000

210,000

210,000

100,000

100,000

7. Retained Earnings 10,000 Depreciation Equipment 20,000 Accumulated Depreciation 30,000 # 8. Retained Earnings 300,000 Depreciation Building 300,000 Accumulated Depreciation 600,000 # 9. Doubtful Accounts 25,000 Allowance for doubtful accounts 25,000 # 10. Interest expense 36,000 Accrued Interest Payable 36,000 #

Computation : Depreciation

Depreciation for 2010 Equipment acc. July 1 Depreciation for 2011

200,000/5x 6/12 200,000/5

10,000 20,000 30,000 25,000

250,000 x 10%

Accrued Interest expense 900,000x 12%x4/12

36,000

ZAMBOANGA COMPANY Statement of Financial Position December 31, 2011 Current Assets: Cash Accounts Receivable Less: Allowance for Doubtful Accounts Inventory Non- current Assets: Equipment Less: Accumulated Depreciation ASSETS 250,000 25,000 200,000 (30,000) 1,500,000

225,000 210,000
170,000

2,035,000

Building Less: Accumulated Depreciation Land TOTAL ASSETS

1,500,000 (600,000) 900,000 800,000 1,870,000 3,905,000

LIABILITIES AND SHAREHOLDERS EQUITY

Current liabilities: Accounts Payable Accrued Expenses

LIABILITIES 280,000 100,000 380,000

Non-current liabilities; Mortgage payable Accrued Interest payable

900,000 36,000

936,000

SHAREHOLDERS EQUITY Share capital 2,000,000 Retained Earnings, end 589,000

2589,000 3,905,000

Note 1 Trade and other Receivables Accounts Receivable 250,000 Allowance for doubtful accounts ( 25,000) Net realizable value Advances to suppliers total Note 2 Equipment Accumulated Depreciation Carrying Amount Note 3 Building Accumulated Depreciation Carrying Amount

225,000 100,000 325,000

200,000 ( 30,000) 170,000 1,500,000 (600,000) 900,000

Zamboanga Company Income Statement Year ended December 2011 Sales Less: Cost of Sales Inventory ,beg Add: Purchases Goods Available for sale Less: Inventory, end Gross Income Expenses: Expenses Doubtful accounts Depreciation Interest Expense Net Income 4,090,000 150,000 1,830,000 1,980,000 210,000 1,530,000 25,000 320,000 36,000

1,770,000 2,320,000

1,911,000 409,000

Computation of sales Sales per book Add: Accounts Receivable, end Total Les: Accounts Receivable, beg Credit adjustment to sales Sales Computation of Purchases Purchases per book Add: Accounts Payable , end Total Less: Accounts payable, beg Advances to supplier Purchases 2,000,000 280,000 2,280,000 350,000 100,000 1,830,000 4,000,000 250,000 4,250,000 200,000 40,000 4,090,000

Computation of Expenses Expenses per book Add: Accrued Expenses, end Total Less: Accrued Expenses, beg Expenses Computation of Retained Earnings Retained Earnings per book Add: Unrecorded Accounts Receivable, 2010 Unrecorded inventory Profit or loss Adjustment Total Less: Error in recording sales Unrecorded Accounts payable Unrecorded Accrued Expense Unrecorded Depreciation- equipment Unrecorded Depreciation building Retained Earnings 600,000 200,000 150,000 210,000 1,160,000 40,000 350,000 70,000 10,000 300,000 390,000 1,500,000 100,000 1,600,000 70,000 1,530,000