Lecture 10 Cash and Accrual Basis

CHAPTER 10 - CASH AND ACCRUAL BASIS
Learning outcomes:
1. To understand cash basis of accounting.
2. To understand accrual basis of accounting.
3. To describe differences between cash basis and accrual basis of accounting.
4. To be able to prepare adjustments in converting the cash basis financial statements to accrual basis
financial statements.
Methodology:
▪ Courseware/Face-to-face
Lecture/Discussion:
Accrual basis of accounting
- The effects of transactions and other events are recognized when they occur (and not as cash or cash
equivalent is received or paid) and they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate.
- Under the accrual basis of accounting, income is recognized when earned regardless of when cash is
received and expenses is recognized when incurred regardless of when cash is paid.
Cash basis of accounting

- Under cash basis of accounting, income is recognized only when cash is received and expense is
recognized only when cash is paid.
❖ Entities applying full PFRS and entities qualifying as SMEs are required under the Standards to use
accrual basis of accounting when preparing financial statements.
Item/ Account Cash basis Accrual basis

Sales Cash sales (+) Cash sales (+)
Collections on trade receivables (+) *Sales on account
Advances received from customers
Purchases Cash purchases (+) Cash purchases
Payments on trade payables (+) (+)
Advances paid to suppliers **Purchases on account
Cost of goods sold Cash basis purchases adjusted for changes Accrual basis purchases
in beginning and ending inventories adjusted for changes in beginning
and ending inventories
Other items of income Income includes only those that are Income includes all items earned
received in cash regardless of whether or not cash
is received.
Other items of Expenses includes only those that are paid Expenses includes all items
expenses in cash incurred regardless of whether or
not cash is paid
Income tax expense Income tax expense is recognized only for Income tax expense is recognized
payments made. considering deferred tax expense
(benefit)
Depreciation Depreciation is provided normally Depreciation is provided
normally
Bad debts No bad debts are recognized because Bad debts are recognized for
receivables are not recognized. receivables whose collection is
doubtful
Amortization of No discount or premium is recognized. The effective interest method is
discount and premium Interest income or expense is recognized used for financial instruments
for cash collections or payments measured at amortized cost
on financial
instruments
Fair value gains or loss Not recognized Recognized
on assets and liabilities
accounted for at fair
value as required or
permitted under PFRSs
Other comprehensive Not recognized Recognized
income
Conversion from cash basis to accrual basis

1. Cash basis sales is:
a. Increased by credit sales (sales on account) made during the period but are not yet collected.
b. Decreased by advance collections from customers for sales not yet made.
2. Accrual basis purchases is:
a. Increased by credit purchases (purchase on account) made during the period but are not yet paid.
b. Decreased by cash payments on advances payments for purchases not yet received.
3. Accrual basis cost of goods sold is computed using the accrual basis purchases adjusted by the change
in inventories during the period.
4. Cash basis income is adjusted for changes in accrued income and unearned income during the reporting
period.
5. Cash basis expenses is adjusted for changes in accrued expenses and prepaid expenses during the
reporting period.
6. Other items of income and expenses under PFRSs are recognized, such as:
a. Depreciation and amortization
b. Bad debts and impairment losses
c. Discount or premium amortization on debt instruments measured at amortized cost
d. Fair value gains or losses on assets and liabilities required or permitted under PFRSs to be accounted
for at fair value
e. Other comprehensive income
f. Income tax allocation
The following formulas may help in converting from cash to accrual and vice versa:
*A/R/N/R, beg. XX **A/P/N/P, beg. XX
Sales on account (accrual basis) XX Purchases on account (excluding XX
freight in) (accrual basis)
Total XX
Total XX
Collections (excluding advance collections
from customers) XX Payments (excluding advance
A/R/N/R, end. XX payments to suppliers) XX
A/P, N/P, end. XX
Prepaid expense, end. XX Accrued income, beg. XX

Add: Accrued expense, beg. XX Add: Unearned income, end. XX
Expense incurred – accrual basis XX Rent income – accrual basis XX
Total XX Total XX
Less: Prepaid expense, beg. XX Less: Accrued income, end. XX
Accrued expense, end. XX Unearned income, beg. XX
Expenses paid – cash basis XX Income collected – cash basis XX
--- END OF LECTURE NOTES ---

Lecture 10 Cash and Accrual Basis

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CHAPTER 10 - CASH AND ACCRUAL BASIS

Cash basis of accounting

Item/ Account Cash basis Accrual basis

Conversion from cash basis to accrual basis

Prepaid expense, end. XX Accrued income, beg. XX

--- END OF LECTURE NOTES ---

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