AUDITING PROBLEM

TOPIC 1: SINGLE ENTRY SYSTEM

Accrual Basis Accounting (Generally Accepted Accounting

Cash Basis Accounting (not GAAP)
Principle)
Cash basis accounting is a system that It is an accounting system that recognizes revenue when earned rather
recognizes revenue when cash is received and than when cash is received and recognizes expenses as it is incurred
expenses when cash is paid. rather than when cash is paid.

Single Entry System

A system of record keeping in which transactions are not analyzed and recorded in the double entry framework.

Single Entry Method

Computation in determining net income or loss is simply to compare the capital or retained earnings at the beginning of the
year and capital or retained earnings at the end of the same year dividends and after taking into consideration drawings or
dividends and after taking it additional investment.

Comparison of Cash Basis and Accrual Basis Accounting

Items of Comparison Cash Basis Actual Basis
Sales Includes: Includes:
 Cash sales  Cash sales
 Collection of trade accounts receivable  Credit sales (sale on
 Collection of trade notes receivable account)
Income other than Includes only those collected during the period Includes those items earned during
sales the period
Purchases Includes: Includes:
 Cash purchase  Cash purchase
 Payment of trade accounts payable  Purchase on account
 Payment of trade notes payable
 Payment in advance to supplies
Expenses, in general Includes those items that are incurred
Includes only those expenses that are paid
regardless of when paid
Depreciation Depreciation is typically provided except when the cost Depreciation is typically provided.
of equipment was treated as expense
Bad debts No bad debts expense is recognized since cash basis
does not recognize receivables. Although some Doubtful accounts are treated as bad
problem may give an indication that the accounts debts.
written off were charged to bad debts expense.

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; 7. Rent receivable/Unearned rent income;
2. Allowance for doubtful accounts; 8. Prepaid rent/Rent payable;
3. Accounts payable/notes payable/advances to supplier; 9. Capital;
4. Merchandise inventory; 10. Retained earnings;
5. Property, plant and equipment; 11. Net assets.
6. Accumulated depreciation;

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

Accounts Receivable / Notes Receivable Trade / Advances from Customers

Beginning balance – Accounts Receivable XX XX Balance, end – Accounts Receivable
Beginning balance – Notes Receivable XX XX Balance, end – Notes Receivable
Balance, end – Advances XX XX Beginning balance – Advances
Sales on account XX XX Sales returns and allowances*
Recoveries XX XX Sales discounts
XX Collections including recoveries
XX Write – off
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.

1
 T-ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS

Allowance for Doubtful Accounts

Accounts written off XX XX Beginning balance
Balance, end XX XX Doubtful accounts expense
XX Recoveries
Total =
When there are no notes receivable and advances from customers, the T-account of the Account receivable is:

Accounts Receivable
Beginning balance – Accounts Receivable XX XX Balance, end – Accounts Receivable
Sales on account XX XX Sales returns and allowances*
Recoveries XX XX Sales discounts
XX Collections including recoveries
XX Write – off
Total =

DR CR
1. To record sales on account.
Accounts Receivable XX
Sales XX

2. To record receipt of note from sales on account.

Notes Receivable XX
Sales XX

3. To record sales return from a customer.

Sales returns and allowance XX
Accounts Receivable XX

4. To record collection within the discount period.

Cash XX
Sales Discount XX
Accounts Receivable XX

5. To record accounts written off.

Allowance for Doubtful Accounts XX
Accounts Receivable XX

6. To record re-establishment of accounts previously written off.

Accounts Receivable XX
Allowance for Doubtful Accounts XX

7. To record collection of accounts previously written off.

Cash XX
Accounts Receivable XX

8. To record advances received from customers.

Cash XX
Advances from customers XX

9. To record delivery of goods to customer with advances.

Advances from customers XX
Sales XX

10. To record the provisions for DA during the year.

Doubtful Accounts Expense XX
Allowance for Doubtful Accounts XX

Observe that in the journal entry, for example sales on account and accounts receivable is debited, so in the T – Account
of the AR, that same amount is also debited.

2
 T-ACCOUNT: ACCOUNTS PAYABLE, NOTES PAYABLE AND ADVANCES TO SUPPLIER

Accounts Payable / Notes Payable / Advances to Supplier

Payments XX XX Beginning balance – Accounts Payable
Purchase returns and allowances XX XX Beginning balance – Notes Payable
Purchase discounts XX XX Balance end – Advances
Beginning balance – Advances XX XX Purchases
Balance, end – Accounts Payable XX
Balance, end – Notes Payable XX
Total =

When there are no notes payable and advances to suppliers, the T-account of the Account payable is:

T-ACCOUNT: ACCOUNTS PAYABLE TRADE

Accounts Payable Trade

Payments XX XX Beginning balance – Accounts Payable
Purchase returns and allowances XX XX Purchases (gross)
Purchase discounts XX
Beginning balance – Advances XX
Total =

DR CR
1. To record purchase on account.
Purchases XX
Accounts Payable XX

2. To record issuance of note for purchase on account.

Purchases XX
Notes Payable XX

3. To record return of merchandise to supplier.

Accounts Payable XX
Purchase Returns and Allowance XX

4. To record payment within the discount period.

Accounts Payable XX
Purchase Discount XX
Sales XX

5. To record advances to suppliers.

Advances to suppliers XX
Cash XX

6. To record receipt of goods from suppliers arising from advances.

Purchases XX
Advances to suppliers XX

T-ACCOUNT: MERCHANDISE INVENTORY

Merchandise Inventory
Beginning balance XX XX Balance, end
Net purchases XX XX Cost of Sales
Total =

NOTES:
• In using this T-account, aside from the journal entries, it follows • Net purchases are computed as follows:
the following formula in the computation of the cost of sales: Gross purchases XX
Add: Freight – in XX
Merchandise inventory, beginning XX Less:
Add: Net purchases XX Purchase discount XX
Total goods available for sale XX Purchase allowance XX
Cost of Sales XX Purchase returns XX
Net purchases XX

• The T-account presented is applicable to finished goods inventory of merchandising company.

3
This T-account is also applicable to interest receivable/unearned interest income, royalty receivable/unearned royalty income
and other deferred assets.

T-ACCOUNT: RENT RECEIVABLE / UNEARNED RENT INCOME

Rent Receivable / Unearned Rent Income

Beginning balance – Rent Receivable XX XX Balance, end – Rent Receivable
Balance, end – Unearned Rent XX XX Beginning balance – Unearned Rent
Rent Income XX XX Collection of Rent
Total =

DR CR
1. To record collection of rent. Note: This T – Account is also applicable to
Cash XX interest receivable / unearned interest income
Unearned Rent Income / Rent Receivable XX royalty receivable / unearned royalty income and
other deferred assets.
2. To record adjusting entry of the rent income.
Unearned Rent Income XX
Rent Income XX

3. To record accrual of rent receivable.

Rent Receivable XX
Rent Income XX

T-ACCOUNT: PREPAID RENT / RENT PAYABLE

Prepaid Rent / Rent Payable

Beginning balance – Prepaid assets XX XX Balance, end – Prepaid asset
Balance, end – Accrued Liability XX XX Beginning balance – Accrued Liability
Payments XX XX Expense
Total =

Note: This T-account is also applicable to prepaid salaries/salaries payable.

DR CR
1. To record payment of rent in advance. Note: This T – Account is also applicable to
Prepaid Rent / Rent Payable XX
prepaid salaries / salaries payable.
Cash XX

2. To record adjusting entry for the expired portion of rent.

Rent Expense XX
Prepaid Rent XX

3. To record accrual of rent receivable.

Rent Expense XX
Rent Payable XX
T-ACCOUNT: PROPERTY, PLANT AND EQUIPMENT

Property, Plant, and Equipment

Beginning balance XX XX Cost of asset derecognized
Cost of asset acquired XX XX Balance, end
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.

Accumulated Depreciation
Balance, end XX XX Beginning Balance
Accumulated Depreciation of asset derecognized XX XX Depreciation Expense
Total =

4
 DR CR
1. To record cash acquisition of PPE.
PPE XX
Cash XX

2. To record derecognition (e.g., sale, donation, retirement) of PPE.

Cash XX
Accumulated Depreciation XX
Loss on Sale XX
Or Gain on Sale XX
Property, Plant, and Equipment XX

3. To record the AJE for depreciation expense.

Depreciation Expense XX
Accumulated Depreciaiton XX

T-ACCOUNT: CAPITAL

Capital
Balance, end XX XX Beginning balance
Withdrawal XX XX Additional Investment
Net Loss XX XX Net Income
Total =

DR CR
1. To record investment made by the owner. Note: When the owner withdrew merchandise
Cash XX inventories or other non-cash assets, the
Capital XX drawings account should be debited to an
amount equal to the cost, not the selling price
2. To record withdrawal by the owner. or fair value of the merchandise or non-cash
Drawings XX asset withdrawn.
Cash or any other appropriate account XX

3. To close the drawings to capital account.

Capital XX
Drawings XX

4. To close thee net income to capital account.

Income Summary XX
Capital XX

5. To close the net loss to capital account.

Capital XX
Income Summary XX

T- ACCOUNT: RETAINED EARNINGS

Retained Earnings
Balance, end XX XX Beginning balance
Prior period error XX XX Prior period error
Dividends declared XX XX Net income
Net loss XX
Total =

T- ACCOUNT: NET ASSETS

Net Assets
Increase in Asset XX XX Decease in Asset
Decrease in Liabilities XX XX Increase in Liabilities
Dividends Declared XX XX Increase in Share Capital
Net Loss XX XX Increase in Share Premium
XX Net Income
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.