CASH Transactions Debit Credit Cash receipts 1,280,000 Cash Disbursements 825,000 December 31 balances 455,000 You are contacted by the management to compute its net income using the accrual basis of accounting. During the process of preparation, the following were identified by you that will impact your computation: Property, plant and equipment are depreciated on a straight line basis. Annual depreciation is P 105,000. Prepaid insurance of P 18,000 was recognized as expense when it was paid. P 12,000 of the balance relates to year 2023. The entire amount of P 120,000 which was received as advance rental for office space in its building was recognized as rent income when received. P 70,000 of the amount will be earned in 2023. Employees are due P 28,000 at the end of 2022. Uncollected interest from investment at the end of 2022 is P 31,700. It is estimated that your 2022 fee for accounting services that have not been billed will be P 5,000. QUESTIONS: What is the net income under the cash basis of accounting for the year 2022? What is the correct net income before income tax for 2022 by accrual accounting concepts? What is the net effect of the errors in net income for 2023 using the accrual accounting concepts?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
| CASH | ||
| Transactions | Debit | Credit |
| Cash receipts | 1,280,000 | |
| Cash Disbursements | 825,000 | |
| December 31 balances | 455,000 |
You are contacted by the management to compute its net income using the accrual basis of accounting. During the process of preparation, the following were identified by you that will impact your computation:
- Property, plant and equipment are depreciated on a straight line basis. Annual depreciation is P 105,000.
- Prepaid insurance of P 18,000 was recognized as expense when it was paid. P 12,000 of the balance relates to year 2023.
- The entire amount of P 120,000 which was received as advance rental for office space in its building was recognized as rent income when received. P 70,000 of the amount will be earned in 2023.
- Employees are due P 28,000 at the end of 2022.
- Uncollected interest from investment at the end of 2022 is P 31,700.
- It is estimated that your 2022 fee for accounting services that have not been billed will be P 5,000.
QUESTIONS:
- What is the net income under the cash basis of accounting for the year 2022?
- What is the correct net income before income tax for 2022 by accrual accounting concepts?
- What is the net effect of the errors in net income for 2023 using the accrual accounting concepts?
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