INTERMEDIATE ACCOUNTING III (AE 17)
LEARNING MATERIAL
UNIT NUMBER/ HEADING: SINGLE ENTRY
LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Differentiate the concept of single entry system in contrast to
double entry system;
b. Identify the records kept under a single entry system;
c. Determine net income using the single entry method
d. Prepare financial statements based on single entry records
INTRODUCTION:
The very heart of the accounting process is the analysis of the dual
effect of each transaction on the basic accounting model “Assets = Liabilities
+ Capital”. All transactions are normally analyzed and recorded in terms of
debits and credits. This is the essence of the double entry system of
bookkeeping. However, where the records are incomplete, they are said to be
maintained on a single entry basis.
In this module, we will understand more how are records maintained
under the single entry system and how are financial statements being
prepared using the single entry system.
Presentation of Content
CONCEPTS AND PRINCIPLES
Double entry system of bookkeeping is the analysis and recording of
transactions in terms of debits and credits
Single entry system of bookkeeping is a system of record keeping in
which transactions are not analyzed and recorded in the double entry
framework
o Under this system, the records maintained are represented only
by “bare essentials”
o The major record is the cashbook (showing all receipts and
disbursements)
o Normally include a record of cash, accounts receivable, accounts
payable, PPE, and taxes paid
o Among others, the single entry problems include:
Single entry method of determining net income or loss
Preparation of income statement
Preparation of statement of financial position
1
SINGLE ENTRY METHOD
The computation procedure followed in determining net income or loss
is simply to compare the capital or retained earnings at the beginning of
the year with that at the end of the same year after taking into
consideration withdrawals or dividends and additional investment
o Any increase in capital or retained earnings is net income
o Any decrease in capital or retained earnings is net loss
The single entry method of determining net income or loss is also known
as “net assets approach” or “capital maintenance approach”
Formula for proprietorship or partnership
Capital, end of the year xx
Withdrawals xx
Total xx
Capital, beginning of year xx
Additional investments xx (xx)
Net income (loss) xx
Formula for corporation
Retained earnings, end xx
Dividends declared or paid xx
Other items that decreased RE but not P/L xx
Total xx
Retained earnings, beginning xx
Other items that increased RE but not P/L xx (xx)
Net income (loss) xx
Illustration 1
An entity provided the following data for the current year:
January 1 December 31
Total assets P2,000,000 P3,000,000
Total liabilities P1,200,000 P1,800,000
Additional investments P 600,000
Withdrawals P 900,000
2
Computation
The net income for the current year is computed as follows:
Capital, Dec 31 (P3,000,000-P1,800,000) P1,200,000
Withdrawals P 900,000
Total P2,100,000
Capital, Jan. 1 (P2,000,000-P1,200,000) P 800,000
Additional investments P 600,000 (P1,400,000)
Net income P 700,000
Illustration 2
An entity provided the following information in relation to retained earnings
for the current year:
Retained earnings – December 31 P4,000,000
Retained earnings – January 1 P4,500,000
During the current year, the entity issued shares capital with par value of
P2,000,000 and fair value of P2,500,000 as 10% stock dividend. At year-end,
the entity declared a cash dividend of P3,000,000.
Computation
The net income for the current year is computed as follows:
Retained earnings – Dec 31 P4,000,000
Stock dividend at fair value P2,500,000
Cash dividend P3,000,000
Total P9,500,000
Retained earnings – January 1 (P4,500,000)
Net income P5,000,000
**The stock dividend is recognized at fair value because it is less than 20%
Illustration 3
An entity provided the following changes in account balances during the
current year:
Increase (Decrease)
Cash P1,500,000
Accounts receivable P 500,000
3
Merchandise inventory P2,000,000
Prepaid expense (P 100,000)
Land P5,000,000
Accounts Payable (P1,100,000)
Bonds Payable P4,000,000
Share capital P4,000,000
Share premium P1,000,000
Dividend of P1,500,00 was paid during the year and that no other
transactions affected the retained earnings. In this example, the retained
earnings and shareholders’ equity at the beginning and end of the year cannot
be determined.
Thus, the procedure is to determine the effect of the changes in assets and
liabilities on net assets whether the change in the asset or liability increaser
or decreases the net assets.
Increase in assets and decrease in liabilities increase net assets.
Increase in liabilities and decreases in assets decrease net assets.
Computation
Effect on net assets
Increase Decrease
Increase in cash P1,500,000
Increase in A/R P 500,000
Increase in inventory P2,000,000
Decrease in prepaid expense P 100,000
Increase in land P5,000,000
Decrease in A/P P1,100,000
Increase in B/P P4,000,0000
Total P10,100,000 P4,100,000
4
Net increase in net assets (P10,100,000-P4,100,000) P6,000,000
Dividend paid P1,500,000
Total P7,500,000
Increase in share capital P4,000,000
Increase in share premium P1,000,000 (P5,000,000)
Net income P2,500,000
**The dividend paid is added back to net assets because it decreased net
assets but not representing profit or loss
**The increase in share capital and increase in share premium are deducted
because they increased net assets but not representing profit or loss
PREPARATION OF FINANCIAL STATEMENTS
The preparation of the income statement involves the computation of
individual revenue and expense balances by reference to the cash
receipts and disbursements and the changes in assets and liabilities
The formulas used in converting cash basis to accrual basis of
accounting are useful in this case. (So, pakibalikan na lang yung
mga formulas presented doon)
In addition, the formula in computing depreciation may also be of help
Carrying amount of PPE, beginning xx
Cost of property acquired xx
Total xx
Carrying amount of PPE, ending xx
Carrying amount of property sold xx xx
Depreciation xx
The preparation of the statement of financial position involves
inventorying, counting and verification procedures to determine the
nature and amount of most of the assets and liabilities.
