CHARACTERISTICS OF SINGLE ENTRY 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 system is called the double entry system of bookkeeping. A system of record keeping in which transactions ar€ not > ~@nalyzed ‘and recorded in the double entry framework is called a single entry system. Zs Incomplete records are said to be maintained on a single entry basis. : Under the single entry system, the records maintained are represented only by the so-called “bare essentials”. t Normally, the records include a record of cash, accounts receivable, accounts payable, property, plant and equipment, and taxes paid. : The major record under the single entry system is the cashbook. The cashbook is maintained showing all receipts and disbursements. And because in a single entry no specific accounts for the receipts and disbursements are debited or credited, only @ description of the transaction is made. - With respect to accounts receivable and accounts payable, only a list of customers and creditors is made with their corresponding balances. 422 aIntroduction : Errors can arise in respect of the recognition, nreasurement, presentation or disclosure of elements of financial statements. Potential current period errors discovered in that period are corrected before the financial statements are authorized for issue. However, material errors are sometimes not discovered. until ‘a subsequent period, and the prior period errors are corrected in the comparative information presented in the financial statements for that subsequent period. PRIOR PERIOD ERRORS Prior period errors are omissions and misstatements in the entity's financial statements for one or more periods arising from a failure to use or misuse of reliable information that: a. Was available when financial statements for these periods were authorized for issue. : b. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Prior period errors include the effect of mathematical mistake, mistake in applying accounting policy, oversight or misinterpretation of facts, and fraud. Treatment of prior period errors An entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery. A prior period error shall be corrected by retrospective restatement. In other words, if comparative statements, are presented, the prior year statements are restated to correct the error. : The correction of a prior period error is an adjustment of the beginning balance of retained earnings of the earliest period Presented. 455Statement of financial position errors Statement of financial position errors affect the statement of financial position or real accounts only. In other words, there may be improper classification of an asset, liability and capital account. In such a case, an entry is simply made to reclassify the account balances. For example, if preference share capital is erroneously credited instead of ordinary share capital, the reclassifying entry is debit preference share capital and credit ordinary share capital. Income statement errors Income statement errors affect the income statement or nominal accounts only. There may be improper classification of revenue and expense accounts. These errors have no effect on the statement of financial position and on net income. Thus, a reclassifying entry is necessary only if the error is discovered in the same year it is committed. Otherwise, if the error is discovered in a subsequent year, no reclassifying entry is necessary because the nominal accounts for the current year are correctly stated. For example, the entity erroneously debited purchases instead of office supplies during 2021. If the error is discovered in 2021, the reclassifying entry is debit officé supplies and credit purchases If the error is discovered in 2022, no reclassifying entry is made. The office supplies account and purchases account are already closed in 2021. ~Combined statement of fi i iti income statement errors financial position and These errors affect both the statement of financi iti 1 nancial posi jncome statement because they result in a inisstolement| aa income. i For example, if accrued salaries payable is overlooked, the effects are: : Salaries expense understated (income statement error). Liability understated (statement of financial position error). Net income overstated (income statement error). Beiainad earnings overstated (statement of financial position error). pose Combined statement of financial position and income statement errors are classified as counterbalancing errors and noncounterbalancing errors. \Counterbalancing errors Counterbalancing errors are errors which, if not detected, are automatically counterbalanced or corrected in the next accounting period. In other words, counterbalancng errors will be offset or corrected over two periods or correct ‘themselves over two periods. Effects of counterbalancing errors a. The income statements for two successive periods are incorrect. . The statement of financial position at the end of the first period is incorrect. c. The statement of financial position at the end o} period is correct, Counterbalancing errors normally include the misstatement of the following: f the second peu, including purchases and sales . Prepaid expense found . Accrued expense |. omintl oie e na Deferred income Ce Accrued income Spe rp 457°Overstatement of ending inventory On December 31, 2020, the physical count was overstated by 50,000. If the books for 2021 have not been closed, the entry on December 31, 2021 to correct the error is: : Retained earnings 50,000 Inventory, January 1, 2021 50,000 The retained earnings account is debited because the net income of 2020 was overstated. The inventory account is credited because the ending inventory on December 31, 2020 was overstated. If the books for 2021 have been closed, no entry is necessary because the error in 2020 is counterbalanced in 2021. In other words, the ending inventory in 2020 becomes the beginning inventory in 2021. Thus, if the beginning inventory of 2021 is overstated, cost of goods sold would be overstated with a consequent understatement of net income. Understatement ending inventory On December 31, 2020, the physical count was understated by 50,000. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: Inventory, January 1, 2021 50,000 Retained earnings 50,000 The inventory account is debited a: i aI é ind the retained earnings account is credited because the ending inventory of 2020 was understated with a consequent understatement of net income. If the books for 2021 have been closed, try ii a because the 2020 exror is counterbalanved in 2021 458Understatement of purchases The entity failed to record a merchandise purchased in 2020 and the same was recorded in 2021. The physical inventory on December 31, 2020 was correctly stated. If the books for 2021 have not een closed, the entry to correct the error on December 31, 2021 is: Retained earnings - 50,000 Purchases 50,000 The retained earnings account is debited because net income of 2020 was overstated. The purchases account is credited because the purchase pertains - to 2020 and the same is recorded in 2021, thus resulting to overstatement of 2021 purchases. If the books for 2021 have been closed, no entry is necessary because the 2020 error is counterbalanced in 2021. The purchases account in 2020 is understated while the purchases account in 2021 is overstated. Thus, the purchases equalize each other.Overstatement of purchases and ending inventory The entity recorded on December 31, 2020 P50,000 of purchases in transit to which the entity had no title. The same merchandise was included in the inventory of December 31, 2020. If the books for 2021 have not been closed, the entries to correct the error on December 31, 2021 are: 1. Purchases 50,000 Retained earnings 50,000 2. Retained earnings 50,000 Inventory, January 1, 2021 50,000 In the first entry, the purchases account is debited because the purchase pertains to 2021 and was erroneously recorded in 2020. ‘The retained earnings account is credited because the net income of 2020 was understated by reason of overstated purchases. In the second entry, the retained earnings account is debited and the inventory accdunt is credited because the ending inventory of 2020 was overstated resulting to overstatement of net income. Actually, the net effect of the error is zero on net income and retained earnings. If the books for 2021 have been closed, no entry is necessary _ because the 2020 error is counterbalanced in 2021. ‘The purchases account in 2020 is overstated and the purchases account in 2021 is understated. Thus, the purchases equalize each other. The inventory on December 31, 2020 was overstated resulting to overstatement of net income. The inventory on January 1, 2021 was also overstated and thus overstating cost of goods sold and understating net income. 460 - Saco ardUnderstatement of sales . The entity failed to record sales of P50,000 in 2020 arid the same was recorded in 2021. . The physical inventory was correctly stated on December 31, 2020. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: - 50,000 Sales Retained earnings 50,000 The sales account is debited because the same pertains to 2020 and was recorded in 2021 thus overstating 2021 sales. The retained earnings account ic credited because the’ 2020 net income was understated. . If the books for 2021 have been closed, no entry is necessary because the 2020 error is counterbalanced in 2021. The sales account of 2020 was understated and the sales account of 2021 was overstated. Thus, the sales for the two years equalize each other.Overstatement of sales Understatement of ending inventory The entity recorded on December 31, 2020 P50,000 of sales in transit and to which the customer had no title. ‘The cost of the merchandise was P30,000 and the same was excluded from the December 31, 2020 inventory. If the books for 2021 have not been closed, the entries to correct the error on December 31, 2021 are: 1. Retained earnings 50,000 Sales 50,000 2. Inventory, January 1, 2021 30,000 Retained earnings 30,000 In the first entry, the retained earnings account is debited because the 2020 net income was overstated. The sales account is credited because the sale pertains to 2021 and was erroneously recorded in 2020. In the second entry, the inventory account is debited and.the retained earnings account is credited because the 2020 net income was understated by reason of understatement of 2020 ending inventory. ‘ If the books for 2021 have been closed, no entry is necessary because the 2020 error is counterbalanced in 2021. ‘The sales account in 2020 was overstated and the sales account in 2021 was understated and thus the sales counterbalance each other. The understated ending inventory on December 31, 2020 becomes the beginning inventory in 2021. Thus, the effect on inet income is counterbalancing. 462Failure to record prepaid expense On January 1, 2020, the entity purchased an insurance for two years for P50,000. The payment was debited to an expense and no adjustment was made on Decémber 31, 2020 for the prepaid insurance. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: , Insurance 25,000 Retained earnings 25,000 The insurance account is debited because the prepaid insurance on December 31, 2020 becomes an expense in 2021. The retained earnings account is credited because the 2020 net income was understated. If the books for 2021 have been closed, no entry is.necessary because the error is counterbalanced. The net income of 2020 was understated by reason of overstatement of insurance expense while the net income of 2021 was overstated by reason of understatement of insurance expense. Failure to record accrued expense On December 31, 2020, accrued rent expénse of P50,000 was not recorded. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: Retained earnings 50,000 Rent expense 50,000 The retained earnings account is debited because the net income of 2020 was overstated. Thé rent expense is credited because the accrual of 2020 necessarily was paid in 2021 and the same was debited to rent expense, thus overstating the rent expense of 2021. . If the books for 2021 have been‘closed, no entry is necessary because the 2020 error is counterbalanced in 2021. The net income of 2020 was overstated by reason of understatement of rent expense while the 2021 net income was understated by reason of overstatement of rent expense, : 463Failure to record a deferred income - i i t for two years in 1, 2020, the entity received ren e the aaae ‘of 50,000. The same was credited to rent income and no adjustment was made on December 31, 2020. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: it 25,000 Retained earnings x Rent income 25,000 "The retained earnings account is debited because the 2020 net income was overstated. The rent income is credited because the unearned rent income on December 31, 2020 becomes an income of 2021. If the books for 2021 have been closed, no entry is necessary because the 2020 error is counterbalanced in 2021. The 2020 vent income was overstated while the 2021 rent income was understated. Thus, the errors counterbalance each other. Failure to record accrued income On December 31, 2020, accrued interest receivable of P50,000 was not recorded. If the books for 2021 have not been closed, the entry to correct the error on December 31, 2021 is: Interest income 50,000 Retained earnings 50,000 The interest income is debited because the interest acerual of 2020 necessarily was received in 2021 and the same was credited to interest income, thus overstating the 2021 interest income. The retained earnings account is credited because the 2020 net income was understated. If the books for 2021 have been closed, no entry is necessary because the 2020 error is counterbalanced in 2021. The 2020 interest income was understated while the 2021 interest income was overstated. Thus, the errors equalize each other. 4642 Noncounterbalancing errors Noncounterbalancing errors are errors which, if not detected, are not automatically counterbalanced or corrected in the next accounting period. In other words, if the net income of one year is understated or overstated, the net income of subsequent year is not affected. Effects of noncounterbalancing errors 1. The income statement of the period in which the error is committed is incorrect but the succeeding income statement is not affected. 2, The statement of financial position of the year of error and succeeding statement of financial position are incorrect until the error is corrected. : : The best example of a noncounterbalancing error is the misstatement of depreciation.» ,.,.. Illustration ue On January 1, 2020 the entity purchased an equipment with useful life of 5 years for P500,000 but the same was debited to repair and maintenance. If the books for 2021 have not been closed, the entries to correct the error on December 31, 2021 are: 1. Equipment 500,000 Retained earnings 500,000 2. Depreciation (500,000 / 5) 100,000 Retained earnings 100,000 200,000 Accumulated depreciation If the books for 2021 have been closed, the entries to correct the error on December 31, 2021 are: 1. Equipment 500,000 Retained earnings 500,000 2. Retained earni 200,000 ‘ined earnings ain Accumulated depreciation 465Illustration 1 An entity reported net income for 2019 P3,000,000, 2020 4,000,000 and 2021 P3,500,000. 1. December 31, 2019 inventory overstated 120,000 2. December 31, 2021 inventory understated 210,000 3. December 31, 2019 accrued interest payable understated 40,000 4, December 31, 2021 accrued interestpayable overstated 90,000 5. Depreciation for 2020 understated 180,000 6. Depreciation for 2021 overstated 30,000 . 2019 = 2020-2021 Net income per book 3,000,000 4,000,000 3,500,000 1. Overstatement of 2019inventory (120,000) 120,000 2) Understatement of 2021 inventory 210,000 3. Understatement of 2019 accrued i interest payable (40,000) 40,000 * 4, Overstatement of 2021 accrued interest payable 90,000 5. Understatement of 2020 depreciation (180,000) 6. Overstatement of 2021 depreciation 30,000 ocenee ncee 2,840,000 92,060,000 3,880,000 © The books for 2021 have not yet been closed. Correcting entries on December 31, 2021 1. No adjustment. The overstatement of income in 2019 is counterbalanced by the understatement of income in 2020. 2. Inventory —December 31, 2021 210,000 Income summary 210,000 3. No adjustment. The overstatement of income in 2019 is counterbalanced by the understatement of income in 2020. 4. Accrued interest payable - 90,000 Interest expense . 90,000 5. Retained earnings 180,000 ‘Accumulated depreciation 180,000 6. Accumulated depreciation 30,000 Depreciation 30,000 466Illustration 2 ‘An entity reported net income for 2019 P1,500,000, 2020 2,000,000 and 2021 P2,800,000. An audit disclosed the following: 1. Accounts receivable instead of notes receivable was debited in 2021 20,000 2. Purchases account was debited in 2021 instead of office supplies 5,000 3. Thephysical inventory on December 31, 2019 was overstated 10,000 4, Thephysical inventory on December 31, 2020 was understated 18,000 Advances to supplier were recorded as purchases 5. but the merchandise was received in subsequent year: 2019 30,000 2020 40,000 3. Advances from customers recorded as salés but ‘the goods were delivered in the following year: 6. 2019 25,000 2020 50,000 . Insurance premium for three years paid in 2019 was charged entirely to expense in 2019 15,000 . Salaries accrued not recorded: 2019 30,000 2021 60,000 9. Rent fortwoyears received in 2020 wasentirely credited toinoome 10,000 10. Unrecorded accrued interest receivable: 2020 10,000 2021 25,000 11. Improvements on building had been charged to expense on January 1, 2020. Improvements have alifeof 5 years. 100,000 12. On January 1, 2020, an equipment costing P40,000 was sold for 20,000. aia . Atthe date ofsale, the equipment had an accumulated depreciation ofP25,000. The cash received was recorded as other income in 2020. 467Worksheet for corrected net income 2019 2020 2021 Net income 1,500,000 2,000,000 2,800,000 1, Noeffect 2. Noeffect 3. 2019 inventory overstated ( 10,000) —_ 10,000 4, 2020inventory understated 15,000 ( 15,000) 5. Advancesrecorded as purchases 2019 30,000 — ( 30,000) 2020 40,000 ( 40,000) 6. Advances recorded as sales E 2019 ( 25,000) 25,000 2020 (50,000) 50,000 7. Insurance premium for 3 years debited to expense in 2019 10,000 ( 5,000) ( 5,000) 8. Salaries accrued unrecorded 2019 ( 30,000) 30,000 2021 (60,000) 9. Rentincome for 2 years recorded as income in 2020 ( 5,000) 5,000 10. Interest receivable unrecorded 2020 10,000 ( 10,000) 2021 25,000 11. ‘Improvements debited to expense 100,000 Depreciation (100,000/5) ( 20,000) ( 20,000) 12, Overstatementof other income (15,000) Corrected net income 000 2,105,000 2,730,000 468Correcting entries - December 31, 2021 The books for 2021 have not yet been closed. 1. Notesreceivable Accounts receivable This is only a reclassification entry. 2. Office supplies Purchases This is also a reclassification entry. 8. Noadjustment. ‘The ending inventory of 2019 becomes the beginning inventory of 2020. Accordingly, the overstatement of income in 2019 is counterbalanced by the . understatement of income in 2020. Inventory —January 1, 2021 Retained earnings p ‘The retained earnings account is credited s because the income of 2020 was understated by reason of the understatement of the 2020 inventory. 5. Purchases Retained earnings: ‘The retained earnings account is credited because the income of 2020 was understated by reason of the recording of advances in 2020 as purchases, The purchases account is debited because i advances of 2020 become purchases of 1 The 2019 error of P30,000 requires no correction because the same is. counterbalanced in 2020. 469 20,000 20,000 5,000 5,000 15,000 15,000 40,000 40,000Retained earnings Sales The retained earnings account is debited because the income of 2020 was overstated by reason of the recording of advances from customers in 2020 as sales. The sales account is credited because the 2020 advances from customers become sales of 2021. The 2019 error of P25,000 requires no correction because the same is counterbalanced in 2020. . Insurance Retained earnings The insurance account is debited because this is the portion applicable to 2021. The retained earnings account is credited because the income of 2019 was understated by P10,000 and the income of 2020 was overstated by P5,000, resulting to a net understatement of P5,000. . Salaries Accrued salaries payable This is an ordinary adjustment of acerual on Decem* 2r 31, 2021. The 2019 error of P30,000 requires no correction because the same is counterbalanced in 2020. . Retained earnings Rentincome The retained earnings account is debited because the income of 2020 was overstated. The rent income is credited because this is the portion applicable to 2021, 470 50,000 5,000 60,000 5,000 50,000 5,000 60,00010. ai Interestincome Retained earnings The interest income is debited because the accrued interest receivable of 2020 is presumably collected in 2021 and credited to interest income. Thus, the interest income of 2021 is overstated. ‘The retained earnings account is credited because the income of 2020 was understated by reason of nonrecording of accrued interest receivable. Accrued interest receivable Interest income This is an ordinary adjustment for accrual on December 31, 2021. 25,000 Building 100,000 Retained earnings The retained earnings account is credited because income of 2020 was understated by expensing the improvements on building. Retained earnings Depreciation Accumulated depreciation The amount debited to retained earnings pertains to the depreciation of 2020. . Retained earnings Accumulated depreciation Equipment Sale price Carrying amount (40,000— 25,000) Gain on sale of equipment in 2020 Cash received recorded as other income in 2020 Overstatement of income in 2020 471 20,000 20,000 15,000 25,000 25,000 100,000 40,000 40,000 20,000 _ 15,000 5,000 20,000 15,000Single entry method Under the single entry method, the computation of 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 after taking into consideration withdrawals or dividends and additional investments. The difference is either net income or net loss. Any increase in capital or retained earnings is net income and 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 Add: Withdrawals xx Total xx Less: Capital, beginning of year xx Additional investments XxX xx Net income (loss) xx Formula for corporation Retained earnings, end = xx Add: Dividends declared or paid xx Other items that decrease retained earnings but not profit or loss xx Total xx Less: Retained earnings, beginning XxX Other items that increase retained carningsbut not profit or loss xx Netincome (loss) BX 423Illustration 1 a An entity provided the following data for the current year: January 1 December 81 Total assets 2,000,000 3,000,000 Total liabilities 1,200,000 1,800,000 Additional investments 600,000 Withdrawals 900,000 Computation of net income Capital, December 31 1,200,000 Add: Withdrawals 900,000 Total 2,100,000 Less: Capital, January 1 800,000 Additional investments 600,000 Net income 700 Capital is the excess of total assets over total liabilities. Illustration 2 An entity provided the following information in relation to retained earnings for the current year: Retained earnings — December 31 4,000,000 Retained earnings — January 1 4,500,000 During the current year, the entity issued 10% share dividend with par value of P2,000,000 and fair value of P2,500,000. At year-end, the entity declared a cash dividend of P3,000,000. Computation of net income Retained earnings - December 31 4,000,000 Share dividend at fair value 2,500,000 Cash dividend 3,000,000 Total te 9,500,000 Retained earnings - January 1 (4,500,000) Net income : 5,000,000 The share dividend is recognized at fair value because it is Jess than 20%. 424Illustration 3 , An entity reported the following changes in account balances during the current year: Increase (Decrease) Cash 1,500,000 Accounts receivable 500,000 Inventory - 2,000,000 Prepaid expenses (100,000) Land 5,000,000 Accounts payable (1,100,000) Bonds payable 4,000,000 Share capital : 4,000,000 Share premium 1,000,000 Dividend of P1,500,000 was paid during the year and that no other transactions affected the retained earnings. In the 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 increases or decreases the net assets. Increases in assets and decreases in liabilities increase net assets while increases in liabilities and decreases in assets decrease net assets. 425Computation of net income Effect on net assets Increase Decrease Increase in cash : 1,500,000 Increase in accounts receivable : 500,000 Increase in inventory 2,000,000 Decrease in prepaid expenses 100,000 Increase in land 5,000,000 Decrease in accounts payable 1,100,000 Increase in bonds payable 4,000,000 Total 10,100,000 4,100,000 . ———=- oS == Net increase in net assets (10,100,000 — 4,100,000) 6,000,000 Add: Dividend paid 1,500,000 ata ; 7,500,000 Less: Increase in share capital -. 4,000,000 Increase in share premium 1,000,000 5,000,000 Net income 2,500,000 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 thé 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 and such formulas involve the following computation: a, Sales b. Purchases c. Income other than sales d. Expenses in general 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. 0 For example, cash could be determined by count and by examining bank statements. Ree (3) Accounts receivable and notes receivable could be summarized from unpaid sales invoices and promissory notes. 3}, Merchandise on hand, supplies and other inventories could be \ counted and their cost determined from purchase invoices. 9 ‘The cost of property, plant and equipment could be established by reference to deeds of sale and other documents evidencing ownership of title. ;! Accounts payable and notes payable could be determined from purchase invoices, memoranda, correspondence and even consultation with creditors. ({) Ownership: equity or capital would be the difference between L the value assigned to assets and liabilities. 427Illustration 1 Negros Store provided the following data obtained from the single entry records for the current year. December 81 January 1 Cash - 890,000 600,000 Notes receivable 600,000 200/000 Accounts receivable 1,000,000 800,000 300,000 800,000 Inventory Equipment 550,000 600,000 Notes payable 250,000 350,000 Accounts payable 500,000 600,000 ‘Accrued interest payable 20,000 40,000 Unearned rent income 20,000 60,000 The cashbook showed the following information: Balance, January 1 600,000 Receipts: Accounts receivable 1,500,000 Notes receivable 500,000 Cash sales 400,000 Rent income 80,000 Sale of equipment costing P100,000 and with carrying amount of P50,000 60,000 Additional investment 300,000 2,840,000 Total 3,440,000 ‘Payments: ‘Accounts payable 750,000 Notes payable 650,000 Cash purchases 300,000 Interest expense * 50,000 Expenses 400,000 Equipment 200,000 Withdrawals 200,000 _ 2,550,000 Balance, December 31 890,000 Supplementary information _ Sales discounts granted to customers 50,000 Saleg returns made by customers 150,000 Accounts receivable written off as uncollectible 30,000 Purchase discounts on accounts payable paid 40,000 428 2