The cash basis is a method of recording accounting transactions for revenue and expenses only when the

corresponding cash is received or payments are made. Thus, you record revenue only when a customer pays for a
billed product or service, and you record a payable only when it is paid by the company.
Why would a company use cash basis accounting? Cash basis accounting. The cash basis ofaccounting recognizes
revenues when cash is received, and expenses when they are paid. This method does not recognize accounts
receivable or accounts payable. Many smallbusinesses opt to use the cash basis of accounting because it is simple
to maintain.
Who uses cash basis accounting? The cash method is used by many sole proprietors and businesses with no
inventory. From a tax standpoint, it's sometimes advantageous for a new business to use the cash method of
accounting. That way, recording income can be put off until the next tax year, while expenses are counted right
away.
Accounting for acquisition of PPE
Once the cost is determined, entity will make the required accounting entries to record the asset. Entity may buy
the asset on:
Cash basis; paying for asset in cash or cash equivalent
Credit basis; payment is delayed for certain period, usually less than year, thus creating a liability at the time of
acquisition
Exchange basis or trade-in basis; giving up old asset as part or complete payment for in exchange of newer asset
and may or may involve additional cash payment at the time of acquisition or later.
Lump-sum basis; acquiring multiple asset against a single payment
Deferred payment basis; where payment is deferred for a period longer than one accounting period or simply
more than a year’s time.
a. On Cash Basis - PPE acquired through cash purchase shall initially be recognized at cost which includes cash paid
plus all costs incurred in bringing the asset to the location necessary for its intended use such as delivery,
installation costs, etc. These are recognized in the books of accounts as PPE after inspection and acceptance of
delivery.
Example, an entity purchased a photocopying machine with the following costs:
Total cost:
Invoice price P45,000.00
Delivery cost 3,000.00
Installation cost 1,500.00
Test run cost 1,000.00
Total 50,500.00
Less: Withholding Tax 2,651.79
Net Amount Paid P47,848.21

The accounting entries to recognize the photocopying machine shall be as follows:

Account
Account Title Debit Credit
Code
Office Equipment
Cash - MDS, Regular 10605020 50,500.00
Due to BIR 10104040 47,848.21
To recognize cash purchase of 20201010 2,651.79
office
equipment.

b. On Account - When an asset is acquired on account subject to a cash discount, the cost of the asset is equal to
the purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts
and rebates.
Example, an entity purchased a threshing machine on account at P200,000, 2/10, n/30.
The accounting entries to recognize the machine shall be as follows:
 Account
Account Title Debit Credit
Code
Agricultural and Forestry
Equipment
10605040 196,000
Accounts Payable
20101010 196,000
To recognize purchase of
machinery on
account
Accounts Payable
Cash - MDS, Regular 20101010 196,000
Due to BIR 10104040 185,500
To recognize payment of 20201010 10,500
machinery
within the discount period
Accounts Payable
Other Losses 20101010 196,000
Cash - MDS, Regular 50504990 4,000
189,500
Due to BIR 10104040
10,500
To recognize payment of 20201010
machinery
beyond the discount period

Note: Refer to Chapter 22 - Illustrative Entries for the constructive receipt of NCA for TRA and remittance to BTr
Note: Invoice price minus the discount regardless of whether the discount is taken or not. Cash discounts are
generally considered as reduction of cost and not as income. If the discount is not taken, shall be recognized as
Other Losses.
c. On Installment Basis - The cost of an item of PPE is the cash price equivalent or its fair value at the recognition
date. However, if acquired through installment and payment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payment is recognized as interest over the period of
credit, unless such interest capitalized as allowed in PPSAS 5, Borrowing Cost
Example, an entity purchased a bulldozer at an installment price of P3,000,000. The terms are P500,000 down
payment and the balance is payable in four equal annual installments. The cash price of the heavy equipment is
P2,700,000. The purchase shall be recognized as follows:
Account
Account Title Debit Credit
Code
Construction and Heavy
Equipment 10605080
2,700,000.00
Other Financial Charges 50104990
300,000.00
(Discount) 20101010 2,500,000.00
Accounts Payable 10104040 355,359.00
Cash - MDS, Regular 20201010 144,641.70
Due to BIR
To recognize the purchase and initial payment for the bulldozer acquired on installment
basis.
Note: Refer to Chapter 22 - Illustrative Entries for the constructive receipt of NCA for TRA and remittance to BTr
Accounts Payable 20101010
625,000
Interest Expenses 50301020
75,000
Other Financial Charges 50301990 75,000
Cash - MDS, Regular 10104040 625,000
To recognize the first installment payment and amortization of discount.
d. Purchase with promotional items - If promotional items are received upon purchase of the PPE, the allocation of
cost for the promo items received shall be as follows:
1. If the promotional item received is the same as the PPE purchased, the total purchase cost shall be allocated to
the total quantity purchased plus the promotional item.
Example, an entity purchased 10 units of motor vehicles at P330,000 per unit totaling P3,300,000. An additional
unit was received as promotional item. Computation of the cost per unit is P3,300,000/11 units = P300,000. The
journal entry to recognize the motor vehicles are as follows:
Account
Account Title Debit Credit
Code
Motor Vehicles 10606010
3,300,000
Accounts Payable 20101010 3,300,000
To recognize the purchase of 11 units of motor vehicles at P300,000/unit.
Accounts Payable 20101010
3,300,000.00
Cash - MDS, Regular 10104040 3,123,215.70
Due to BIR 20201010 176,784.30

Note: Refer to Chapter 22 - Illustrative Entries for the constructive receipt of NCA for TRA and remittance to BTr
e. If the promotional item received is different from the PPE purchased, the cost of the promo item shall be its fair
value - It shall be deducted from the total cost of the items purchased and the balance shall be allocated to the
total quantity purchased.
Example, an entity purchased a motor vehicle at P330,000. A window-type air conditioning unit with fair value of
P20,000 was received as promotional item. Computation of the cost of motor vehicle is P330,000 - P20,000 =
P310,000. The journal entry to recognize the motor vehicles are as follows:
Account
Account Title Debit Credit
Code
Motor Vehicles 10606010
310,000
Accounts Payable 20101010 310,000
To recognize the purchase of motor vehicles at P310,000
Office Equipment 10605020
20,000
Accounts Payable 20101010 20,000
To recognize the window-type air conditioning unit received as promo items
Accounts Payable 20101010
330,000.00
Cash - MDS, Regular 10104040 312,321.57
Due to BIR 20201010 17,678.43

Note: Refer to Chapter 22 - Illustrative Entries for the constructive receipt of NCA for TRA and remittance to BTr

RECOGNITION PRINCIPLE
Under this recognition principle, an entity shall evaluate all its PPE costs at the time they are incurred. These costs
include cost incurred initially to acquire or construct an item of PPE and costs incurred subsequently to add to,
replace part of, or service the PPE.
1 Accounting – Cash basis acquisition of PPE
If item of property, plant and equipment is acquired on cash basis then its a simple transaction of one asset
increasing and the other decreasing.
For example entity bought a machinery of $100,000 paying by cash then journal entry will be as follows:
Machinery a/c 100,000
Cash a/c 100,000
Similarly, if asset is bought paying by cheque then bank account will be credited. For example if entity bought
printer to be used in head office for $2,000 and paid the supplier via cheque then journal entry will be:
 Office equipment a/c 2,000
Bank a/c 2,000
2 Accounting – PPE acquired on credit basis
Entity may acquire an asset on credit basis meaning that payment will be made at a later date. This will create a
liability at the time of acquisition which is recorded by crediting an account with appropriate title which is usually
the name of supplier.
For example a building is acquired by business worth $20,000 and promised to pay the full amount in 2 months
time to Momhil Plc. This will be recorded as follows:
Building a/c 20,000
Momhil Plc a/c 20,000
3 Accounting – PPE acquired on exchange basis
Sometimes entity acquires a new asset in exchange of old one. As new asset is coming in and old asset is going out
therefore it is acquisition and disposal of asset at the same time. As the value of outgoing asset and incoming asset
are connected, it sometimes get tricky and care must be taken in calculating the values.
We must know either the value of new asset or the disposal consideration of old asset and we can work out the
other easily.
For example a new asset worth 10,000 is acquired and no payment is made to supplier except that entity gave and
old asset in exchange. In this case disposal consideration of old asset is 10,000
Another example can be where entity acquired new asset that has a fair value of 15,000. Entity paid 7,500 in cash
and also gave a used asset as part of purchase consideration. In this case the disposal value of old asset can be
found using this simple formula:
New asset value = Cash + Old asset sales value
15,000 = 7,500 + Old asset sales value
15,000 – 7,000 = Old asset sales value
Old asset sales value = 7,500
We will discuss the journal entries for this case later in the section Disposal of property, plant and
equipment
4 Accounting – PPE acquired on Lump-sum basis
If multiple assets are acquired as part of one deal for which a single payment is made it is called lump-sum
purchase.
For example entity has acquired land, building and installed machinery for 200,000. Although all assets are
acquired under one deal, we still have to recognize the assets separately in the statement of financial position thus
we need to know the values of each individual assets.
To allocate the purchase consideration entity use relative fair values of asset and divide the total
consideration on pro-rata basis. If it is not possible to determine the fair values of assets then there are other
allocation basis available like future income basis, replacement cost basis. Entity is required to
use such basis of allocation that render true and fair values of assets.
Example – Lump-sum purchase of property, plant and equipment
Rush Inc. has acquired new assets to expand its business to northern areas of Pakistan. Assets acquired include
building, office equipment and piece of land. A single payment of 200,000 was made.
Fair values of similar type of assets in the region are as follows:
Building 81,000
Land 100,000
Office Equipment 50,000
231,000
Give the journal to record the assets in books of Rush Inc.
Solution:
First we need to find the values of each asset from total purchase value using relative fair values of asset. Following
table shows the working:
Fair value % fair value % Cost Value
 Building 81,000 81,000 / 231,000 200,000 x 0.35 70000
Land 100,000 100,000 / 231,000 200,000 x 0.43 86000
Office Equipment 50,000 50,000 / 231,000 200,000 x 0.22 44000
231,000 200000
The journal entry to recognize assets will be:
Building a/c 70,000
Land a/c 86,000
Office equipment a/c 44,000
Cash a/c 200,000
5 Accounting – PPE acquired on Deferred payment basis
Entities may acquire asset on such contracts where payment has been delayed for significant period of time. Unlike
credit basis purchase where payment is made in few months time, in deferred payment contracts actual cash
outflow may occur after 5 years or 10 years of actual purchase.
Under such contracts, the deferred portion of consideration will be recorded on present value basis in the cost of
assets. However, unwinding charge will be treated as finance cost for the period and recorded in the income
statement instead of being capitalized as cost of the asset.
To make proper calculations, discount rate to be used for present value calculation must be known and the period
over which payment is deferred must also known with certainty. Usually it is written as part of contract or a
separate instrument is used like bond.
Example – Purchasing PPE on deferred payment basis
Miyar & Co works on restoration of glaciers around the world. In order to dig a tunnel to reach one remote glacier
in Hopar valley, company has acquired a digger that cost $1.5 million at the first day of the year.
under the contract Miyar will pay $1 million upfront whereas $500,000 will be paid after 5 years from today.
Applicable discount rate is found to be 10%.
Give the journal entries to record above transaction
Solution:First we have to calculate the cost of asset to be recognized. For that we need to calculate the present
value (PV) of $500,000 which can be done using a formula or discount table.
Formula for PV calculation is: 1/(1+r)n
where “r” is discount rate and “n” is the number of years. Following table shows the calculation:
Cash payment 1,000,000

Deferred payment: 500,000

Present value:
= 500,000 / (1+0.1)5
= 500,000 / 1.61051
= 310,461 310,461

Total 1,310,461
Journal entry at the time of acquisition will be:
Machinery a/c 1,310,461
Cash a/c 1,000,000
Deferred payment liability a/c 310,461
Journal entry at the end of the year:
As the asset is acquired at the start of the year therefore, by the end of first year, entity will have to record
to unwinding  of long term liability i.e. reversal of discount recorded but only that pertains to first year as follows:
Deferred payment liability 310,461
 Add: unwinding of discount treated as interest expense
31,046
(310,461 x 0.1 = 31,046)
341,057
 
Finance lease refers to the lease where the finance company owns the asset legally during the tenure of
the lease but all the risk and reward associated with the asset are transferred to the lessee by the lessor
and at the end of the lease term lessee also gets the ownership of the asset.
EXCHANGE TRANSACTION
Exchanges that have commercial substance (future cash flows are expected to change) should be
accounted for at fair value. The fair value approach for exchanges having commercial substance will
ordinarily result in recognition of a gain or loss because the fair value will typically differ from the recorded
book value of a swapped asset. When there is commercial substance (which is when there is a change
in cash flow resulting from the transaction), the parties should recognize a gain or loss on the exchange.
If there is no commercial substance, record the acquired asset at the book value of the asset given up
in the exchange.
NON – EXCHANGE TRANSACTION
An exchange or exchange-like transaction is one in which each party receives and sacrifices something of
approximate equal value. A non-exchange transaction is one in which one party receives something of
value without directly giving value in exchange. Grants can be either exchange or non-exchange
transactions. GASB 33 only applies to non-exchange transactions.