Financial Accounting and Reporting Volume 1a

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Financial Accounting and Reporting - Volume 1A
Accounting (Cagayan State University)
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Financial accounting and reporting VOL-1A

ACCOUNTING PROCESS Usual Examples of Special Journals
2. Accounting Cycle 11. Sales Journal

It is a step-by-step process of recording, It is a special journal where only sales of
classification, and summarization of economic merchandise on account are recorded.
transactions of a business.
12. Cash Receipts Journal
3. Phases of the Accounting Cycle It is a special journal where all types of cash
receipts are recorded.
a. Recording (steps 1-3)
b. Summarizing (steps 4-10) 13. Purchases Journal
It is a special journal used to record all
3. Steps in the Accounting Cycle purchases on account of merchandise, equipment,
supplies, etc.
a. Analyzing the transaction
b. Journalizing 14. Cash Disbursements Journal
c. Posting It is a special journal where all payments of
d. Unadjusted trial balance cash for any purpose are recorded.
e. Adjusting entries
f. Adjusted trial balance Types of Journal Entries According to Form
g. Financial statements
h. Closing entries 16. Simple Journal Entry
i. Post-closing trial balance It is a type of journal entry which contains a
j. Reversing entries single debit and a single credit element.
4. Analyzing the Transaction 17. Compound Journal Entry

This is where the accountant gathers It is a type of journal entry which has two or
information from source documents and more elements in either or both debit and credit
determines the impact of the transaction on the sides and often represents two or more
financial position. transactions.
***
5. Journalizing
This is the process of recording the 18. Accounts
transactions in the appropriate journals. These are the storage units of accounting
information and are used to summarize changes in
6. Journal assets, liabilities, and equity including income and
It is a chronological record of transactions. expenses.
It is also known as the book of original entry.
Common Account Types
Kinds of Journals
20. Real Accounts
8. General Journal These are the statement of financial position
It is a journal where all transactions could be accounts or so-called permanent accounts which
recorded. are not closed and are carried over to the next
accounting period (i.e., assets, liabilities, and equity
9. Special Journals accounts).
These are journals used in recording large
numbers of like transactions.

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21. Nominal Accounts 31. Trial Balance
These are the income statement accounts It is a list of general ledger accounts with
or temporary capital accounts which are closed at their respective debit or credit balances.
the end of the accounting period (i.e., income and
expense accounts). 32. Adjusting Entries
These are journal entries made at the end of
22. Mixed Account an accounting period to update certain revenue and
While still unadjusted, it represents a expense accounts and to make sure the entity
combination of real and nominal accounts (e.g., complies with the matching principle.
prepaid expenses).
33. Characteristics of Adjusting Entries
23. Control Account
It is the general ledger account that a. Usually refer to transactions that have
summarizes the detailed information in a subsidiary effects on more than one accounting
ledger. period;
24. Suspense Account b. Include at least one (1) nominal account
It is an account that holds temporarily and one (1) real account; and
certain information pending for disposition. c. Are generally not based on source
documents.
25. Reciprocal Account
It is an account that has a counterpart in 34. Classification of Adjusting Entries
another book within the entity or in another ledger
of another entity. a. Prepayments
*** b. Deferred Income
c. Accrued expenses
26. Posting d. Accrued income
It is the process of transferring data from the e. Estimates
journal to the appropriate accounts in the general f. Ending inventory
ledger and subsidiary ledger. This process
classifies all accounts that were recorded in the 35. Prepayments
journals. These are expense items already paid for but
not yet incurred.
27. Ledger
It is a book containing accounts in which the 36. Methods of Initially Recording Prepayments
classified and summarized information from the
journals is posted as debits and credits. It is also a. Asset method – Dr. Prepaid expense; Cr.
known as the book of final entry. Cash
b. Expense method – Dr. Expense; Cr. Cash
Kinds of Ledgers
37. Pro-Forma Adjusting Entries for Prepayments
29. General Ledger
It includes all the accounts appearing on the a. Asset method – Dr. Expense (expired
financial statements. portion); Cr. Prepaid expense
b. Expense method – Dr. Prepaid
30. Subsidiary Ledger expense (remaining portion); Cr.
It affords additional detail in support of Expense
certain general ledger accounts.
***

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38. Deferred Income 49. Ending Inventory Adjustment
It refers to an income item that is already It is an adjustment used to set up the year-
collected in cash but not yet earned. end count of the inventory. This is only applied in
the periodic inventory system.
39. Methods of Initially Recording Deferred Income
50. Preparation of the Financial Statements
a. Liability method – Dr. Cash; Cr. It is the most important part of the
Unearned income summarizing phase. This is where the processed
b. Income method – Dr. Cash; Cr. Income information is communicated to users.
40. Pro-Forma Adjusting Entries for Deferred 51. Basic Financial Statements
Income
a. Statement of Financial Position (Balance
a. Liability method – Dr. Unearned income Sheet)
(earned portion); Cr. Income b. Statement of Comprehensive Income
b. Income method – Dr. Income (unearned (Income Statement)
portion); Cr. Unearned income c. Statement of Changes in Equity
d. Statement of Cash Flows
41. Accrued Expense e. Notes and Disclosures.
It occurs in a transaction where expense has
already been incurred but not yet paid for in cash. 52. Closing Entries
These are recorded and posted for the
42. Pro-Forma Adjusting Entry for Accrued Expense purpose of closing all nominal or temporary
Dr. Expense; Cr. Liability (i.e., payable) accounts to the income summary account and the
resulting net income or loss is afterwards closed to
43. Accrued Income the capital or retained earnings account.
It occurs in a transaction where income has
been already earned but not yet collected in cash. 53. Reversing Entries
These are made at the beginning of the new
44. Pro-Forma Adjusting Entry for Accrued Income accounting period to reverse certain adjusting
Dr. Asset (i.e., receivable); Cr. Income entries from the preceding accounting period.
45. Estimates 54. Adjusting Entries Subject for Reversal

These are items of adjusting entries that do
not involve cash flows. a. Prepayments under expense method
b. Deferred income under income method
Common Types of Estimates c. Accrued expense
d. Accrued income
47. Provision for Doubtful Accounts
It is the estimated amount of bad debts that 55. Optional Steps in the Accounting Cycle
will arise from accounts receivable that have been
issued but not yet collected. a. All trial balances
b. Reversing entries
48. Depreciation
It is the systematic allocation of the cost of
a fixed asset over its useful life.
***

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REVISED CONCEPTUAL FRAMEWORK 62. Financial Position
It refers to the financial condition of the
57. Missions of IASB in Developing Accounting reporting entity represented by the economic
Standards resources it owns and claims of other entities
against these.
a. Contribute to transparency – by
enhancing international comparability 63. Accrual Accounting
and quality of financial information. It means that the events should be reflected
b. Strengthen accountability – of the in the reports in the periods when the effects of
people entrusted with the entity. transactions occur, regardless the related cash
c. Contribute to economic efficiency – by flows.
helping investors identify opportunities
and risks across the world. a. Income shall be recognized when
earned, rather than when received in
58. Conceptual Framework cash.
b. Expenses shall be recognized when
a. It aims to assist the IASB in developing incurred, rather than when paid for in
standards. cash.
b. It helps financial statement preparers
and users to better understand and 64. Past Cash Flows
interpret the standards. These are considered important information
c. It can be used as a reference by used to assess the management’s ability to
preparers who are trying to develop generate future cash flows.
accounting policies but cannot find any
applicable standard currently in place. Chapter 2
d. It is not a standard by itself, and does not
override the provisions of any standard. Types of Qualitative Characteristics of Financial
Information
59. Objectives of Conceptual Framework 67. Fundamental Qualitative Characteristics

Their focus is on the content or substance of
a. To provide financial information about financial information.
reporting entities; and
b. To help investors, lenders and other 68. Enhancing Qualitative Characteristics
creditors (primary users) in decision Their focus is on the presentation or form of
making. financial information.
Chapter 1 Fundamental Qualitative Characteristics
61. Objective of General-Purpose Financial 70. Relevance

Reporting Financial information possessing this
qualitative characteristic is capable of making a
a. To provide financial information about difference in the users’ decisions.
reporting entities; and
b. Help investors, lenders and other 71. Faithful Representation
creditors (primary users) in decision It requires that accounting transactions and
making. events should be recorded in a manner that
represents their true economic substance.

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Elements of Relevance Enhancing Qualitative Characteristics
73. Predictive Value 82. Comparability

It helps the users of financial statements in It asserts that information about a reporting
predicting future trends of the business. entity is more useful if it can be compared with a
similar information about other entities and with
74. Confirmatory Value similar information about the same entity for
It helps the users of financial statements in another period or another date.
confirming or correcting any past predictions they
have made. 83. Verifiability
*** It helps to assure users that information
represents faithfully the economic phenomena it
75. Materiality purports to represent.
It is the threshold above which missing or It means that different knowledgeable and
incorrect information in financial statements is independent observers could reach consensus,
considered to have an impact on the decision although not necessarily complete agreement, that
making of users. a particular depiction is a faithful representation.
It is an entity-specific aspect of relevance
based on the nature or magnitude (or both) of the Aspects of Comparability
items to which the information relates in the context
of an individual entity’s financial report. 85. Horizontal Comparability
It refers to comparison within an entity from
Underlying Characteristics Maximized by Faithful one period to the next.
Representation
86. Dimensional Comparability
77. Completeness It refers to comparison between two or more
It asserts that financial information must be entities in the same industry.
complete in all material respects, since omissions
of important data may be misleading. Methods of Verification
78. Neutrality 88. Direct Verification

It asserts that financial information must be It means verifying an amount or other
free from bias or not prepared with the purpose to representation through direct observation (e.g.,
influence certain decisions of the users. counting cash items).
89. Indirect Verification

79. Free from Error It is verifying the carrying amount of
It asserts that financial information must inventory by checking the inputs (quantities and
not contain any inaccuracies or omissions. costs) and recalculating the ending inventory using
*** the same cost flow assumption (e.g., computing
inventory using first-in, first-out or FIFO method).
80. Prudence / Conservatism ***
It is the exercise of caution when making
judgements under conditions of uncertainty such Chapter 3
that assets and income are not overstated and
expenses and liability are not understated. 91. Financial Statements
These are written records that convey the
business activities and position of a reporting
entity.

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Complete Set of Financial Statements Types of Financial Statements as to Its Reporting
Entity
93. Statement of Financial Position
It contains information about the assets, 103. Consolidated
liabilities and equity of the reporting entity at a point It refers to financial statements prepared by
in time. a parent and its subsidiaries reporting as a single
entity.
94. Statements of Financial Performance
These contain information about the income 104. Unconsolidated
and expenses of the reporting entity over a period of It refers to financial statements provided by
time. one entity only (e.g., parent alone).
95. Statement of Cash Flows 105. Combined

It contains information about the flow of It refers to financial statements whose
cash to and out of the entity during a reporting reporting entity comprises of two or more entities
period. not linked by a parent-subsidiary relationship.
96. Statement of Changes in Equity Chapter 4

It contains information about the
contributions from and distributions to equity Elements of Financial Statements
holders.
108. Asset
97. Notes and Disclosures It is a present economic resource controlled
These statements contain information by the entity as a result of past events.
about the accounting methods, assumptions,
judgments used and their changes. 109. Liability
*** It is a present obligation of the entity to
transfer an economic resource as a result of past
98. Reporting Period events.
It is a specified period of time in which the
financial statements are prepared for. 110. Equity
It is the residual interest in the assets of the
99. Going Concern entity after deducting all its liabilities.
It means that an entity will continue to
operate for the foreseeable future (usually 12 111. Income
months after the reporting date). It refers to increases in assets or decreases
in liabilities resulting in increases in equity, other
100. Reporting Entity than contributions from equity holders.
It is an entity who must or chooses to
prepare financial statements. 112. Expense
It refers to decreases in assets or increases
101. Kinds of Reporting Entities in liabilities resulting in decreases in equity, other
than distributions to equity holders.
a. A single entity – e.g., one company
b. A portion of an entity – e.g., a division Types of Income
of one company
c. More than one entity – e.g., a parent 113. Revenue
and its subsidiaries reporting as a It refers to income from primary activities.
group

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114. Gain Methods of Measuring Current Value
It refers to income from incidental activities.
*** 126. Fair Value
It is the price that would be received to sell
115. Loss an asset or paid to settle a liability in an orderly
It refers to expenses incurred from events transaction between market participants at
which are not part of operating activities. measurement date (based on exit price).
Chapter 5 127. Value in Use

It is the present value of cash flows
117. Recognition expected to be derived from the used and ultimate
It is the process of incorporating in the disposal of an asset (based on exit price).
balance sheet or income statement an item that
meets the definition of an element and satisfies the 128. Fulfillment Value
criteria for recognition. It is the present value of the cash expected
to be transferred for the payment of a liability
118. Criteria for Recognition (based on exit price).
a. It is probable that any future economic 129. Current Cost

benefit associated with the item will flow It is the cost that would be required to
to or from the entity; and replace an asset in the current period (based on
b. The item’s cost or value can be entry price).
measured with reliability.
Chapter 7
119. Derecognition
It means the removal of an asset or liability 131. Presentation
from the statement of financial position and It is the format in which the financial
normally it happens when the item no longer meets statements are communicated to users.
the definition of an asset or a liability.
132. Disclosure
Chapter 6 It refers to additional information attached
to an entity’s financial statements, usually as
121. Measurement explanation for activities which have significantly
It involves the assignment of monetary influenced the entity’s financial results.
amounts at which the elements of the financial
statements are to be recognized and reported. 133. Rules on Presentation of Items in the Financial
Statements
Bases of Measurement General rule: Group similar items and
separate dissimilar items.
123. Historical Cost Exceptions: Material items of the same
This measurement is based on the nature should be reported separately in financial
transaction price at the time of recognition of the statements and dissimilar items may be aggregated
element (based on entry price). if these are immaterial.
124. Current Value

It measures the element in a manner which
is updated to reflect the conditions at the
measurement date.

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Chapter 8 issued after a buyer pays for the same with cash or
another form of guaranteed funds. If it is payable to
Concepts of Capital Maintenance the reporting entity, it is included in the books as
cash.
136. Financial Capital Maintenance
It asserts that profit is earned only when the 144. Postdated Check
amount of net assets at the end of the period is It is a check written by the drawer (payor) for
greater than the amount of net assets in the a date in the future. it may only be cashed or
beginning, after excluding contributions from and deposited on or after the date written on it. If it is
distributions to equity holders (mandated by payable to the reporting entity, it is not included in
standards). the books as cash. If it is payable to a different
party, it should not be excluded in the total cash
137. Physical Capital Maintenance balance.
It asserts that profit is earned if the physical
productive capacity of the entity based on, for Cash Items Included in the Accounting Books
example, units of output per day, increases during
the period, after excluding movements with equity 146. Cash on Hand
holders. It includes undeposited cash collections and
other cash items awaiting deposit.
CASH AND CASH EQUIVALENTS 147. Cash in Bank

It includes demand deposit or checking
139. Money account and saving deposit which are unrestricted
It is the standard medium of exchange in as to withdrawal.
business transactions. it refers to the currency and
coins which are in circulation and legal tender. 148. Cash Fund Set Aside for Current Purposes
Examples of this include:
140. Cash
In the context of accounting, it includes a. Petty cash fund
money and any other negotiable instrument that is b. Dividend fund
payable in money and acceptable by the bank for c. Payroll fund
deposit and immediate credit. d. Revolving fund
e. Tax fund
141. Check f. Interest fund
It is a document that orders a bank to pay a ***
specific amount of money from the person's
account to the person in whose name the same has 149. Bond Sinking Fund
been issued. In general, it is included in the books It is a restricted asset of a corporation that
as cash provided that the same is payable to the was required to set aside money for redeeming or
reporting entity. buying back some of its bonds payable.
General rule: It is presented as a noncurrent
142. Bank Draft asset.
It is a check drawn by a bank on its own Exception: It is presented as a current asset
funds in another bank. If it is payable to the when the bonds associated to it become due within
reporting entity, it is included in the books as cash. 12 months after the end of the reporting period.
143. Money Order 150. Fund Held for Future Plant Expansion
It is a paper document, similar to a check, It is a noncash item always presented as a
used for making payments. it is prepaid, so it is only noncurrent asset.

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160. Measurement of Cash
151. Preference Share Redemption Fund
It is a noncash item always presented as a a. In general – face value
noncurrent asset. b. Foreign currency – current exchange
rate
152. Cash Equivalents c. Cash held by a bank or financial
These are short-term and highly liquid institution under bankruptcy or financial
investments that are readily convertible into cash difficulty – estimated realizable value
and so near their maturity that they present
insignificant risk of changes in value because of 161. Foreign Exchange Restriction
changes in interest rates. Deposits in foreign banks which are subject
to foreign exchange restriction, if material, should
153. Criterion for an Item to Qualify as Cash be classified separately among noncurrent assets
Equivalent and the restriction clearly indicated.
Only highly liquid investments that are
acquired three months before maturity can qualify 162. Classification of Cash Fund Related to a
as cash equivalents. Liability
The classification should be parallel with
154. Equity Securities as Cash Equivalents such related liability (i.e., if the noncurrent liability is
General rule: Equity securities cannot qualify reclassified as current, the related noncurrent cash
as cash equivalents because shares do not have a fund shall also be reclassified as current asset).
maturity date.
Exception: Preference shares with specified 163. Classification of Cash Fund Set Aside for the
redemption date and acquired three months before Acquisition of a Noncurrent Asset
redemption date can qualify as cash equivalents. Such fund should be classified as
noncurrent asset regardless of the year of
Classification of Investments of Excess Cash disbursement.
156. Cash Equivalent 164. Bank Overdraft

See no. 152 for definition. It occurs when the cash in a bank account
has a credit balance resulting from the issuance of
157. Short-Term Financial Asset checks in excess of deposits.
It is an investment that matures in more
than three months but within one year from the end 165. Classification of Bank Overdraft
of the reporting period and is presented separately General rule: It shall be classified as a
as current asset. current liability and should not be offset against
other bank accounts with debit balances.
158. Long-Term Investments Exceptions:
It is an investment that matures in more
than one year from the end of the reporting period a. If there are other deposit accounts in the
and is classified as noncurrent asset. same bank as the account with the credit
*** balance, offsetting with such other
accounts is allowed.
159. Reclassification of Long-Term Investments b. If the amount is immaterial, offsetting is
If a long-term investment becomes due allowed.
within one year from the end of the reporting period,
the same shall be reclassified as current or 166. Compensating Balance
temporary investment. It generally takes the form of minimum
checking or demand deposit account balance that

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must be maintained in connection with a borrowing 176. Adjustment Required for Issued Checks That
arrangement with a bank. Became Stale
Types of Compensating Balance a. If the amount is material - Dr. Cash in

bank; Cr. Accounts payable or
168. Informal Compensating Balance appropriate account
It refers to one that is not legally restricted b. If the amount is immaterial - Dr. Cash in
and shall be included as part of cash. If the problem bank; Cr. Miscellaneous income
is silent, the compensating balance is treated as
unrestricted. 177. Journal Entries for Cash Shortage
169. Formal Compensating Balance a. Initial entry – Dr. Cash short or over; Cr.
It refers to one that is legally restricted and Cash)
shall be classified as current or noncurrent asset b. If the cashier or cash custodian is held
depending on the terms of the related loan. responsible for the cash shortage – Dr.
*** Due from cashier; Cr. Cash short or over
c. If reasonable efforts fail to disclose the
170. Unreleased or Undelivered Checks cause of the shortage – Dr. Loss from
It is a check that is merely drawn and cash shortage; Cr. Cash short or over
recorded but not given to the payee before the end
of reporting period. 178. Journal Entries for Cash Overage
171. Adjustment Required for Undelivered or a. Initial entry – Dr. Cash; Cr. Cash short or
Unreleased Checks over
Dr. Cash in bank; Cr. Expense or liability – b. If there is no claim on the overage – Dr.
The entry made upon issuance of said check should Cash short or over; Cr. Miscellaneous
be reversed because in essence, no payment has income
really been made. c. If the cash overage is properly found to
be the money of the cashier – Dr. Cash
172. Postdated Check Delivered short or over; Cr. Payable to cashier
It is a check drawn, recorded and already
given to the payee but it bears a date subsequent to 179. Imprest System
the end of reporting period. It is a system of control of cash which
requires that all cash receipts should be deposited
173. Adjustment Required for Postdated Checks intact and all cash disbursements should be made
Delivered by means of check.
Dr. Cash in bank; Cr. Expense or liability –
The entry made upon issuance of said check should Methods of Handling the Petty Cash Fund
be reversed because in essence, no payment has
really been made. 181. Imprest Fund System
174. Stale Check or Check Long Outstanding a. A memorandum entry is simply prepared
It is a check not encashed by the payee in the petty cash journal for each
within a relatively long period of time. disbursement.
b. Replenishment of the fund is usually
175. Prescriptive Period for Checks equal to the petty cash disbursements.
In banking practice, a check becomes stale c. Replenishment should only be by means
if not encashed within 6 months from the time of of drawing checks and not from
issuance. undeposited collections.
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d. It is necessary to adjust the e. Decrease of the fund – Dr. Cash in bank;
unreplenished expenses at the end of Cr. Petty cash fund
the reporting period in order to state the
correct balance of the fund. 186. Demand Deposit
It is the current account or checking account
182. Fluctuating Fund System or commercial deposit where deposits are covered
by deposit slips and where funds are withdrawable
a. Disbursements are immediately on demand by drawing checks against the bank.
recorded in the general journal or cash
disbursements journal. 187. Savings Deposit
b. Replenishment of the fund may or may It is a bank account where the depositor is
not be the same amount as the petty given a passbook upon initial deposit. the passbook
cash disbursement. is required when making deposits and withdrawals.
c. No adjustment for unreplenished this type of bank deposit is interest bearing.
expenses is needed at the end of the
reporting period because of the outright 186. Time Deposit
recording of expenses. It is a bank deposit evidenced by a formal
agreement called certificate of deposit. it is interest
Journal Entries for the Handling of Petty Cash bearing and may be preterminated or withdrawn on
Fund demand or after a certain period of time agreed
upon.
184. Imprest Fund System
189. Journal Entry Used to Record Collection of
a. Establishment of the fund – Dr. Petty Cash in the Books of the Reporting Entity
cash fund; Cr. Cash in bank Dr. Cash or Cash in bank; Cr. Accounts
b. Payment of expenses out of the fund – receivable or any other appropriate account
memorandum entry in the petty cash
journal 190. Journal Entry Used by the Bank to Record
c. Replenishment of petty cash payments Collection of Cash by the Reporting Entity and
– Dr. Expenses; Cr. Cash in bank Subsequent Deposit to the Bank
d. Adjusting entry if no replenishment is Dr. Cash; Cr. Bank account of reporting
made at year-end – Dr. Expenses; cr. entity
Cash in bank
e. Increase in fund – Dr. Petty cash fund; 191. Journal Entry Used to Record Disbursements
Cr. Cash in bank of Cash in the Books of the Reporting Entity
f. Decrease in fund – Dr. Cash in bank; Cr. Dr. Expenses or any other appropriate
Petty cash fund account; Cr. Cash or Cash in bank
185. Fluctuating Fund System 192. Journal Entry Used by the Bank to Record
Withdrawals or Disbursements of Cash by the
a. Establishment of the fund – Dr. Petty Reporting Entity
cash fund; Cr. Cash in bank Dr. Bank account of reporting entity; Cr.
b. Payment of expenses out of the petty Cash
cash fund – Dr. Expenses; Cr. Petty cash
fund 193. Bank Reconciliation
c. Replenishment or increase of the fund – It is a statement which brings into
Dr. Petty cash fund; Cr. Cash in bank agreement the cash balance per book and cash
d. Adjusting entry if no replenishment is balance per bank.
made at year-end – no entry required
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194. Bank Statement 200. NSF or DAIF Checks
It is a monthly report of the bank to the These are checks deposited but not returned
depositor showing data about the transactions of by the bank because of insufficiency of fund.
the reporting entity with the bank during the period
and the beginning and ending balances of its bank Bank Reconciling Items
account.
202. Deposits in Transit
195. Cancelled Checks These are collections already recorded by
These are the checks (attached to the bank the depositor as cash receipts but not yet reflected
statement upon receipt) issued by the depositor on the bank statement.
and paid by the bank during the month.
203. Outstanding Checks
Book Reconciling Items These are checks already recorded by the
depositor as cash disbursements but not yet
197. Credit Memos reflected on the bank statement.
These refer to items not representing
deposits credited by the bank to the account of the 204. Bank Errors
depositor but not yet recorded by the depositor as These refer to incorrect posting of cash
cash receipts. Examples: deposits or withdrawals resulting to either
overstatement or understatement of cash balance
a. Notes receivable collected by bank in in the bank account of the depositor.
favor of the depositor ***
b. Proceeds of bank loan
c. Matured time deposits transferred by the 205. Certified Check
bank to the current account of the It is a check for which the issuing bank
depositor guarantees availability of cash in the holder's
account.
198. Debit Memos
These refer to items not representing checks 206. Accounting Treatment for Certified Checks
paid by bank which are charged or debited by the Certified checks should be deducted from
bank to the account of the depositor but not yet the total outstanding checks (if included therein)
recorded by the depositor as cash disbursements. because they are no longer outstanding for bank
Examples: reconciliation purposes.
a. NSF checks or DAIF (drawn against Forms of Bank Reconciliation

insufficient fund) checks
b. Technically defective checks 208. Adjusted Balance Method
c. Bank service charges It is a form of bank reconciliation where the
d. Reduction of loan book balance and the bank balance are brought to
a current cash balance that must appear on the
199. Book Errors balance sheet.
These refer to incorrect recording of cash
receipts or disbursements resulting to either 209. Book to Bank Method
overstatement or understatement of cash balance It is a form of bank reconciliation where the
in the books of the entity. book balance is reconciled with the bank balance or
*** the book balance is adjusted to equal the bank
balance.
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210. Bank to Book Method 217. Book Debits
It is a form of bank reconciliation where the These refer to cash receipts or all items
bank balance is reconciled with the book balance or debited to the cash in bank account.
the bank balance is adjusted to equal the book
balance. 218. Book Credits
*** These refer to cash disbursements or all
items credited to the cash in bank account.
211. Formula to Compute for the Adjusted Book
Balance under the Adjusted Balance Method of 219. Computation of End of Month Balance per
Bank Reconciliation Bank
Book balance + Credit memos - Debit Beginning of month balance per bank + Bank
Memos ± Effect of errors = Adjusted book balance credits during the month - Bank debits during the
month = End of month balance per bank
212. Formula to Compute for the Adjusted Bank
Balance under the Adjusted Balance Method of 220. Bank Credits
Bank Reconciliation These refer to all items credited to the
Bank balance + Deposits in transit - account of the depositor which include deposits
Outstanding checks (after excluding certified acknowledged by bank and credit memos.
checks) ± Effect of errors = Adjusted bank balance
221. Bank Debits
213. Formula Used Under the Book to Bank Method These refer to all items debited to the
of Bank Reconciliation account of the depositor which includes checks
Book balance + Credit memos + Outstanding paid by bank and debit memos.
checks (after excluding certified checks) - Debit
memos - Deposits in transit ± Effect of errors = Bank 222. Computation of End of Month Deposits in
balance Transit
Beginning of month deposits in transit +
214. Formula Used Under the Bank to Book Method Book debits - CM from previous month - Bank
of Bank Reconciliation credits + CM from current month = End of month
Bank balance + Deposits in transit + Debit deposits in transit
memos - Outstanding checks (after excluding
certified checks) - Credit memos ± effect of errors = 223. Computation of End of Month Outstanding
book balance Checks
Beginning of month outstanding checks +
215. Proof of Cash Book credits – DM from previous month + Bank
It is a reconciliation of the general ledger debits + DM from current month = End of month
cash balance at both the beginning and end of a outstanding checks
period, combined with a reconciliation of cash
deposited for the period with the cash receipts
journal, and a reconciliation of checks for the period
with the cash disbursements journal.
216. Computation of End of Month Balance per

Book
Beginning of month balance per book +
Book debits during the month - Book credits during
the month = End of month balance per book
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Summary of Proof of Cash Procedures for the Book Balance
Beginning Book Credits
Book Debits Ending Cash
Cash or Cash
Bank Reconciling Items or Cash Balance per
Balance per Disburse-
Receipts Book
Book ments
225. Credit memos from previous month’s
bank statement Add Deduct
226. Credit memos from current month’s bank
statement A A
227. Debit memos from previous month’s bank
statement D D
228. Debit memos from current month’s bank
statement A D
229. NSF check deposited last month
redeposited this month D A D A
230. NSF check deposited this month
redeposited this month A A
231. NSF check deposited this month to be
redeposited next month A D
232. Overstated recording of cash receipts in
the cash in bank account (committed during
the previous month, discovered in the current D D
month)
the current month, discovered upon the receipt D D
of bank statement)
the cash in bank account (committed and
discovered during the current month)
D D
235. Understated recording of cash receipts in
the previous month, discovered in the current A D
month)
the current month, discovered upon the receipt A A
of bank statement)
the cash in bank account (committed and No adjustment required
discovered during the current month)
238. Overstated recording of cash
disbursements in the cash in bank account
(committed during the previous month, A D
discovered in the current month)
disbursements in the cash in bank account D A
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(committed during the current month,
discovered upon the receipt of bank statement)
(committed and discovered during the current D D
month)
241. Understated recording of cash
(committed during the previous month, D D
discovered in the current month)
(committed during the current month, A D
discovered upon the receipt of bank statement)
(committed and discovered during the current
No adjustment required.
month)
Summary of Proof of Cash Procedures for the Bank Balance

Beginning
Ending Cash
Cash Bank Credits Bank Debits
Balance per
Bank Reconciling Items Balance per or Cash or Cash
Bank
Bank Deposits Withdrawals
Statement
Statement
245. Deposits in transit as of beginning of the
current month A D
246. Deposits in transit as of end of the current
month A A
247. Outstanding checks as of beginning of the
current month D D
248. Outstanding checks as of end of the
current month A D
249. Cash collections disbursed instead of
being deposited intact A A
250. Overstated recording of cash deposit in
the bank account of reporting entity
corrected in the current month)
(committed during the current month, still D D
uncorrected as per bank statement)
(committed and corrected in the current D D
month)
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253. Understated recording of cash deposit in
(committed during the current month, still A A
(committed and corrected in the current No adjustment required.
month)
256. Overstated recording of cash withdrawal
in the bank account of the reporting entity
in the bank account of reporting entity
(committed during the current month, still D A
(committed and corrected in the current D D
month)
259. Understated recording of cash withdrawal
(committed during the current month, still A D
(committed and corrected in the current No adjustment required.
month)
RECEIVABLES 265. Accounts Receivable

These are open accounts arising from the
263. Receivables sale of goods and services in the ordinary course of
These are financial assets that represent a business and not supported by promissory notes.
contractual right to receive cash or another
financial asset from another entity. 266. Notes Receivable
These are receivables supported by formal
264. Trade Receivables promises to pay in the form of notes.
These refer to claims arising from sale of
merchandise or services in the ordinary course of
business (e.g., accounts receivable, notes
receivable, etc.).
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267. Nontrade Receivables 275. Accrued Income
These represent claims arising from Examples: Dividends receivable, accrued
sources other than the sale of merchandise or rent, accrued royalties income, accrued interest on
services in the ordinary course of business. bond investments, etc.
Always classified as current asset.
268. Classification of Trade Receivables
276. Claims Receivable
a. Current asset – if expected to be realized Examples: Claims against common carriers
in cash within the normal operating for losses or damages, claim for rebates and tax
cycle or one year, whichever is longer; refunds, claims from insurance entities, etc.
default in case the problem is silent. Always classified as current asset.
b. Noncurrent asset – in case otherwise.
277. Customer’s Credit Balances
269. Classification of Nontrade Receivables These balances occur due to overpayments,
returns and allowances, and advanced payments
a. Current asset – if expected to be realized from customers.
in cash within one year, the length of the General rule: Current liability
operating cycle notwithstanding. Exception: If the amount is immaterial,
b. Noncurrent asset – in case otherwise. offset against customers’ accounts with debit
balances.
270. Advances to or Receivables from
Shareholders, Directors, Officers or Employees 278. Measurement of Accounts Receivable
General rule: Current asset
Exception: Noncurrent asset if stated to be a. Initial measurement – fair value (face
collectible beyond 1 year. amount or original invoice amount)
b. Subsequent measurement – amortized
271. Advances to Affiliates cost (net realizable value of accounts
Noncurrent (long-term investment). receivable or gross accounts receivable
less allowances)
272. Subscription Receivable
General rule: Deduction from subscribed 279. Allowances Against Accounts Receivable
share capital. These are usually deducted from accounts
Exception: Current asset if stated to be receivable to get the latter’s estimated recoverable
collectible within 1 year. amount or realizable value.
273. Debit Balances in Creditors' Accounts a. Allowance for freight charges

These balances occur due to overpayments b. Allowance for sales returns
and/or returns and allowances. c. Allowance for sales discounts
General rule: Current asset. d. Allowance for doubtful accounts
Exception: If the amount is immaterial,
offset against the creditors' accounts with credit 280. FOB Destination
balances. It is a shipping term which means that
ownership of the goods purchased is vested in the
274. Special Deposits on Contract Bids buyer upon receipt thereof. Under this shipping
General rule: Noncurrent asset. term, the seller (owner during the freight period) is
Exception: Current asset if stated to be responsible for the freight charges.
collectible within 1 year.
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281. FOB Shipping Point of the product. No ledger account is opened for this
It is a shipping term which means that kind of discount.
ownership of the goods purchased is vested in the
buyer upon shipment thereof. Under this shipping 290. Cash Discount
term, the buyer (owner during the freight period) is It is a discount allowed to stimulate instant
responsible for the freight charges. payment of the goods purchased.
282. Freight Collect Methods of Recording Credit Sales

It means that freight charge on the goods
shipped is not yet paid when the goods were 292. Gross Method
shipped (to be paid by the buyer). It is a method of recording credit sales
where the accounts receivable and sales are
283. Freight Prepaid recorded at gross amount of the invoice (more
It means that freight charge on the goods commonly used).
shipped was already paid (by the seller) when the
goods were shipped. 293. Net Method
It is a method of recording credit sales
284. Journal Entry to Record Shipment of where the accounts receivable and sales are
Merchandise Sold Freight Collect Under FOB recorded at net amount of the invoice, meaning the
Destination invoice price minus the cash discount.
Dr. Accounts receivable, Freight out; Cr. ***
Sales, Allowance for freight charge
294. Journal Entries Under the Gross Method of
285. Journal Entry to Record Shipment of Recording Credit Sales
Merchandise Freight Prepaid Under FOB
Destination a. Sale of merchandise on account – Dr.
Dr. Accounts receivable, Freight out; Cr. Accounts receivable (gross amount of
Sales, Cash invoice); Cr. Sales
b. Collection of customer’s account within
286. Journal Entry to Record Shipment of the discount period – Dr. Cash, Sales
Merchandise Sold Freight Collect Under FOB discount; Cr. Accounts receivable
Shipping Point c. Collection of customer’s account
Dr. Accounts receivable, Cr. Sales beyond the discount period – Dr. Cash;
Cr. Accounts receivable
287. Journal Entry to Record Shipment of
Merchandise Sold Freight Prepaid Under FOB 295. Journal Entries Under the Net Method of
Shipping Point Recording Credit Sales
Dr. Accounts receivable (invoice amount +
freight charge); Cr. Sales, Cash a. Sale of merchandise on account – Dr.
Accounts receivable (invoice price -
288. Journal Entry to Record Probable Return of cash discount); Cr. Sales
Merchandise Sold to Customers b. Collection of customer’s account within
Dr. Sales return; Cr. Allowance for sales the discount period – Dr. Cash; Cr.
returns Accounts receivable
c. Collection of customer's account
289. TRADE DISCOUNT beyond the discount period – Dr. Cash;
It is a discount that is allowed by the Cr. Accounts receivable, Sales discount
wholesaler to the retailer, calculated on the list price forfeited
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296. Sales Discount Forfeited 304. Journal Entries Under the Allowance Method
It is a miscellaneous or other income of Recording Bad Debts or Doubtful Accounts
account credited whenever there is a collection of
accounts receivable beyond the discount period a. Provision for doubtful accounts – Dr.
under the net method of recording credit sales. Doubtful accounts expense; Cr.
Allowance for doubtful accounts
297. Journal Entry to Record Expected Sales b. Writeoff of accounts proved to be
Discount worthless or uncollectible – Dr.
Dr. Sales discount; Cr. Allowance for sales Allowance for doubtful accounts; Cr.
discount (this entry may be reversed at the Accounts receivable
beginning of the next period.) c. Recovery and collection of accounts
previously written off – Dr. Cash; Cr.
298. Bad Debt or Doubtful Account Allowance for doubtful accounts
It is an expense that a business incurs once
the repayment of credit previously extended to a 305. Journal Entries Under the Direct Writeoff
customer is estimated to be uncollectible. Method of Recording Bad Debts or Doubtful
Accounts
Methods of Accounting for Bad Debts
a. Writeoff of accounts proved to be
300. Allowance Method worthless or uncollectible – Dr. Bad
It is a method of accounting for bad debts debts expense; Cr. Accounts receivable
which requires the recognition of a bad debt loss if b. Recovery and collection of account
the accounts are doubtful of collection (i.e., a previously written off – Dr. Cash; Cr. Bad
provision for doubtful accounts is required at the debts expense
end of reporting period).
306. CLASSIFICATION OF DOUBTFUL ACCOUNTS
301. Direct Writeoff Method OR BAD DEBTS EXPENSE IN THE INCOME
It is a method of accounting for bad debts STATEMENT
which requires recognition of a bad debt loss only
when the accounts are proved to be worthless or a. Distribution cost - if the granting of
uncollectible. credit and collection of accounts are
*** under the charge of the sales manager.
b. Administrative expense - if the granting
302. Provision of credit and collection of accounts are
It is the amount of an expense that an entity under the charge of an officer other than
elects to recognize now, before it has precise sales manager.
information about the exact amount of the expense.
If the problem is silent, bad debts expense is
an administrative expense.
303. Writeoff
It is a reduction in the recorded amount of an Methods of Estimating Doubtful Accounts
asset which occurs upon the realization that an
asset no longer can be converted into cash, can 308. Aging of Accounts Receivable
provide no further use to a business, or has no It refers to the method of estimating
market value. doubtful accounts where the receivables are
classified by due date. The allowance is then
determined by multiplying the total of each
classification by the rate or percent of loss
experienced by the entity for each category
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(accurate and scientific; presents fairly the 313. Rules on Assessment for Impairment of
accounts receivable at net realizable value). Accounts Receivable
a. It is one of the statement of financial a. Individually significant accounts

position approaches in estimating receivable – should be considered for
doubtful accounts. impairment separately and if impaired,
b. It provides the ending allowance for the impairment loss is recognized.
doubtful accounts. b. Not individually significant accounts
receivable – should be collectively
309. Percentage of Accounts Receivable assessed for impairment (use of a
It is a method of estimating doubtful composite rate that can appropriately
accounts where a certain rate is multiplied by the measure impairment on all accounts in
open accounts at the end of the period in order to the category).
get the required allowance balance. c. Individually significant accounts
receivable initially assessed to be
a. It is one of the statement of financial unimpaired – should be included with
position approaches in estimating other accounts receivable (those not
doubtful accounts. individually significant) with similar
b. It provides the ending allowance for credit risk characteristics and
doubtful accounts. collectively assessed for impairment.
310. Percentage of Sales 314. Journal Entry to Record Impairment Loss on

It is a method of estimating doubtful Accounts Receivable
accounts where the amount of sales for the year is Dr. Doubtful accounts expense; Cr.
multiplied by a certain rate to get the doubtful Allowance for doubtful accounts
accounts expense.
315. Negotiable Promissory Note
a. It is the only income statement approach It is an unconditional promise made in
in estimating doubtful accounts. writing made by one person to another, signed by
b. It provides the doubtful accounts the maker, engaging to pay on demand or at a fixed
expense for the period. or determinable future time a sum certain in money
*** to order or to bearer.
311. Journal Entry to Record Correction in 316. Dishonored

Allowance for Doubtful Account as a Change in It is the status of a promissory note that has
Accounting Estimate already matured but is still unpaid after its
presentment for payment.
a. Inadequate allowance - Dr. Doubtful
accounts expense; Cr. Allowance for 317. Treatment for Dishonored Notes Receivable
doubtful accounts These (face amount, interest and other
b. Excessive allowance - Dr. Allowance for charges) should be removed from the notes
doubtful accounts; Cr. Doubtful receivable account and transferred to accounts
accounts expense receivable.
312. Allowance for Impairment 318. Initial Measurement of Notes Receivable

It is the loss allowance required to be The initial measurement should be fair value
recognized for expected credit losses on financial plus transaction costs which is equal to:
assets measured at amortized cost.
a. General rule: Present value
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b. Exception: Short-term notes receivable 326. Treatment for Noninterest-Bearing Note
shall be measured at face value. Receivable
It is measured at present value which is the
319. Present Value discounted value of future cash flows using the
It is the sum of all future cash flows effective interest rate.
discounted using the prevailing market rate of
interest for similar notes. 327. Implicit Interest Rate
It is an interest rate that is not explicitly
320. Nominal Interest Rate stated in a debt agreement.
It is the interest rate written on the face of an
instrument (form). 328. Subsequent Measurement of Notes Receivable
It is subsequently measured at amortized
321. Effective Interest Rate cost using the effective interest method.
It is the prevailing market rate of interest
(substance). 329. Formula for Amortized Cost of Note Receivable
(Effective Interest Method)
322. Classification of Notes Receivable Initial measurement of note receivable -
Principal repayment ± Cumulative amortization -
a. Interest-bearing note with nominal rate Reduction for impairment or uncollectibility =
is equal to effective interest rate Amortized cost of note receivable
b. Interest-bearing note with nominal rate
is greater than effective interest rate 330. Loan Receivable
c. Interest-bearing note with (nominal rate It is a financial asset arising from a loan
is less than effective interest rate granted by a bank or other financial institution to a
d. Noninterest-bearing note borrower or client.
323. Treatment for Interest-Bearing Note 331. Initial Measurement of Loan Receivable
Receivable with Nominal Rate Equal to the Effective It is initially measured at fair value plus
Interest Rate transaction costs that are directly attributable to
It is recorded at face value (which is equal to the acquisition of the financial asset (transaction
its present value upon issuance). price + direct origination costs - origination fee).
324. Treatment for Interest-Bearing Note 332. Direct Origination Costs

Receivable with Nominal Rate Greater than the These are incremental direct costs of loan
Effective Interest Rate origination resulting from dealings with
It is recorded at face value (which is equal to independent third parties for that loan and various
its present value upon issuance). direct costs from specific activities of the lender for
that loan such as evaluating the prospective buyer’s
325. Treatment for Interest-Bearing Note economic condition, evaluating and recording
Receivable with Nominal Rate Less than the guarantees, etc.
Effective Interest Rate
It is measured at present value which is the 333. Treatment for Direct Origination Costs
discounted value of future cash flows using the General rule: These are included in the initial
effective interest rate. measurement of loan receivable.
Exception: These are expensed outright if
the loan did not materialize.
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334. Indirect Origination Costs ***
These are operating costs of a lending
institution not directly incurred for a specific loan 343. Credit Losses
such as administrative cost, rent, depreciation and These are the present value of all cash
all other occupancy and equipment costs. shortfalls from a loan receivable or any similar
financial asset.
335. Treatment for Indirect Origination Costs
These are expensed as incurred. 344. Credit Risk
It is the risk that one party to a financial
336. Origination Fee instrument will cause a financial loss for the other
It is an upfront fee charged by a lender for party by failing to discharge an obligation.
processing of a new loan application.
345. Impairment Loss on Loan Receivable Under
337. Treatment for Origination Fee the Incurred Loss Model
It is recognized as unearned interest income It is measured as the difference between the
and amortized over the term of the loan. carrying amount and the present value of estimated
future cash flows discounted at the original
338. Subsequent Measurement of Loan Receivable effective rate.
It is subsequently measured at amortized
cost using the effective interest method. Measurement Bases Under the Expected Credit
Loss Model
339. Formula for Amortized Cost of Loan
Receivable (Effective Interest Method) 347. 12-Month Expected Credit Loss (Stage 1)
Initial measurement of loan receivable - It is the portion of the lifetime expected
Principal repayment ± Cumulative amortization - credit losses that represent the expected credit
Reduction for impairment or uncollectibility = losses that result from default events on a financial
Amortized cost of loan receivable instrument that are possible within the 12 months
after the reporting date. It applies to all items (from
Models for the Provision for Credit Losses from initial recognition) as long as there is no significant
Financial Instruments deterioration in credit quality
341. Incurred Loss Model (IAS 39 – Old) 348. Lifetime Expected Credit Loss (Stages 2 and 3)
It assumes that all loans will be repaid until It is the expected credit loss that results
evidence to the contrary (known as a loss or trigger from all possible default events over the expected
event) is identified. Only at that point is the impaired life of the financial instrument. It applies when a
loan (or portfolio of loans) written down to a lower significant increase in credit risk has occurred on an
value. individual or collective basis
***
342. Expected Credit Loss Model (IFRS 9 – New)
It allows entities to take into account 349. Loss Given Default
expectations of future credit losses. It results in the It is the amount of money a bank or other
earlier recognition of credit losses as it will no financial institution loses when a borrower defaults
longer be appropriate for entities to wait for an on a loan.
incurred loss event to have occurred before credit
losses are recognized.
Stages of the General Approach (Expected Credit Loss Model)
350. Stage 1 Stage 2 Stage 3
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Loss allowance updated 12-month expected Lifetime expected credit Lifetime expected credit
at each reporting date credit losses losses losses
Lifetime expected credit Credit risk has increased Credit risk has increased
losses criteria significantly since initial
significantly since initial
recognition (whether on recognition (whether on
an individual or collective
an individual or collective
basis). basis).
+
Credit impairment
Interest income Effective interest rate on Effective interest rate on Effective interest rate on
calculated based on gross carrying amount gross carrying amount amortized cost (gross
carrying amount less
loss allowance)
Change in credit risk
since initial recognition
Improvement ↔
Deterioration
351. Computation of Impairment Loss Under the 354. Receivable Financing

Stage 1 of General Approach It is the financial flexibility or capability of an
Carrying amount, reporting date entity to raise money out of its receivables.
- Present value of expected cash flows
= Expected credit loss 355. Forms of Receivable Financing
* Probability of default within 12 months or
LGD a. Pledge of accounts receivable
= 12-month expected credit loss allowance b. Assignment of accounts receivable
- Expected credit loss allowance, previous c. Factoring of accounts receivable
year d. Discounting of notes receivable
= Impairment loss
356. Pledge of Accounts Receivable
352. Computation of Impairment Loss Under Stage It is a form of receivable financing where a
2 of General Approach business uses its accounts receivable as collateral
Carrying amount, reporting date on a loan, usually a line of credit.
- Present value of expected cash flows
= Expected credit loss 357. Line of Credit
* Probability of default within the remaining It is the preset borrowing limit that a
term or LGD borrower can use at any time.
= Lifetime expected credit loss allowance
- Expected credit loss allowance, previous 358. Discount on Loan
year It exists when the interest for the term of the
= Impairment loss loan is deducted in advance.
353. Computation of Impairment Loss Under the 359. Journal Entries Related to the Pledge of
Stage 3 of General Approach Accounts Receivable
Carrying amount, reporting date
- Present value of expected cash flows a. Commencement of loan in which the
= Lifetime expected credit loss accounts receivable have been pledged
- Expected credit loss allowance, previous – Dr. Cash, Discount on note payable (if
year discounted); Cr. Note payable
= Impairment loss b. Amortization of discount on note
payable at the end of reporting period or
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at the date of settlement – Dr. Interest assigned with service charge – Dr.
expense; Cr. Discount on note payable Cash, Service charge; Cr. Note payable
c. Payment of bank loan – Dr. Note – bank
payable; Cr. Cash c. Issuance of credit memo for sales
return to a customer whose account
360. Formula for Carrying Amount of Discounted was assigned – Dr. Sale return; Cr.
Note Payable Accounts receivable – assigned
Note payable – Discount on note payable = d. Collection of cash from assigned
Carrying amount of note payable accounts receivable less cash discount
– Dr. Cash, Sales discount; Cr. Accounts
361. Assignment of Accounts Receivable receivable – assigned
It is a form of receivable financing where a e. Remittance of collections from
borrower called the assignor transfer rights in some assigned accounts receivable to the
accounts receivable to a lender called the assignee bank (assignee) plus interest – Dr. Note
in consideration for a loan. payable – bank, Interest expense; Cr.
Cash
Kinds of Assignment of Accounts Receivable f. Writeoff of assigned accounts
receivable – Dr. Allowance for doubtful
363. Nonnotification Basis accounts; Cr. Accounts receivable
It is a kind of assignment of accounts g. Transfer of assigned accounts
receivable where the customers are not informed receivable to accounts receivable after
that their accounts have been assigned (more making the last remittance of
commonly practiced). collections paying off the loan balance
plus interest – Dr. Accounts receivable;
364. Notification Basis Cr. Accounts receivable – assigned
It is a kind of assignment of accounts
receivable where the customers are notified that 368. Journal Entries Related to the Assignment of
their accounts have been assigned to have them Accounts Receivable Under Notification Basis
make their payments directly to the assignee
*** a. Separation of assigned accounts
receivable – Dr. Accounts receivable –
365. Service Charge, Financing Charge or assigned; Cr. Accounts receivable
Commission b. Receipt of notice from bank about
It is the interest for the loan that an assignee collection of accounts receivable
charges for the assignment agreement. assigned with cash discount – Dr. Note
payable – bank, Sales discount; Cr.
366. Equity in Assigned Accounts Receivable Cash
It is the difference between the accounts c. Sending of check to bank for interest
receivable assigned and the note payable from bank due on loan for which accounts
that shall be disclosed by the entity. receivable were assigned – Dr. Interest
expense; Cr. Cash
367. Journal Entries Related to the Assignment of d. Receipt of notice from bank about
Accounts Receivable Under Nonnotification Basis collection of assigned accounts
receivable allowing for the final
a. Separation of assigned accounts settlement of the loan (with interest)
receivable – Dr. Accounts receivable – and the remittance of excess
assigned; Cr. Accounts receivable collections and return of uncollected
b. Commencement of the loan for which assigned accounts – Dr. Cash, Interest
specific accounts receivable are
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expense, Note payable – bank; Cr. 377. Factor's Holdback
Accounts receivable – assigned It is a predetermined amount withheld by the
factor as a protection against customer returns and
369. Factoring of Accounts Receivable allowances and other special adjustments.
It is the selling of accounts receivables to a
third party to raise cash under notification and 378. Journal Entries Related to the Factoring of
nonrecourse bases. Accounts Receivable as a Continuing Agreement
370. Factor a. Factoring where invoice is subject to

It is the bank or finance entity to which the credit terms allowing for availment of
accounts receivable are sold in factoring. cash discount with commission and
factor’s holdback – Dr. Cash, Sales
Forms of Factoring of Accounts Receivable discount, Commission (balancing
figure), Receivable from factor (factor’s
372. Casual Factoring holdback); Cr. Accounts receivable
It is a type of factoring which simply means b. Return of merchandise by customer
normal sale of accounts receivable. If an entity finds whose account was previously factored
in a critical cash position, it may be forced to factor – Dr. Sales return and allowances
some or all of its accounts receivable at a (invoice price of goods returned; Cr.
substantial discount to a bank or a finance entity to Sales discount (invoice price * discount
obtain the much needed cash. rate), Receivable from factor (balancing
figure)
373. Factoring in a Continuing Agreement c. Final settlement with the factor after all
It is an arrangement where a financing entity the receivables factored are collected –
purchases all of the accounts receivable of a certain Dr. Cash; Cr. Receivable from factor
entity. In this context, before the merchandise in
shipped to the customer, the company seeks for the 379. Credit Card
factor’s credit approval, if approved, the accounts It is a plastic card which enables the holder
are directly sold to the factor then assumes for its to obtain credit up to a predetermined limit from the
collections. issuer of the card for the purchase of goods and
services (somewhat similar to factoring).
374. Journal Entry to Record the Factoring of
Accounts Receivable (Casual) 380. Journal Entries Related to Credit Card
Dr. Cash, Allowance for doubtful accounts (if Transactions
any), Loss on factoring (balancing figure); Cr.
Accounts receivable a. Credit card sales – Dr. Accounts
receivable – credit card company; Cr.
375. Factor's Credit Approval Sales
It is required before a merchandise is b. Payment from credit card company – Dr.
shipped to a customer when the reporting entity's Cash, Credit card service charge; Cr.
accounts receivable are under a factoring as a Accounts receivable – credit card
continuing agreement. company
376. Factoring Fee or Commission 381. Discounting of Note Receivable

It is charged by the factor for its services of It is a form of receivable financing where a
credit approval, billing, collecting and assuming note receivable is converted into cash by selling
uncollectible factored accounts. them to a financial institution at a discount.
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382. Endorsement 394. Discount
It is the transfer of right to a negotiable It is the amount of interest deducted by the
instrument by simply signing at the back of the bank in advance.
instrument.
395. Formula for Discount
383. Endorsement with Recourse Discount = Maturity value * Discount rate *
It means that the endorser shall pay the Discount period
endorsee if the maker dishonors the note (default in
case the problem is silent). 396. Discount Rate
It is the rate used by the bank in computing
384. Endorsement without Recourse the discount.
It means that the endorser avoids future
liability even if the maker refuses to pay the 397. Discount Period
endorsee on the date of maturity. It is the period of time from date of
discounting to maturity date (unexpired term of the
385. Net Proceeds note).
These refer to the discounted value of the
note received by the endorser from the endorsee. 398. Formula for Discount Period
Discount period = Term of the note – Expired
386. Formula for Net Proceeds portion of the term up to the date of discounting
Net proceeds = Maturity value – Discount
399. Journal for Discounting of Note Receivable
387. Maturity Value without Recourse
It is the amount due on the note at the date Dr. Cash, Loss on note receivable
of maturity. discounting; Cr. Note receivable, Interest income
(principal * interest rate * time from date of note to
388. Formula for Maturity Value date of discounting)
Maturity value = Principal + Interest over the
whole term of the note Accounting Treatments for Discounting of Notes
Receivable with Recourse
389. Maturity Date
It is the date on which the note should be 401. Conditional Sale
paid. It is a way of accounting for note receivable
discounting which treats the transaction as the sale
390. Principal of note receivable subject to a condition (the
It is the amount appearing on the face of the endorser has to refund the endorsee in case the
note (face value). note is subsequently dishonored).
391. Interest 402. Secured Borrowing

It is the amount of interest for the full term It is a way of accounting for note receivable
of the note. discounting which treats the transaction as the
borrowing of cash by the endorser from the
392. Formula for Interest endorsee with the note receivable held as security
Interest = Principal * Rate * Time by the latter for such borrowing.
***
393. Time
It is the period within which the interest shall
accrue (date of note to maturity date).
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403. Journal Entries Related to the Discounting of 406. Journal Entry to Record Discounting of Own
Notes Receivable Under Conditional Sale Note
Dr. Cash, Discount on note payable; Cr. Note
a. Discounting – Dr. Cash, Loss on note payable (primary liability instead of contingent
receivable discounting (balancing liability)
figure); Cr. Note receivable discounted (a
contra-asset deducted from other notes INVENTORIES
receivable, requires disclosure of
contingent liability equal to this amount), 408. Inventories
Interest income These are assets held for sale in the ordinary
b. Payment by the maker for the course of business, in the process of production for
discounted note at maturity – dr. Note such sale, or in the form of materials or supplies to
receivable discounted (Contingent be consumed in the production process or in the
liability is extinguished also.); Cr. Note rendering of services.
receivable
c. Dishonor of discounted note by the Nature of Operations
maker
• Payment to endorsee – Dr. Accounts 409. Trading Concern
receivable; Cr. Cash It is one that buys and sells goods in the
• Extinguishment of contingent same form purchased.
liability – Dr. Note receivable
discounted; Cr. Note receivable 410. Manufacturing Concern
It is one that buys goods which are altered
404. Journal Entries Related to the Discounting of or converted into another form before they are made
Notes Receivable Under Secured Borrowing available for sale.
a. Discounting – Dr. Cash, Interest expense 411. Service Concern

(balancing figure); Cr. Liability for note It is one that provides work performed in an
receivable discounted, Interest income expert manner by an individual or team for the
b. Payment by the maker for the benefit of its customers.
discounted note at maturity – Dr. ***
Liability for note receivable discounted;
Cr. Note receivable 412. Merchandise Inventory
c. Dishonor of discounted note by the It is generally applied to goods sold by a
maker trading concern.
• Payment to endorsee – Dr. Accounts
receivable; Cr. Cash Inventories of a Manufacturing Concern
• Derecognition of liability for note
receivable discounted – Dr. Liability 414. Finished Goods
for note receivable discounted; Cr. These are inventory that have been assigned
Note receivable their full share of manufacturing costs.
405. Discounting of Own Note 415. Goods in Process or Work in Process

It is the discounting of a promissory note These are partially completed products
where the maker is not a customer but the reporting which require further process or work before they
entity itself. can be sold.
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416. Raw Materials Maritime Shipping Terms
These are goods that are to be used in the
production process. 421. FAS or Free Alongside
A seller who ships FAS must bear all
417. Factory or Manufacturing Supplies expenses and risk involved in delivering the goods
These are similar to raw materials but are to the dock next to or alongside the vessel on which
used indirectly in the production process. Indirect the goods are to be shipped.
usage means either of the following:
422. CIF or Cost, Insurance and Freight
a. not physically incorporated in the Under this shipping contract, the buyer
products being manufactured (e.g., agrees to pay in a lump sum the cost of the goods,
sandpaper); or insurance cost and freight charge.
b. though become part of the finished
product, the amounts involved are 423. Ex-Ship
insignificant that it is impractical to A seller who delivers the goods ex-ship
attempt to allocate their costs directly to bears all expenses and risk of loss until the goods
the product (e.g., paint, nails, etc.). are unloaded from the vessel at which time title and
*** risk of loss shall pass to the buyer.
***
418. Rule on the Inclusion of Goods in the Inventory
General rule: All goods to which the entity 424. Consignment
has title shall be included as inventory, regardless It is a method of marketing goods in which
of location. the owner called the consignor transfers physical
possession of certain goods to an agent called the
a. Goods owned and on hand consignee who sells them on the owner's behalf.
b. Goods in transit and sold FOB
destination 425. Treatment for Consigned Goods
c. Goods in transit and purchased FOB These (including freight and other handling
shipping point charges) shall form part of the consignor's
d. Goods out on Consignment inventory and excluded from the consignee's
e. Goods held in the hands of salesmen or inventory.
agents
f. Goods held by customers on approval or 426. Journal Entries Related to Consigned Goods
on trial
a. Consignee upon sale of consigned
Exception: Goods sold on installment basis, goods - Dr. Cash; Cr. Commission
though do legally remain as property of the seller, Income, Due to Consignor
are included in the inventory of the buyer and b. Consignee upon remittance of proceeds
excluded from that of the seller. - Dr. Due to Consignor; Cr. Cash (net of
commission)
419. Summary of Ownership of Goods Under c. Consignor upon remittance of proceeds
Different Shipping Terms - Dr. Cash, Commission; Cr. Sales
a. FOB destination - the seller is the owner 427. Statement Presentation of Inventory
while the goods are still in transit.
b. FOB shipping - the buyer becomes the a. Current asset
owner of the goods at the moment the b. As one line item in the statement of
goods are shipped. financial position but the details of the
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inventories shall be disclosed in the c. Return of merchandise to supplier - Dr.
notes to financial statements Accounts payable; Cr. Merchandise
inventory
Accounting Systems for Inventories d. Sale of merchandise on account - Dr.
Accounts receivable; Cr. Sales; Dr. Cost
429. Periodic System of goods sold; Cr. Merchandise
It calls for the physical counting of goods on inventory
hand at the end of the accounting period to e. Return of merchandise sold from
determine quantities. This is generally used when customer - Dr. Sales returns; Cr.
individual inventory items are of large volume and Accounts receivable; Dr. Merchandise
have small peso investment (e.g., groceries, inventory; Cr. Cost of goods sold
hardwars, etc.). f. Adjustment of ending inventory - no
entry required
430. Perpetual System
It requires the maintenance of records called 433. Treatment for inventory Shortages or
stock cards that usually offer a running summary of Overages
the inventory inflow and outflow. This is commonly
used when the inventory items are of low volume a. Normal (e.g., due to evaporation) -
and, treated individually, represent a relatively large closed to cost of goods sold
peso investment (e.g., jewelry, cars, etc.). b. Abnormal (e.g., theft) - charged to other
*** income or other expense
431. Journal Entries Under the Periodic Inventory
System 434. Trade discounts
These are deductions from the list or catalog
a. Purchase of merchandise on account - price in order to arrive at the invoice price which is
Dr. Purchases; Cr. Accounts payable the amount actually charged to the buyer. These are
b. Payment of freight on purchase - Dr. not recorded.
Freight in; Cr. Cash
c. Return of merchandise purchased to 435. Cash discounts
supplier - Dr. Accounts payable; Cr. These are deductions from the invoice price
Purchase return when payment is made within the discount period.
d. Sale of merchandise on account - Dr. The purpose of this type of discount is to encourage
Accounts Receivable; Cr. Sales prompt payment. These are recorded as purchase
e. Return of merchandise sold from discount by the buyer and sales discount by the
customer - Dr. Sales return; Cr. seller.
Accounts receivable
f. Adjustment of ending inventory - Dr. Components of Cost of Inventories
Merchandise inventory-end; Cr. Income
summary 437. Cost of purchase
It comprises the purchase price, import
432. Journal Entries Under the Perpetual Inventory duties and irrevocable taxes, freight, handling and
System other costs directly attributable to the acquisition of
finished goods, materjals and services. It does not
a. Purchase of merchandise on account - include interest expense.
Dr. Merchandjse inventory; Cr. Accounts
payable 438. Cost of Conversion
b. Payment of Freight on the Purchase - Dr. It includes costs that are directly (e.g., direct
Merchandise inventory; Cr. Cash labor) and indirectly (e.g., factory overhead) related
to the units of production.
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439. Other Inventoriable Costs 448. Last in, First Out (LIFO) Method
These are costs that are incurred to bring It assumes that the goods last purchased
the inventories to their present location or are first sol and consequently the goods remaining
condition. in the inventory at the end of the period are those
*** first purchased or produced. The standard,
however, does not permit anymore the use of this
440. Treatment for Storage Costs formula in measuring cost of inventories.
a. Storage of goods in process – capitalized
b. Storage of finished goods - expensed 449. Specific Identification
It requires a detailed physical count, so that
441. Treatment for Administrative Overhead the company knows exactly how many of each good
Expensed brought on specific dates remained at year-end
inventory. When this information is found, the
442. Treatment for Distribution or Selling Cost amount of goods is multiplied by their purchase
Expensed cost at their purchase date, to get a number for the
ending inventory cost. The major argument against
443. Work in Progress this method is that it is very costly to implement.
It is the term used to describe the
inventories of a service provider. 450. Standard Costs
These are predetermined product costs
Cost Formulas for Inventories established on the basis of normal levels of
materials and supplies, labor, efficiency and
445. First in, First Out (FIFO) Method capacity utilization (to be discussed further in
It assumes that the goods first purchased Advanced Accounting and Reporting).
are first sold and consequently the goods remaining
in the inventory at the end of the period are those 451. Relative Sales Price Method
most recently purchased or produced. It is used when different commodities are
Consequently: purchased at a lump sum by apportioning the single
cost among the commodities based on their
a. The inventory is stated at current respective sales price.
replacement cost; ***
b. In a period of inflation or rising prices,
this method would result to the highest 452. Measurement of Inventory
net income; and General rule: Inventories shall be measured
c. In a period of deflation or declining at the lower of cost and net realizable value.
prices, this method would result to the Exceptions:
lowest net income.
a. Agricultural, forest and mineral products
446. Weighted Average - Periodic – net realizable value
The cost of the beginning inventory plus the b. Commodities of broker-traders – fair
total cost of purchases during the period is divided value less cost of disposal
by the total units purchased plus those in the
beginning inventory to get a weighted average unit 453. Net Realizable Value
cost. It is the estimated selling price in the
ordinary course of business less the estimated cost
447. Weighted Average – Perpetual of completion and the estimated cost of disposal.
The weighted average is calculated as each
additional shipment is received.
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454. Method of Determination of Net Realizable purchase commitment previously
Value recorded.
c. Whatever the case is, the Purchases
a. It is usually on an item by item or account is debited at the lower of the
individual basis. purchase commitment price and the
b. It is not appropriate to write down replacement cost (or prevailing market
inventories based on a classification of purchase price).
inventory (e.g., raw materials, work in
process, and finished goods). 460. Biological Assets
c. Materials and other supplies held for use These are living animals and living plants
in production are not written down below used in agricultural activities.
cost if the finished products in which
they will be incorporated are expected to 461. Agricultural Produce
be sold at or above cost. It is the harvested product of an entity’s
biological assets.
Methods of Accounting for Inventory Writedown
462. Harvest
456. Direct Method It is the detachment of produce from a
The inventory is recorded at the lower of biological asset or cessation of a biological asset’s
cost or net realizable value. Any loss on inventory life processes.
writedown is not accounted for separately but
buried in the cost of goods sold. 463. Agricultural Activity
It is the management by an entity of the
457. Allowance Method biological transformation and harvest of biological
The inventory is recorded at cost and any assets for sale or for conversion into agricultural
loss on inventory writedown is accounted for produce or into additional biological assets (e.g.,
separately. A loss account “loss on inventory raising livestock, annual or perennial cropping, etc.).
writedown” is debited and a valuation account
“allowance for inventory writedown” is credited. 464. Biological Transformation
*** It comprises the processes of growth,
degeneration, production and procreation that
458. Purchase Commitments cause qualitative or quantitative changes in a
These are obligations of the entity to acquire biological asset.
certain goods sometime in the future at a fixed price
and fixed quantity. Types of Biological Transformations
459. Treatment for Purchase Commitments 466. Growth

It is an increase in quantity or improvement
a. If there is a decline in purchase price in quality of an animal or plant.
after a noncancelable purchase
commitment has been made, a loss is 467. Degeneration
recorded in the period of the price It is a decrease in quantity or deterioration in
decline (Dr. Loss on purchase quality of an animal or plant.
commitment; Cr. Estimated liability for ;
purchase commitment). 468. Procreation
b. Conversely, if a gain is recognized if It is the creation of additional living animal
there is an increase in purchase price but or plant.
such gain is limited to the loss on ***
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469. Measurement of Biological Assets value of the biological assets. The fair value of the
General rule: Biological assets shall be land may be deducted from the fair value of the
measured on initial recognition and at the end of combined assets to arrive at the fair value of the
reporting period at fair value less cost of disposal. biological assets.
Exception: Only on initial recognition, a
biological asset, for which market determined 475. Government Grant Related to Biological Assets
prices are not available or estimates of fair value are The grant relating to biological asset that
determined to be clearly unreliable, shall be has been measured at fair value less cost of
measured at cost less accumulated depreciation disposal shall be recognized as income in the
and any accumulated impairment loss. However, following manner:
once the fair value of such a biological asset
becomes clearly measurable, the entity shall a. Unconditional grant – when the grant
measure the biological asset at fair value less cost becomes receivable; or
of disposal. b. Conditional grant – when the conditions
attaching to the grant are met.
470. Measurement of Agricultural Produce
Agricultural produce growing on bearer Refer to PAS 20 “Government Grant” for
plant (see no. 472 for definition) is measured at fair grants relating to biological asset measured at cost
value less cost of disposal with changes recognized less any accumulated depreciation and any
in profit or loss as the produce grows (i.e., accumulated impairment loss.
measured at the end of each reporting period).
Agricultural produce shall be measured at 476. Bearer Plants
fair value less cost of disposal at the point of These are living plants that:
harvest. Subsequently, its measurement shall
conform to that of inventories (i.e., lower of cost or a. Are used in the production or supply of
net realizable value). agricultural produce;
b. Are expected to bear produce for more
471. Cost of Disposal than one period; and
It is the incremental cost directly c. Has a remote likelihood of being sold as
attributable to the disposal of an asset. In other agricultural produce, except for
words, cost of disposal is necessary for a sale to incidental scrap sales.
occur but that would not otherwise arise (e.g.,
commission to broker or dealer, transfer tax, etc.). Examples: Mango trees, grape vines, etc.
Exclusions: Trees grown and harvested to
472. Journal Entry to Record Harvesting of be sold as log; annual crops which do not bear
Agricultural Produce produce for more than one period and are held
Dr. Inventory; Cr. Gain on change in fair solely to be harvested as agricultural produce.
value (fair value less cost of disposal of agricultural
produce – decrease in fair value of biological asset 477. Classification Immature Bearer Plants
due to harvest) These are classified as qualifying assets or
assets which are being built by an entity and it takes
473. Agricultural Land a substantial time to build them. Costs such as
It is classified under property, plant and general and specific borrowing costs are to be
equipment and not under biological assets. capitalized until the bearer plants reach maturity.
474. Biological Asset Attached to Land 478. Classification of Mature Bearer Plants
An entity may use information regarding the These are classified as property, plant and
combined assets (e.g., trees in a plantation forest equipment measured either using the cost model or
and land sold as a package) to determine the fair revaluation model.
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reporting period or
479. Plants with Dual Use period date of
These are plants which are: recognition
a. Cultivated for bearing agricultural 486. Journal Entries for Changes in Fair Value of
produce; and Biological Assets
b. Are being sold either as a living plant or
agricultural produce. a. At birth – Dr. Biological assets; Cr. Gain
on change in fair value
480. Classification of Plants with Dual Use b. Net increase in fair value – Dr. Biological
These are classified as biological assets. assets; Cr. Gain on change in fair value
c. Net decrease in fair value – Dr. Loss on
481. Classification of Bearer Animals change in fair value; Cr. Biological assets
These are classified as biological assets.
Methods of Estimating Inventory Valuation
482. Classification of Animals Related to
Recreational Activities 488. Gross Profit Method
These are classified as property, plant and It is based on the assumption that the rate
equipment. of gross profit remains approximately the same
from period to period and therefore the ratio of cost
Types of Changes in Fair Value of Biological of goods sold to net sales is relatively constant from
Assets period to period.
Type Minuend Subtrahend Add 489. Retail Inventory Method

484. Fair value Fair value It is a technique used to estimate the value
Price at: at: of ending inventory in stores using the cost to retail
change a. Age – a. Age – price ratio.
end of beginning ***
reporting of reporting
period period or 490. Purposes of Estimating the Value of Inventory
b. date of
Valuation recognition a. To determine the amount of inventory
– end of b. destroyed by fire and other catastrophe
reporting Valuation – or theft for insurance purposes;
period end of b. To verify the correctness or
reporting reasonableness of physical count; and
period c. To use the estimate in preparing interim
485. Fair value Fair value Gain on financial statements (because it may
Physical at: at: change take time to do a physical count).
change a. Age – a. Age – in fair
beginning beginning value at 491. Basic Formula Under the Gross Profit Method
of of reporting birth Ending inventory = Goods available for sale
reporting period or – Cost of goods sold
period or date of
date of recognition 492. Formula for Goods Available for Sale
recognition b. Goods available for sale = Beginning
b. Valuation – inventory + Purchases + Freight in – Purchase
Valuation beginning returns, allowances and discount
– end of of reporting
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493. Formulas for Gross Profit and Gross Profit Treatment of Items Under the Retail Inventory
Rate Method
a. Gross profit = Net sales – Cost of goods Item Treatment

sold 499. Purchase Deducted from
b. Gross profit rate based on sales = Gross Discount purchases at cost only
profit / Net sales 500. Purchase Return Deducted from
c. Gross profit rate based on cost = Gross purchases at cost and
profit / Cost of goods sold at retail
501. Purchase Deducted from
494. Formulas for Cost of Goods Sold Allowance purchases at cost only
496. Freight in Addition to purchases
a. Gross profit based on sales is available: at cost only
Cost of goods sold = Net sales * Cost 502. Departmental Addition to purchases
ratio Transfer in or Debit at cost and at retail
b. Gross profit based on cost is available: 503. Departmental Deduction from
Cost of goods sold = Net sales / Sales Transfer out or Credit purchases at cost and
ratio at retail
504. Sales Discount Disregarded (i.e., not
495. Formula for Conversion of Gross Profit Rate and Sales Allowance deducted from sales)
Based on Sales to Gross Profit Based on Cost and 505. Sales Return / Deducted from sales
Vice Versa Sales Return and
Allowance
a. Gross profit rate based on cost = Gross 506. Employee Added to sales
profit rate based on sales / (100% - Discounts
Gross profit based on sales)
507. Normal shortage, Deducted from goods
b. Gross profit rate based on sales = Gross
shrinkage, spoilage, available for sale at
profit rate based on cost / (100% + Gross
breakage retail
profit based on cost)
508. Abnormal Deducted from goods
shortage, shrinkage, available for sale both
496. Treatment for Sales Allowance and Sales
spoilage, breakage at cost and at retail
Discount Under the Gross Profit Method
These are not deducted from sales (only
Other Items Related to Retail Method
sales returns are deducted) because they do not
affect the physical volume of goods sold.
Item Description
510. Initial Markup It is the original markup
497. Basic Formula Under the Retail Inventory
on the cost of goods.
Method
511. Original Retail It is the sales price at
a. Goods available for sale at retail or which the goods are
selling price – Net sales (gross sales offered for sale.
minus sales returns only) = Ending 512. Additional Markup It is an increase in sales
inventory at selling price price above the original
b. Ending inventory at cost = Ending sales price.
inventory at selling price * Cost ratio 513. Markup It is a decrease in sales
c. Cost ratio = Goods available for sale at Cancelation price that does not
cost / Goods available for sale at selling decrease the sales
price price below the original
sales price.
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514. Net Additional Markup minus markup an auxiliary relationship to the central revenue
Markup or Net Markup cancelation. producing activities of the entity.
515. Markdown It is a decrease in sales
price below the original 525. Purposes of Investments
sales price.
516. Markdown It is an increase in sales a. Accretion of wealth – e.g., interest,
Cancelation price that does not dividends, royalties, rentals, etc.
increase the sales price b. Capital appreciation – e.g., land, real
above the original sales estate, gold, diamonds, etc.
price. c. Ownership control – e.g., investments in
517. Net Markdown Markdown minus subsidiaries and associates
markdown cancelation. d. Meeting business requirements – e.g.,
518. Maintained It is the difference sinking fund, preference share
Markup / Markon between cost and sales redemption fund, plant expansion fund,
price after adjustment etc.
for all of the above e. Protection – e.g., cash surrender value
items.
526. Classification of Investments
Approaches in the Use of Retail Method
a. Current asset – if investments are
520. Conservative / Conventional / LCNRV readily realizable and are intended to be
Approach held for not more than one (1) year.
It considers any net markup but ignores any b. Noncurrent asset – if investments are
net markdown in the computation of goods intended to be held for more than one (1)
available for sale at retail price as denominator in year or are not expected to be realized
the formula for cost ratio. within twelve (12) months after the end
of the reporting period.
521. Average Cost Approach
It includes both net markup and net 527. Financial Instrument
markdown in the computation of goods available It is any contract that gives rise to a financial
for sale at retail price as denominator in the formula asset of one entity and a financial liability or an
for cost ratio. equity instrument of another entity.
522. FIFO Retail Approach 528. Financial Asset

It includes both net markup and net It is any asset that is:
markdown in the computation of goods available
for sale at retail price as denominator in the formula a. Cash;
for cost ratio. b. A contractual right to receive cash or
In addition, it does not consider the another financial asset from another
beginning inventory in the computation of cost ratio entity (e.g., trade accounts receivable,
(called current year cost ratio) both in the notes receivable, loans receivable,
numerator (at cost) and denominator (at retail bonds receivable, etc.);
price) sides. c. A contractual right to exchange financial
instrument with another entity under
INVESTMENTS conditions that are potentially favorable
(e.g., option held by the holder to
524. Investments purchase shares of another entity at less
These are assets not directly identified with than market price); or
the operating activities of an entity and occupy only
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d. An equity instrument of another entity • Investment in unquoted equity
(e.g., trading securities). instruments
d. Under equity method of accounting
529. Items Not Considered Financial Assets • Investment of 20% to 50% interest
against investee
a. Intangible assets e. Under consolidation method
b. Physical assets – inventory and • Investment of more than 50%
property, plant and equipment interest against investee
c. Prepaid expenses
d. Leased assets 534. Measurement of Debt Investments
530. Equity Security a. At fair value through profit or loss

It refers to any instrument representing • Those held for trading
ownership shares and right, warrants or options to • Those held for collection of
acquire or dispose of ownership shares at a fixed or contractual cash flows but
determinable price (e.g., ordinary shares, preference irrevocably designated to be
shares, etc.). measured at FVPL (i.e., fair value
option)
531. Debt Security • Those held for collection of
It refers to any security that represents a contractual cash flows and for sale
creditor relationship with an entity (e.g., corporate of the financial asset but irrevocably
bonds, BSP treasury bills, etc.). designated to be measured at FVPL
b. At fair value through other
532. Classification of Financial Assets comprehensive income
• Those held for collection of
a. Those held at fair value through profit or contractual cash flows and for sale
loss (FVPL) – equity and debt of the financial asset
instruments c. At amortized cost
b. Those held at fair value through other • Those held for collection of
comprehensive income (FVOCI) – equity contractual cash flows
and debt instruments
c. Those held at amortized cost – debt 535. Fair Value of an Asset
instruments only It is the price that would be received to sell
an asset in an orderly transaction between market
533. Measurement of Equity Investments participants at the measurement date. At initial
recognition, the fair value of a financial asset is
a. At fair value through profit or loss normally the transaction price (i.e., equal to the
• Those held for trading (i.e., trading consideration given).
securities)
• Those not held for trading 536. Quoted Price of Equity Security
• All other investments in quoted It means the price per share of such security
equity instruments in pesos.
b. At fair value through other
comprehensive income 537. Initial Measurement of Financial Assets
• Those not held for trading but
irrevocably elected to be measured a. In case of financial asset held at FVPL –
at FVOCI at fair value
c. At cost b. In case of financial asset held at FVOCI
– at fair value plus transaction costs
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directly attributable to the acquisition of 542. Journal Entries Related to Equity Investment
the financial asset Held at FVPL
c. In case of financial asset held at
amortized cost – at fair value plus a. Acquisition – Dr. Trading securities,
transaction costs directly attributable to Commission expense (transaction cost);
the acquisition of the financial asset Cr. Cash
b. Increase in fair value at reporting date –
538. Directly Attributable Transaction Costs Dr. Trading securities; Cr. Unrealized
These are costs that would not have been gain – Trading securities (fair value less
incurred had the entity not acquired a financial carrying amount)
asset. c. Decrease in fair value at reporting date –
Dr. Unrealized loss -TS – Trading
539. Treatment for Directly Attributable securities (carrying amount less fair
Transaction Costs value); Cr. Trading securities
General rule: These are capitalized as part of d. Sale at higher than carrying amount –
the financial asset. Dr. Cash (proceeds from sale); Cr.
Exception: If the financial asset is measured Trading securities (carrying amount),
at FVPL, such costs are expensed outright. Gain on sale of trading securities
(balancing figure)
540. Recognition of Gain or Loss on Change in Fair e. Sale at lower than carrying amount – Dr.
Value Cash (proceeds from sale), Loss on sale
of trading securities (balancing figure);
a. Financial asset held at FVPL– such gain Cr. Trading securities (carrying amount)
or loss shall be presented in the profit or
loss (i.e., income statement). 543. Journal Entries Related to Equity Investment
b. Financial asset held at FVOCI – such Held at FVOCI
gain or loss shall be presented in the
other comprehensive income. a. Acquisition – Dr. Financial asset –
c. Financial asset held at amortized cost – FVOCI (fair value plus transaction cost)
such gain or loss are not recognized (alternative account: Available for sale
because the investment concerned is securities); Cr. Cash
not reported at fair value. b. Increase in fair value at reporting date –
Dr. Financial Asset – FVOCI; Cr.
541. Unrealized and Realized Changes in Fair Value Unrealized gain – OCI (fair value less
carrying amount)
a. Unrealized gain – fair value at the c. Decrease in fair value at reporting date –
reporting date is higher than carrying Dr. Unrealized loss – OCI (carrying
amount before adjustment (no sale) amount less fair value)
b. Unrealized loss – fair value at the d. Sale at higher than carrying amount –
reporting date is lower than carrying Dr. Cash (proceeds); Cr. Financial asset
amount before adjustment (no sale) – FVOCI (carrying amount), Retained
c. Realized gain – fair value at the date of earnings (balancing figure)
sale of financial asset is higher than e. Sale at lower than carrying amount – Dr.
carrying amount Cash (proceeds), Retained earnings
d. Realized loss – fair value at the date of (balancing figure); Cr. Financial asset –
sale of financial asset is lower than FVOCI (carrying amount
carrying amount f. Reclassification of cumulative
unrealized gain and/or loss upon sale of
financial asset – Dr. Unrealized gain –
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OCI (cumulative balance); Cr. Unrealized b. It is applied prospectively from the
loss – OCI (cumulative balance), reclassification date.
Retained earnings (balancing figure,
may also be debited) 545. Reclassification Date
It is the first day of the reporting period
544. Reclassification of Financial Asset following the change in business model that results
in an entity’s reclassification of financial asset.
a. It is required only when an entity
changes its business model for
managing the financial asset.
Reclassification Procedures
From FVPL From FVOCI From Amortized Cost

To FVPL n/a a. Recognize any b. The fair value on
unrealized gain or reclassification date
loss (in OCI) to becomes the new
measure the financial gross carrying
asset at the latest fair amount.
value. c. The difference
b. The financial asset between the previous
continues to be carrying amount and
measured at fair fair value at the date
value. of reclassification is
c. The cumulative gain recognized in the
or loss previously profit or loss.
recognized in OCI is d. Effective interest rate
reclassified to profit is calculated based on
or loss at the new gross
reclassification date. carrying amount.
To FVOCI a. Recognize any n/a a. The fair value on
unrealized gain or reclassification date
loss (in profit or loss) becomes the new
to measure the gross carrying
financial asset at the amount.
latest fair value. b. The difference
b. The financial asset between the
continues to be amortized cost
measured at fair carrying amount and
value. fair value is
c. Recognized any recognized in other
subsequent changes comprehensive
in fair value in OCI. income.
c. Effective interest rate
at initial recognition
and the measurement
of expected credit
losses are not
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adjusted as a result of
reclassification.
To Amortized Cost a. Recognize any a. Recognize any n/a
unrealized gain or unrealized gain or
loss (in profit or loss) loss (in OCI) to
to measure the measure the financial
financial asset at the asset at the latest fair
latest fair value. value.
b. The fair value at the b. The fair value at the
reclassification date reclassification date
becomes the new becomes the new
carrying amount. amortized cost
c. The difference carrying amount.
between the new c. The cumulative gain
carrying amount of or loss previously
the financial asset at recognized in OCI is
amortized cost and removed from equity
the face value of the and adjusted against
financial asset shall the fair value at
be amortized using reclassification date.
the effective interest
method.
547. Impairment of Equity Investments c. Reasonable and supportable

It is not necessary to assess financial assets information that is available without
(equity and debt investments) measured at fair undue cost or effort.
value through profit or loss and equity investments
measured at fair value through other 550. Acquisition Cost of Equity Securities Acquired
comprehensive income for impairment. in an Exchange
Such cost shall be determined by reference
548. Impairment of Debt Investments to the following in order of priority:
An entity shall recognize a loss allowance
for expected credit losses on: a. Fair value of asset given
b. Fair value of asset received
a. Debt investment measured at amortized c. Carrying amount of asset given
cost; and
b. Debt investment measured at FVOCI. 551. Allocation of Cost of Equity Securities
Acquired in Lump Sum
See nos. 377-348 for related procedure. If two or more equity securities are acquired
at a single cost or lump sum, the single cost is
549. Considerations in the Measurement of allocated to the securities acquired on the basis of
Impairment their fair value.
a. Probability weighted outcome – The 552. Categories of Investments in Equity Securities

estimate should reflect the possibility
that a credit loss occurs and the a. Trading securities or financial assets at
possibility that no credit loss occurs. FVPL
b. Time value of money – The expected b. Financial assets at FVOCI (formerly
credit losses should be discounted. called available for sale securities)
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c. Investment in associate 561. Shares Selling Ex-Dividend
d. Investment in subsidiary These are those shares sold between the
e. Investment in unquoted equity date of record and the date of payment. This means
instruments that the shares can be sold, and still the original
shareholder has the right to receive the dividends
553. Unquoted Equity Instruments on payment date.
These are measured at cost if the fair value
cannot be measured reliably. 562. Recognition of Dividends as Income
These shall be recognized as revenue on the
554. Sale of Equity Securities of the Same Class date of declaration. The reason is that when
Acquired at Different Dates and at Different Costs dividends are declared, the shareholder has already
In that case, the entity shall determine the acquired the right thereto so much so that if the
cost of securities using either FIFO or average cost shares are subsequently sold, the sale price
approach. normally includes the accrued dividends.
555. Dividend 563. Journal Entry to Record Sale of Shares Ex-

It is a distribution of profits by a corporation Dividend
to its shareholders. Dr. Cash (proceeds); Cr. Investment in equity
securities (carrying amount of shares sold),
Significant Dates Related to Dividends Dividend income, Gain on sale of investment
(balancing figure)
557. Date of Declaration
This is the date on which the payment of Forms of Dividends
dividends is approved by the Board of Directors.
Journal entry: Dr. Dividends receivable; Cr. 565. Cash Dividends
Dividend income These are dividends paid to shareholders in
the form of cash. (See no. 553 for related journal
558. Date of Record entry.)
This is the date on which the stock and
transfer book of the corporation is closed for 566. Property Dividends
registration. Only those stockholders registered as Also known as dividends in kind, these are
of this date are entitled to receive dividends. dividends in the form of property or noncash assets.
Journal entry: No entry required. These are considered as income and recorded at
fair value.
559. Date of Payment Journal entry: Dr. Noncash assets; Cr.
This is the date on which the dividends Dividend income
declared shall be paid.
Journal entry: Dr. Cash; Cr. Dividends 567. Liquidating Dividends
receivable These represent return of invested capital,
*** and therefore, are not income. The payment may be
in the form of cash or noncash assets.
560. Shares Selling Dividend-On Journal entry: Dr. Cash or other appropriate
These are those shares sold between the account; Cr. Investment in equity securities
date of declaration and the record date. This means
that when shares are sold between these dates, 568. Stock Dividends
they carry with them the right to receive dividends. Also known as bonus issue, these are
dividends in the form of the issuing entity’s own
shares. Such dividends are not reported as income.
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Shares of another entity declared as dividends are a. At fair value of shares received; or
not stock dividends but property dividends. b. Equal to the cash dividends that would
*** have been received (in the absence of
fair value).
569. Wasting Asset Corporation
It is a corporation engaged in mining or 575. Cash Received in Lieu of Stock Dividends
cutting timber or some such business, so that This is the case when stock dividends are
dividends are in fact paid out of capital, the assets declared but cash is received in lieu of stock
being consumed in the regular course of dividends.
operations.
Approaches to the Recording of Cash Received in
570. Rule on Payment of Liquidating Dividends Lieu of Stock Dividends
General rule: Liquidating dividends are paid
when the corporation is dissolved and liquidated. 577. As If Approach
Exception: Wasting asset corporations are This approach is the one to be followed
allowed to pay liquidating dividends even before under financial accounting. It asserts that the stock
dissolution and liquidation (journal entry: Dr. Cash; dividends are assumed to be received and
Cr. Dividends income [normal dividend], Investment subsequently sold at the cash received. Therefore,
in equity securities [liquidating dividend]). a gain or loss may be recognized.
Journal entries:
Kinds of Stock Dividends
a. Cash received > Investment carrying
572. Stock Dividends of the Same Kind amount allocated to assumed stock
These are stock dividends which are of the dividends – Dr. Cash; Cr. Investment in
same class or series (e.g., ordinary shares, equity securities; Gain on investment
preference shares, etc.) as those held already by the (balancing figure)
shareholder (reporting entity). The receipt of these b. Cash received < Investment carrying
shares is recorded only by means of a amount allocated to assumed stock
memorandum entry on the part of the shareholder. dividends – Dr. Cash, Loss on
Stock dividends do not affect the total cost of the investment (balancing figure); Cr.
investment but reduce the cost of the investment Investment in equity securities
per share.
578. BIR Approach
573. Stock Dividends Different from Those Held Under the ruling of the BIR, all cash received,
These are stock dividends which are of a whether originally designated as cash dividend or
different class or series as those held already by the stock dividend, is recognized as income.
shareholder. The original cost of the investment is ***
apportioned between the original shares and the
stock dividends (of different class or series) on the 579. Share Split
basis of market value of each at the date of receipt It is a change in the number of shares
(journal entry: Dr. Investment in preference shares; outstanding without capitalizing retained earnings
Cr. Investment in ordinary shares). or changing the amount of a corporation’s legal
*** capital.
574. Shares Received in Lieu of Cash Dividends Types of Share Splits

This is the case when cash dividends are
declared but shares are received in lieu of cash. The 581. Split Up
following are to be used in recognizing the receipt It is a transaction whereby the outstanding
of such dividend as income (in order of priority): shares are called in and replaced by a larger
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number, accompanied by a reduction in the par or Accounting Treatments for Stock Rights
stated value of each share. Only a memorandum
entry is made to record the receipt of the shares by 587. Accounted for Separately.
virtue of share split. The stock rights as a form of equity
instrument is measured initially at fair value and
582. Split Down classified as current asset.
It is the reverse of the split up. The
outstanding shares are called in and replaced by a 588. Not Accounted for Separately
smaller number, accompanied by an increase in the The stock rights are recognized as
par or stated value. Only a memorandum entry is embedded derivative of the host contract
made to record the receipt of the shares by virtue of “investment in equity instrument.”
share split.
*** Significant Dates Related to Stock Rights
583. Special Assessments 590. Date of Declaration

These are additional capital contribution of It is the date on which the issuance of stock
the shareholders (i.e., additional investment without rights is approved by the Board of Directors.
the increase in the number of shares owned). These
are recorded as additional cost of the investment on 591. Date of Record
the part of the shareholders. It is the date on which the stock and transfer
Journal entry: Dr. Investment in equity book of the entity will be closed for registration and
securities; Cr. Cash only those shareholders registered as of this date
are entitled to receive stock rights.
584. Redemption of Shares
It is a transaction where the shareholder 592. Expiration Date
sells a portion or all of its shares (usually preference It is the date up to which the stock rights
shares) back to the issuing corporation in shall be exercised.
accordance with the terms provided in the share ***
certificate (i.e., at a defined date after issuance).
Such transaction is recorded in the same manner as 593. Shares Selling Right-On
the sale of shares. These refer to shares sold between the date
Journal entry: Dr. Cash (proceeds); Cr. of declaration and date of record of stock rights.
Investment in preference shares, Gain on This means that the share cannot be sold without
investment (balancing figure) (Dr. Loss on also selling the right or vice versa.
investment if the cash received is less than the
carrying amount of the shares redeemed) 594. Shares Selling Ex-Right
These refer to shares sold after the date of
585. Stock Right or Rights Issue record of stock rights. This means that the share
Also called as preemptive right, it is a legal can now be sold separately from the right or vice
right granted to shareholders to subscribe for new versa.
shares issued by a corporation at a specified price
during a definite period. As a general rule, a 595. Theoretical or Parity Value of Stock Right
shareholder receives one right for every share It is the assumed fair value of the right that
owned. is derived from the market value of the share.
Formulas:
a. Shares selling right on: Value of one

right = Market value of share right on
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minus subscription price / Number of 600. Associate
rights to purchase one share plus 1 It is defined as an entity over which the
b. Shares selling ex-right: Value of one investor has significant influence.
right = Market value of share ex-right
minus subscription price / Number of 601. Subsidiary
rights to purchase one share It is defined as an entity that is controlled by
another entity.
596. Journal Entries Related to Stock Rights
Accounted for Separately 602. Degree of Influence of Investor
c. Original investment in shares – Dr. a. Ownership of less than 20% of

Investment in equity securities; Cr. Cash outstanding shares – no significant
d. Receipt of stock rights – Dr. Stock influence or control; simple investment
rights; Cr. Investment in equity in equity securities
securities b. Ownership of 20% to 50% - significant
e. Exercise of stock rights – Dr. influence; investee is considered an
Investment in equity securities; Cr. associate of investor.
Cash, Stock rights c. Ownership of more than 50% - control;
f. Sale of stock rights at a gain – Dr. Cash; investee is considered a subsidiary of
Cr. Stock rights, Gain on sale of stock investor (parent).
rights (balancing figure)
g. Expiration of stock rights – Dr. Loss on 603. Exceptions to the 20% Threshold of Ownership
stock rights; Cr. Stock rights Rule
An investor may still have significant
597. Journal Entries Related to Stock Rights Not influence over an investee even if the 20% threshold
Accounted for Separately of ownership is not met if there is evidence of any
of the following factors:
a. Original investment in shares – Dr.
Investment in equity securities; Cr. Cash a. Representation in the board of directors
b. Receipt of stock rights – Memorandum b. Participation in policy making process
entry c. Material transactions between the
c. Exercise of stock rights – Dr. investor and investee
Investment in equity securities; Cr. Cash d. Interchange of managerial personnel
d. Sale of stock rights – Dr. Cash; Cr. e. Provision of essential technical
Investment in equity securities information
e. Expiration of stock rights – f. Ownership of potential voting rights that
Memorandum entry are currently exercisable (e.g., share
warrants, debt or equity instruments that
598. Significant Influence are convertible into ordinary shares, etc.)
It is the power to participate in the financial
and operating policy decisions of the investee but 604. Causes of Loss of Significant Influence
not control or joint control over those policies.
a. Transfer of ownership of shares by the
599. Control investor leaving no or less than 20%
It is the power over the investee or the power ownership over the investee.
to govern the financial and operating policies of an b. Loss of power to participate in the
investee so as to obtain benefits. financial and operating policy decisions
of the investee.
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c. Associate becoming subject to control acquired. Such excess is attributed to the following
of a government, court, administrator, or in order of priority:
regulator.
d. As a result of contractual agreement. a. Undervaluation of the investee’s assets
(e.g., building, land, inventory, etc.);
605. Equity Method and/or
b. Goodwill.
a. It is applicable when the investor has a
significant influence over the investee. Formula:
b. The investor and the investee are viewed
as a single economic unit. a. Acquisition cost – Carrying amount of
c. It is only applied if the investment is in net assets acquired = Excess of cost
ordinary shares (voting shares) (FVPL or over carrying amount
FVOCI classification is applied to b. Excess of cost over carrying amount –
investments in preference shares). Undervaluation of assets of investee =
d. The investment is initially recognized at Excess attributable to goodwill
cost.
e. The carrying amount is increased 608. Treatments for Excess of Cost over Carrying
(decreased) by the investor’s share of Amount
the profit (loss) of the investee. Journal entry for amortization or recognition
f. Distributions or dividends received from as expense of excess of cost over carrying amount
an investee reduce the carrying amount – Dr. Investment income; Cr. Investment in
of the investment. associate
g. The investment is recorded under the
Investment in Associate account. a. Attributable to depreciable asset –
amortized over the remaining life of the
606. Journal Entries Under Equity Method depreciable asset
b. Attributable to land – not amortized
a. Acquisition of shares – Dr. Investment in c. Attributable to inventory – expensed
associate (at cost); Cr. Cash when the inventory is sold
b. Share in net income of associate – Dr. d. Attributable to goodwill – not amortized
Investment in associate (associate’s net (but the entire investment in associate
income * percentage ownership by including the goodwill is tested for
investor over associate); Cr. Investment impairment at the end of each reporting
income period)
c. Share in net loss of associate – Dr. Loss
on investment; Cr. Investment in 609. Treatment for Excess of Net Fair Value Over
associate (associate’s net loss * Cost
percentage ownership) Any excess of the investor’s share of the net
d. Receipt of stock dividend – fair value of the associate’s identifiable assets
memorandum entry (does not include goodwill) and liabilities over the
e. Receipt of cash or property dividend – cost of the investment is included as income in the
Dr. Cash or noncash asset; Cr. determination of the investor’s share of the
Investment in associate associate’s profit or loss.
607. Excess of Cost Over Carrying Amount a. Attributable to depreciable asset –

It occurs when the investor pays more than amortized over the remaining life of the
the carrying amount of the net assets (of investee) depreciable asset
b. Attributable to land – not amortized
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c. Attributable to inventory – expensed b. When the reporting dates of the investor
when the inventory is sold and the investee are different, the
associate shall prepare for the use of the
610. Investee with Heavy Losses investor financial statements as of the
If an investor’s share of losses of an same date as the financial statements of
associate equals or exceeds the carrying amount of the investor unless it is impracticable to
an investment, the investor discontinues do so.
recognizing its share of further losses. The c. In any case, the difference between the
investment is reported at nil or zero. reporting date of the associate and that
If the associate subsequently reports of the investor shall be no more than
income, the investor resumes including its share of three (3) months.
such income after its share of the income equals the
share of losses not recognized. 616. Accounting Policies of the Investee
If an associate uses accounting policies
611. Impairment of Investment in Associate other than those of the investor, adjustments shall
An impairment loss shall be recognized be made to conform the associate’s accounting
whenever the carrying amount of the investment in policies to those of the investor.
associate exceeds its recoverable amount.
617. Upstream Transactions
612. Investee with Cumulative Preference Shares These are sales of assets (e.g., inventory)
When an associate has outstanding from an associate to the investor. The unrealized
cumulative preference shares, the investor shall profit from these transactions must be eliminated in
compute its share of earnings or losses after determining the investor’s share in profit or loss of
deducting the preference dividends, whether or not associate.
such dividends are declared.
618. Unrealized and Realized Profit from Upstream
613. Investee with Noncumulative Preference Transactions
Shares Upstream sale price – Cost of asset sold =
When an associate has outstanding Profit from upstream sale
noncumulative preference shares, the investor shall
compute its share of earnings after deducting the a. Unrealized profit – profit attributed to
preference dividends only when declared. asset sold by an associate to the
investor when such asset is still held by
614. Other Changes in the Associate’s Equity the investor at the end of the reporting
Adjustments to the carrying amount of the period.
investment in associate may be necessary for b. Realized profit – profit attributed to
changes in the investor’s proportionate interest in asset sold by an associate to the
the investee arising from changes in the investee’s investor when such asset is
equity that have not been recognized in the subsequently sold by the investor
investee’s profit or loss (e.g., revaluation of (except when depreciable asset was
property, plant and equipment, foreign exchange sold).
translation differences, etc.).
619. Downstream Transactions
615. Reporting Date of the Investee These are sales of assets (e.g., inventory)
from the investor to an associate. The unrealized
a. The most recent available financial profit from these transactions must be eliminated
statements of the associate are to be either:
used by the investor in applying the
equity method.
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a. By deducting the same from the profit of consolidated financial statements
the associate as in upstream available for public use the comply
transactions; or with PFRSs.
b. By adjusting the accounts of the
investor. 623. Associate Held for Sale
The investment in associate classified as
620. Upstream or Downstream Sale of Depreciable “held for sale” shall be measured at lower of
Asset carrying amount and fair value less cost of disposal.
The profit on the upstream or downstream
sale of depreciable asset is realized as the asset is 624. Cost Method
used or over the remaining life of the asset. It is the accounting method applied with
respect to investment in unquoted equity
621. Discontinuance of Equity Method instrument or nonmarketable equity investment.
An investor shall discontinue the use of the
equity method from the date that it ceases to have 625. Journal Entries Related to Cost Method
significant influence over an associate.
Consequently, the investor shall account for the h. Acquisition – Dr. Investment in equity
investment as follows: securities; Cr. Cash
i. Investee reported net income – No entry
a. Financial asset at FVPL required
b. Financial asset at FVOCI j. Investee reported net loss – No entry
c. Nonmarketable investment at cost or required
investment in unquoted equity e. Receipt of stock dividend –
instrument Memorandum entry
f. Receipt of cash dividend – Dr. Cash; Cr.
622. Instances When Equity Method Is Not Dividend income
Applicable g. Changes in fair value – No entry
required
a. If the investor is a parent exempt from h. Sale of shares (selling price > cost) – Dr.
preparing consolidated financial Cash (selling price); Cr. Investment in
statements; or equity securities (cost), Gain on sale of
b. If all of the following apply: investment (balancing figure)
• The investor is a wholly-owned
subsidiary, or a partially-owned 626. Reclassification from Equity Method to Fair
subsidiary of another entity and the Value Method (i.e., FVPL or FVOCI) or Cost Method
other owners do not object to the a. Occurs when significant influence is
investor not applying the equity lost for some reason.
method; b. Any retained investment is measured at
• The investor’s debt and equity fair value.
instruments are not traded in a c. The difference between the net
public market or “over the counter: proceeds from disposal of part of the
market; investment and the carrying amount of
• The investor did not file or it is not in the investment sold is included in profit
the process of filing financial or loss.
statements with the SEC for the
purpose of issuing any class of
instruments in a public market; and
• The ultimate or any intermediate
parent of the investor produces
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627. Reclassification from Fair Value Method or 631. Classification of Bond Investments
Cost Method to Equity Method Subsequent measurement of bond
investments:
a. Occurs when investment in associate is
achieved in stages. a. Financial asset at FVPL.
b. The existing interest in associate is b. Financial asset at amortized cost
remeasured at fair value with any d. Financial asset at FVOCI
change in fair value included in profit or
loss. 632. Initial Measurement of Bond Investments
c. If the existing interest is accounted for General rule: At fair value plus transaction
as FVOCI, any unrealized gain or loss at costs that are directly attributable to the
the date the investee becomes an acquisition.
associate is reclassified to retained Exception: Transaction costs attributable to
earnings. the acquisition of bond investments held for trading
d. The fair value of the existing interest or at FVPL are expensed immediately.
plus the cost of the additional interest
acquired constitutes the total cost of the 633. Acquisition of Bond Investments on Interest
investment for the initial application of Date
the equity method. In this case, there is no accounting problem
e. The total cost of the investment for the because the purchase price is initially recognized as
initial application of the equity method the acquisition cost (i.e., it does not include any
minus the carrying amount of the net accrued interest).
assets acquired at the date significant Journal entry: Dr. Investment in bonds
influence is obtained equals excess of (purchase price); Cr. Cash
cost over carrying amount or excess net
fair value. 634. Acquisition of Bond Investments Between
Interest Dates
628. Bond In this case, the purchase price normally
It is a formal unconditional promise made includes accrued interest. That portion of the
under seal to pay a specified sum of money at a purchase price representing accrued interest
determinable future date, and to make periodic should not be reported as part of the cost of
interest payments at a stated rate until the principal investment but should be accounted for separately.
sum is paid.
635. Approaches to the Accounting Treatment for
629. Parties to a Bond Contract Accrued Interest on Date of Acquisition
a. Issuer – debtor; the one who borrows a. Approach 1

funds from another party. • Acquisition – Dr. Investment in
b. Investor – creditor; the one who lends bonds (purchase price allocated to
funds. bonds), Accrued interest receivable
(purchase price allocated to accrued
630. Bond Indenture interest); Cr. Cash (total purchase
It is a document that contains the contractual price)
agreement between the issuer and investor which may • Receipt of interest payment – Dr.
include a description of the bond features, Cash; Cr. Interest receivable
restrictions placed on the issuer, and the actions b. Approach 2
that will be triggered if the issuer fails to make • Acquisition – Dr. Investment in
timely payments. bonds (purchase price allocated to
bonds), Interest income (purchase
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price allocated to accrued interest); discount over the life of the bonds (bondholder’s
Cr. Cash (total purchase price) POV – from the date of acquisition to the date of
• Receipt of interest payment – Dr. maturity). Amortization may be made on interest
Cash; Cr. Interest income dates or at the end of the reporting period.
636. Sale of Bond Investments a. Amortization of bond premium – Dr.

Interest income; Cr. Investment in bonds
a. On interest date – Dr. Cash; Cr. Trading b. Amortization of bond discount – Dr.
securities Investment in bonds; Cr. Interest income
b. Between interest dates – Dr. Cash
(consideration received); Cr. Trading 642. Collection of Interest
securities (carrying amount), Interest The collection of interest from bond
income (accrued interest income), Gain investments occur on the interest payment date
on sale of trading securities (balancing (usually semiannual or annual).
figure) • Formula: Face amount of bonds *
Nominal interest rate = Interest
637. Classification of Bonds collection
• Journal entry: Dr. Cash; Cr. Interest
a. Measured at FVPL – current asset income
b. Measured at FVOCI or at amortized cost
– noncurrent asset 643. Carrying Amount of Investment in Bonds
Original cost – Repayments + Amortization
638. Amortized Cost of discount – Amortization of premium – Reduction
It is the initial recognition amount of the for impairment or uncollectibility = Carrying amount
investment minus repayments, plus amortization of of investment in bonds
discount, minus amortization of premium, and
minus reduction for impairment or uncollectibility. Types of Bonds
639. Bond Premium 645. Callable Bonds

It occurs when bonds payable are issued for These are bonds which may be called in or
an amount greater than their face or maturity redeemed by the issuing entity prior to their date of
amount. This is caused by the bonds having a maturity. The difference between the redemption
stated interest rate that is higher than the market price (call price per bond * number of bonds) and
interest rate for similar bonds. the carrying amount of the bond investment on the
Formula: Purchase price of investment – date of redemption is recognized in profit or loss.
Face amount = Bond premium
646. Convertible Bonds
640. Bond Discount These are bonds which give the bondholders
It occurs when bonds payable are issued for the right to exchange their bonds for share capital
an amount lesser than their face or maturity of the issuing entity at any time prior to maturity.
amount. This is caused by the bonds having a Because of the conversion feature, bonds of this
stated interest rate that is lower than the market type are classified as financial assets measured at
interest rate for similar bonds. fair value (not at amortized cost).
Formula: Face amount – Purchase price of
investment = Bond discount 647. Serial Bonds
These are bonds which have a series of
641. Amortization maturity dates or those bonds which are payable in
In the context of bond premium or discount, installments.
it is the gradual reduction of either bond premium or
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648. Term Bonds 655. Relationship Between the Effective Rate and
These are bonds that mature on a single Nominal Rate
date (includes callable and convertible bonds).
a. If the cost of the bond investment is
Methods of Amortization of Premium or Discount equal to the face value – the effective
rate and the nominal rate are equal.
650. Straight Line Method b. When the bonds are acquired at a
This method provides for an equal amount premium – the effective rate is lower
of premium or discount amortization each than the nominal rate (loss on the part of
accounting period. the bondholder).
Formula: Bond premium or discount c. When the bonds are acquired at a
amortization = Total bond or premium / Life of bond discount – the effective rate is higher
than the nominal rate (gain on the part of
651. Bond Outstanding Method the bondholder).
This method is applicable to serial bonds
and provides for a decreasing amount of 656. Schedule of Amortization
amortization. It is a table used to compute for the amount
Formula: of amortization of premium or discount on bonds
Bond payable under the effective interest method.
Premium or
Outstanding
Year Fraction Discount
(Face Columns Comprising the Amortization Schedule
Amortization
Amount)
20XX A1 A1/B A1 * (A1/B) 658. Date
20XX A2 A2/B A2 * (A2/B) It contains the date when the bond
20XX A3 A3/B A3 * (A3/B) investment was acquired (1st row) and the interest
20XX A4 A4/B A4 * (A4/B) dates subsequent to that.
Total B
659. Interest Received
652. Effective Interest Method It contains the values of interest payments
It is also called as “interest method” or received by the bondholder. It also includes any
“scientific method.” This method requires the principal payments for each period (in case of serial
comparison between interest earned or interest bonds) and at the maturity of the bonds (for all
income and the interest received. The difference bonds).
between the two represents the premium or Formula: (Outstanding face value of bonds *
discount amortization. Nominal rate) + Principal payments = Interest
received
653. Nominal Rate
It is the coupon rate or stated rate appearing 660. Interest Income
on the face of the bond. It is where the interest It contains the value of the interest earned
payments received by the investor is based. by the bondholder for each period.
Formula: Carrying amount of bond
654. Effective Rate investment * Effective rate = Interest income
It is the yield rate or market rate which is the
actual or true rate of interest which the bondholder 661. Premium or Discount Amortization
earns on the bond investment. It contains the amount of amortization of
premium or discount for the period.
Formula: Interest income – Interest received
= Discount (Premium) amortization
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a. If the bond investment was acquired at a 664. Bond Investment Measured at FVPL (Fair
premium – the amortization column Value Option)
contains negative values (interest All changes in fair value are recognized in
received > interest income) profit or loss. Accordingly, any transaction cost is
b. If the bond investment was acquired at a an outright expense. Moreover, the interest income
discount – the amortization column is based on the nominal interest rate rather than the
contains positive values (interest effective interest rate.
received < interest income)
665. Interpolation Process
The amortization of discount may be in It is a method used in the computation of the
negative values due to the effect of principal effective interest rate by finding the rate that would
payments. equate the acquisition cost and the present value of
the future cash flows from the bonds through the
662. Carrying Amount use of trial and error and the following formula:
It contains the balance or book value of the
bond investment after the amortization of premium 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒
or discount. 𝑋 − 𝐿𝑜𝑤𝑒𝑟 𝑟𝑎𝑡𝑒 𝑙𝑖𝑚𝑖𝑡
=
Formula: Preceding carrying amount + 𝑈𝑝𝑝𝑒𝑟 𝑟𝑎𝑡𝑒 𝑙𝑖𝑚𝑖𝑡 − 𝐿𝑜𝑤𝑒𝑟 𝑟𝑎𝑡𝑒 𝑙𝑖𝑚𝑖𝑡
Amortization of discount (premium)
666. Computation of the Purchase Price or Market
a. If the bond investment was acquired at a Price of Bonds
premium – the amortization shall be
deducted from the preceding carrying a. Using the effective rate, find the present
amount (to decrease carrying amount to value of an ordinary annuity of 1 for the
face value). number of interest periods involved.
b. If the bond investment was acquired at a b. Multiply the nominal rate by the face
discount – the amortization shall be amount of the bonds for one interest
added to the preceding carrying amount period. Also multiply the effective rate by
(to increase carrying amount to face the face amount for one interest period.
value). Get the difference between the two
products.
The above rules are subject to exception c. The difference computed in step b is
specifically in the case of serial bonds where the multiplied by the present value factor
amortization of discount may have to be deducted determined in step a. The answer
from the preceding carrying amount due to principal represents either a discount or premium.
payments. As a guide, follow the formulas as they • If Effective rate > Nominal rate:
are arranged and let the sign (i.e., negative or Discount
positive) of the values help in determining whether • If Effective rate < Nominal rate:
to add or deduct. Premium
d. The face amount of the bonds plus
663. Bond Investment Measured at FVOCI premium or minus discount equals the
In this case, the bond investment is purchase price of the bond (on interest
measured at fair value through other date).
comprehensive income. Subsequently, the entity e. To compute for the purchase price of the
must record discount amortization in accordance bond between interest dates, add the
with the effective interest able of amortization accrued interest from the last interest
regardless of the change in market value. date to the intended date of purchase.
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667. Investment Property 671. Property Leased to an Affiliate
It is defined as property (land or building or
part of a building or both) held by an owner or by the a. Perspective of reporting entity (lessor) –
lessee under a finance lease to earn rentals or for investment property
capital appreciation or both. b. Perspective of the group (consolidated
financial statements) – owner-occupied
668. Owner-Occupied Property property
It refers to property held by its owner for its
own productive purposes, such as administration or 672. Initial Measurement of Investment Property
the production of goods or services.
a. General rule – At cost plus directly
669. Examples of Investment Property attributable expenditures (e.g.,
professional fees, transfer taxes, etc.)
a. Land held for capital appreciation b. Self-constructed investment property –
b. Land held for a currently undetermined cost at the date when the construction or
use development is complete
c. Building owned by the reporting entity, or c. Deferred or installment purchase of
held by the entity under a finance lease, investment property – cash price
and leased out under an operating lease equivalent (difference recognized as
d. Building that is vacant but is held to be interest expense over the credit period)
leased out under an operating lease d. Acquisition of investment property
e. Property that is being constructed or through exchange (for a nonmonetary
developed for future use as investment asset or a combination of monetary and
property nonmonetary asset) – fair value of
investment property unless the
670. Classification of Property That Is Partly exchange transaction lacks commercial
Investment and Partly Owner-Occupied substance. If the fair value of neither the
asset received nor the asset given up is
a. If these portions could be sold or leased reliably measurable, the cost is equal to
out separately – classified separately as the carrying amount of the asset given
investment property and owner- up.
occupied property
b. If the portions could not be sold 673. Subsequent Measurement of Investment
separately – investment property if only Property
a significant portion is held for General rule: Either of the following
manufacturing or administrative
purposes (otherwise, owner-occupied a. Fair value model – changes in fair value
property) recognized in profit or loss
c. Provision of insignificant ancillary b. Cost model
services (e.g., security, maintenance
services, etc.) by the entity to the Exception:
occupants of the property – investment
property a. Investment property held by lessee
d. Provision of significant ancillary under an operating lease – fair value
services (e.g., hotel services) – owner- model
occupied property b. If the fair value of investment property
cannot be determined reliably – cost
method
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674. Change of Use of Property c. When no future economic benefits are
expected from the investment property
a. Commencement of owner occupation –
transfer from investment property to 677. Fund
owner-occupied property It is defined as cash or other assets set
b. Commencement of development with a aside for a specific purpose either by reason of the
view to sale – transfer from investment action of management or by virtue of a contract or
property to inventory legal agreement.
c. End of owner occupation – transfer from
owner-occupied property to investment 678. Funds Held for Current Purposes
property Classified as cash (current assets).
d. Commencement of an operating lease to
another entity – transfer from owner a. Petty cash fund
occupied property to investment b. Payroll fund
property c. Interest fund
d. Dividend fund
675. Measurement of Transfers e. Tax fund
a. When the entity uses the cost model, 679. Funds Held for Noncurrent Purposes
transfers between investment property, Classified as long-term investments
owner-occupied property, and inventory (noncurrent assets).
shall be made at carrying amount.
b. A transfer from investment property a. Sinking fund
carried at fair value to owner-occupied b. Preference share redemption fund
property shall be accounted for at fair c. Plant expansion fund
value which becomes the deemed cost d. Contingency fund
for subsequent accounting. e. Insurance fund
c. If owner-occupied property is
transferred to investment property that Funds held for the purpose of liquidating
is to be carried at fair value, the liabilities are classified as current assets when the
difference between the fair value and the related liability becomes due within twelve (12)
carrying amount of the property shall be months after the end of the reporting period
accounted for as revaluation of property, (parallel classification).
plant, and equipment.
d. If an inventory is transferred to 680. Measurement of Fund
investment property that is to be carried Long term fund shall be carried at the
at fair value, the remeasurement to fair amount of cash plus the cost of securities adjusted
value shall be included in profit or loss. from discount or premium amortization, and other
e. When an investment property under assets in the fund.
construction is completed and to be
carried at fair value, the difference 681. Sinking Fund
between fair value and carrying amount It is a fund set aside for the liquidation of
shall be included in profit or loss. long-term debt, more particularly long-term bonds
payable.
676. Derecognition of Investment Property
a. On disposal
b. When investment property is
permanently withdrawn from use
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682. Journal Entries Related to Sinking Fund Under fund expenses; Cr. Sinking fund income
the Administration of the Entity (interest), Gain on sale of securities
(balancing figure)
a. Transfer of cash to sinking fund – Dr. d. Receipt of periodic report from trustee
Sinking fund cash; Cr. Cash about payment of bonds payable and
b. Appropriation of retained earnings every interest – Dr. Bonds payable, Interest
end of reporting period as a matter of expense; Cr. Sinking fund – trustee
accounting policy – Dr. Retained e. Receipt of remittance from trustee of the
earnings; Cr. Retained earnings balance of sinking fund – Dr. Cash; Cr.
appropriated for sinking fund Sinking fund – trustee
c. Investment of sinking fund cash in
financial assets – Dr. Sinking fund 684. Nature of Sinking Fund Contributions
securities; Cr. Sinking fund cash
d. Receipt of interest on sinking fund a. Voluntary – if it is the result of a
securities – Dr. Sinking fund cash; Cr. discretionary action of management.
Sinking fund income b. Mandatory – if it is required by contract,
e. Accrual of interest on sinking fund usually with bondholders.
securities – Dr. Accrued interest
receivable; Cr. Sinking fund income 685. Formula for Computation of Annual
f. Payment of fund expenses – Dr. Sinking Contribution to Sinking Fund at the End of Each
fund expense; Cr. Sinking fund cash Year
g. Sale of sinking fund securities at a gain Annual contribution = Fund to be
– Dr. Sinking fund cash (proceeds); Cr. accumulated / Future value of an ordinary annuity
Sinking fund securities (carrying of 1
amount), Gain on sale of securities
(balancing figure) 686. Formula for Computation of One-Time
h. Retirement of bonds related to sinking Contribution to Sinking Fund
fund – Dr. Bonds payable, Interest One-time contribution = Fund to be
expense; Cr. Sinking fund cash accumulated / Future value of 1
i. Return of residual sinking fund cash to
general fund – Dr. Cash; Cr. Sinking fund 687. Preference Share Redemption Fund
cash It is a fund set up to ensure the eventual
j. Release of the appropriated retained redemption of preference shares issued by the
earnings – Dr. Retained earnings entity.
appropriated for sinking fund; Cr. Journal entries:
Retained earnings
a. Establishment of the fund – Dr.
683. Journal Entries Related to Sinking Fund Under Preference share redemption fund; Cr.
the Administration of a Trustee Cash
b. Redemption of shares – Dr. Preference
a. Contribution of cash to sinking fund – share capital (carrying amount),
Dr. Sinking fund – Trustee; Cr. Cash Retained earnings (balancing figure);
b. Receipt of periodic report from trustee Preference share redemption fund
about investment transactions within (redemption price)
the fund – No entry is necessary.
c. Receipt of periodic report from trustee
about sale of securities at a gain and
payment of fund expenses – Dr. Sinking
fund – trustee (net cash inflow), Sinking
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Funds for Acquisition of Property 693. Cash Surrender Value
689. Replacement Fund a. It is the amount which the insurance firm

It is cash set aside in anticipation of future will pay upon the surrender and
replacement of depreciable asset. cancelation of life insurance policy.
b. The insurance must have been
690. Plant Expansion Fund established to ensure the life of an
It is cash set aside in anticipation of future entity’s officer and name itself as
acquisition of additional property because of beneficiary.
expanded or increased volume of operations.
*** 694. Treatment if the Beneficiary of Life Insurance
Is Not the Entity
691. Contingency Fund If the beneficiary is the officer insured or any
It is cash set aside for the purpose of person other than the entity (e.g., wife of the officer),
meeting obligations that may arise from the payment of the premium is charged to
contingencies like pending lawsuits or taxes in insurance expense.
dispute.
Journal entries: 695. Requisites for Entitlement to Cash Surrender
Value
a. Establishment of the fund – Dr.
Contingency fund (estimated damages); a. The policy is a life policy (i.e., not fire,
Cr. Cash accident, and other nonlife policies).
b. Payment for damages – Dr. Loss on b. Premiums for three (3) full years must
damages (actual damages paid); Cr. have been paid.
Contingency fund c. The policy is surrendered at the end of
c. Reversion of remaining fund to general the third year or anytime thereafter.
cash – Dr. Cash; Cr. Contingency fund
696. Treatment for Loan from the Insurance Entity
692. Insurance Fund The loan shall not be deducted from the
It is cash set aside for the purpose of cash surrender value for financial statement
meeting obligations that may arise from certain purposes.
risks not insured against (e.g., fire, typhoon,
explosion, etc.). Its establishment is the result of a 697. Journal Entries Related to Cash Surrender
policy of self-insurance which is actually a policy of Value
“no insurance”.
Journal entries: a. Payment of the insurance premium – Dr.
Life insurance expense; Cr. Cash
a. Contribution to the fund – Dr. Insurance b. Adjustment of the unexpired premium at
fund; Cr. Cash the end of the period – Dr. Prepaid life
b. Building destroyed by fire – Dr. Fire loss insurance; Cr. Life insurance expense
(balancing figure), Accumulated c. Dividends received on the life policy –
depreciation; Cr. Building Dr. Cash; Cr. Life insurance expense
c. Construction of new building using fund d. Initial recognition of the cash surrender
– Dr. Building; Cr. Insurance fund, Cash value at the end of the third year – Dr.
(additional) Cash surrender value; Cr. Life insurance
expense (1/3 or value representing third
year), Retained earnings (2/3 or value
representing first and second years)
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e. Recognition of cash surrender value 703. Derivative
subsequent to the third year – Dr. Cash
surrender value; Cr. Life insurance a. It is a financial instrument that derive its
expense value from the movement in commodity
f. Receipt of the proceeds of the life policy price, foreign exchange rate, and interest
– Dr. Cash (face of policy); Cr. Cash rate of an underlying asset or financial
surrender value (carrying amount), Life instrument.
insurance expense (unexpired premium), b. It is an executory contract, meaning, it is
Gain on life insurance settlement not a transaction but an exchange of
(balancing figure) promises about future action.
c. It gives one party a contractual right to
Types of Financial Risks exchange financial asset or financial
liability with another party under
699. Price Risk conditions that are potentially favorable.
It is the uncertainty about the future price of d. On the other hand, the other party has a
an asset. contractual obligation to exchange
under potentially unfavorable
700. Credit Risk conditions.
It is the uncertainty over whether a e. There is no payment or there is only a
counterparty or the party on the other side of the small payment for such financial
contract will honor the terms of the contract. instrument on the date of contract.
***
701. Interest Rate Risk 704. Underlying Variable
It is an asset, basket of assets, index, or even
a. It is the uncertainty about future interest another derivative, such that the cash flows of the
rates and their impact on cash flows and derivative depend on the value of this underlying
the fair value of the financial (e.g., specified interest rate, commodity price,
instruments. foreign exchange rate, price index, etc.).
b. A borrower with a variable-rate loan is
exposed to an interest rate risk by 705. Notional Value/Amount
reason of the fluctuation of interest rate It is the nominal or face amount used to
in the future. calculate payments on a financial instrument (e.g.,
c. A borrower with a fixed-rate loan is also amount of currency, number of shares, number of
exposed to an interest rate risk because units, etc.).
there is always a possibility that interest
rate will decrease in the future. 706. Hedging
It means designating one or more hedging
702. Foreign Currency Risk instruments so that the change in fair value or cash
flows is an offset, in whole or in part, to the change
a. It is the uncertainty about future in fair value or cash flows of a hedged item.
Philippine peso cash flows stemming
from assets and liabilities denominated 707. Hedging Instrument
in foreign currency. It is a derivative whose fair value or cash
b. The peso equivalent of the foreign flows would be expected to offset changes in the
currency loan on the date of maturity will fair value or cash flows of a hedged item.
differ from the peso equivalent of the
foreign currency loan when it was 708. Hedged Item
obtained. It is an asset, liability, firm commitment,
highly probable forecast transaction or net
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investment in a foreign operation that exposes the 710. Designations of Derivatives
entity to risk of changes in fair value or future cash a. Those not designated as a hedging
flows (also referred to as primary financial instrument
instrument). b. Those designated as a cash flow hedge
c. Those designated as a fair value hedge
709. Measurement of Derivatives
At fair value.
711. Derivative with No

Cash Flow Hedge Fair Value Hedge
Hedging Designation
Description It refers to a derivative It is a derivative that It is a derivative that
held for speculation offsets in whole or in part offsets in whole or in part
purposes. the variability of cash the change in the fair
flows from a probable value of an asset or a
forecast transaction. liability.
Treatment for changes in Recognize in profit or a. Effective portion Recognized in profit or
fair value of derivative loss. – recognized as loss.
component of
OCI.
b. Ineffective
portion –
recognized in
profit or loss.
Measurement of hedged No hedged item. Hedged item is not Hedged item is measured
item adjusted to conform with at fair value.
fair value.
712. Hedge Ineffectiveness 714. Interest Rate Swap

It occurs when the changes in the value of It is a contract whereby two parties agree to
the hedged item does not match up exactly to the exchange cash flows for future interest payments
changes in the value of the hedging instrument. The based on a contract of loan.
ineffective portion is the difference between the
change in hedging instrument and the change in a. Hedged item (primary financial
hedged item. instrument) – loan
b. Hedging instrument (derivative financial
a. Over-hedge – change in hedging instrument) – interest rate swao
instrument > change in hedged item c. Underlying variable – interest rate
b. Under-hedge – change in hedging d. Notional – principal amount of loan
instrument < change in hedged item
Variants of Interest Rate Swap Agreement
713. Examples of Derivatives
716. Receive Variable, Pay Fix Interest Rate Swap
a. Interest rate swap It is entered into by the reporting entity with
b. Forward contract another in case the former has an existing loan with
c. Futures contract variable interest rate.
d. Option
e. Foreign currency forward contract 717. Receive Fix, Pay Variable Interest Rate Swap
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It is entered into by the reporting entity with
another in case the former has an existing loan with
fixed interest rate.
Journal Entries Related to Interest Rate Swap Agreement (Cash Flow Hedge)
719. Receive Variable, Pay Fix Interest Receive Fix, Pay Variable Interest
Rate Swap Rate Swap
Commencement of loan Dr. Cash (principal and notional Dr. Cash (principal and notional
amount); Cr. Loan payable amount); Cr. Loan payable
Interest payment to creditor Dr. Interest expense (principal Dr. Interest expense (principal *
amount * underlying [variable] amount underlying [fixed] interest
interest rate); Cr. Cash rate); Cr. Cash
Variable rate Fixed rate: Entry at No entry required because the fair No entry required because the fair
the beginning of interest period value of derivative is zero (0). value of derivative is zero (0).
Variable rate > Fixed rate: Entry at Dr. Interest rate swap receivable Dr. Unrealized loss – interest rate
the beginning of interest period (notional amount * [underlying swap; Cr. Interest rate swap
rate – fixed rate] * PV factor at payable (notional amount *
underlying rate); Cr. Unrealized [variable rate – underlying rate] *
gain – interest rate swap PV factor at underlying rate)
Variable rate > Fixed rate: Swap Dr. Cash (notional amount * Dr. Interest rate swap payable
payment [underlying rate – fixed rate]); Cr. (amount recognized at the
Interest rate swap receivable beginning of interest period),
(amount recognized at the Unrealized loss – interest rate
beginning of interest period); swap (interest rate swap payable *
Unrealized gain – interest rate underlying rate); Cr. Cash (notional
swap (interest rate swap amount * [variable rate –
receivable * underlying rate) underlying rate])
Variable rate > Fixed rate: Dr. Unrealized gain – interest rate Dr. Interest expense; Cr.
Recognition of change in fair swap (cumulative balance); Cr. Unrealized loss – interest rate
value of derivative in profit or loss Interest expense swap (cumulative balance)
Fixed rate > Variable rate: Entry at Dr. Unrealized loss – interest rate Dr. Interest rate swap receivable
the beginning of interest period swap; Cr. Interest rate swap (notional amount * [underlying
payable (notional amount * rate – fixed rate] * PV factor at
[variable rate – underlying rate] * underlying rate); Cr. Unrealized
PV factor at underlying rate) gain – interest rate swap
Fixed rate > Variable rate: Swap Dr. Interest rate swap payable Dr. Cash (notional amount *
payment (amount recognized at the [underlying rate – fixed rate]); Cr.
beginning of interest period), Interest rate swap receivable
Unrealized loss – interest rate (amount recognized at the
swap (interest rate swap payable beginning of interest period);
* underlying rate); Cr. Cash Unrealized gain – interest rate
(notional amount * [variable rate swap (interest rate swap
– underlying rate]) receivable * underlying rate)
Fixed rate > Variable rate: Dr. Interest expense; Cr. Dr. Unrealized gain – interest rate
Reclassification of unrealized Unrealized loss – interest rate swap (cumulative balance); Cr.
gain or loss to profit or loss swap (cumulative balance) Interest expense
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Payment of principal amount of Dr. Loan payable; Cr. Cash Dr. Loan payable; Cr. Cash
loan
720. Procedures Related to Interest Rate Swap 721. Forward Contract

Agreement (Fair Value Hedge) It is an agreement between two parties to
The following shall be applied as exchange a specified amount of commodity,
modifications to the entries for cash flow hedge. security or foreign currency on a specified date in
the future at a specified price or exchange rate.
a. Gain on Interest Rate Swap account
(income) is used instead of Unrealized a. Hedged item (primary financial
Gain – Interest Rate Swap (OCI). The instrument) – highly probable forecast
same goes with losses. purchase
b. There is no entry needed to reclassify b. Hedging instrument (derivative financial
unrealized gain or loss to profit or loss. instrument) – forward contract
c. The hedged item is remeasured at the c. Underlying variable – price per unit of
end of each reporting period to fair value. commodity
• PV of principal at current market rate d. Notional – number of units of
+ PV of annual interest at current commodity to be purchased
market rate = FV of hedged item
• FV of hedged item – Unadjusted 722. Forward Price
carrying amount of hedged item = It is the price at which the commodities are
Increase (Decrease) in carrying to be sold under a forward contract regardless of
amount of hedged item the changes in the prevailing market price.
• Journal entry for increase – Dr. Loss
on note payable; Cr. Noe payable 723. Journal Entries Related to Forward Contract
• Journal entry for decrease – Dr. Noe (Cash Flow Hedge)
payable; Cr. Gain on note payable
d. Premium or discount on hedged item a. Market price < Forward price at end of
arises due to the remeasurement of the reporting period or at the date of
same at fair value. purchase – Dr. Forward contract
• Premium – when the fair value of the receivable (number of units * [forward
hedged item is greater than the face price – market price]); Cr. Unrealized
value. gain – forward contract (component of
• Discount – when the fair value of the OCI)
hedged item is lower than the face b. Market price > Forward price at end of
value. reporting period or at the date of
e. Such premium or discount is to be purchase – Dr. Unrealized loss –
amortized at the end of the reporting forward contract; Cr. Forward contract
period by making one of the following payable
entries, as applicable: c. Receipt of cash in accordance with
• Amortization of premium – Dr. Note forward contract (if market price <
payable; Cr. Interest expense forward price) at the date of purchase –
• Amortization of discount – Dr. Dr. Cash; Cr. Forward contract
Interest expense; Cr. Note payable receivable
f. All other procedures are patterned with d. Payment of cash in accordance with
cash flow hedge. forward contract (if market price >
forward price) at the date of purchase –
Dr. Forward contract payable; Cr. Cash
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lOMoARcPSD|6968211
Financial accounting and reporting VOL–1A

e. Purchase of commodity – Dr. the strike or exercise price and because of that the
Purchases; Cr. Cash (at forward price) natural action of an entity is to exercise the option.
f. Reclassification of OCI component
(gain) – Dr. Unrealized gain – forward 729. Out of the Money
contract; Cr. Gain on forward contract This is the case of an option contract when
(offset against cost of goods sold) the market price of the commodity is lesser than the
g. Reclassification of OCI component strike or exercise price and because of that the
(loss) – Dr. Loss on forward contract; Cr. natural action of an entity is to refrain from
Unrealized loss – forward contract exercising the option.
724. Futures Contract 730. At the Money

It is a contract to purchase or sell a specified This is the case of an option contract when
commodity at some future date at a specified price. the market price of the commodity is equal to the
The main difference between this and a forward strike or exercise price and because of that the
contract is that the former is traded in a futures natural action of an entity is to exercise the option.
exchange market in much the same manner as debt
and equity securities are being traded in the stock 731. Journal Entries Related to an Option Contract
market (the parties do not know each other very (Call Option – Cash Flow Hedge - In the Money)
well).
a. Payment of option premium – Dr. Call
725. Option option; Cr. Cash
It is a contract that gives the holder the right b. Market price > Strike price – Dr. Call
to purchase (not an obligation) to purchase (call option; Cr. Unrealized gain – call option
option) or sell (put option) an asset at a specified (fair value of call option or market price
price during a definite period at some future time. less exercise price – carrying amount of
call option before adjustment = increase
a. Hedged item (primary financial in fair value)
instrument) – highly probable forecast c. Receipt of cash from the exercise of call
purchase option – Dr. Cash; Cr. Call option
b. Hedging instrument (derivative financial d. Purchase of raw materials – Dr. Raw
instrument) – option contract material purchases; Cr. Cash
c. Underlying variable – price per unit of e. Reclassification of OCI component to
commodity profit or loss – Dr. Unrealized gain – call
d. Notional – number of units of option; Cr. Purchases
commodity to be purchased
732. Journal Entries Related to an Option Contract
726. Option Premium (Call Option – Cash Flow Hedge – Out of the Money)
It refers to an initial small payment required
under an option contract for protection against a. Payment of option premium – Dr. Call
unfavorable movement in price. option; Cr. Cash
b. Market price > Strike price – Dr. Call
727. Strike or Exercise Price option; Cr. Unrealized gain – call option
It is the price at which the commodity is to (fair value of call option or market price
be sold upon the exercise of the option. less exercise price – carrying amount of
call option before adjustment = increase
728. In the Money in fair value)
This is the case of an option contract when
the market price of the commodity is greater than
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c. Market price < Strike price – Dr. b. The remaining balance of the time value
Unrealized loss – call option; Cr. Call of option is not settled but recognized as
option loss.
d. Non-exercise of call option – Dr. Loss on c. Intrinsic value at date of settlement –
call option, Unrealized gain – call option; Option payment = Net gain (loss) on call
Cr. Unrealized loss – call option, Call option
option
736. Foreign Currency Forward Contract
Unlike a forward or futures contract, the It is a binding contract in the foreign
entity has no liability if the market price is lower exchange market that locks in the exchange rate for
than the underlying price under an option contract. the purchase or sale of a currency on a future date.
In case the option is not exercised, the entity will be
able to purchase the commodity at the prevailing a. Hedged item (primary financial
market price. instrument) – highly probable forecast
purchase
733. Intrinsic Value of Option b. Hedging instrument (derivative financial
It is the excess of the market price over the instrument) – foreign currency forward
strike price. It is used when an option contract is contract
entered into for speculation purposes only. c. Underlying variable – currency
Formula: (Market price at adjustment date – exchange rate
Underlying strike price at a previous date) * Number d. Notional – amount of foreign currency to
of units = Increase (decrease) in intrinsic value be purchased
a. Increase in intrinsic value – Dr. Call 737. Journal Entries Related to Foreign Currency
option; Cr. Gain on call option Forward Contract (Cash Flow Hedge)
b. Decrease in intrinsic value – Dr. Loss on
call option; Cr. Call option a. Increase in fair value of derivative
(Exchange rate > Underlying price) – Dr.
734. Time Value of Option Forward contract receivable; Cr.
It refers to the portion of option premium Unrealized gain – forward contract
that is attributable to the amount of time remaining b. Net settlement – Dr. Cash (currency at
until the expiration of the option contract. It is used current exchange rate – underlying
when an option contract is entered into for price); Cr. Forward contract receivable
speculation purposes only. c. Purchase of asset in foreign currency –
Formula: (Time value of option at Dr. Equipment (at current exchange
adjustment date – Time value of option at a rate); Cr. Cash
previous date) * Number of units = Increase d. Reclassification of OCI component – Dr.
(decrease) in time value Unrealized gain – forward contract; Cr.
Equipment
a. Increase in time value – Dr. Call option;
Cr. Gain on call option 738. Journal Entries Related to Foreign Currency
b. Decrease in time value – Dr. Loss on call Forward Contract (Fair Value Hedge)
option; Cr. Call option
a. Purchase of asset on account – Dr.
735. Settlement of Call Option for Speculation Equipment; Cr. Accounts payable
b. Remeasurement of hedged item – Dr.
a. The intrinsic value is the amount Loss on foreign exchange (increase in
collected from the speculator. cash settlement); Cr. Accounts payable
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c. Increase in fair value of hedging
instrument – Dr. Forward contract
receivable; Cr. Gain on forward contract
d. Settlement of hedging instrument – Dr.
Cash; Cr. Forward contract receivable
e. Settlement of hedged item – Dr.
Accounts payable; Cr. Cash
739. Embedded Derivatives

It is a component of a hybrid or combined
contract (also host contract) with the effect that
some of the cash flows of the combined contract
vary in a way similar to a stand-alone derivative.
Examples:
a. Convertible bond instrument (host
contract) – equity conversion option
(embedded derivative)
b. Investment in redeemable preference
shares (host contract) – redemption
option (embedded derivative)
c. Investment in bond (host contract)
whose interest or principal payment is
linked to the price of gold or silver
(embedded derivative)
740. Bifurcation
It is the process of separating an embedded
derivative from the host contract. It shall be done if
the following conditions are met:
a. A separate instrument with the same
terms as the embedded derivative would
meet the definition of a derivative.
b. The combined contract is not measured
at fair value.
c. The economic characteristics and risks
of the embedded feature are not closely
related to the economic characteristics
and risks of the host contract.
d. The host contract is outside the scope of
PFRS 9.
If separated, the embedded derivative is

accounted for at fair value and the host contract is
accounted for in accordance with appropriate
PFRS.
END OF VOLUME 1-A
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Financial Accounting and Reporting - Volume 1A

Accounting (Cagayan State University)

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Financial accounting and reporting VOL-1A

2. Accounting Cycle 11. Sales Journal

4. Analyzing the Transaction 17. Compound Journal Entry

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45. Estimates 54. Adjusting Entries Subject for Reversal

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59. Objectives of Conceptual Framework 67. Fundamental Qualitative Characteristics

Chapter 1 Fundamental Qualitative Characteristics

61. Objective of General-Purpose Financial 70. Relevance

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73. Predictive Value 82. Comparability

78. Neutrality 88. Direct Verification

89. Indirect Verification

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95. Statement of Cash Flows 105. Combined

96. Statement of Changes in Equity Chapter 4

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Financial accounting and reporting VOL-1A

Chapter 5 127. Value in Use

a. It is probable that any future economic 129. Current Cost

124. Current Value

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CASH AND CASH EQUIVALENTS 147. Cash in Bank

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156. Cash Equivalent 164. Bank Overdraft

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Types of Compensating Balance a. If the amount is material - Dr. Cash in

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a. NSF checks or DAIF (drawn against Forms of Bank Reconciliation

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Financial accounting and reporting VOL-1A

216. Computation of End of Month Balance per

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Summary of Proof of Cash Procedures for the Bank Balance

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RECEIVABLES 265. Accounts Receivable

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273. Debit Balances in Creditors' Accounts a. Allowance for freight charges

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Financial accounting and reporting VOL-1A

282. Freight Collect Methods of Recording Credit Sales

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