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Chapter 1: The Accounting Process  Used both under double and single entry system.
Accounting  Cash and accrual basis can be used under double and single entry system.

 Process of identifying, measuring and communicating economic Account basic storage of accounting information
information to permit informed judgement and decision by users of Debit Left side, Credit Right side
information.
Chart of accounts is list of all accounts used by entity
Accounting Information
Trial Balance
 Collecting and processing transaction data and disseminating financial
 list of all accounts and their balances.
information to interested parties.
 Used to check the quality of total debits and credits in the accounts.
 Subsystem of MIS.
Errors revealed at the trial balance.
Management Information system
All adjusting entries
 Set of data gathering, analyzing and reporting function designed to carry
 involved at least one statement of financial position account and one
out its function.
statement comprehensive income account.
 Accounting Information System, Personnel Information System and
 Used to update balances prior to preparation of financial statement.
Logistics Information system.
Financial Statement information accumulated and processed in accounting
Accounting Cycle
periodically communicated to others.
 Steps or procedures used in recording transaction and preparing financial
Income
statement.
 Liability method
Journal or book of original entry
 Income method
 Formal record where transaction are initially recorded.
Expense
 Posted to the ledger or book of final entry.
 Used only under double entry system;  Asset method
 Expense method
Ledger
Reversing entries
 Systematic compilation of group of accounts.
 All accruals
Subsidiary ledger
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 Prepayments recorded using expense method  Includes money

 Unearned income initially recorded using income method  Readily available for unrestricted use
 Measured at face value
 Money standard medium of exchange and the basis of accounting
A trial balance measurements.
a. proves that debits and credits are equal in the ledger. Cash includes:
b. provides a listing of open accounts and their balances which are used in  Cash on hand – it refers to undeposited collection awaiting deposit and
preparing financial statements. other current funds held as reporting date.
c. is usually prepared three times in the accounting cycle.  Cash in bank- refers to deposits in the bank
prepaid asset/expense Example of cash
 When an item of expense is paid and recorded in advance before it is  Coins and currencies
incurred, it is normally  Demands and deposit and savings account
Journal  Checks (Cashier checks, personal checks, manager’s checks, travelers
check and Certified checks removed from customers and other
 An accounting record into which the essential facts and figures in
connection with all transactions are initially recorded external party)
 Bank drafts- guarantees by the bank to advance funds
Adjusting entries  Money orders similar to the bank drafts but drawn from post office or
 These are entries made at the end of the accounting period to update other financial institution
certain amounts so that they reflect correct balances at the designated  Cash fund set aside for current operation or working funds
time. a. Petty cash fund
b. Revolving fun
c. Payroll fund
CHAPTER 2 d. Change fund
Cash and cash equivalent e. Dividend fund
f. Tax fund
The first line statement in financial position g. Travel fund
Cash h. Interest fund
i. Other types of imprest bank account used in current operation
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 Revolving fund
Similar to petty cash fund  Unused credit line
 held by sales representatives and revolving funds held by field engineers  Not recorded as cash but rather disclosed only in notes
in construction firm  Difference between line of credit and amount actually borrowed
 Tax fund – used paying tax
Check drawn are either :
Items not included as cash
 Unreleased or undelivered payee
 Post-dated check – check dated in future  Postdated, no payment has actually been made
 IOUS or advance to the employees THEREFORE , ADJUSTING ENTRY IS NEEDED TO REVERT
 Cash fund not available for use in current operation (sinking fund, plant BACK THE UNRELEASED CHECK OR POST DATED CHECK
expansion fund ,depreciation fund, preference share redemption, INTO CASH AND A/PAYABLE.
contingency fund and insurance fund
Stale Check
 Postage stamps
NOTES:  Delivered to the payee are not encashed within a long period of time,
 Postdated check and IOUS( I owe you) – receivable normally 6 months
 Do not qualify as cash, not presently available for immediate used  Reverted as cash
 At the reporting period, an adjustment is necessary to revert back
Cash includes money or its equivalent that is readily available for
at postdated checks to accounts receivable. unrestricted use.
 If not recorded, check might not be presented on the time for Postdated check received from Exclude from cash
encashment on due date. customers
 All check collection are recorded as cash receipts and adjustments Undelivered check drawn Include from cash
for postdated checks are made only when financial statement are Postdated check drawn Include from cash
prepared. Stale check Include from cash

 Depreciation fund
Cash Equivalent
 Asset replacement fund wherein cash payment to fund are equal to
periodic depreciation charges on related asset. When asset is fully Short term highly liquid investment that are readily convertible to known
depreciated, the fund can be used to acquire replacement amounts of cash
 Restricted fund part of other assets
Apply 3-month rule for cash equivalent where duration from date purchase up
 Unused postage stamps – prepaid supplies
to date maturity
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Example of cash equivalent:
a. Treasury bills – acquired 3 months before maturity date
 Treasury bill short term obligation issued at the government at a
discount (maturity date 90 days or less than a year)
 Treasury notes and treasury bonds - long term obligation issued by the
government ( treasury notes 1 year and less than 10 years and treasury
bonds 10 years or more)
b. Money market instrument or commercial paper – acquired 3 months
before maturity
 Money market instrument investment in portfolios of short term
securities
 Commercial papers short term, unsecured, notes payable issued in
large denomination by large companies with high credit ratings
( maturity date 270 days and commercial 3 months or less)
c. 3-month time deposit
 Bank deposit normally fixed denomination
Check and equity securities
 Checks and banks are not cash equivalent – not short term investment.
 Equity and securities cannot qualify as cash equivalent – shares of stocks
do not have maturity date
 Redeemable preference shares qualify as cash equivalent because of
redeemable preference share are debt instruments rather than equity
instrument.
Financial statement presentation
Cash measured at face value
 Cash denominated in foreign currency translated at the current exchange
rate at reporting date
 Cash maintained in the bank undergoing bankruptcy excluded from cash
and presented as accounts receivable measured at realizable value.
Deposit in Foreign banks
 Unrestricted deposits in foreign banks that are available for immediate
withdrawal included as cash face amount value
 Restricted not available for withdrawal are excluded from cash and
presented as receivable
Compensating balances
Minimum balance that must be maintain in entity’s bank account
o Legally restricted as to withdrawal by borrowers excluded from cash
o Not legally restricted withdrawal included in cash
o Compensating balances are disclosed in notes and increased both the
yield rate for the lender and effective interest rate of the borrower.
Notes
 Post-dated check excluded while postdated check drawn and
undelivered check drawn are included
 Deposit in escrow is a restricted held in trust for another party.
This excluded cash – restricted
 Restricted compensating balance- excluded from cash
 Cash in bank- dollar deposit and sinking fund are excluded from
cash – restricted
 6-month time deposit, treasury bond ,purchased 3/1/20x1
maturing 2/28/20x2 and treasury note are excluded – do not meet
3 months or less before maturity
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 Unused credit line disclosed only in notes

 Treasury shares excluded –not assets its contra equity and
deduction in shareholders equity
Example of internal control over cash
Bank overdraft 1. Segregation of incompatible duties
 Its is the negative balances in cash in bank resulting from overpayment of a. Authorization
checks in excess in amount deposits. b. Execution
 Occur in checking accounts not savings: c. Recording
 Payable on demand: current liabilities d. Custody over cash should be segregated ( should be given by treasurer)
 When two or more bank accounts maintained in the same bank and one 2. Imprest system
account result overdraft, overdraft may offset or deducted from other All cash receipts should be deposited intact and all cash disbursement
bank account with positive balances- unrestricted. should be made through check.
 Repayable on demand and form integral parts of the entity’s cash 3. Bank reconciliation
management, included cash and cash equivalent as deduction offset. should be prepared regularly to reconcile timely basis the differences
between cash balances per books and bank.
Financial assets and financial liabilities may be offset if the entity both : 4. Cash counts
a. A legal right a setoff to provide reasonable assurance that actual cash tallies.
b. An intention to settle the amounts on net basis or simultaneously 5. Minimum cash balance
to defray specific business requirements.
Internal control over cash 6. Lockbox account
Any action effected by management that is designed to help an entity achieve to expedite cash collection and ensure that cash collection are deposited
its objective. intact.
Its is rented for free
 Reliability of financial reporting 7. Non encashment
 Effectiveness and efficiency of operation of personal check from petty cash fund
 Compliance with laws and regulation Encashment for personal check should be prohibited
 Safeguarding assets 8. Voucher system
internal control overall cash disbursement.

 Cash inherent risk and exposed to theft and other types of fraud.
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 Report that is prepared for the purpose of bringing the balances for cash
Cash shortage – cash count less than cash records  Prepared on monthly basis immediately upon receipt of monthly bank
statement from the bank.
 Debited to suspense account a. Balance per books statement
Cash overage- cash records less than cash count b. Balance per bank statement

 Nominal or real (not appear in financial statement. Bank statement

 Issued by the bank, shows deposits and withrawals

Concealment of cash shortage Credit memos

1. Lapping –receivable have been misappropriated and concealed by apply  Addition made by the bank to depositor’s account but not yet
subsequent collection from another customer. recorded
2. Kiting – overstating balance of cash Debit memos
Done by recording only the receipt portion not disbursement portion.
 Bank transfer schedule  Deduction made by the bank to depositor’s account but not yet
 Cut off bank statement recorded
 Proof of cash a. Bank services charges
3. Window dressing form of fraudulent financial reporting and not primarily b. No sufficient fund
a method of concealing cash shortage. c. Automatic debits
 Occurs when books not closed at year end of transaction. d. Payment of loans
 Cooking of the books Book errors
 Errors committed by the depositors
Deposit in transit
 Deposit made but not yet credited by the bank to depositor’s bank
account
 Occurs when deposits are mailed to the bank (otw)
Chapter 3
Outstanding check
Bank reconciliation
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 Checks drawn and released to payees but not yet encashed by the bank. Deposit in Transit
( stale check and certified check are excluded)
 Difference between amount deposit recorded in the books and
Bank errors
amount of deposit actually credited by the bank to entity’s account.
 errors made by the bank
Outstanding checks
NOTES:
 Bank reconciliation (general ledger must be balance in bank
statement)  Difference between the amount checks drawn and amounts checks
 Credit memo – inadd na sa bank account natin pero hindi pa encashed with the bank.
natin nalilist as a cash  No outstanding check if the amount equal to the amount checks
 Debit memo –binawas sa banko pero di naka-list satin at encashed w/ the bank.
nadeduct sa pera natin
 BOOK (+cm,-dm)
 BANK (-CM,-DM) PROOF OF CASH
 Deposit in transit- otw pa yung pera inshort nakaadd na sa book  expanded in bank reconciliation includes proof of cash and cash
kahit wala pa sa banko natin disbursement.
 Outstanding check nabawas na sa atin , nacredit na pero di pa  Useful in discovering discrepancies in handling cash over certain period
nababawas satin bank account. of time.
 Credit memos, debit memos and book errors are referred to as
 “four column” bank reconciliation.
book reconciling items. The depositors should make reconciling
 The receipts and disbursement pertain to current month.
entries for these items.
 Deposit in transit, outstanding check and bank errors referred as
to bank reconciling items. The depositors does not make CHAPTER 4
reconciling entries for these items. Accounts receivable
Receivable – assets represents contractual rights to receive cash or other
assets from entity.
Computation of deposits in transit & outstanding checks
Examples of receivable:
 CPA Board exam question require the computation of deposit in transit a. Accounts receivable
and outstanding check through reconstruction set of data (problems may b. Notes receivable
be solved in t-account) c. Loans receivable
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d. Advances
e. Accrued income
f. Deposits
g. Claims receivable

The non-financial institution, receivables are classified into:

Trade receivable
 sale of goods and services in ordinary course of business. ( trade
accounts receivable and trade notes receivable)
 Current assets, expected to realized w/in normal operating cycle or
one year
Non-trade receivable
 sale from other resources.
 Can be current if expected to realized w/in one year
NORMAL
OPERATING CYCLE
 time between the acquisition of asset for processing their realization in
cash or cash equivalent (if the entity’s normal operating cycle was not
identifiable assumed 12months)