CASH AND CASH EQUIVALENT

Cash item Undelivered or Unreleased check

 Cash on Hand - That merely drawn and recorded but not

- Undeposited cash collection given to the payee before the end of
- Customer checks reporting period
- Cashier or Manager Checks
Postdated Check
- Travels Checks
- Bank Drafts and money orders - is a check drawn, recorded and already
 Cash in bank given to the payee but it bears a date
- Demand Deposit subsequent to the end of the reporting
- Saving Deposits “unrestricted” period
 Cash Fund
- Petty cash fund Cash Shortage
- Payroll Fund -Cash count shows cash which is less than
- Dividend Fund the balance per book
Cash Equivalent (3 months rule) Cash Overage
a. 3 months BSP treasury bill -Cash count shows cash which more than
b. 3 years BSP treasury bill purchased 3 the balance per book
months before date of maturity
c. 3 months time deposit Petty Cash Fund
d. 3 months money market instrument
- set aside to pay small expenses which
or commercial paper
cannot be paid conveniently by means of
Bank Overdraft checks

- Current Liability and should not be offset a. Imprest fund

against other bank account with debit
b. Fluctuating fund
balance

Compensating Balance

- Generally takes the form of minimum

checking or demand deposit account
balance that must be maintained in
connection with borrowing arrangement
with a bank.
 BANK RECONCILIATION

1. Book Reconciling Item DEPOSITS IN TRANSIT

a. Credit Memos (+)
b. Debit Memos (-)
c. Errors (+/-)
2. Bank Reconciling Item
a. Deposit in Transit (+)
b. Outstanding Check (-)
c. Errors (+/-)
Credit Memos
- refer to items not representing deposits
credited by the bank to the account of the
depositor “but not yet recorded by the
depositor as cash receipt”
a. Note Receivable collected by the bank
b. Proceeds of bank loan credited to the
account
c. Matured time deposits transferred by the
bank
Debit Memos
- refer to items not representing checks
paid by bank which are charged or debited
by the bank of the depositor “but not yet
recorded by the depositor as cash
disbursements.”
a. NSF
- Collections already recorded by the
depositor as cash receipts “but not yet
reflected on the bank statement”
a. Collections already forwarded to the
bank for deposit but too late to appear in
bank statement
b. Undeposited collections “cash on hand”
waiting to delivery to the bank for deposit.
Outstanding Check
- Checks already recorded by the depositor
as cash disbursement “but not yet reflected
on the bank statement”
a. Check drawn and already given to payees
but not yet presented for payment.
b. Certified Check – bank has stamped on its
face word “accepted or certified” indicating
sufficiency of fund.
 Adjusted Balance Method
Book balance xx
Add: Credit memos xx
Total xx
Less: Debit memos xx
Adjusted Book balance xx

b. Technically defective checks

Bank balance xx
c. Bank service charges Add: Deposit in Transit xx
Total xx
d. Reduction of loan Less: Outstanding Checks xx
Adjusted Bank balance xx
  Book to Bank Method  Bank to Book Method

Book balance xx Bank balance xx

Add: Credit memos xx Add: Deposit in Transits xx
Outstanding checks xx xx Debit memos xx xx
Total xx Total xx
Less: Debit memos xx Less: Outstanding checks xx
Deposit in Transits xx xx Credit memos xx xx
Bank balance xx Book balance xx

PROOF OF CASH

Is an expended reconciliation in that it The Bank reconciliation is called “two-date”

includes proof of receipts and because it literally involves two dates.
disbursements
a. Book balance- beginning &
a. Adjusted Balance method ending
b. Book to Bank method b. Bank balance- beginning &
c. Bank to Book method ending
c. Deposit in Transits - beginning &
ending
d. Outstanding Check - beginning &
ending

ACCOUNT RECEIVABLE

Trade and Nontrade Receivable d. Subscription receivable

e. Creditors accounts with debit
- refer to claims arising from sale of
balance
merchandise or services in the ordinary
f. Special deposits
course of business
g. Dividend receivable
a. Advance to or receivable h. Claims receivable
b. Advance to affiliates
Customers’ Credit balance
c. Advance to supplier
- are credit balance in accounts receivable Method of recording credit sales
resulting from overpayments, return and
1. Gross Method – is the common and
allowances, and advance payments from
widely used method because it is
customer
simple to apply
Net Realizing Value (NRV) 2. Net Method – The invoice price
minus the cash discount whether
- The initial amount recognized for account
taken or not taken
receivable shall be reduced by adjustments
which in the ordinary course of business will Allowance for sales discount
reduce the amount recoverable from the
- if customers are granted cash discounts
customer
for prompt payment, then, conceptually
estimates of cash discounts on open
accounts at the end of the period based on
a. Allowance for Freight charge
past experience shall be made
b. Allowance for Sales Return
c. Allowance for Sales Discount
d. Allowance for Doubtful Accounts
Accounting for bad debt
Accounting for Freight Charge
- Business entities sell on credit rather than
- Sometimes, goods are sold FOB only for cash to increase total sales and
destination but shipped freight collect with thereby increase income
the understanding that the buyer will pay
1. Allowance method
for the freight charge and deduct the same
2. Direct write-off method
when remittance is made by him
Doubtful account in the income statement
Allowance for sales returns
1. Distribution cost – under the charge
- That is unsatisfactory or will make other
of the sales manager
claims requiring reduction in the amount
2. Administrative expense – under the
due as in the case of shipment shortages
charge of an officer rather than sales
and defects
manager
Sales discount

- is a reduction from invoice price by reason

of prompt payment

ESTIMATION OF DOUBTFUL ACCOUNTS

Aging of account receivable
- Involved an analysis where the accounts
are classified into not due or past due
a. Not Due
b. 1 to 30 days past due
c. 31 to 60 days past due
d. 61 to 90 days past due
e. 91 to 120 days past due
f. 121 to 180 days past due
g. 181 to 365 days past due
h. More than 1 year past due
NOTES RECEIVABLE
Note receivable
- are claims supported by formal promises
to pay usually in the form of notes
- Negotiable promissory note is an
unconditional promise in writing made by
one person to another, signed by the
maker, engaging to pay on demand or at a
fixed determinable future time a sum
certain in money to order or to bearer
Dishonored notes
- When promissory note matures and is not
paid, it is said to be dishonored
- Note receivable to Account receivable
- The amount debited to accounts
receivable should include the face amount,
interest and other charges.
Percent of accounts receivable
- A certain rate is multiplied by the open
accounts at the end of the period in order
to get the required allowance balance “This
procedure has the advantage of presenting
the accounts receivable at estimated NRV,
this approach is also simple to apply”
Percent of sales
- The amount of sales for the year is
multiplied by the certain rate to get the
doubtful account expense. The rate may be
applied on credit sales or total sales
Initial measurement of notes receivable
- Conceptually, notes receivable shall be
measured initially at present value
- Short term note receivable shall be
measured at face amount
Interest-bearing notes receivable
- The initial measurement of long-term
notes will depend on whether the notes are
interest-bearing or noninterest bearing
- Interest-bearing long-term notes are
measured at face amount which is actually
the present value upon issuance
Noninterest-bearing notes receivable
- Long-term notes are measures at present
value which is the discounted value of the
future cash flow using the effective interest
rate
- is a misnomer because all notes implicitly
contain interest
Subsequent measurement
- To initial recognition, long-term notes
receivable shall be measured at amortized
LOAN RECEIVABLE
- is a financial asset arising from loan
granted by a bank or other financial
institution to borrower or client.
Initial measurement of Loan
receivable
- An entity shall measure a loan
receivable at fair value plus
transaction cost that are directly
attributed to the acquisition of the
financial asset.
- Transaction cost that are directly
attributable to the loan receivable
include direct origination cost
- Direct origination costs should be
included in the initial measurement
of the loan receivable
- However, indirect origination costs
should be treated as outright
expense
Meaning of amortized cost
- Is the amount at which the loan
receivable is measured initially:
a. Minus Principal repayment
b. Plus or minus cumulative
amortization
cost using the effective interest method.
The amortized cost is the amount at which
the note receivable is measured initially:
a. Minus principle repayment
b. Plus or minus cumulative
amortization
c. Minus reduction for impairment or
uncollectibility
c. Minus reduction for
impairment of
uncollectability
Origination fees
-Lending activities usually precede the
actual disbursement of funds and generally
include efforts to identify and attract
potential borrowers and to originate a loan
(fee charge by the bank against the
borrower)
a. Evaluating the borrower’s financial
condition
b. Evaluating guarantees, collateral and
other security
c. Negotiating the terms of the loan
d. Preparing and processing the
documents related to the loan
e. Closing and approving the loan
transaction
Accounting for origination fees
- Receivable from borrower are recognized
as unearned interest income and amortized
over the term of the loan
 12 months expected credit loss

Impairment of loan - is defined as the portion of the lifetime

expected credit loss from default event that
- An entity shall recognized a loss allowance
are possible within 12 months after the
for expected credit losses on financial asset
reporting period
measured at amortized cost
Lifetime expected credit loss

- shall always be recognized for trade

a. The probability-weighted outcome
receivable through aging, percentage of
b. The time value of money
accounts receivable and percentage sales
c. Reasonable and supportable
information that is available without 3 stage of impairment approach
undue cost or effort
1. Low credit risk
Meaning of credit risk 2. Significant increase in credit risk but
no objective evidence of impairment
- is the risk that one party to a financial
3. Objective evidence of impairment
instrument will cause a financial loss for the
other party by failing to discharge an
obligation

RECEIVABLE FINANCING
(Pledge, assignment and factoring)

- is the financial flexibility or capacity of an - Recorded by debiting cash and discount on

entity to raise money out of its receivable
Form of receivable financing
a. Pledge of account receivable
b. Assignment of account receivable
c. Factoring of account receivable
d. Discounting of Account receivable
Pledge of account receivable
- When loans are obtained from the bank or
any lending institution, the account
receivable may be pledge as collateral
security for the payment of the loan
note payable if loan is discounted, and
crediting note payable
Assignment of account receivable
- a borrower called the assignor transfers
rights in some accounts receivable to a
lender called the assignee in consideration
for a loan
- is a more formal type of pledging of
account receivable. Assignment is secured
borrowing evidenced by a financing
agreement and a promissory note both of
which the assignor signs.

Factoring
- is a sale of account receivable usually on a
without recourse, notification basis.
a. Casual factoring
b. Factoring as a continuing agreement
Casual factoring
- Is an entity finds itself in a critical position,
it may be forced some or all of its accounts
RECEIVABLE FINANCING
(Discount of note receivable)
- is a form of receivable financing,
discounting specifically pertains to note
receivable
Endorsement
- is the transfer right to a negotiable
instrument by simply signing at the back of
the instrument
- In the legal parlance, this is the secondary
liability of the endorser. In the accounting
INVENTORIES
- are assets held for sale in the ordinary
course of business, encompass goods
purchased and held for resale
a. Merchandise
b. Land and other properties
Inventories of a manufacturing concern:
receivable at a substantial discount to a
bank or a finance entity to obtain the much
needed cash
Factoring as a continuing agreement
- Where a finance entity purchases all of
the accounts receivable of a certain entity
Credit card
- is a plastic card which enables the holder
to obtain credit up to a predetermined limit
from the issuer of the card for the purchase
of goods and services
parlance, this is contingent liability of the
endorser
Term related
Maturity value – is equal to the principal
plus interest
Discount – is equal to maturity value times
discount rate times discount period
Accounting for note receivable is depend on
whether the discounting is with or without
recourse (is absolute)
a. Finished Goods
b. Goods in Process
c. Raw Material
d. Factory of Manufacturing supplies
Goods includible in the inventory
- As a rule, all goods to which the entity has
title shall be included I the inventory,
regardless of location
Legal Test
a. Goods owned and on hand
b. Goods in transit and sold FOB
destination
c. Goods in transit and purchase FOB
destination
d. Goods out on consignment to
consignee
e. Goods in the hands of salesmen or
agent
f. Goods held by customers on
approval or on trial
Consigned goods
- is a method of marketing goods in which
the owner called the consignor transfers
physical possession of certain goods to an
agent called the consignee who sell them
on the owner’s behalf
Inventory shortage or overage
- If at the end of the account period, a
physical count indicates a different amount,
an adjustment is necessary to recognize any
inventory shortage or overage
Trade discount
- are deducted from the list or catalog price
in order to arrive the invoice price which is
the amount actually charge to the buyer
(not recorded)
Cash discount
- are deducted from the invoice price when
payment is made within the discount period
(recorded)
Method or recording purchases
1. Gross Method – Purchases and
accounts payable are recorded at
gross amount of invoice (violate the
matching principle because the
discount are recorded)
2. Net Method – Purchases and
account payable are recorded at net
amount of invoice
Cost of inventories
a. Cost of Purchase
- comprises the purchase price,
import duties and irrecoverable
taxes, freight, handling the other
cost directly attributable to the
acquisition of finished goods,
materials and services
b. Cost of conversion
- includes cost directly related to the
units of production such as direct
labor, also includes a systematic
allocation of fixed production
(normal capacity of the production
facilities) and variable production
(actual use of the production
facilities) overhead that is incurred
in converting materials into finished
goods
c. Direct attributable cost
- incurred in bringing the inventories
to their present location and
 condition (excluded: abnormal
amount, storage cost, admin.
overhead, distribution/selling cost

Cost of inventories of a service provider

a. Labor and other cost of personnel

directly engaged in providing the
service, including supervisory
personnel
b. Direct attribute overhead