CASH AND CASH

EQUIVALENTS
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 1: Cash and Cash Equivalents

■ After studying this chapter, you should be able to:

a.) To understand the concept of cash.
b.) To understand the concept of cash equivalents.
c.) To identify items considered cash.
d.) To identify items considered cash equivalents.
e.) To know the accounting for petty cash fund.
 Cash and Cash Equivalents

First line item under Current Assets

Statement of Financial Position
Warm Up Exercise
Affable Company provided the following information at year-end comprising the
cash account:
Cash in Bank – demand deposit P5,000,000
Cash on hand 400,000
Postage stamps unused 5,000
Certificate of time deposit 1,500,000
Money order 100,000
Manager check 100,000
Traveler check 1,000,000
Post dated customer check 500,000

What total amount should be reported as cash at year-end?

 Cash
■ As contemplated in accounting, cash includes money and any other negotiable
instrument that is payable in money and acceptable by the bank for deposit and
immediate credit.

(1) Cash on hand

- undeposited cash collections and other cash items awaiting for
deposit
- Customer’s checks
- Cashier’s or manager’s checks
- Traveler’s checks
- Bank Drafts
- Money Orders
(2) Cash in Bank
- Demand Deposit or Checking Account
- Savings Deposit
 Cash (Cont.)
(3) Cash fund set aside for current purposes
- petty cash
- payroll fund
- dividend fund
- travel fund
- interest fund

There is no specific standard dealing with cash. The only guidance is found in PAS 1,
paragraph 66, which provides that an entity shall classify an asset as current when the
asset is cash or a cash equivalent unless it is restricted to settle a liability for more than
twelve (12) months after the end of the reporting period.
This means that cash must be readily available in the payment of current liabilities
and not be subject to any restrictions, contractual or otherwise.
 Cash Equivalents

PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid

investments that are readily convertible into cash and so near their maturity that they
present insignificant risk of changes in value because of changes in interest rates.
The standard further states that only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents.
(1) Three-month BSP Treasury Bill
(2) Three-year BSP Treasury Bill purchased three months before date of maturity
(3) Three-month time deposit
(4) Three-month money market instrument or commercial paper
 Investments of Excess Cash

Excess cash may be invested in time deposits, money market instruments and treasury
bills for the purpose of earning interest income.
Ø If the term is three months or less, such instruments are classified as cash
equivalents and therefore included in the caption “cash and cash equivalents”,
Ø If the term is more than three months but within one year, such investments are
classified as short term financial assets or temporary investments and presented
separately as current asset.
Ø If the term is more than one year, such investments are classified as non-current or
long term investments. However, if such investments become due within one year
from the end of the reporting period, they are classified as current or temporary
investments.
Measurement If a bank or financial
institution holding the funds
Cash is measured at of an entity is in bankruptcy
face value. or financial difficulty, cash
should be written down to
estimated realizable value if
Cash in foreign the amount of recoverable is
estimated to be lower than
c u r r e n c y i s the face value.
measured at current
exchange rate.
Presentation This caption includes all cash
items, such as cash on hand,
Cash and cash cash in bank, petty cash
equivalents should fund and cash equivalents
be shown as the first which are unrestricted in use
for current operations.
line item under
H oweve r, t h e d e t a i l s
current assets.
comprising the cash and
(Statement of cash equivalents should be
Financial Position) disclosed in the notes to
financial statements.
Foreign Currency

■ Should be translated to Philippine Peso using the current

exchange rate
■ Deposits in foreign countries which are not subject to any
foreign exchange restriction are included in “cash”
■ Deposits in foreign bank which are subject to foreign
exchange restriction should be classified separately among
non-current assets and the restriction clearly indicated
Cash fund for a Certain Purpose

Cash fund = Current Operations / Current Obligations = Cash and Cash

Equivalents (Current Asset)

However, if

Cash Fund = Non Current Purpose / Non Current Obligations = Long

Term Investment (Non Current Asset)
Classification of Cash Fund

Ø Classification of cash fund as current or non-current should parallel to

the classification of the related liability.

Ø Cash fund set aside for the acquisition of a noncurrent asset should
be classified as noncurrent regardless of the year of disbursement.
Cash fund for a certain purpose
Current Asset (Cash and
Cash Equivalents Long-term Investment
ü Petty Cash Fund ü Sinking Fund
ü Payroll Fund ü Preference share for redemption
ü Travel Fund fund
ü Interest Fund ü Contingent Fund
ü Dividend Fund ü Insurance Fund
ü Tax Fund ü Fund for acquisition or construction
of property, plant and equipment
Bank Overdraft (generally NOT permitted in the Philippines)
When the Cash in Bank has a Credit Balance.
A bank overdraft is classified as a current liability and
should NOT be offset against other bank accounts with debit
balances.
Exceptions:
1. When an entity maintains two or more accounts in one
bank and one account results in an overdraft, such overdraft
can be offset against the other bank account with a debit
balance.
Bank Overdraft (Cont.)
Exceptions to the general rule:
1. When an entity maintains two or more accounts in one
bank and one account results in an overdraft, such
overdraft can be offset against the other bank account
with a debit balance.
2. An overdraft can also be offset against the other bank
account if the amount is NOT material.
3. Under IFRS, bank overdraft can be offset against other
bank account when payable on demand and often
fluctuates from positive to negative as an integral part of
cash management.
Compensating Balance
Generally, it takes the form of minimum checking or
demand deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.
This arrangement results in the reduction of the amount
borrowed because the compensating balance provides a
source of fund to the bank as partial compensation for the
loan extended.
Classification of Compensating Balance
■ If the deposit is not legally restricted as to withdrawal by the
borrower because of an informal compensating balance
agreement, the compensating balance is part of cash.

§ If the compensating balance is legally restricted because of

a formal compensating balance agreement, the
compensating balance is classified separately as “cash held
for compensating balance under current assets – if the
related loan short-term. If the related loan is long – term,
the compensating balance is classified as non-current
investment.
Undelivered or Unreleased Check

Check that is merely drawn and recorded but not

given to the payee BEFORE the end of the reporting
period.

Adjusting entry is required to restore the cash balance

and set up the liability:
Cash xx
Accounts Payable/Appropriate Acct xx
Post Dated Check Delivered

Check that is merely drawn, recorded and already

given to the payee but it bears a date subsequent to the
end of reporting period.
The original entry recording a delivered postdated
check shall also be reversed and therefore restored to
the cash balance.
Cash xx
A/P or appropriate acct xx
Stale Check or Check Long Outstanding

Check that is not encashed by the payee within a

relatively long period of time.
If the amount is immaterial, it is simply accounted for as
miscellaneous income.
Cash xx
Miscellaneous Income xx
However, if the amount is material and liability is expected
to continue, the cash is restored and the liability is again set up.
Cash xx
A/P Appropriate account xx
Cash Shortage or Overage

Cash Shortage = Actual Cash Count < Balance per Record

Entry:

Cash Overage = Actual Cash Count > Balance per Record

Entry:
Accounting for Cash Shortage
Where the cash count shows cash which is less than the
balance per book, a cash shortage is to be recorded.
Cash short or over xx
Cash xx
The cash short or over is only a temporary or suspense account.
Accounting for Cash Shortage

Hence, if the cashier or cash is held responsible for the cash

shortage, the adjustment should be:
Due from cashier xx
Cash short or over xx
However, if reasonable efforts fail to disclose the cause of the
shortage, the adjustment should be:
Loss from cash shortage xx
Cash short or over xx
Accounting for Cash Overage
The cash overage is treated as miscellaneous income if
there is no claim on the same.
Cash short or over xx
Miscellaneous Income xx
But when the cash overage is properly found to be the
money of the cashier, the journal entry is:
Cash short or over xx
Payable to the cashier xx
Petty Cash Fund
Money set aside to pay small expenses which cannot be paid
conveniently by means of check:
Methods of handling petty cash:
1. Imprest Fund System
2. Fluctuating Fund System
Thank you!
 BANK
RECONCILIATION
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 2: Bank Reconciliation

■ After studying this chapter, you should be able to:

a.) To understand the need for a bank reconciliation.
b.) To know the reconciling items affecting the cash in bank per ledger.
c.) To know the reconciling items affecting the cash in book per bank statement.
d.) To be able to prepare a bank reconciliation.
e.) To be able to prepare the necessary adjusting entries to reconcile the cash in
bank ledger with the cash in bank per bank statement.
Bank Deposits
1.) Demand Deposit (Current or Checking Account):
- Non – interest bearing
- deposits are covered by deposit slips and where funds are
withdrawable on demand by drawing checks against the
bank.
2.) Savings Deposit
- Interest bearing
- the depositor is given a passbook upon the initial deposit.
The passbook is required when making deposits and
withdrawals.
Bank Deposits (Cont.)
3.) Time Deposit
- interest bearing
- formal agreement embodied in an instrument (Certificate
of Deposit).
- predetermined or withdrawn on demand or after a certain
period of time agreed upon.
Bank Reconciliation
Incidentally, of the three kinds of deposit, a bank reconciliation is necessary
only for a demand deposit or checking account.
- A statement which brings into agreement the cash balance per book and
cash balance per bank.
A bank statement is a monthly report of the bank to the depositor showing:
a.) The cash balance per bank at the beginning
b.) The deposits made by the depositor and acknowledged by the bank
c.) The checks drawn by the depositor and paid by the bank
d.) The daily cash balance per bank during the month
Reconciling Items
Book Reconciling Items
Ø Credit Memos (CM)
1. Notes collected by bank in favor of the depositor and credited to the account
of the depositor.
2. Proceeds of bank loan credited to the account of the depositor.
3. Matured time deposits transferred by the bank to the current account of the
depositor
Ø Debit Memos (DM)
1. NSF or DAIF Check
2. Technically defective check
3. Bank Service Charges
4. Reduction of Loan
Ø Errors
Reconciling Items
Bank Reconciling Items
Ø Deposit in Transit
1. Collections already forwarded to the bank but too late to appear in the bank
statement.
2. Undeposited collections – cash on hand awaiting for delivery to the bank for
deposit
Ø Outstanding Checks
1. Checks drawn and already given to payees but not yet presented for payment
2. Certified Checks – should be deducted from the total outstanding checks (if
included therein)
Ø Errors
Bank Reconciliation Formats
1. Adjusted Balance Method
Book Balance xx
Add: Credit Memos xx
Total xx
Less: Debit Memos xx
Adjusted Book Balance xx

Bank Balance xx
Add: Deposit in Transit xx
Total xx
Less: Outstanding Checks xx
Adjusted Bank Balance xx
Bank Reconciliation Formats
2. Book to Bank
Book Balance xx
Add: Credit Memos xx
Outstanding Checks xx xx
Total xx
Less: Debit Memos xx
Deposits in Transit xx xx
Bank Balance xx

3. Bank to Book
Bank Balance xx
Add: Deposit in Transit xx
Debit Memos xx xx
Total xx
Less: Outstanding Checks xx
Credit Memos xx xx
Book Balance xx
Note: The first method (Adjusted Balance Method) is preferred over the other two.

PREPARATION OF ADJUSTING ENTRIES:

Only the BOOK RECONCILING ITEMS require adjusting entries on the book of
the depositor.
Sample Problem
Divine Company prepared the followed bank reconciliation on December 31:
Balance per bank statement 2,800,000
Add: Deposit in Transit 195,000
Checkbook printing charge 5,000
Error made by Divine in recording
check issued in December 35,000
NSF check 110,000 345,000
Total 3,145.000
Less: Outstanding check 100,000
Note collected by bank including
P15,000 interest 215,000 315,000
Balance per book 2,830,000

Required: What amount should be reported as cash in bank at year-end?

THANK YOU!
PROOF OF CASH
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 3: Proof of Cash

■ After studying this chapter, one should be able to:

a.) To be able to prepare a two-date bank reconciliation.
b.) To know the computation of deposits in transit and outstanding checks.
c.) To know the reconciliation of cash receipts per ledger with cash receipts per
bank statement.
d.) To know the reconciliation of cash disbursements per ledger with cash
disbursement per bank statement.
e.) To understand the nature of proof of cash.
f.) To be able to prepare a reconciliation showing of proof cash.
PROOF OF CASH
An expanded reconciliation in that it includes proof of receipts and
disbursements.
To locate possible errors or fraud
Three (3) forms of proof of cash:
a. Adjusted Balance Method
b. Book to Bank Method
c. Bank to Book Method
Formulas:
Deposit in Transit

Deposit in Transit – Beginning of the Month Pxxx

Add: Cash Receipts deposited during the
month xxx
Total deposits should be acknowledged by the
bank xxx
Less: Deposits acknowledged by the bank (xxx)
Deposit in Transit – End of the Month xxx
Formulas:
Outstanding Check

Outstanding Check– Beginning of the Month Pxxx

Add: Checks drawn by the company/depositor
During the month xxx
Total checks to be paid by the bank
xxx
Less: Checks paid by the month during the (xxx)
month
Outstanding Checks – End of the Month xxx
PROOF OF CASH FORMAT

Receipts (Book Disbursements

Beg of the Month Debits) (Book Credits) End of the Month
  A B C A+B-C
Balance per Book xx xx xx xx
CM:        
Last Month xx (xx)    
Current Month   xx   xx
DM:        
Last Month (xx)   (xx)  
Current Month     xx (xx)
Adjusted Book Balance xx xx xx xx

Beg of the Month Receipts (Bank Disbursements End of the

Credits) (Bank Debits) Month
Balance per Bank xx xx xx xx
Deposits in Transit:        
Last Month xx (xx)    
Current Month   xx   xx
Outstanding Checks:        
Last Month (xx)   (xx)  
Current Month     xx (xx)
Adjusted Bank Balance xx xx xx xx
Illustrative Problems-Adjusted Balance
Method
Thank you!
 ACCOUNTS
RECEIVABLE
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 4: Accounts Receivable

■ After studying this chapter, one should be able to:

a.) To know the classification and presentation of the receivables.
b.) To know the initial and subsequent measurement of accounting receivables.
c.) To identify the adjustments necessary in determining the net realizable value
of accounts receivable.
d.) To understand the gross method and net method of recording credit sales.
e.) To know the accounting for doubtful accounts, worthless accounts written off
and recoveries of accounts written off.
Definition:
Receivables are FINANCIAL ASSETS that
represent a contractual right to receive
cash or another financial asset from
another entity.
Types:
a . ) Tr a d e Re c e i va b l e s – c l a i m s a r i s i n g f ro m t h e s a l e o f
merchandise or services in the ordinary course of business. These
claims are classified as current assets because they are expected
to be realized in cash within the normal operating cycle or one year,
whichever is longer.

b.) Non Trade Receivables – claims arising from sources other than
the sale of merchandise or services in the ordinary course of
business. These claims are classified as current assets when they
are expected to be realized in cash within one year
notwithstanding the length of the operating cycle. Otherwise they
are classified as noncurrent assets.
Trade Receivables:
Ø Accounts Receivables – open accounts or those are
not supported by promissory notes.
(customers’ accounts, trade debtors, and trade
accounts receivables)

Ø Notes Receivables – supported by formal

promises to pay in the form of notes.

Ø Loans Receivables – for banks and other

financial institutions, receivables result primarily
from loans to customers.
Classification:
Ø Trade Receivables
- Current Assets
- Realized in cash within the normal
operating cycle or one year, whichever is longer.
v Account Receivable – Current Asset
v Notes Receivable – within one year – Current Asset
- beyond one year – Non Current
Asset
Classification:
Ø Non Trade Receivables
Current Assets – realized in cash within
one year, the length of the operating cycle
nothwithstanding.
Non Current Assets – collectible within one
year.
Presentation:
Trade and Non trade receivables which are
currently collectible shall be presented on the
face of the statement of financial position as
o n e l i n e i t e m c a l l e d Tr a d e a n d O t h e r
Receivables.
Examples of Nontrade Receivables:
1. Advances to or receivables from shareholders, directors, officers or
employees. If collectible in one year, such advances or receivables
should be classified as current assets.
2. Advances to affiliates/subsidiaries– usually treated as noncurrent
assets
3. Advances to supplier for acquisition of merchandise – current asset
4. Subscription receivable – current assets if collectible within one year.
Otherwise, they are shown as a deduction from subscribed share
capital
5. Creditors’ accounts with debit balances – results from overpayment or
returns and allowances. Classified as current assets.
Examples of Nontrade Receivables:
6. Special deposits on contract bids – classified as either current or
noncurrent assets depending on the collectability
7. Accrued Income (dividends receivable, accrued rent income, interest)
8. Claims receivable (insurance (fire): receivable from insurance, tax
refund (receivable from BIR)
Customer’s Credit Balance
Customer’s credit balances are credit balances in accounts receivable resulting from
overpayments, returns and allowances, and advance payments from customers.
These credit balances are classified as current liabilities and are not offset against the
debit balances in other customers’ accounts, except when the same is not material in
which case only the net accounts receivable may be presented.
Initial Measurement
PFRS 9, paragraph 5.1.1 provides that a financial asset
shall be recognized initially at fair value plus transaction costs
that are directly attributable to the acquisition.
Fair Value = Transaction price (FV of the consideration
given)
Accounts Receivable shall be measured initially at face
amount or original invoice amount.
Subsequent Measurement
In accordance with PFRS 9, paragraph 5.2.1, after initial
recognition. Accounts receivable shall be measured at amortized cost.
Amortized Cost = Net Realizable Value
The net realizable value of accounts receivable is the amount of
cash expected to be collected or the estimated recoverable amount.
Accounts Receivable
Less:
Allowance for doubtful accounts (non-collection)
Allowance for sales returns (defective)
Allowance for sales discounts (discounts)
Net Realizable Value
Shipping Terms
In order to give proper accounting recognition to freight charge in relation to accounts
receivable, the following terms should be understood – FOB Destination, FOB Shipping
Points, freight collect and freight prepaid.
FOB Destination – ownership of the goods purchased is vested in the buyer upon
receipt thereof
- seller shall be responsible for the freight charge up to the point of
destination
FOB Shipping Point – ownership of the goods purchased is vested in the buyer upon
shipment thereof
- incumbent upon the buyer to pay for the transportation charge
from the point of shipment to the point of destination
Freight (Delivery Charge)
General rule: Owner of the goods pay for the freight.
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid already by the seller; seller pays the freight

(Upon Shipment)
Freight Collect Freight Prepaid
FOB Shipping Point no problem **
FOB Destination ** no problem
Allowance for Sales Returns
The measurement of accounts receivable shall also recognize the
probability that some customers will return goods that are unsatisfactory
or will make other claims requiring reduction in the amount due as in the
case of shipment shortages and defects.
For example, an amount of P50,000 of the total accounts receivable
at year end represents selling price of goods that will probably returned.
The journal entry to recognize the probable return is:
Sales return 50,000
Allowance for sales return 50,000
 Allowance for Sales Discounts
Entities usually offer cash discounts to credit customers. A cash discount is a
reduction from an invoice price by reason of prompt payment.
A cash discount is also known as sales discount on the part of the seller and a
purchase discount on the part of the buyer.
A cash discount may be expressed as 5/10, n/30. This means that the
customer is entitled to a 5% discount if the payment is made in 10 days from the invoice
date.
If the customer fails to pay within the 10 day – discount period, the gross
amount of the invoice price must be paid within 30 days from the invoice date.
Methods of recording credit sales
a. Gross Method – The accounts receivable and sales are recorded at gross
amount of the invoice. This is the common and widely used method.
Illustration:
1. Sale of merchandise for P100,000 terms 5/10, n/30.
Accounts Receivable 100,000
Sales 100,000

2. Assume collection is made within the discount period.

Cash 95,000
Sales discount 5,000
Accounts Receivable 100,000

3. Assume collection is made beyond the discount period.

Cash 100,000
Accounts Receivable 100,000
Methods of recording credit sales
b. Net Method – The accounts receivable and sales are recorded at
net amount of the invoice, meaning the invoice price minus the
cash discount.
Illustration:
1. Sale of merchandise for P100,000 terms 5/10, n/30.
Accounts Receivable 95,000
Sales 95,000

2. Assume collection is made within the discount period.

Cash 95,000
Accounts Receivable 95,000

3. Assume collection is made beyond the discount period.

Cash 100,000
Accounts Receivable 95,000
Sales discount forfeited 5,000 (Other income)
Allowance for Sales Discounts
If customers are granted cash discounts for prompt payments, then
conceptually estimates of cash discounts on open accounts at the end of
the period based on past experience shall be made.
For example, of the accounts receivable of P1,000,000 at the end of
the period, it is reliably estimated that discounts to be taken will amount
to P50,000.
The adjustment to record the expected sales discount is:
Sales discount 50,000
Allowance for sales discount 50,000
Accounting for Bad Debts
Methods followed in accounting for this bad debt loss:
(1) Allowance Method
(2) Direct writeoff Method
Business entities sell on credit rather than only for cash to
increase total sales and thereby increase income.
However, an entity that sells on credit assumes the risk that some
customers will not pay their accounts.
When an account becomes uncollectible, the entity has sustained
a bad debt loss. This loss simply one of the cost of doing business on
credit.
Allowance Method
Requires recognition of a bad debt loss if the accounts are
doubtful of collection.

o To recognize doubtful accounts:

Doubtful accounts/bad debts expense xx

Allowance for doubtful accounts xx

o Doubtful accounts subsequently found to be worthless:

Allowance for doubtful accounts xx

Accounts receivable xx
Allowance Method
Generally accepted accounting principles require the use of the
allowance method because it conforms with the matching principle.

Moreover, accounts receivable would be properly measured at net

realizable value.
Shipping Terms
Freight (Delivery Charge) General rule: The owner pays the freight or delivery charge
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid by the seller; seller pays the freight
FOB Collect FOB Prepaid
FOB Shipping Point (buyer) ok **
FOB Destination (seller) ** ok
Shipping Terms
Freight (Delivery Charge) General rule: The owner pays the freight or delivery charge
Freight Collect – not yet paid by the seller; buyer pays the freight
Freight Prepaid – paid by the seller; seller pays the freight
FOB Collect FOB Prepaid
FOB Shipping Point (buyer) ok **
FOB Destination (seller) ** ok
Recoveries of accounts written off
If collection is made on account previously written off as
uncollectible, the customary procedure is first to recharge the
customer’s account with the amount collected and possibly
with the entire amount previously charged off if it is now
expected that collection will be received in full.
The collection is then recorded normally by debiting cash
and crediting accounts receivable.
The recharging of the customer’s account is usually
followed because it is an evidence of the attempt of the
customer to reestablish his credit with the entity.
Recoveries of accounts written off (cont.)

What account should be credited when the customer’s

account is recharged?

The generally accepted approach is to simply reverse the

original entry of the writeoff regardless of whether the recovery
is during the year of writeoff or subsequent thereto.
Direct Writeoff Method

This method requires recognition of a bad debt loss only

when the accounts proved to be worthless or uncollectible.
Worthless accounts are recorded by debiting bad debts
and crediting accounts receivable. If the accounts are only
doubtful of collection, no adjustment is necessary.
 Allowance Method Direct Write Off
1. Estimation of Doubtful Accounts 1. Estimation of Doubtful Accounts
Doubtful Accounts xx No Entry
Allowance for DA xx

2. Write Off 2. Write Off

Allowance for DA xx Doubtful Accounts xx
Accounts Receivable xx Accounts Receivable xx

3. Recovery 3. Recovery
Accounts Receivable xx Accounts Receivable xx
Allowance for DA xx Doubtful Accounts xx

4. Collection 4. Collection
Cash xx Cash xx
Accounts Receivable xx Accounts Receivable xx
Doubtful accounts in the income statement

1. Distribution Cost – if the granting of credit and collection of

accounts are under the charge of the sales manager.

2. Administrative Expense – if the granting of credit and

collection of accounts are under the charge of an officer
other than the sales manager.

In the absence of any contrary statement, doubtful accounts

shall be classified as administrative expense.
 ESTIMATION OF
DOUBTFUL ACCOUNTS
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 5: Estimation of Doubtful
Accounts
■ After studying this chapter, one should be able to:
a.) To identify the methods of estimating doubtful accounts expense.
b.) To understand the argument for and against the aging of accounts receivable
method.
c.) To understand the argument for and against the percentage of accounts
receivable method.
d.) To understand the argument for and against the percentage of sales method.
e.) To determine the doubtful accounts expense and the allowance for doubtful
accounts under aging, percentage of accounts receivable and percentage of
sales method.
Methods of Estimating Doubtful Accounts:
1. Aging the Accounts Receivable or Statement of
Financial Position Approach
2. Percent of Accounts Receivable or Statement of
Financial Position Approach
3. Percent of Sales or Income Statement Approach
 Allowance for Doubtful Accounts

Write Off xxx xxx Beg

  xxx DAE

  xxx Recovery

xxx End /Req Allowance

Aging of Accounts Receivable
The aging of accounts receivable involves an analysis
where the accounts are classified into not due or past due.

a. Not due e. 91 to 120 days past due

b. 1 to 30 days past due f. 121 to 180 days past due
c. 31 to 60 days past due g. 181 to 365 days past due
d. 61 to 90 days past due h. More than 1 year past due
Aging of Accounts Receivable (cont.)
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.

= Required Allowance / ADA, end

When is an account past due?
The credit terms will determine whether an account is
past due. For example, if the credit terms were 2/10, n/30
and the account is 45 days old, it is considered to be 15 days
past due.

Therefore, the phrase “past due” refers to the period

beyond the maximum credit term. In the example, the credit
term or credit period is 30 days.
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.
The rate used is usually determined from past
experience of the entity.

= Required Allowance / ADA, end

Percent of Sales
The amount of sales for the year is multiplied by a
certain rate to get the doubtful accounts expense. The rate
may be applied on credit sales or total sales.

The rate is multiplied by the current year’s charge sales

to arrive at the doubtful accounts expense.

= Doubtful Accounts Expense

 Account Receivable
Beg BalanceCollections

Credit SalesSales Returns

RecoveryWrite Offs

  FOB Destination, FC

 
Note:
1. Percent of Sales = expense for the period (matching principle)
2. Percent of Accounts Receivable = required balance (ending)
3. Aging of Accounts Receivable = required balance (ending)
Illustration:
NOTES RECEIVABLE
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 6: Notes Receivable

After studying this chapter, one should be able to:

o To understand the concept and nature of notes
receivable
o To know the initial and subsequent measurement of
notes receivable
o To know the accounting for interest – bearing note
receivable
o To know the accounting for non-interest bearing note
receivable
Definition
Notes 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.
Notes receivable represents only claims arising from sale of
merchandise or service in the ordinary course of business.
Dishonored notes
A promissory note matures and is not paid.
Theoretically, dishonored notes receivable should
be removed from the notes receivable account and
transferred to accounts receivable.
The amount debited to accounts receivable
should include the face amount, interest and other
charges.
Initial Measurement of Notes Receivable
Conceptually, notes receivable shall be measured
initially at present value.
The present value is the sum of all future cash flows
discounted using the prevailing market rate of interest for
similar notes.
The prevailing market rate if interest is actually the
effective interest rate.
Short-term notes receivable shall be measured at face
value.
INITIAL MEASUREMENT

Long Term Notes

In General Long Term Notes (Non Interest
(Conceptual) Short Term Notes (Interest Bearing) Bearing)

NR should be measured a t Fa c e Va l u e u p o n
at Face Value at Present Value (PV)
initially at Present Value (PV) issuance

A c t u a l l y, a l l n o t e s
**sum of all future implicitly contain interest.
W h y n o t P V ? I t i s Interest bearing since it is
cashflows discounted using It was called a non
immaterial to compute explicitly stated in the
the effective interest rate interest simply because
the PV contract the % of interest
(prevailing market rate) interest is
(unlike interest bearing)
SUBSEQUENT MEASUREMENT

Long Term Notes

Long Term Notes (Non Interest
Short Term Notes (Interest Bearing) Bearing)
at AMORTIZED COST
using the effective
interest method
at AMORTIZED COST
at Face Value using the effective PV + Amortization of the
interest method discount or Face Value
minus unamortized
unearned interest
income
Interest-bearing notes receivable
The initial measurement of long – term notes will
depend on whether the notes are interest-bearing or non-
interest bearing.

Interest-bearing long term notes are measured at face

value which is actually the present value upon issuance.
Time Value of Money Concept and
Compounding of Interest

Time Value of Money

1990s Today 2030

Present Value Future Value
P1,000
Purchasing Power Inflation
Simple Interest vs. Compounding of
Interest
Principal Amount P10,000
Interest Rate 10% per year
Time period 2 years
Simple Interest Compounded Interest
First year 10k x 10% = P1,000 First year 10k x 10% = P1,000
2nd year 10k x 10% = 1,000 2nd year 11k x 10% = 1,100
Total = P2,000 = P 2,100
Present value and Future value
When you were young, your grandmother gave
you a certain amount of money but you don’t
remember how much it was. You decided to put
this amount to the bank for 7 years with 6%
interest rate and become P100 after 7 years.
Question, how much was the amount given to
you at the beginning?
 Present Value 6% interest rate for 7 years Future Value
(PV) (FV)

PV (???) PV = FV x P 100
P66.51

PV = FV x (1 + r)
=100 x 0.665
= P66.51
Explaining the Concept of PV and FV

Present Value – What today’s value of tomorrow’s cash before

the interest rate is applied in the money?

Future Value – What is tomorrow’s value of today’s cash after

we applied in the interest rate in the money?
 Present Value 6% interest rate for 7 years Future Value
(PV) (FV)

PV (???) PV = FV x P 100
P66.51

FV= PV x (1 + r)
=66.51 x 1.5036
= P100
1, PV of 1 = one time payment
2. PV of Ordinary Annuity of 1 = installment payment
3. PV of Annuity Due of 1 = installment payment (payment there’s at the beginning
of the contract)
Noninterest-bearing notes receivable
Non-interest bearing long term notes are measured at
present value which is discounted value of the future cash
flows using the effective interest rate.
Actually, the term “noninterest-bearing” is a misnomer
because all notes implicitly contain interest.
It is simply a case of the “interest being included in the
face amount” rather than being stated as a separate rate.
Subsequent measurement

Subsequent to initial recognition, long term

notes receivable shall be measured at amortized cost
using the effective interest method.
The amortized cost measurement is in
accordance with PFRS 9, paragraph 5.2.1.
Meaning of Amortized Cost
The amor tized cost is the amount at which the note
receivable is measured initially:
a. Minus principal repayment

b. Plus or minus cumulative amortization of any difference

between the initial carrying amount and the principal maturity
amount

c. Minus reduction for impairment or uncollectibility

For long-term noninterest-bearing notes receivable, the

amortized cost is the present value plus amortization of the
discount, or the face value minus the unamortized unearned
interest income.
 RECEIVABLE
FINANCING
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 7: Receivable Financing

After studying this chapter, one should be able to:

o To identify the sources of financing through receivables
o To know the accounting for pledge of accounts
receivable
o To know the accounting for assignment of accounts
receivable
o To understand factoring of accounts receivable.
o To know the classification and presentation of pledged,
assigned and factored accounts receivable.
Concept of Receivable Financing
Receivable Financing is the financial flexibility or capability of an
entity to raise money out of its receivables.
During a general business decline, an entity may find itself in tight
cash position because sales decrease and customers are not paying
their accounts on time.
But the entity’s current accounts and notes payable must
continue to be paid it its credit standing is not to suffer.
The entity then would be in a financial distress as collections of
receivable are delayed but cash payments for obligations must be
maintained.
Under these circumstances, if the situation becomes very critical,
the entity may be forced to look for cash by financing its receivables.
Forms of Receivable Financing
The common forms of receivable financing are:
a. Pledge of Accounts Receivable
b. Assignment of Accounts Receivable
c. Factoring of Accounts Receivable
d. Discounting of Notes Receivable
Pledge of Accounts Receivable
When loans are obtained from the bank or any lending
institution, the accounts receivable may be pledged as
collateral security for the payment of the loan.
Normally, the borrowing entity makes the collections of
the pledged accounts but may be required to turn over the
collections to the bank in satisfaction of the loan.
Pledge of Accounts Receivable (cont.)
The loan is recorded by debiting cash and discount on
notes payable if loan is discounted, and crediting note payable.
The subsequent payment of the loan is recorded by
debiting note payable and crediting cash.
With respect to the pledged accounts, no entry would
be necessary. It is sufficient that disclosure thereof is made
in a note to financial statement.
 Problem 1
Company X provided the following information in
connection with a bank loan:

March 1 Company borrowed P2,000,000 from Mar 1 Cash 2,000,000

bank on a six month note carrying an interest of 12% Notes Payable 2,000,000
per annum. Accounts of P3,000,000 are pledged to
secure the loan. Disclosure: P3M of A/R has been pledged to a
P2M Notes Payable.
April 1 Pledged accounts of P1,000,000 are Apr.1 Cash 980,000
collected minus 2% discount SD 20,000
A/R 1,000,000
June 1 The remaining pledged accounts are
collected Jun 1 Cash 2,000,000
A/R 2,000,000
September 1 The bank loan is repaid plus interest.
Sep. Notes Payable 2,000,000
Required: Interest Exp 120,000
Prepare journal entries to record the transactions. Cash 2,120,000
Assignment of Accounts Receivable
Assignment of accounts receivable means that a
borrower called the assignor transfer rights in some
accounts receivable to a lender called the assignee in
consideration for a loan.
Actually, assignment is a more formal type of
pledging of accounts receivable. Assignment is
s e c u r e d b o r row i n g ev i d e n c e d by a f i n a n c i n g
agreement and a promissory note both of which the
assignor assigns.
Assignment of Accounts Receivable (cont.)
However, pledging is general and because all
accounts receivable serve as collateral security for the
loan.
On the other hand, assignment is specific
because specific accounts receivable ser ve as
collateral security for the loan.
Assignment of Accounts Receivable (cont.)
Assignments may be done either on a
nonnotification or notification basis.
When accounts are assigned on a
nonnotification basis, customers are not informed that
their accounts have been assigned.
As a result, the customers continue to make
payments to the assignor, who in turn remits the
collection to the assignee.
Assignment of Accounts Receivable (cont.)
When accounts are assigned on a notification
basis, customers are notified to make their payments
directly to the assignee.
The assignee usually lends only a percentage of
the face value of the accounts assigned because the
assigned accounts may not be fully realized by reason
of such factors as sales discount, sales return and
allowances and uncollectible accounts.
Assignment of Accounts Receivable (cont.)
T h e p e rc e n t a g e m ay b e 7 0 % , 8 0 % o r 9 0 %
depending on the quality of the accounts.
The assignee usually charges interest for the
loan that it makes and requires a service or financing
charge or commission for the assignment agreement.
Problem 2
Company X provided the following transactions:

May 1 Company assigned P800,000 of accounts receivable to a bank in consideration

for a loan. A cash advance of 80% less service charge of P20,000 was made by the
latter. It was agreed that interest of 2% per month is to be made and that assignor
continues to make the collections. The entity signed a promissory note for the loan.
5 The entity issued a credit memo to a customer for returned merchandise,
P30,000 the account is one of the assigned accounts.
10 Collections of P500,000 of the assigned accounts were made, less 2% discount

June 1 Remitted the collections to the bank plus 2% interest for one month
7 Assigned accounts of P10,000 proved to be worthless
20 Collections of P200,000 for the accounts assigned were made

July 1 Final settlement was made with the bank. Company X accordingly remitted the
total amount due the bank to pay off the loan plus interest charge.

Required: Prepare journal entries to record the transactions.

Factoring
Factoring is a sale of accounts receivable on a
without recourse, notification basis.
In a factoring arrangement, an entity sells
accounts receivable to a bank or finance entity called
a factor.
Accordingly, a gain or loss is recognized for the
difference between the proceeds received and the net
carrying amount of the receivables factored.
Factoring (cont.)
Factoring differs from an assignment in that an
entity actually transfer ownership of the accounts
receivable to the factor.
Thus, the factor assumes responsibility for
uncollectible factored accounts.
In assignment, the assignor retains ownership of
the accounts assigned.
Factoring (cont.)
Because of the nature of the transaction, the
customers whose accounts are factored are notified
and required to pay directly to the factor.
The factor has then responsibility of keeping the
receivable records and collecting the accounts.
Factoring may take the for of the ff:
a. Casual factoring
b. Factoring as a continuing agreement
Casual Factoring
An entity factored P100,000 of accounts receivable with an allowance for
doubtful accounts of P5,000 for P80,000.
Journal entry to record the sale:
Cash 80,000
ADA 5,000
Loss on factoring 15,000
Accounts Receivable 100,000
 Factoring as a continuing agreement
Factoring may involve a continuing arrangement where a finance entity purchases all of
the accounts receivable of a certain entity.
In this setup, before a merchandise is shipped to a customer, the selling entity requests
the factor’s credit approval.
If it is approved , the account is sold immediately to the factor after shipment of the
goods
The factor then assumes the credit function as well as the collection function.
For compensation, typically the factor charges a commission or factoring fee of 5% to
20% for its services of credit approval, billing, collecting and assuming uncollectible
factored accounts.
Moreover, the factor may withhold a predetermined amount as a protection against the
customer returns and allowances and other special adjustments.
This amount withheld is known as the “factor’s holdback”. - receivable from factor and
classified as current asset.
Final settlement of the factor’s holdback is made after the factored receivables have
been fully collected.
Illustration
An entity factored accounts receivable of P500,000 with credit terms of 2/10, n/30
immediately after shipment of the goods to the customer
The factor charged a 5% commission based on the gross amount of the receivables
factored.
In addition, the factor withheld 20% of the amount of the receivables factored to cover
sales returns and allowances.
Journal entry:
Cash 365,000
Sales Discount 10,000
Commission 25,000
Receivable from factor 100,000
Accounts Receivable 500,000
If the customer is subsequently allowed a credit of P50,000 for damaged merchandise,
the journal entry is
Sales return and allowance 50,000
Sales discount 1,000
Receivable from factor 49,000

When all the receivables factored are collected by the factor with no further returns and
allowances, the final settlement with the factor is recorded as follows:

Cash 51,000
Receivable from factor 51,000
 Problem 3
Company X factored P60,000 accounts
receivable to ABC Financing Corp on Jan 1,
2023. ABC charged 4% service fee and
retained a 10% holdback to cover expected 1. (b) Casual
sales returns. In addition, ABC charged a Cash 50,160
12% interest on computed on a weighted Receivable from factor 6,000
average time to maturity of the receivables of Loss on factoring 3,840
73 days based on 365 days.
Account Receivable 60,000
Requirements:
1, A s s u m i n g C o mp a ny X fa c to r e d t h e
receivables on a without recourse basis. (b) regular
Cash 50,160
a, How much proceeds is received from
factoring on Jan 1, 2023. P50,160 Receivable from factor 6,000
Service Charge 2,400
b. Provide the journal entries in Co X Interest Exp 1.440
books to record the factoring assuming the
factoring is made (a) on a casual basis and Account Receivable 60,000
(b) as a regular means of financing.
c. How much is the cost of factoring?
P3,840.00
 Problem 3
C o m p a ny X f a c t o r e d P 6 0 , 0 0 0 a c c o u n t s
receivable to ABC Financing Corp on Jan 1,
2 0 2 3 . A B C c h a r g e d 4 % s e r v i c e fe e a n d
retained a 10% holdback to cover expected
sales returns. In addition, ABC charged a 12% 1. (b) Casual
interest on computed on a weighted average Cash 50,160
time to maturity of the receivables of 73 days Receivable from factor 6,000
based on 365 days.
Loss on factoring 6,840
Requirements:
Account Receivable 60,000
1, Assuming Company X factored the Liability for recourse
receivables on a with recourse basis and that
the recourse obligation has a fair value of obligation 3,000
P3,000
a, How much proceeds is received from (b) regular
factoring on Jan 1, 2023. P50,160 Cash 50,160
b. Provide the journal entries in Co X books Receivable from factor 6,000
to record the factoring assuming the factoring is Service Charge 2,400
made (a) on a casual basis and (b) as a regular
means of financing. Interest Exp 1.440
Loss on factoring 3,000
c. How much is the cost of factoring?
P6,840.00 Account Receivable 60,000
Liability for recourse
obligation 3,000
3. Assuming that all receivables are collected after sales returns of P2,000 . Provide
the journal entry to record the settlement of the factor’s holdback if the factoring
was made on a.) without recourse basis and (b) with recourse basis.

Without Recourse With Recourse

Sales Return 2.000 Sales Return 2,000
Receivable from factor 2,000 Receivable from factor 2,000

Cash 4,000 Cash 4,000

Receivable from factor 4,000 Receivable from factor 4,000

Liability for recourse obligation 3,000

Gain on recourse 3,000
 RECEIVABLE
FINANCING
Reference: Intermediate Accounting Volume 1 2020
Edition by Conrado Valix, Jose F. Peralta and Christian Aris
M. Valix
Chapter 7: Receivable Financing

After studying this chapter, one should be able to:

o To know the concept of discounting of notes receivable.
o To distinguish discounting of note receivable with
recourse and without recourse.
o To understand discounting of note receivable accounted
for as conditional sale with recognition of contingent
liability.
o To understand discounting of note receivable accounted
for as secured borrowing.
Concept of Discounting
As a form of receivable financing, discounting specifically pertains
to note receivable.
In a promissory note, the original parties are the maker and payee.
The maker is the one liable and the payee is the one entitled to
payment on the date of maturity.
When a note is negotiable, the payee may obtain cash before
maturity date by discounting the note at a bank or other financing
company.
To discount the note, the payee must endorse it.
Thus, legally the payee becomes an endorser and the bank
becomes an endorsee.
Endorsement
Endorsement is the transfer of right to a
negotiable instrument by simply signing at the back of
the instrument.
Types of Endorsement:
1. With recourse – endorser shall pay the endorsee if
the maker dishonors the note.
- secondar y liability of the endorser (legal
parlance)
- contingent liability of the endorser (accounting
parlance)
Endorsement (cont.)
2. Without recourse – endorser avoids future
liability even if the maker refuses to pay the endorsee
on the date of maturity.
In the absence of any evidence to the contrary,
endorsement is assumed to be with recourse.