CH 8 - Statement of Financial Position
Financial Statements
Financial statements are the means by which
the information accumulated and processed in
financial accounting is periodically
communicated to the users.
It is the end product or main output of the
financial accounting process.
General purpose financial statement are those
intended to meet the needs of users who are
not in a position to require an entity to prepare
reports tailored to their particular information
needs.
Components of Financial Statements
Statement of financial position (balance sheet)
Income statement (statement of financial
performance)
Statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes comprising a summary of significant
accounting policies and other explanatory
notes
Objective of Financial Statement
The objective of financial statements is to
provide information about the financial
position, financial performance and cash flows
of an entity that is useful to a wide range of
users in making economic decisions.
It also shows the results of management’s
stewardship of the resources entrusted to it.
To meet the objective, financial statements provide
information about the following:
Assets
Liabilities
Equity
Income and expenses including gains and
losses
Contributions and distributions to owners
Cash flows
Frequency of Reporting
Financial statements shall be prepared at least
annually.
Disclosure is required when the reporting
period changes:
1. The period covered by the financial
statements.
2. The reason for using a longer or shorter
period.
3. The fact that the amounts presented in the
financial statements are not comparable.
Statement of Financial Position
A formal statement showing three elements,
namely assets, liabilities and equity.
It is used to evaluate liquidity, solvency and the
need for additional financing.
Asset
An asset is an economic resource controlled by
an entity as a result of past event.
The economic resource is a right that has the
potential to produce economic benefits.
Assets are classified as current and noncurrent
assets.
Operating Cycle
The operating cycle of an entity is the time
between the acquisition of assets for
processing and their realization in cash or cash
equivalents.
If not clearly identifiable, the operation cycle is
assumed to be twelve months.
Current Assets
The asset is cash or cash equivalent unless the
asset is restricted to settle a liability for more
than twelve months after the reporting period.
The entity holds the asset primarily for the
purpose of trading.
The entity expects to realize the asset within
twelve months after the reporting period.
The entity expects to realize the asset or
intends to sell or consume it within the entity’s
normal operating cycle.
Presentation of current assets (order of liquidity): Other noncurrent assets are those assets that do
Cash and cash equivalents not fit into the definition of the previously
Financial assets at fair value (trading securities mentioned noncurrent assets:
and other investments in quoted equity Long-term advances to officers, directors,
instruments). shareholders and employees.
Trade and other receivables Abandoned property.
Inventories Long-term refundable deposit.
Prepaid assets
Liability
Noncurrent Assets A liability is a present obligation of an entity to
transfer an economic resource as a result of a
An entity shall classify all other assets not classified past transaction.
as current as noncurrent. An obligation is a duty or responsibility that an
Property, plant and equipment entity has no practical ability to avoid.
Long-term investments It can be legal or constructive.
Intangible assets Liabilities are classified as current and
Deferred tax assets noncurrent.
Other noncurrent assets
Current Liability
Property, plant and equipment are tangible assets An entity expects to settle within the entity’s
which are held by an entity for: normal operating cycle.
Use in production or supply of goods and The entity holds that liability primarily for the
services. purpose of trading.
Rental to others. The liability is due to be settled within twelve
Administrative purposes. months after the reporting period.
The entity does not have an unconditional right
They are expected to be used during more than to defer settlement of the liability for at least
one period. twelve months after the reporting period.

They are presented at cost less accumulated Presentation of current liabilities:

depreciation except land. Trade and other payables – accounts payable,
notes payable, accrued interest on notes
Long-term investments are assets held by the payable, dividends payable and accrued
entity for the accretion of wealth through: interest.
Capital distribution (interest, royalties, Current provisions
dividends, and rentals). Short-term borrowing
Capital appreciation (changes in value leading Current portion of long-term debt
to gains) Current tax liability
Other benefits (obtained through trading
relationships) All liabilities not classified current are considered
as noncurrent liabilities:
Intangible assets are identifiable nonmonetary Noncurrent portion of long-term debt
assets without physical substance. Finance lease liability
Identifiable – patent, franchise, copyright, lease Deferred tax liability
right, trademark and computer software. Long-term obligations to company officers
Unidentifiable – goodwill. Long-term deferred revenue
Current Maturing Debt
A liability which is due to be settled within twelve
months after the reporting period is still a current
liability, even if:
The original term was for a period longer than
twelve months.
An agreement to refinance or to reschedule
payment on a long-term basis is completed
after the reporting period and before the
financial statements are authorized for issue.
1. If refinanced on or before the end of the
reporting period – it shall be adjusted and
classified as noncurrent.
Discretion to Refinance
If the entity has the discretion to refinance or
roll over an obligation for at least twelve
months after the reporting period, the
obligation is classified as noncurrent even if it
would otherwise be due within a shorter
period.
The entity has an unconditional right to defer
payment for at least twelve months after the
end of the reporting period.
If the discretion to refinance is not at the
discretion of the entity, the obligation is
classified as current.
Covenants
These are attached to borrowing agreements
which represents undertakings by the
borrower.
These are restrictions on the borrower to
undertake further borrowings, paying
dividends, maintaining specified level of capital
and so forth.
If breached, the liability becomes payable on
demand.
Effect of Breach of Covenants
A liability is classified as current even if the
lender has agreed, after the reporting period
and before the financial statements are
authorized for issue, not to demand payment
as a consequence of breach.
A liability is classified as noncurrent if the
lender has agreed on or before the end of the
reporting period to provide a grace period
ending at least twelve months after the end of
reporting period.
Equity
Equity is the residual interest in the assets of
the entity after deducting all of its liabilities.
Equity also means net assets or total assets
minus liabilities.
1. Owner’s equity
2. Partners’ equity
3. Stockholders’ equity refers to the residual
interest of owners in the net assets of a
corporation measured by the excess of assets
over liabilities.
Notes to Financial Statements
Notes to financial statements provide narrative
description or disaggregation of items
presented in the financial statements and
information about items that do not qualify for
recognition.
It is used to report information that does not
fit into the body of the financial statements in
order to enhance the understandability of
financial statements.
Its purpose is to provide the necessary
disclosures required by PFRS.
Forms of Statement of Financial Position
Report form sets forth the three major
sections in a downward sequence of assets,
liabilities and equity.
Account form follows that of an account, the
assets are shown on the left side and the
liabilities and equity on the right side of the
statement of financial position.
CH 9 - Statement of Comprehensive Income
Income Statement
An income statement is a formal statement
showing the financial performance (income,
expenses, gains, losses and net income or loss
recognized) of an entity for a given period of
time.
The financial performance (results of operation)
is primarily measured in terms of the level of
income earned through the effective and
efficient utilization of its resources.
The transaction approach is used in computing
the net income.
Comprehensive Income
Comprehensive income is the change in equity
during a period resulting from transactions and
other events, other than changes resulting
from transactions with owners in their capacity
as owners:
1. Components of profit or loss
2. Components of other comprehensive income
Profit or loss (net income or net loss) is the
total of income less expenses, excluding
components of other income.
Other comprehensive income comprises of
items of income and expenses including
reclassification adjustments that are not
recognized in profit or loss as required by
PFRS.
Presentation of other comprehensive income
(classified by nature):
OCI that will be reclassified subsequently to
profit or loss when specific conditions are met.
OCI that will not be reclassified subsequently to
profit or loss but to retained earnings
OCI that will be reclassified to profit or loss:
Unrealized gain or loss on debt instrument
measured at fair value through other
comprehensive income.
Gain or loss from translating financial
statements of a foreign operation.
Unrealized gain or loss on derivative contracts
designated as cash flow hedge.
OCI that will be reclassified to retained
earnings:
Unrealized gain or loss on equity investment
measured at fair value through other
comprehensive income (upon disposal).
Revaluation surplus.
Remeasurement of defined benefit plan
(including actuarial gain or loss).
Change in fair value attributable to credit risk
of a financial liability designated at fair value
through profit or loss.
Presentation of comprehensive income:
Two statements:
1. An income statement showing components of
profit or loss.
2. A statement of comprehensive income
beginning with profit or loss as shown in the
income statement plus or minus the
components of other comprehensive income.
Single statement of comprehensive income.
Sources of Income
Sales of merchandise to customers – sales to
customers during the period where sales
returns, allowances and discounts shall be
deducted from gross revenue.
Rendering of services – professional fees,
media advertising commissions, insurance
agency commissions, admission fees for
artistic performance and tuition.
Use of entity resources – interest, rent, royalty,
and dividend income.
Disposal of resources other than products –
gain on sale of investments, gain on sale of
property, plant and equipment, and gain on
sale of intangible assets.
Components of Expense
Cost of goods sold
Distribution costs or selling expenses
Administrative expenses
Other expenses
Income tax expense
classification of Expenses
Distribution costs constitute costs which are
directly related to selling, advertising and
delivery of goods to customers.
Salesmen’s salaries
Salesmen’s commissions
Travelling and marketing expenses
Advertising and publicity
Freight out
Depreciation of delivery and store equipment
Administrative expenses constitute cost of
administering the business.
Doubtful accounts
Office salaries
Expenses of general executives, accounting
and credit
Office supplies used
Certain taxes
Administrative expenses constitute cost of
administering the business.
Contribution
Professional fees
Depreciation of office building and equipment
Amortization of intangible assets
Other expenses are those expenses which are
not directly related to the selling and
administrative function.
Loss on sale of trading investments
Loss on disposal of property, plant and
equipment
Loss of sale of noncurrent investment
Casualty loss – flood, earthquake, fire
Disclosure Requirements
Disclosed on the face of the income statement and
statement of comprehensive income:
Profit or loss for the period attributable to
noncontrolling interest and owners of the
parent.
Total comprehensive income for the period
attributable to noncontrolling interest and
owners of the parent.
Forms of Income Statements
Functional presentation classifies according to
their function as part of cost of goods sold,
distribution costs, administrative expenses and
other expenses.
Natural presentation aggregates the revenues
in one group and the costs and expenses in
the other group.
Statement of Retained Earnings
The statement of retained earnings shows the
changes affecting directly the retained earnings of
an entity and relates the income statement of
financial position.
Profit or loss for the period.
Prior period errors.
Dividends declared and paid to shareholders.
Effect of change in accounting policy.
Appropriation of retained earnings.
Statement of Changes in Equity
The statement of changes in equity is a basic
statement that shows the movements in the
elements or components of the shareholders’
equity.
Comprehensive income for the period.
For each component of equity, the effects of
changes in accounting policies and corrections
of errors.
For each component of equity, a reconciliation
between the carrying amount at the beginning and
end of the period, separately disclosing changes
from:
Profit or loss
Each item of other comprehensive income
Transactions with owners in their capacity as
owners showing separately contributions by
and distributions to owners.
CH 10 - Statement of Cash Flows
Statement of Cash Flows
A statement of cash flows is a component of
financial statements summarizing the
operating, investing and financing activities of
an entity.
It provides the information about the cash
receipts and cash payments of an entity during
the period.
Classification of Cash Flows
Operating activities - are the cash flows derived
primarily from the principal revenue producing
activities of the entity.
Investing activities - are cash flows derived from
the acquisition and disposal of long-term
assets and other investments not included in
cash equivalent.
Financing activities - are the cash flows derived
from the equity capital and borrowings of the
entity.
Cash Flows from Operating Activities
1. Cash receipts from sale of goods and rendering Cash Flows from Financing Activities
of services.
2. Cash receipts from royalties, rental, fees,
commissions and other revenue.
3. Cash payments to suppliers for goods and
services.
4. Cash payments for selling, administrative and
other expenses.
5. Cash receipts and cash payments of an
insurance entity for premiums and claims,
annuities and other policy benefits.
6. Cash payments or refunds of income taxes
unless specifically identifies with financing and
investing activities.
7. Cash receipts and payments for securities held
for trading.
8. Cash flows arising from the purchase and sale
of dealing or trading securities are classified as
operating activities.
9. Cash advances and loans made by a financial
institution are usually classified as operating
activities since they relate to the main revenue
producing activity of the entity.
Cash Flows from Investing Activities
Cash payments to acquire property, plant and
equipment, intangibles and other long-term
assets.
Cash receipts from sales of property, plant and
equipment, intangibles and other long-term
assets.
Cash payments to acquire equity or debt
instruments of other entities (current and long-
term investments).
Cash receipts from sales of equity or debt
instruments of other entities.
Cash advances and loans to other parties
other than advances and loans made by
financial institution.
Cash receipts from repayment of advances
and loans made to other parties.
Cash payments for futures contract, forward
contract, option contract and swap contract.
Cash receipts from futures contract, forward
contract, option contract and swap contract.
Cash receipts from issuance of ordinary and
preference shares.
Cash payments to acquire treasury shares.
Cash receipts form issuing debentures, loans,
notes, bonds, mortgages, and other short or
long-term borrowings.
Cash payments for amounts borrowed.
Cash payments by a lessee for the reduction of
the outstanding principal less liability.
Noncash Transactions
Acquisition of asset by assuming directly
related liability.
Acquisition of asset by issuing share capital.
Acquisition of assets by issuing bonds payable.
Conversion of bonds payable into share
capital.
Conversion of preference shares into ordinary
shares.
Interest
Interest paid and interest expense shall be
classified as operating cash flows.
Alternatively, interest paid may be classified as
financing because it is a cost of obtaining
financial resources.
Alternatively, interest received may be classified
as investing cash flow because it is a return of
investment.
For financial institution, interest paid and
interest received are usually classified as
operating cash flows.
CH 11 - Cash and Cash Equivalents
Definition of Cash
Cash includes money and any other negotiable
instrument that is payable in money and
acceptable by the bank for deposit and immediate
credit.
Money refers to the currency and coins which
are in circulation and legal tender.
Cash includes cash on hand, cash in bank and fund Investment of Excess Cash
that are readily available in the payment of current
obligations and not subject to any restrictions,
contractual, or otherwise.
Inclusions in Cash
Cash on hand – undeposited cash collections
and other cash awaiting deposit (customers’
check, cashier or manager’s check, traveler’s
check, bank drafts, and money orders).
Cash in bank – demand deposits or checking
accounts and savings deposit which are
unrestricted as to withdrawal.
Cash fund – set aside for current purposes
(petty cash fund, payroll fund, and dividend
fund).
Cash Equivalents
Cash equivalents – short-term highly liquid
investments that are readily convertible to
known amount of cash and which are subject
to an insignificant risk if change in value.
Inclusions in Cash Equivalents
Investment with a short maturity of three
months or less from the date of acquisition.
1. Three-month BSP treasury bill.
2. Three-year BSP treasury bill purchased three
months before the date of maturity.
3. Three-month time deposit.
4. Three-month money market instrument or
commercial paper.
Exclusions from Cash Equivalents
Equity securities – do not have a maturity date.
Preference shares – with specified redemption
date and acquired three months before
redemption date is cash equivalents.
BSP treasury bill – purchased one year ago
even if the remaining maturity is three months
or less.
Cash accumulated in excess of that needed for
current operations should be invested
temporarily to earn revenue.
1. Time deposits.
2. Money market instruments.
3. Treasury bills.
Cash and cash equivalents if the term is three
months or less.
Short-term financial asset or temporary
investments if the term is more than three
months but within one year.
Non-current or long-term investments if the
term is more than one year. They are
reclassified as current or temporary
investments if they become due within one
year from the end of the reporting period.
Measurement of Cash
Measured at face value.
Cash in foreign currency – current exchange
rate.
Cash in bank or financial institution in
bankruptcy or financial difficulty – estimated
realizable value if the amount recoverable is
lower than face value.
Financial Statement Presentation
Cash and cash equivalents should be shown as
the first line item under current assets.
1. Cash items (cash on hand, cash in bank, petty
cash fund) and cash equivalents which are
unrestricted in use for current operations.
Details comprising the cash and cash
equivalents should be disclosed in the noted
to financial statements.
Foreign Currency
It should be translated to Philippine pesos
using the current exchange rate.
It should not be subjected to any foreign
exchange restriction.
If subject to foreign exchange restriction – it
should be classified as non-current and the
restriction clearly indicated.
Cash Fund for Certain Purpose
Current assets if cash fund is set aside for use
in current operations or payment of current
obligation part of cash and cash equivalents.
Long-term investments if cash fund is set aside
for non-current purpose or payment of non-
current obligations.
Bank Overdraft
Bank overdraft occurs when a certain cash
account has a credit cash balance arising out of
the issuance of checks in excess of deposits.
It is treated as a current liability and should not
be offset against other bank accounts with
debit balances.
If the entity maintains more than one account
in one bank the overdraft can be offset with the
other bank accounts.
If the overdraft is not material, it can also be
offset.
Compensating Balance
Compensating balance is the minimum checking or
demand deposit account balance that must be
maintained in connection with a borrowing
agreement with a bank.
Cash – if the deposit is not legally restricted as
to withdrawal.
Cash held as compensating balance (current) –
if the deposit is legally restricted as to
withdrawal under a short-term loan agreement. Cash Overage
Undelivered or Unreleased Check
Undelivered or unreleased check is one that is
merely drawn and recorded but not yet given
or collected by the payee before the end of the
reporting period.
There is no payment pending the delivery or
release of the check.
The entity has still control over the check which
may be cancelled anytime.
Post Dated Check Delivered
Post dated check delivered is a check drawn,
recorded and already given to the payee but
bears a date subsequent to the end of the
reporting period.
There is no payment until the check is
presented to the bank for encashment or
deposit.
Stale Check or Check Long Outstanding
Stale check is a check not encashed by the
payee within a relatively long period of time
usually six months.
After three months, the issuing entity can issue
a stop payment order to the bank for the
cancellation of the previously issued check.
Petty Cash Fund
Petty cash fund is money set aside to pay small
expenses which cannot be conveniently paid
by means of a check.
1. Imprest system requires that all cash receipts
should be deposited intact and all cash
disbursements should be made by means of a
check
2. Fluctuating states that the check drawn to
replenish the fund does not necessarily equal
the total petty cash disbursements.
Cash Short'
Cash short occurs when the cash count is less
than the balance per books.
If the cashier or petty cash custodian is held
responsible it should be recorded as a
receivable from the cashier or petty cash
custodian.
If reasonable efforts fail to disclose the cause
of the shortage it should be recorded as a loss
from cash shortage.
Cash overage occurs when the cash count is more
than the balance per books.
If the overage is properly found to be the
money of the cashier or petty cash custodian
then it should be recorded as payable to the
cashier or custodian.
If the cause of overage cannot be determined
then it should be recorded as miscellaneous
income.
Bank Reconciliation
Bank reconciliation is a statement which brings
into agreements the cash balance per book
and the cash balance per bank.
Bank statement is a monthly report of the bank
to the depositor that shows:
1. The cash balance per bank at the beginning
and ending.
2. The amount of cash credited and debited by
the bank.
3. The daily cash balances.
Cash Balance per Book and per Bank
Collections / receipts
1. The collections made by the company are
recorded as debits in the books of accounts.
2. When deposited, the bank credits the same in
their books.
Payments / checks drawn
1. The checks drawn by the company are
recorded as credits in the books of accounts.
2. When presented to the bank for encashment,
the bank debits the same in their books.
Reconciling Items
Book reconciling items
1. Credit memos
2. Debit memos
3. Errors
Bank reconciling items
1. Deposit in transit
2. Outstanding checks
3. Errors
Book Reconciling Items
Credit memos refers to items not representing
deposits credited by the bank to the account of
the depositor but not yet recorded by the
depositor as cash receipts.
1. Notes receivable collected on behalf of the
depositor.
2. Proceeds of a bank loan credited to the
account of the depositor.
3. Matured time deposits credited to the account
of the depositor.
Debit memos are items not representing
checks acknowledged by the bank which are
charged or debited by the bank against the
account of the depositor but not yet recorded
as disbursements in the entity’s books of
account.
1. No sufficient funds
2. Technically defective checks
3. Bank service charges
4. Reduction of loan
Bank Reconciling Items
Deposits in transits are collections already
recorded by the depositor as cash receipts but
not yet reflected on the bank statement.
1. Collections already deposited to the bank but
too late to appear in the bank statement.
2. Undeposited collections awaiting deposit to
the bank.
Outstanding checks are checks already
recorded by the depositor as cash
disbursements but are not yet reflected on the
bank statement.
1. Checks already given to the payee but not yet
encashed.
2. Certified checks are checks already accepted
or certified indicating sufficiency of fund. They
are deducted from the total outstanding
checks.
Forms of Bank Reconciliation
Adjusted balance method – the book and bank
balance are reconciled to arrive at the correct
cash balance that must appear in the
statement of financial position.
Book to bank method – the book balance is
reconciled to equal the bank balance.
Bank to book method – the bank balance is
reconciled to equal the book balance.
Proof of Cash
Proof of cash is an expanded reconciliation in
that it includes proof of receipts and
disbursements.
CH 12.1 - Receivables
Receivables
Receivables are financial assets that represent
a contractual right to receive cash or another
financial asset from another entity.
1. Trade and non-trade receivables.
2. Loans receivables – result from the loans
granted by banks and other financial
institutions to customers.
Trade and Non-trade Receivables
Trade receivables – claims arising from the sale
of merchandise or services in the ordinary
course of business.
1. Accounts receivables – open accounts not
supported by promissory notes.
2. Notes receivables – supported by formal
promises to pay.
Non-trade receivables – claims arising from
sources other than the sale of merchandise or
services.
Classification of Receivables
Trade receivables which are expected to be
realized in cash within one year or the normal
operating cycle whichever is long is current.
Non-trade receivables which are expected to
be realized in cash within one year the length
of the operating cycle notwithstanding is
current.
Non-trade receivables collectible beyond one
year is non-current.
Non-trade Receivables
Advances to or receivables from shareholders,
directors, officers or employees
1. Current assets– if collectible in one year.
2. Non-current assets – if not collectible in one
year.
Advances to affiliates – long-term investments
Advances to supplier – current assets
Subscription receivables
1. Current assets – if collectible within one year.
2. Deduction from share capital – if not collectible
within one year.
Creditors’ debit balances
Current assets – if material
Offset against the creditors with credit balance
– if not material
Special deposits on contract bids
1. Current assets – currently collectible.
2. Non-current assets – if silent.
Accrued income – current assets
Claims receivable – current assets
Presentation of Receivables
Trade receivables and non-trade receivables
which are currently collectible shall be
presented on the face of the statements of
financial position as one line item under trade
and other receivables.
The detail of the total trade and other
receivables shall be disclosed in the notes to
the financial statements.
Customers' Credit Balance
Customers’ credit balance are credit balances
in accounts receivable resulting from
overpayments, returns and allowances, and
advance payments from customers.
1. Current assets – if material.
2. Offset against the creditors with credit balance
– if not material.
Initial Measurement
Financial asset shall be recognized initially at
fair value plus transaction costs that are
directly attributable to the acquisition.
1. Fair value is equal to transaction price (fair
value of the consideration given).
Short-term receivables – fair value is equal to
the face amount or original invoice amount.
Long-term receivables
1. Interest-bearing – fair value is equal to face
value.
2. Noninterest-bearing – fair value is equal to the
present value of all future cash flows
discounted using the prevailing market rate of
interest for similar receivables.
Subsequent Measurement Method of Recording Credit Sales
Accounts receivable shall be measured initially
at face value or original invoice amount.
Subsequent measurement – accounts
receivable shall be measured at amortized
cost.
1. Amortized cost – net realizable value.
2. Net realizable value – amount of cash expected
to be collected or the estimated recoverable Bad Debts
amount. Bad debts refer to the amount of credit sales
that may become uncollectible.
Net Realizable Value 1. Allowance method – requires the recognition
Assets shall not be carried at above their of bad debts loss if the accounts are doubtful
recoverable amount. Adjustments to trade of collection.
accounts receivable: 2. Direct write off method – requires the
1. Allowance for freight charge recognition of bad debts loss only when the
2. Allowance for sales return account is proved to be worthless or
3. Allowance for discount uncollectible.
4. Allowance for doubtful accounts
Recoveries of Accounts Written Off
Freight Charges When collected – recharge the customer’s
FOB destination – ownership of goods account with the amount collected and
purchased is vested in the buyer upon receipt possibly with the entire amount previously
freight is paid by seller. charged off if it is expected to be received in
FOB shipping – ownership of goods purchased full.
is vested in the buyer upon shipment freight is
paid by the buyer. Allowance for Bad Debts
Freight collect – freight charge is actually paid
by the buyer.
Freight prepaid – freight charge is already paid
by the seller.

Sales Returns and Discounts

Sales returns – customers will return goods
that are unsatisfactory or will make claims
requiring reduction in the amount due as in the
case of shipment shortages and defects.
Sales discounts – cash discount is a reduction
from an invoice price by reason of prompt
payment.
1. Seller – sales discount
2. Buyer – purchase discount
Method of Recording Credit Sales
Gross method – the accounts receivable and
sales are both recorded at gross amount of the
invoice.
Net method – the accounts receivable and
sales are recorded at net amount of the invoice
(price minus cash discount).
Aging of Accounts Receivable
It involves an analysis where the accounts are
classified as not due or past due and the
allowance is determined by multiplying the
total of each classification by the rate
experienced by each category.
1. Advantage – considered as more accurate and
scientific computation of the allowance for
doubtful accounts.
2. Disadvantage – it violates the matching
process.
Percent of Sales
The amount of sales for the year is multiplied
by a certain rate to determine the doubtful
accounts expense.
1. Advantage – there is proper matching of cost
against revenue.
2. Disadvantage – accounts receivable may not be
shown at estimated realizable value because
the allowance may be excessive or inadequate.

Correction of Doubtful Accounts

The percentage of sales has the disadvantage
of determining the adequacy of the allowance
account.
Ageing of the accounts is necessary to test the
reasonableness of the allowance.
The difference is reported in the income
statement as an adjustment to the doubtful
accounts expense.
CH 12.2 - Notes Receivables
Notes Receivable
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.
Dishonored Notes
Dishonored notes are promissory notes that
matures and it not paid.
This includes a reclassification from notes
receivable to accounts receivable with interests
and charges.
DR. Accounts Receivable
CR. Notes Receivable
CR. Interest Income
Initial Measurement
Short-term notes receivable – face value since
the effect of discounting is usually not material.
Long-term notes receivable
1. Interest-bearing – face value which is usually
the present value upon issuance.
2. Noninterest-bearing – present value which is
the discounted value.
Subsequent Measurement
Interest-bearing long-term notes receivable –
amortized cost using effective interest method.
Noninterest-bearing long-term notes receivable
1. Present value plus the interest income
(amortization of discount on notes receivable).
2. Face value minus the balance of the discount
on notes receivable.
Loan Receivable
Loan receivable is a financial asset arising from
a loan granted by a bank or other financial
institution to a borrower or client.
The term of the loan may be short term but the
repayment may cover several years.
Initial Measurement
Initial recognition – fair value (transaction price,
amount of the loan granted) plus transaction
costs that are directly attributable to the
acquisition of the loan.
Transaction costs
1. Direct origination cost – added.
2. Indirect origination cost – outright expense.
3. Origination fees received – deducted.
Subsequent Measurement
Subsequent measurement – amortized cost
using the effective interest method.
1. If initial measurement is lower than principal
amount – difference is added to carrying
amount.
2. If initial measurement is higher than principal
amount – difference is deducted from carrying
amount.
Origination Fees
Origination fees – fees charged by the bank
against the borrower for the creation of the
loan.
Evaluating the borrower’s financial condition,
evaluating guarantees, collateral and other
security, negotiating the terms of the loan,
preparing and processing documents and
closing the loan transaction.
Accounting for Origination Fees
Origination fees received from the borrower –
unearned interest income and amortized over
the term of the loan.
Origination fees not chargeable against the
borrower – direct origination cost are deferred
and amortized over the term of the loan.
Preferably, offset directly against any unearned
origination fees received.
If the origination fees received exceed the
direct origination costs – unearned interest
income and the amortization increased
interest income.
If the direct origination costs exceed the
origination fees received – charged to direct
origination costs and the amortization
decreases interest income.
Presentation
The loan receivable is measured and presented
at amortized cost.
Face value of the loan net of unearned interest
income.
CH 12.3 - Receivables Financing
Receivables Financing
Receivable financing is the financial flexibility or
capability of an entity to raise money out of its
receivables.
Forms of accounts receivable financing –
pledging, assignment, and factoring.
Form of notes receivable financing –
discounting.
Pledging
Pledging 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.
The borrowing entity continues to collect the
pledged accounts receivable but may be
required to turn over the collections to the
bank in satisfaction of the loan.
Loan Recording
DR. Cash
DR. Discount on loan payable
CR. Loan Payable
Subsequent Payment
DR. Loan Payable
CR. Cash
Financial Statement Presentation
Disclosure is made in the notes to the financial
statements.
The carrying amount of the note payable is
shown net of discount on note payable.
The discount on note payable is amortized
using the straight-line method.
Assignment
Assignment – the borrower (assignor or owner
of the receivable) transfer its rights in some of
its accounts receivable to a lender (assignee) in
consideration of a loan.
1. Assignment – specific accounts receivable.
2. Pledging – all accounts receivable.
It is evidenced by a financing agreement and a
promissory note.
Feature of Assignment
Notification basis – customers are notified to
make the payments direct to the assignee
(lender).
Non-notification basis – customers are not
informed that their accounts have been
assigned.
The assignee (lender) analyzes the assignor’s
(borrowers) accounts receivable before the
assignment.
The assignee charges interest, service or
finance charge or commission for the loan.
Financial Statement Presentation
The details of the assigned receivables is
presented in the notes to the financial
statements as part of the trade and other
receivables.
The disclosure shall include its equity in the
assigned accounts receivable (Value of the
assigned receivable less the carrying amount
of the note payable).
Factoring
Factoring – the borrower entity sell the
accounts receivable without recourse and
notification basis to a factor.
1. Factoring – transfers ownership of the
receivables.
2. Assignment – retains ownership of the
receivables.
Gain or loss is recognized for the difference
between the proceeds and the net carrying
amount of the receivables.
Types of Factoring
Casual factoring – an entity is forced to factor
some or all of its receivables at a substantial
discount to obtain the much needed cash.
Factoring as a continuing agreement – a
finance entity purchases all the accounts
receivable of an entity.
Features of Casual Factoring
Selling entity secures credit approval from the
factor.
The factor assumed credit and collection
function.
Factor charges a commission or factoring fee
for credit approval, billing, collecting, and
assuming uncollectible factored accounts.
Factor’s holdback (current asset) –
predetermined amount as protection against
customer returns, allowances and other
adjustments.
Discounting of Notes Receivable
Parties to a note receivable:
1. Maker – liable to pay the note.
2. Payee – entitled to receive payment on
maturity
Discounting – the process obtaining cash from
the note receivable prior to the maturity date
at discounted amounted at a bank or other
financial institution.
1. Maturity date is the date on which the note
should be collected or paid.
Types of Discounting
To discount the note, the payee must endorse
it. The payee is the endorser and the bank is
the endorsee.
1. Endorsement with recourse (if silent) –
endorser (payee) shall pay the endorsee if the
maker dishonors the note (contingent liability
of the endorser).
2. Endorsement without recourse – endorser
avoids future liability even if the maker refuses
to pay the endorsee at maturity date.
Discounting of Notes Receivable
Maturity value (carrying amount) of the note is
equal to the principal value plus interest.
Discount is equal to maturity value times
discount rate and discount time.
Discount time is the remaining term of the
note.
Net proceeds is maturity value less discount.
Gain or loss on discounting is the difference
between the net proceeds and carrying
amount.
with Recourse - Conditional Sale
Conditional sale – the note receivable is
recognized as a contingent liability
The note receivable discounted is deducted
from the total notes receivable with disclosure.
1. Paid by maker on maturity – contingent liability
is extinguished and credited to note
receivable.
2. Dishonored by maker – the receivable is paid
and contingent liability is extinguished.
With Recourse - Secured Borrowing
Secured borrowing – note receivable is not
derecognized but an accounting liability
(liability for note receivable discounted) is
recorded equal to its face value.
The gain or loss is treated as either interest
income or interest expense.
1. Paid by maker on maturity – liability is
extinguished and credited to note receivable.
2. Dishonored by maker – the receivable is paid
and liability is extinguished.
Journal Entry
Cash (Net proceeds)
Gain or loss (Net proceeds less carrying amount)
Notes receivable (Principal amount)*
Interest income
If net proceeds > carrying amount = Gain on
discounting
If net proceeds < carrying amount = Loss on
discounting
Without recourse – Note receivable discounted
CH 12.4 - Impairment of Receivables
impairment of Receivables
Impaired accounts receivable – these are
accounts receivable that are considered as
uncollectible.
PFRS 9, paragraph 5.5.1, an entity shall
recognize a loss allowance for expected credit
losses on financial asset measured at
amortized cost.
Measurement – equal to the lifetime expected
credit loss if the credit risk on the financial
instrument has increased significantly since
initial recognition.
Probability weighted outcome – possibility that
a credit loss occurs and that the possibility that
no credit loss occurs.
Time value of money – expected credit losses
are discounted or equal to the present value of
all cash shortfalls.
Reasonable and supportable information that
is available without undue cost or effort.
Impairment of Loans Receivable
Measurement – difference between the
carrying amount and the present value of
estimated future cash flows discounted at the
original effective rate.
The carrying amount of the loans receivable
shall be reduced either directly or through the
use of an allowance account.
Steps in Computing Impairment Loss
Compute the present value (based on the
original effective interest) of the total future
cash flows.
Determine the amount of impairment loss:
Carrying amount of the loan less present value
of the total future cash flows.
Prepare the journal entries.

Impairment Assessment for Accounts

Receivable
Individual significant accounts receivable
should be considered for impairment
separately and if impaired, recognize the
impairment loss.
Accounts receivable not individually significant
should be collectively assessed for impairment.
Accounts receivable not considered impaired
should be included with other accounts
receivable with similar credit-risk characteristics
and collectively assessed for impairment.

Steps in Computing Impairment Loss

Determine the portion of the total accounts
receivable as: impaired (uncollectible) and
other accounts receivable (collectible).
Compute the total impairment loss:
1. Impaired accounts receivable
2. Composite rate multiplied to the other
accounts receivable
Prepare journal entries.
CH 13 - Inventories
Inventories
Held for resale In the ordinary course of
business (finished goods).
In the process of production for such sale
(work in process).
In the form of materials or supplies to be
consumed in the production process or in
rendering of services (raw materials and
manufacturing supplies).
Examples of Inventories
Merchandise purchased by a trading entity and Installment contracts
held for resale.
Land and other property held for sale in the
ordinary course of business.
Finished goods, goods undergoing production,
and raw materials and supplies of waiting used
in the production process by a manufacturing
entity.
Classes of Inventories
Inventories of trading or merchandising
concern
1. An entity buys and sells the goods purchased in
the same form.
2. Merchandise inventory.
Inventories of manufacturing concern
1. An entity buys goods and alter (converts) them
into another form before they are made
available for sale.
2. Raw or direct materials, work in process,
finished goods.
Types of Inventories
Finished goods – completed goods ready for
sale.
Work in process – partially completed goods
which required further or additional processing
before they can be sold.
Raw materials – goods to be used in
production.
Direct materials – goods that are already
issued in production.
Factory or manufacturing supplies – are raw
materials issued to production:
1. Do not form part of the finished product.
2. If they form part of the finished product, they
cannot be economically, directly or easily
identifiable or that they cost is insignificant.
Goods Includible in Inventory
Retention of the title by the seller until the
selling price is fully collected – included in the
seller.
Treated as a regular sale where income is
deferred on the part of the seller – excluded
from the seller.
Goods in transit
FOB destination where goods sold is
transferred only upon receipt of goods –
included in the seller.
FOB shipping point where goods sold is
transferred upon shipment – excluded from
the seller.
Others
Goods out on consignment – included in the
seller.
Goods consigned in – excluded from the seller.
Goods held by costumers on approval or trial –
included in the seller.
Freight Terms
Presentation
Inventories are classified as current assets.
It shall be presented as one-line item with the
details disclosed in the notes to the financial
statements.
Accounting for Inventories
Periodic system – calls for the physical counting of
goods on hand at the end of the accounting period
to determine quantities.
The quantities at the end of the period are
multiplied by its unit cost to determine the
inventory value of financial statement
purposes.
Used when inventory have small peso
investment and are fast moving.
Perpetual system – requires the maintenance of
stock cards that shows the running balance of the
inventory including its movements.
An inventory count is conducted at the end of
the period to verify quantities reflected in the
records.
It is used for inventory items with a relatively
large peso investment.
The inventory quantity and value is known at
any time.
Inventory Shortage / Overage
The difference between the physical inventory
and amount recorded in the stock records is
accounted for as inventory short or over which
requires an adjustment to the inventory
account.
1. Inventory shortage – physical inventory is less
than the amount recorded in the books.
2. Inventory overage – physical inventory is
greater than the amount recorded in the
books.
Inventory Discounts
Trade discounts – deductions from the list or
catalog price in order to arrive at the invoice price
which is the amount chargeable to the buyer.
Trade discounts are not recorded.
Its purpose is to encourage trading or increase
sales.
It suggest the price at which the goods may be
resold.
Cash discounts – deductions from the invoice price
when payment is made within the discount period.
Its purpose is to encourage prompt payment
or early payment of account.
Purchase discount / sales discount.
Methods of Recording Purchases
Gross method – both the purchases and
accounts payable are recorded at gross
(100%).
Net method – both the purchases and
accounts payable are recorded at net of
discount.
Methods of Recording Purchases
Cost of Inventory
Purchase cost purchase price, import duties,
non-refundable or non recoverable purchase
taxes and transport, handling and other costs
directly attributable to the acquisition of the
inventory.
1. Trade discounts are directly deducted.
2. Foreign exchange gains or loss are excluded.
3. The difference between the purchase price for
normal credit terms and the amount paid is
recognized as interest expense.
Cost of Inventory
Conversion cost refers to the costs necessary
in converting raw materials into finished goods
which includes direct labor and production
overhead.
Other costs are necessary in bringing the
inventories to their present location and
condition.
Exclusion from Inventory Costs
Abnormal amounts of wasted materials, labor
or other production costs.
Storage cost, unless this costs are necessary in
the production process before a further
production stage.
Administrative overhead that do not contribute
to bringing inventory so their present location
and condition.
Selling costs.
Cost of Inventories of a Service Provider
Includes primarily of the labor and other costs
of personnel directly engaged in providing the
service (supervisory personnel and overhead).
Generally, they are classified as work in
progress.
Labor and other costs relating to sales and
general administrative personnel are excluded
– classified as expense.
Cost Formulas
Cost formulas deal with the computation of
cost of inventories that are charged as expense
and when the related revenue is recognized as
well as the cost of unsold inventories at the
end of the period that are recognized as an
asset.
1. Specific identification
2. First-In, First-Out
3. Weighted average
Specific identification – specific costs are
attributed to identified items of inventory.
Characteristics of Specific Identification
The cost of inventory is determined by
multiplying the units on hand by their actual
unit cost.
This should be used for inventories that are not
ordinarily interchangeable and those that are
segregated for specific projects.
The flow of inventory corresponds with the
actual physical flow.
It is very costly to implement.
Cost Formulas
First-In, First-Out – it is assumed that
inventories that were purchased or produced
first are sold first or issued to production.
Characteristics of FIFO
The cost of sales represents costs from earlier
purchases.
The cost of ending inventory represents costs
from the most recent purchases.
It favors balance sheet presentation.
There is improper matching of cost against
revenue because the COGS is stated as an
earlier purchase price.
In rising prices, FIFO produces the highest net
income.
Cost Formulas
Weighted average – the cost of sales and
ending inventory are determined based on the
weighted average cost of beginning inventory
and all inventories purchased or produced
during the period.
Characteristics of Weighted Average
The weighted average unit cost is computed by
dividing the total cost available for sale by the
total number of units available for sale.
The weighted average unit cost is multiplied
with the inventory quantity on hand to arrive at
the cost of the ending inventory.
It is relatively easy to apply, especially with the
use of computers.
It produces inventory valuation that
approximates current value if there is a rapid
turn over of inventory.
There may be considerable lag between
current cost and inventory valuation since it
includes early purchases.
In rising prices, inventory valuation will be less
than current cost.
Weighted Average - Perpetual
Moving average – the terms used in computing
the weighted average unit cost of inventory
under the perpetual method.
A new weighted average cost per unit is
computed after every purchase or purchase
return.
Net Realizable Value Decline in the purchase price after a
Inventories shall be measured at lower or cost noncancelable purchase commitment has
and net realizable value. been made – loss (other expense) is recorded
Net realizable value refers to the estimated in the period of the price decline.
selling price in the ordinary course of business
less the estimated cost of completion and the Loss on purchase commitment
estimated costs necessary to make the sale. Estimated liability for purchase commitment
Assets shall not be carried in excess of
amounts expected to realized from their sale If the market price rises at the time of the
or use. purchase – gain on purchase commitment is
recorded that is limited to the loss on the
Accounting for Inventory Write-down purchase commitment previously recorded.
If the cost is lower than NRV – no adjustment
If the NRV is lower than cost – inventory is
measured at NRV.
1. Direct method or the COGS method.
2. Allowance method or the loss method.

Direct method – the inventory is recorded at

lower of cost or NRV.
1. Any loss on inventory writedown is not
accounted for separately buy absorbed or
buried in the COGS.
2. Ending inventory is recorded opposite the
income and expense summary account at the
lower of cost or NRV.

Allowance method – the inventory is recorded

at cost and any loss on inventory writedown is
accounted for separately.
1. Gain or loss on inventory writedown is
recorded as an adjustment to the COGS.
2. Allowance for inventory writedown is a
reduction in the cost of the inventory.

Purchase Commitments
Purchase commitments – obligations of the
entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity.
1. When purchase commitments are significant or
unusual – disclosure is required.
2. Losses from firm and noncancellable
commitments shall be recognized.
CH 14 - Biological Assets
Applicability of PAS 41
Biological assets – living animals and living
plants.
Agricultural produce – harvested products from
biological assets.
1. Harvest – refers to the detachment from a
biological assets or the cessation of a biological
asset’s life processes.
Examples of Biological Assets
Agricultural Activity / Agriculture
This refers to the management by an entity of
the biological transformation and harvest of
biological assets for sale or for conversion into
agricultural produce or into additional
biological assets.
1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations /
Floriculture
4. Aquaculture (fish farming)
Features of Agricultural Activity
Capability to change – living animals and plants
are capable of biological transformation.
Management of change – agricultural activity
must be managed to facilitate the biological
transformation by enhancing or at least
stabilizing conditions necessary for the process
to take place.
Measurement of change – change or quantity
brought about biological transformation or
harvest is measured and monitored as a
routing management function.
Biological Transformation
This comprises the process of growth,
degeneration, production and procreation that
cause qualitative or quantitative changes in
biological asset.
1. Growth – increase in quantity or improvement
in the quality of animal or plant.
2. Degeneration – decrease in the quantity or
deterioration in the quality of animal or plant.
3. Procreation – creation of additional living
animal or plant.
Recognition
An entity shall recognize a biological asset or
agricultural produce when:
The entity controls the asset as a result of past
events.
It is probable that future economic benefit
associated with the asset will flow through the
entity.
The fair value or cost of the asset can be
measured reliably.
Measurement
Biological assets shall be measured on initial
recognition and at the end of every reporting
period at fair value less cost of disposal.
Agricultural produce shall be measured at fair
value less cost of disposal at the point of
harvest.
Agricultural Land
Agricultural land is not a biological asset.
The requirements of PAS 16 (Property, plant
and equipment) shall apply to agricultural land
for purposes of measurement.
Bearer-Plants
It is accounted for similar to a manufacturing
asset.
It is a living plant used in the production of an
agricultural produce, expected to bear
produce for more than one period.
At the end of the period, bearer plants are cut
down and sold as scrap.
 Bearer plants
1. Trees that produce fruits.
2. Grapevines in a vineyard.

Not bearer plants

1. Trees to be harvested and sold for log or
lumber.
2. Annual crops.

Agricultural Produce on Bearer Plants

As it grows, it is measured at the end of each
reporting period prior to harvest at fair market
value less cost of disposal.
Once harvested, it is recorded at fair market
value less cost of disposal at the point of
harvest (cost of inventory and gain from
agricultural produce).

Animal-Related Recreational Activities

Management of recreational activities (game
parks and zoos) an are not agricultural
activities.
There is no management of the transformation
of the biological assets but simply a control of
the number of animals.
The natural breeding that takes places is not
managed and is incidental only to the main
activity of providing a recreational facility.
CH 15 - Property, Plant and Equipment
PPE Elements of Cost
Property, plant and equipment are tangible Purchase price (import duties and
assets that are held for use in production or nonrefundable purchase taxes) after deducting
supply of goods or services, for rental to trade discounts and rebates.
others, or for administrative purposes, and are Cost directly attributable to bringing the asset
expected to be used during more than one to the location and condition necessary for it
period. to be capable f operating in the manner
intended by the management.
Characteristics of PPE Initial estimate of the cost of dismantling and
They are tangible assets, meaning they have removing the item and restoring the site on
physical substance. which it is located for which an entity has a
They are used in business: present obligation.
1. Production and supply of goods or services.
2. Rental purposes. Direct Attributable Cost
3. Administrative purposes. Cost of employee benefit arising directly from
They are expected to be used for more than the construction or acquisition of the PPE.
one year. Cost of site preparation.
Initial delivery and handling cost.
Examples of PPE Installation and assembly cost.
Land Professional fee.
Land improvements Cost of testing whether the asset is functioning
Building properly.
Machinery
Ship Subsequent Measurement
Aircraft Cost model means that the property are
Motor vehicle carried at cost less accumulated depreciation
Furniture and fixtures and any impairment loss.
Office equipment Revaluation model means that the property
Pattern, molds and dies are carried at revalued carrying amount.
Tools 1. Revalued carrying amount is the fair value at
Bearer plants the date of the revaluation less any
subsequent accumulated depreciation and
Initial Measurement subsequent impairment loss.
Property, plant and equipment is measured at
cost. Modes of Acquisition
Cost is the amount of cash or cash equivalent Cash basis – cash price equivalent at
paid and the fair value of the other recognition date or the cash paid plus directly
consideration given to acquire an asset at the attributable cost and other cost necessary in
time of acquisition or construction. bringing the asset to the location and its
intended use.
On account – invoice price net of discount
whether taken or not.
Installment – cash price equivalent at
recognition date while the difference between
the cash price and total payment shall be
recognized as interest expense amortized over
the credit period
 Issuance of share capital
1. Fair value of the property received.
2. Fair value of the share capital.
3. Par value or stated value of the share capital.
Issuance of bonds payable
1. Fair value of the bonds payable.
2. Fair value of the asset received.
3. Face amount of the bonds payable.
Exchange
Fair value of the asset plus cash given up.
Carrying amount of the asset if exchange lacks
commercial substance.
1. Commercial substance is an event or
transaction causing the cash flows to change
significantly by reason of exchange.
Construction includes the following cost:
1. Direct cost materials and labor.
2. Indirect cost and incremental overhead cost.
Derecognition
Derecognition means that the cost of the
property together with the related
accumulated depreciation shall be removed
from the accounts.
The difference between the net disposal
proceeds and the carrying amount is treated as
gain or loss.
Concept of Depreciation
Depreciation is defined as the systematic
allocation of the depreciable amount of asset
over the useful life.
Its objective is to have each period benefiting
from the use of the asset to bear an equitable
share of the asset cost.
Depreciation Period
Depreciation begins when the asset is available
for use.
Depreciation ceases when the asset is
derecognized.
Depreciation do not end when the asset
becomes temporarily idle.
Factors of Depreciation
Depreciable amount or depreciable cost is the
cost of an asset or other amount substituted
for cost, less the residual value.
Residual value is the estimated net amount
currently obtainable if the asset as at the end
of the useful life.
Useful life is either the period over which an
asset is expected to be available for use or the
number of production or similar units
expected to be obtained from the asset by the
entity.
Useful Life
The useful life of an asset is expressed as:
1. Time periods in years.
2. Units of output or production.
3. Service hours or working hours.
Factors in Determining Useful Life
Expected usage of the asset – expected
capacity or physical output.
Expected physical wear and tear – number of
shifts the assets is used, repair and
maintenance program, and the care and
maintenance while idle.
Technical or commercial obsolescence –
changes or improvements in production,
change in the market demand for the
production output of the asset.
Legal limits – expiry date of the related lease.
Depreciation Method
Depreciation method shall reflect the pattern
in which the future economic benefits from the
asset are expected to be consumed by the
entity.
Straight Line Method
The annual depreciation charge is calculated
by allocating the depreciable amount equally
over the number of years of estimated useful
life.
Annual depreciation =
(Cost less residual value) / (Useful life in years)
 Depreciable amount multiplied by the straight-
line rate of depreciation also gives the amount
of annual depreciation.
Principal cause of depreciation is passage of
time rather than as a function of usage.
It is widely used in practice because of its
Declining Balance Method
A fixed or uniform rate is multiplied by the
declining carrying amount of the asset in order
to arrive at the annual depreciation.
Applicable to assets that have residual value.

simplicity. Rate=
1-√(n&(Residual value)/Cost)
Production / Variable / Activity Methods

The variable or activity method assumes that Double Declining Balance

depreciation is more of a function of use rather
than passage of time.
1. Assets are deprecated more rapidly if they are
used full time or overtime.
2. There is a direct relationship between
utilization of assets and realization of revenue.
Depreciation rate =
Depreciable cost / Total depreciation base
The procedure is the same principle applied in
the declining balance method wherein the
fixed rate is multiplied to the declining carrying
amount of the asset to arrive at the annual
depreciation.
Double declining balance uses the straight-line
rate multiplied by 2.

Depreciation base is either service hours or

number of output.

Annual depreciation =
Depreciation rate x annual depreciation base

Decreasing / Accelerated Methods

The decreasing charge or accelerated methods
provide higher depreciation in the earlier years
and lower depreciation in the later years of the
useful life of the asset.
1. New assets are generally capable of producing
more revenue in the earlier years.
2. The cost of using an asset includes not only
depreciation but also repairs on such assets.

Sum of Year's Digits

It provides for depreciation that is computed by
multiplying the depreciable amount by a series
of fractions whose numerator is the digit in the
useful life and the denominator is the sum of
the digits in the useful life.

SYD =
Life ((Life+1)/2)

CH 16 - Borrowing Cost
Borrowing Cost
PAS 23, paragraph 5, borrowing cost are
defined as interest and other costs that an
entity incurs in connection with borrowing of
funds.
1. Specific borrowing – intended specifically in
acquiring a qualifying asset.
2. General – intended partly in acquiring a
qualifying asset and partly for general or
working capital purposes.
Qualifying Asset
A qualifying asset is an asset that necessarily
takes a substantial period of time to get ready
for the intended use or sale.
1. Manufacturing plant.
2. Power generation facility.
3. Intangible asset.
4. Investment property.
Borrowing cost of qualifying assets is
capitalized.
Excluded from Capitalization
Borrowing cost related to the following assets
are not capitalized:
1. Assets measured at fair value (biological
assets).
2. Inventory manufactures or produced in large
quantity on a repetitive basis, even if it takes a
substantial period get ready for sale (wine
making / maturing whisky).
3. Assets that are ready for their intended use or
sale when acquired.
Accounting for Borrowing Cost
Borrowing cost that are directly attributable to
the acquisition, construction or production of a
qualifying asset is capitalized (asset).
Borrowing cost that are not directly attributable
to a qualifying asset is expensed immediately
(expense).
Asset Financed by Specific Borrowing
Actual borrowing cost incurred net of any
interest income from the temporary
investments of those borrowings.
Actual borrowing cost
Less: Interest income from temporary investing
Capitalizable borrowing cost
Asset Financed by General Borrowing
Average carrying amount of the asset
multiplied by a capitalization rate or average
interest rate provided it should not exceed the
actual interest incurred (difference is charged
to interest expense).
1. Average carrying amount – similar to the
computation of the average partner’s capital.
2. Capitalization rate or average interest – actual
borrowing cost / total principal.
Commencement of Capitalization
The capitalization of borrowing cost shall
commence if the following conditions are
present:
1. When the entity incurs expenditure for the
asset.
2. When the entity incurs borrowing cost.
3. When the entity undertakes activities that are
necessary to prepare the asset for the
intended use or sale.
Cessation of Capitalization
Completion of the activities necessary to
prepare the qualifying asset.
It is ready for its intended use or sale when the
physical construction of the asset is complete
even though routine administrative work might
still continue.
Disclosure Related to Borrowing Cost
The amount of borrowing costs capitalized
during the period.
The capitalization rate used to determine the
amount of borrowing cost eligible for
capitalization.
Segregation of assets that are qualifying assets
is not required to be disclosed.