WHAT IS CASH?

Cash includes money or equivalent that is readily available for unrestricted use. Money is the standard medium of exchange
and the basis of accounting measurements. Other negotiable instruments that can be used to settle obligations and are readily available
for unrestricted use may form part of cash.

Cash includes:

a. Cash on hand – refers to the undeposited collections awaiting deposit and other current funds held as of the reporting date.

b. Cash in bank – refers to deposits in banks that are available for immediate withdrawal and unrestricted use.

Examples of cash: (Mnemonics: CoDe-Check-FuD-Mo)

1. Coins and currencies

2. Demand deposits (checking or current accounts) and savings account
3. Checks – such as cashier’s checks, personal checks, manager’s check, traveller’s check, and certified checks received from
customers or other external parties.
4. Cash Funds set aside for use in current operations (*refer to note 4.1 for examples)
5. Bank Drafts – guarantees by bank to advance funds on the demand by the party to whom the draft was directed.
6. Money orders – similar to bank drafts but are drawn from post offices or other financial institutions.

*Note 4.1:
a. Petty Cash fund
b. Revolving fund
c. Payroll fund
d. Change fund
e. Dividend fund
f. Tax fund
g. Travel fund
h. Interest fund
i. Other types of imprest bank account used in current operations

Examples of items NOT included in cash:

1. Postdated checks – treated as receivable

2. IOUs or advances to employees – treated as receivable
3. Cash funds not available for use in current operations (such as: Sinking Fund, Plant expansion fund, Depreciation fund,
Contingency fund, Preference Share Redemption, etc.
4. Postage stamps – treated as prepaid supplies.

CHECKS

1. Postdated checks – these are checks with a future date received by the company as payment.
If a postdated check is recorded upon receipt, it will be recorded as:

Cash xx
Accounts Receivable xx

This is an erroneous journal entry since postdated checks are to be recorded as cash upon the arrival of the date indicated on
the check. To correct the previous entry, we should record an adjusting entry as follows:

Accounts Receivable xx
Cash xx

2. Unreleased checks drawn and postdated checks drawn (by the company) – these are checks with future date or still undelivered
which is made by the company as a form of payment to a supplier, merchant or creditor. If these kind of checks are recorded
despite being undelivered or postdated, it will be recorded as:

Accounts Payable xx
Cash xx
 This is an erroneous journal entry since the checks were still undelivered/postdated. Cash is to be recognized upon the delivery
of the check (if not postdated) or upon arrival of the date indicated. To correct the previous entry, we should record an adjusting
entry as follows:

Cash xx
Accounts Payable xx
3. Stale checks – these are checks delivered to payees which are not encashed within a relatively long period of time, normally 6
months or more (but depending on company policy).
The same concepts applied on undelivered checks/postdated checks will be used on stale checks.

CASH EQUIVALENTS
- Are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to
an insignificant risk of changes in value. (PAS 7.6)

Examples of cash equivalents are as follows:

a. Treasury bills, notes, or bonds acquired 3 months before maturity date
o Treasury bill is a short-term obligation issued by the government at a discount usually less than a year.
o Treasury notes and treasury bonds are long-term obligations issued by the government. Notes usually have a
maturity of 1 to less than 10 years, while bonds have a maturity of 10 years or more.
b. Money market instrument or commercial paper acquired 3 months before maturity date
o Money market instruments are investments in portfolios of short-term securities.
o Commercial papers consist of short-term, unsecured, notes payable issued in large denominations by large
companies with high credit ratings to other companies and institutional investors. The maturity date of commercial
paper is normally less than 270 days and is traded in money market and, thus, is highly liquid. A commercial
paper acquired 3 months or less before its maturity date may qualify as cash equivalent.
c. 3-month time deposit
o Time deposit is a form of a bank deposit normally made in fixed denomination, bears interest higher than that of
regular deposits, and has a pre-agreed maturity. A time deposit is evidenced by a certificate of deposit.

OTHER ITEMS

• Equity securities (investment in stocks) – cannot qualify as cash equivalents because shares of stocks do not have a maturity
date.
• Redeemable preference shares (preference shares with mandatory redemption) – if acquired 3 months or less before their
specified redemption date can qualify as cash equivalents because redeemable preference shares are debt instruments.
• Deposit in foreign banks – If unrestricted, included as cash at face amount at the current exchange rate as of the reporting
date. If restricted, excluded from cash, and presented as receivable subject to appropriate allowances for uncollectability and
impairment.
• Compensating balance – a minimum amount that must be maintained in an entity’s bank account as support for funds
borrowed from the bank. If legally restricted as to withdrawal, it shall be excluded from cash and instead be part of other current
assets or other non-current asset depending on the nature of its restriction. (If restriction is within a year, current, otherwise
non-current). If not legally restricted as to withdrawal, it shall be included in cash.
• Bank overdraft – also known as cash overdraft, is a negative (credit) balance in bank account resulting from overpayment of
checks in excess of the amount of deposit. It may only occur in checking accounts, but not in savings and time deposits.
Overdrafts are payable on demand, thus they are presented as current liabilities, except in cases where offsetting is permitted.
Offsetting will be allowed if the following conditions are present:
1. When two or more bank accounts are maintained in the same bank (at least 1 of the bank account is
positive and can absorb the negative balance.)
2. Provided that the positive balance account is unrestricted.

INTERNAL CONTROLS OVER CASH

Internal control is any action or process effected by management that is designed to help an entity achieve its objectives. Such
objectives may be categorized as follows:

a. Reliability of financial reporting,

b. Effectiveness and efficiency of operations,
c. Compliance with laws and regulations, and
d. Safeguarding of assets.
Examples of internal controls over cash:
1. Segregation of incompatible duties
2. Imprest system
3. Bank reconciliation
4. Cash counts
5. Minimum cash balance
6. Lockbox accounts
7. Non-encashment of personal checks from petty cash fund
8. Voucher system
CASH SHORTAGES AND OVERAGES

Shortages and overages arise when the cash count is not equal to the balance per records. If the cash count is less than
the balance per records, there is a shortage, and an overage if vice versa. Initially, a shortage is recorded as follows:

Cash shortage or overage xx

Cash on hand xx

If upon investigation that the shortage is due to the fault of an employee, it shall be charged to a receivable account.
Otherwise, it shall be charged to loss. The following entry shall be recorded to close the shortage account depending on the
result of the investigation:

Receivable from cashier / Loss on cash shortage xx

Cash shortage or overage xx

If the employee pays the receivable, the following entry is to be recorded:

Cash on hand xx
Receivable from cashier xx

On the other hand, cash overage is recorded as follows:

Cash on hand xx
Cash shortage or overage xx

If upon investigation that the overage is due to a fund of an employee mixed up with the company’s fund, it shall be
charged to a payable account. Otherwise, it shall be charged to gain. The following entry shall be recorded to close the overage
account depending on the result of the investigation:

Cash shortage or overage xx

Payable to cashier / Gain on cash overage xx

If the company pays the employee, the following entry is to be recorded:

Payable to cashier xx
Cash on hand xx

• Note: Having a cash overage does not mean it is beneficial to the company even if it results to a gain because it is an indication
of a weak internal control for cash.
 CONCEALMENT OF CASH SHORTAGES

There are ways to fraudulently conceal cash shortages.

1. Lapping – it occurs when collection of receivable from one customer is stolen or misappropriated and then concealed by
applying a subsequent collection from another customer. Most of the time, it is made possible when the incompatible duties
of recording and cash custody are combined.

Example:

December 29 Cashier/Bookkeeper collects P10,000 from customer A, puts money in her pocket and makes no journal
entry.

January 1 Cashier/Bookkeeper collects P15,000 from customer B, puts P5,000 in her purse, and makes the
following journal entry:

Cash 10,000
Accounts Receivable – Mr. A 10,000

January 5 Auditor comes to audit and decided to confirm payments amounting to P20,000 and above. As a
result, the lapping was not detected by the audit conducted.

To show the effect of lapping, take a look at the following:

Let’s say Mr. A has a P100,000 AR Balance and Mr. B has a P90,000 AR Balance. Considering the transactions that transpired,
we can see the effect as follows:

December 29 payment:

Should be balance Recorded balance

Client AR Balance Client AR Balance

Mr. A P 90,000.00 Mr. A P100,000.00
Mr. B P 90,000.00 Mr. B P 90.000.00

January 1 payment:

Should be balance Recorded balance

Client AR Balance Client AR Balance

Mr. A P 90,000.00 Mr. A P 90,000.00
Mr. B P 75,000.00 Mr. B P 90.000.00

- Since the employee was assigned as a cashier and bookkeeper at the same time, she had the power to receive the money
(cashier) and record the transaction (bookkeeper). To avoid such circumstances, some procedures may be applied by the
auditor. One is through confirmation of balances of the clients and advising the management to split the duty of the
employee.

2. Kiting – occurs when cash shortage is concealed by overstating the balance of cash thru exploitation of the float period of
checks (usually 3 days). This normally occurs at month-end.

ISSUES IN CASH

Window Dressing
Books of an entity should be closed at the end of every reporting period in order that financial statements will show fairly the financial
position and performance of the entity and to avoid window dressing.

Window dressing is a practice of opening the books of accounts beyond the close of the reporting period which results to manipulation
of the books to arrive for a better financial position and performance. It could be increasing the assets and lowering the liabilities.

This method is usually accomplished by:

• By recording as of the last day of reporting period collections made subsequent to the close of the period, thus increasing
cash shown in the statement of financial position.
 • By recording as of the last day of the reporting period payments of accounts made subsequent to the close of the period, thus
decreasing liabilities shown in the statement of financial position.

Such practices are unacceptable and undesirable. Thus, entries made to window dress must be reversed back to correct the statements
as these entries pertain to the subsequent period. This act causes misstatement of the assets, liabilities, equity, income and expense.

ILLUSTRATION

The correct current position at the end of the current year is as follows:
Current assets 8,400,000
Current liabilities 4,000,000
Current ratio (CA/CL) 2.1

The books were kept open and two transactions which occurred in January of the following year were recorded as of the end of the
current year.

JOURNAL ENTRIES
A. Sale for P2,000,000 of merchandise costing P800,000:
Consequently, the resulting balances would be:
Accounts Receivable 2,000,000
Current Assets 8,800,000
Sales 2,000,000
Current Liabilities 3,200,000
Cost of Sales 800,000
Current Ratio 2.75
Merchandise Inventory 800,000

B. Payment of accounts payable, P800,000:

Accounts Payable 800,000
Cash 800,000

The original current assets balance of P8,400,000 is increased by the accounts receivable of P2,000,000 but decreased by the cost of
the merchandise sold P800,000 and payment of accounts payable of P800,000.

The current liabilities balance of P4,000,000 is reduced by the payment of accounts payable of P800,000.
As a consequence of the window dressing, the effects are:
a. The current ratio increased from 2.1 to 2.75, an apparent improvement in the current financial position
b. Sales are overstated by P2,000,000

Lapping
Another act which causes misstatement in the presentation of the financial statement is Lapping, which is commonly used in
concealing cash shortage.

This is done by misappropriating a collection from one customer and concealing this defalcation by applying a subsequent collection
made from another customer.

It involves series of postponements of the entries for the collection of the receivables. Poor internal control may lead to this scenario
especially when the bookkeeper and the cashier are one and the same person.

Kiting
This is another act of concealing a cash shortage. It is possible when an entity maintains current accounts in different banks and
commonly done at the end of the month.

It occurs when a check is drawn against a first bank and depositing the same check in a second bank to cover the shortage in the latter
bank. No entry is made for both the drawing and deposit if the check.

This fraudulent device is made possible when the check is drawn against the first bank at the end of the month, the bank statement for
such month does not yet show the check drawn because the said check is yet to be cleared or presented for payment to the first bank.
Hence, the cash balance in the first bank at the end of the month is not affected.

On the other hand, when the check is deposited in the second bank at the end of the month, the bank statement for such month will
already show the deposit thereby increasing the cash in said bank and covering the cash shortage therein
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 account is only a temporary or suspense account. When financial statements are prepared the same should be
adjusted.

Hence, if he cashier or cash custodian 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 is

Loss from cash shortage xx

Cash short or over xx

Accounting for cash overage

Where the cash count shows cash which is more than the balance per book, a cash overage is to be recorded.

Cash xx
Cash short or over xx

Note that whether it is a cash shortage or cash overage, the offsetting account is cash short or over account. Such account should be
adjusted when statements are made.

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 where the cash overage is properly found to be the money of the cashier, the journal entry is:

Cash short or over xx

Payable to cashier xx

Imprest System

The imprest system is a system of control of cash which requires that all cash receipts should be deposited intact and all cash
disbursements should be made by means of check.

While internal control ideally requires that all payments should be made by means of check, this is sometimes impossible.

There are occasions when the issuance of checks becomes impractical or inconvenient such as when small amounts are paid or things
are hurriedly bought or customers are entertained.

Consequently, in such instances, it may be more economical and convenient to pay in cash rather than issue checks.

Life Application:
Improving Cash Management
Even if a company is making a profit by making more revenue than it incurs in expenses, it will have to manage its cash flow correctly
to be successful. A company’s cash flow is tied to its operations or business activities, to its investment activities (such as the purchase
or the sale of capital equipment), and to its financing activities (such as raising debt or equity funding or repaying such funding). The
cash that a company generates from its operations is tied to its core business activities and provides the best opportunities for cash
flow management.
Summary:
• Cash is the most liquid asset and can be used immediately to perform economic actions like buying, selling, or paying debt,
and meeting immediate wants and needs.
• Liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.
• money market: A market for trading short-term debt instruments, such as treasury bills, commercial paper, bankers’
acceptances, and certificates of deposit
• liquidity: Availability of cash over short term: ability to service short-term debt.

IMPREST SYSTEM: Petty Cash Fund

How is Petty Cash Transaction Controlled and Reported?

As control measures of petty cash fund, the procedures are widely used:

• One person is usually given the responsibility of operating the petty cash fund
• Each time an expenditure is made, a source document (called a petty cash voucher) is prepared for payment evidence. The
voucher is signed by the person receiving the cash and by the person in charge of the fund (petty cashier). The petty cash
voucher includes the amount and purpose of the expenditure.
• A record (usually multi columned) is kept to record each expenditure from the petty cash fund
• Each time the fund is almost depleted and also at the end of every accounting period, a check is prepared for the amount
spent and cashed to replenish the petty cash fund.

PETTY CASH RECEIPT

No. 121 Date August 1, 2001
Paid to Metropolitan Times Amount: 300

For Daily Newspaper

Charge to Miscellaneous Administrative Expense
Payment received:
S.O. Hall Approve by N.E.R

No Description Journal Entry

1 Petty Cash xxx
An establishment of petty cash fund
Cash xxx
2 Payment expenses by the petty cash custodian No Entry
3 Receiving disbursement evidences and replenished petty Kinds of Expenses xxx
cash Cash xxx
4 Petty cash funds are too small and needed to increase petty Petty Cash Xxx
cash fund balance Cash xxx
5 Petty cash funds are too much and needed to decrease petty Cash xxx
cash fund balance Petty Cash xxx

5 At the end of period, to make an adjusting entry (If there are Kinds of Expenses xxx
unrecorded transactions) Petty Cash xxx
6 At the beginning of next period, the reversing entries is Petty cash xxx
developed Kinds of Expenses xxx
ILLUSTRATION:

Date Description Journal Entry

Airlangga, Corp established petty cash Petty Cash 10,000,000
March 1,2021
funds Rp. 10,000,000 Cash 10,000,000
The petty cash receipts indicate
expenditures for the following items:
• Office supplies Rp. 5,000,000
• Postage expenses Rp.
500,000 No Entries
• Utility expenses Rp.
3,000,000
March 14, 2021
• Miscellaneous expenses Rp.
300,000
Office supplies 5,000,000
Postage expenses 500,000
Utility expenses 3,000,000
Replenished petty cash funds
Miscellaneous expenses 300,000
March 15, 2021
Cash 8,800,000
Petty cash funds are too small and Petty Cash 2,500,000
March 16, 2021 needed to increase petty cash fund
balance, Rp. 2,500,000 Cash 2,500,000

At the end of period, the expenditures Adjusting Entry

are unrecorded for the following items: Postage expenses 300,000
• Postage expenses Rp. 300,000
• Utility expenses Rp. Utility expenses 1,200,000
1,200,000
• Miscellaneous expenses Rp. Miscellaneous expenses 100,000
100,000
Petty Cash 1,600,000
Reversing Entry
Petty Cash 1,600,000
At the beginning of the next period, the Postage expenses 300,000
April 1, 2021
reversing entries to be made
Utility expenses 1,200,000
Miscellaneous
100,000
Exp.

BANK RECONCILIATION

Bank Deposits

There are three kinds of bank deposits, namely:

1. Demand Deposit
• This is the current account or checking account or commercial deposit where deposits are covered by deposit
slips and where funds are withdrawable on demand by drawing checks against the bank.
• A demand deposit is noninterest bearing.

2. Saving Deposit
• The depositor is given a passbook upon the initial deposit. The passbook is required when making deposits and
withdrawals.
• Withdrawals are made anytime but the bank sometimes may require notice of withdrawal.
• A saving deposit is interest bearing.
 3. Time Deposit
• This is similar to saving deposit in the sense that it is interest bearing.
• A time deposit is evidenced, however by, a formal agreement embodied in an instrument called certificate of
deposit.
• Time deposit may be predetermined or withdrawn on demand or after a certain period of time agreed upon.

Bank Reconciliation Statement

A bank reconciliation statement is a report that is prepared for the purpose of bringing the balances of cash per records and
per bank statement into agreement.

The reconciliation usually prepared monthly because the bank provides the depositor with the bank statement at the end of
every month.

Bank reconciliation are prepared to:

a) Explain the difference between the cash balance reported on the bank statement and the cash balance in the accounting
books.
b) Arrive at the adjusted (correct) cash balance to be shown in the financial statements.
c) Provide information for reconciling journal entries.

A bank statement is a monthly report of the bank to the depositor showing: 1. The cash balance
per bank at the beginning;

2. The deposits made by the depositor and acknowledged by the bank; 3. The checks drawn by the
depositor and paid by the bank; and

4. The daily cash balance per bank during the month.

RECONCILING ITEMS

Book Reconciling Items:

1. Credit memos – These are book reconciling items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.
The following are examples of credit memos.
Interest earned – This is a type of credit memo that will appear on the bank statement when a bank gives a
company interest on its account balances.
Notes receivable – This is a type of reconciliation where the bank will increase the company's checking account for
the amount it collected (principal and interest) and will decrease the account by the collection fee it charges.
Proceeds of bank loan credited to the account of the depositor.
Matured time deposits transferred by the bank to the current account of the depositor.

2. Debit Memos - These are book reconciling items not representing checks paid by the bank which are charged or debited
by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursements.

The following are examples of debit memos:

No Sufficient Funds (NSF) – These are checks that were not honored by the bank of the person or company
writing the check because that account did not have a sufficient balance.
Technically Defective Checks - These are check that deposited but returned by the bank because of technical
defects such as absence of signature/ countersignature, erasures, mutilated checks, conflict between amount in
words and figures.
Bank service charges – This type of debit memo comprises fees deducted from the bank statement for the bank's
processing of the checking account activity. These include bank charges for interest, collection, checkbook and
penalty.
Reduction of Loan – This pertains to amount deducted from the current portion of depositor in payment for loan
which the depositor owes the bank and which has already matured.

3. Errors - These are book reconciling items which represent the errors made by the accountant or another person in charge
during the bookkeeping process
 Bank Reconciling Items:

1. Deposits in Transit – These are collections already recorded by the depositor as cash receipts but not yet reflected on
the bank statements.

The following are examples of deposits in transit:

Collections already forwarded to the bank for deposit but too late to appear in the bank statement. E.g. deposits are
mailed to the bank, placed in an overnight depository
Undeposited collections or those still in the hands of the depositor. These are cash on hands awaiting delivery to
the bank for deposit.

2. Outstanding Checks - These checks are already recorded by the depositor as cash disbursements but not yet reflected
on the bank statement.

The following are examples of outstanding check:

Check drawn and drawn but not yet presented by payee for payment.
Certified checks - the bank, when certifying the checks automatically debits (reduces) the depositor's account and
assumes direct liability on paying the certified checks to the payee. Certified checks should be deducted if included
because they are no longer outstanding.
Stale checks - checks that remain outstanding for a relatively long period of time, are reverted back to cash,
meaning, they are added back to the cash balance per books, and are excluded from outstanding checks.

3. Errors - These are bank reconciling items which represent the errors made by the bank such as erroneously debiting the
company’s account for the transaction that does not exist.

FORMS OF BANK RECONCILIATION:

1. Adjusted balance method - Under this method, the book balance and the bank balance are brought to a correct cash balance that
must appear on the balance sheet.

Balance per book, end Xxx Balance per bank, end Xxx

Add: Credit Memos Xxx Add: Deposits in Transit Xxx

Total Xxx Total Xxx
Less: Debit Memos Xxx Less: Outstanding Checks Xxx
Adjusted book balance Xxx Adjusted bank balance Xxx

2. Book to bank method - Under this method, the book balance is reconciled with the bank balance or the book balance is adjusted
to equal the bank balance.

Book balance Xxx

Add: Credit Memos Xxx
Outstanding Checks Xxx Xxx
Total Xxx
Less: Debit Memos Xxx
Deposit in Transit Xxx (Xxx)
Bank Balance Xxx
3. Bank to book method - Under this method, the bank balance is reconciled with the book balance or the bank balance is adjusted
equally with the bank balance.

Bank Balance Xxx

Add: Deposit in Transit Xxx

Debit Memos Xxx Xxx

Total Xxx

Less: Outstanding Checks Xxx

Credit Memos Xxx (Xxx)

Book balance Xxx

ILLUSTRATION
You received your July 2018 bank statement. The July 31, 2018 cash balance in your accounting books is P300,000 while the cash
balance shown on the bank statement is P430,000. You determined the following reconciling item:
a. Credit memo - P190,000
b. Debit memo - P30,000
c. Deposits in transit - P50,000
d. Outstanding checks - P20,000

Prepare the bank reconciliation.

1. Bank Reconciliation using ADJUSTED BALANCE METHOD:

Balance per book, end P300,000 Balance per bank, end P430,000

Credit memos (CM) 190,000 Deposits in transit (DIT) 50,000

Debit memos (DM) (30,000) Oustanding checks (OC) (20,000)

Book errors 0 Bank errors 0

Adjusted balance P460,000 Adjusted Balance P460,000

2. Bank Reconciliation using BOOK TO BANK METHOD:

Book balance P300,000

Add: Credit Memos 190,000
Outstanding Checks 20,000 210,000
Total 510,000
Less: Debit Memos 30,000
Deposit in Transit 50,000 (80,000)
Bank Balance 430,000
 3. Bank Reconciliation using BANK TO BOOK METHOD:

Bank Balance P430,000

Add: Deposit in Transit 50,000

Debit Memos 30,000 80,000

Total 510,000

Less: Outstanding Checks 20,000

Credit Memos 190,000 (210,000)

Book balance 300,000

COMPUTATION OF DEPOSITS IN TRANSIT & OUTSTANDING CHECKS

- There are certain instances where deposits in transits and outstanding checks are not immediately available in the problem.
You may only solve the problem through reconstruction of data. The following T-account formula may be used to compute
for DIT and OC:
-
*Deposit in Transit, Ending = DIT, beg. Balance + Deposits made during current month – Deposits credit by bank during current
month

DEPOSIT IN TRANSIT

DIT, beg. Balance xx

Add: Debits per books Total Credits per Bank Statement

Less: xx xx CM last month

Less: Eff
(xx) (xx) Less: CM current month
Add/Less:
Less: Effect of bank error last
ect during
Deposit made of bookcurrent
error last month (xx)
month (xx) during current month
month

Effect of book error in current Add/Less: Effect of bank error

xx
month xx in current month

xx xx Deposits credited by bank

XX DIT, end. balance

*OC, Ending = OC Beg. Balance
+ Checks Drawn During
Current Month – Checks encashed
by Bank During Current Month

OUTSTANDING CHECKS
 Add: xx OC, beg. balance

Debits
bank statement xx xx Total Credits per Book
per
Less: DM current month (xx) (xx) Less: DM last month
Less: Effect of b
Less: Effect of book error last
ank error last month (xx) (xx)
Add/Less: month error in current month

Effect of bank error in

Deposit made during current month xx xx Add/Less: Effect of book
current month

Checks drawn during current

OC, xx xx end. bal.
month

XX

Liability
- Present obligations of an entity arising from past transactions or events, the settlement of which is expected to result in an
outflow from the entity of resources embodying economic benefits.

Elements of a liability
1. Present obligation
- can be legal or constructive
2. Arises from past events
- there is an obligating event
3. Outflow of future economic benefits
- payment in money
- transfer of non-cash assets
- performance of service

Classifications of Liabilities
1. Current Liability
- Entity expects to settle the obligation within the normal operating cycle.
- Liability is due within 12 months after the reporting period.
General rule: current
Exceptions:
a. the entity has the discretion to refinance or roll over an obligation for at least 12 months after the reporting date.
b. refinancing on a long-term basis is completed on or before the end of the reporting period.

- Held for trading

- Does not have an unconditional right to defer settlement for at least 12 months after the reporting period

2. Non-current Liability
- Residual definition
- Liability is due after 12 months after the reporting period.
General rule: non-current
Exception:
breach of contract (payable on demand)
Exception to the exception to the rule:
a. the lender agreed to provide grace period of 12 months after the reporting date, on or before the end of the
reporting date.
b. the lender agreed to waived the breach of covenant on or before the end of the reporting date.
Measurement:

Conceptually, all liabilities are initially measured at present value and subsequently measured at amortized cost.

Initial Subsequent
Short-term interest-bearing Face Value Face Value
Short-term non-interest-bearing Face Value Face Value
Long-term interest-bearing Face Value Face Value
Long-term non-interest-bearing Present Value Amortized Cost

Sample Scenarios:

On May 1, 2021, A Company issued P1M, 12-month promissory note to B Company in exchange for equipment. Reporting date is on
December 31, 2021 while the date the financial statements are authorized for issue is on March 31, 2022.

Required: What is the proper classification (current or non-current) under the following scenarios:

1. A Company has the discretion to refinance or roll over for another year. (Non-current)
2. On March 1, 2022 before the financial statements were issued, the note payable was replaced by an 18-month note for the
same amount. (Current)
3. A Company intends to pay the obligation on April 20, 2022 and borrows again on the same date for the same amount. The
new note will be due in 2 years from May 1, 2021.
(Current)
4. On February 1, 2022, the entire note was refinanced through an issuance of long-term obligation.
(Current)
5. On November 30, 2021, A Company entered into an agreement with Rain to refinance the obligation for 8 months from May
1, 2022. The new maturity date will be on December 31, 2022.
(Current)
6. On December 31, 2021, A Company entered into an agreement with B Company to refinance the obligation for another 12
months from May 1, 2022.
(Non-current)

On May 1, 2021, A Company issued a P1M, 2-year promissory note to B Company in exchange for an equipment. Reporting date is
on December 31, 2021 while the date the financial statements are authorized for issue is on March 31, 2022.

1. A Company intends to settle the note on the maturity date.

(Non-current)

2. On April 30, 2022, A Company entered into an agreement with B Company to refinance the obligation for another 2 years
from the date of maturity.
(Non-current)

3. On March 1, 2022, A Company breaches a covenant related to the obligation and the loan becomes payable on demand. On
the same date, B Company agreed to give A Company a grace period of 1 year from the date of breach.
(Non-current)

4. On November 1, 2021, A Company breaches a covenant related to the obligation and loan becomes payable on demand. On
the same date, B Company agreed to give A Company a grace period of 1 year from the date of breach.
(Current)

5. On October 1, 2021, A Company breaches a covenant related to the obligation and the loan becomes payable on demand. On
the same date, B Company agreed to give A Company a grace period of 1 year after the reporting date.
(Non-current)

6. On September 1, 2021, A Company breaches a covenant related to the obligation and the loan becomes payable on demand.
On the same date, B Company agreed to waive the breach and give A Company a second chance.
(Non-current)
Deferred Revenue, Gift Certificate, Refundable Deposits and Bonus

Accruals vs Deferrals

Accrual
- Earned revenue
- Incurred expenses
- No cash received or paid

Deferral
- Cash is received
- Cash is paid
- Revenue not yet earned or expenses not yet incurred

Deferred revenue or unearned income

- Income received but not yet earned

Journal Entries:

Liability Method:

When cash was received:

Cash xx
Unearned Income xx

When service was performed:

Unearned Income xx
Income xx

Income Method:

When cash was received:

Cash xx
Income xx

When service was not performed:

Income xx
Unearned Income xx

Gift Certificate
- Voucher given as a present that is exchangeable for a specified cash value of goods or service from a particular place of
business

Journal Entries:

When gift certificate was sold:

Cash xx
Gift Certificate Payable xx

When gift certificate was redeemed:

Gift Certificate Payable xx
Sales xx

When gift certificate was not redeemed:

Gift Certificate Payable xx
Forfeited Gift Certificate xx
Refundable Deposits
- Consist of cash or property received from customers but which are refundable after compliance with certain conditions

Journal Entries:

When container’s deposit was received from a customer:

Cash xx
Container’s Deposit xx

When container’s deposit was returned to a customer:

Container’s deposit xx
Cash xx

When container’s deposit was not returned:

Container’s Deposit xx
Container xx

Bonus
- Is a financial compensation that is above and beyond the normal payment expectations of its recipient.

Bonus computation:

1. Before bonus and before tax

B = %(Net Income)

2. After bonus but before tax

B = %(NI-B)

3. Before bonus but after tax

B = %(NI-T)
T = %(NI-B)
B = %(NI-(%(NI-B))

4. After bonus and after tax

B = %(NI-B-T)
T = %(NI – B)
B = %(NI-B-(%(NI-B))

Journal Entry:
Bonus Expense xx
Bonus Payable xx