ACCOUNTING CYCLE
Temporary accounts
represent the steps or procedures used to
record transaction and prepare financial
statements. The accounting cycle implements
the accounting process of identifying,
recording and communicating economic
information.
Asset – is an economic resource controlled by
the entity as a result of past events.
 Steps
1) Identifying and analyzing – the
accountants gather information from
source documents and determines the
effect of the transactions on the account
2) Journalizing – The identified
accountable events are recorded in the
journals
3) Posting – Information from the journal
are transferred to the ledger
4) Preparing unadjusted trial Balance –
the balances of the general ledger
accounts are proved as the equality of
debits and credits. The unadjusted trial
balance serves as basis for adjusted
entries.
5) Preparing the adjusting entries – The
accounts are updated as of the reporting
dare on an accrual basis by recording
accruals, expiration of deferrals,
estimations, and other events often not
signaled by new source documents.
6) Preparing the adjusted trial balance
(worksheet) – The equality of debits and
credit are rechecked after adjustments
are made. The adjusted trial balance
serves as basis for the preparation of
financial statement.
7) Preparing the financial statements –
these are the means by which the
information processed is communicated
to user
8) Closing books – the involves
journalizing and posting closing entries
and ruling ledger.
(nominal accounts) are closed and the
resulting profit or loss is transferred to
an equity account.
9) Preparing the post-closing trial
balance – the equality of debit and
credit are again rechecked after the
closing process.
10) Recording the reversing entries – are
usually made at the beginning of the
next accounting period to simplify the
recording of certain transactions in that
period.
Cash and cash equivalent
CHAPTER 1
Cash – most significant because of its ability to
settle an obligation, acquire another asset, pay
operating costs, or provide returns to enterprise
owners. (most often the first item listed in the
face of financial statements)
- It is used as a medium of exchange.
- Refers to currency and coins that are in
circulation
- Recognized at face value and must be
unrestricted and must be available for
use in current operations.
- If the financial institution holding the
funds of an entity is in bankruptcy or
financial difficulty, cash should be
written down to estimated realizable
value if the amount recoverable is
estimated to be lower than face value
It includes:
 Bills and coins on hand
 Demand credit instruments (checks,
bank drafts, postal money orders and
currency demand deposits with banks)
The presentation of the cash item must parallel
the intention of the management for which cash
is held.
INVESTMENT OF EXCESS OF CACH
 - Excess cash should be invested in
revenue-earning investment
- Excessive amount of cash also
indicates that the resources are not
efficiently managed and represents
unproductive assets.
Cash funds – during current operations qualify
to be reported as cash in the current assets
section of the statement of financial position.
Examples:
(Payroll fund, working fund, Change fund, Petty
cash fund, Interest fund, Dividend fund)
Cash funds intended for acquisition of non-
current assets do not quality to be reported as
part of current assets. (plant expansion fund,
equipment acquisition fund)
Cash funds for settlement of long-term
obligations are also classified as non-current.
(Sinking fund) unless the long-term obligation
or portion becomes due within 12 months after
the end of the reporting period.
Cash funds set aside for liquidation shall be
both classified as current and form part of cash.
Cash equivalents – highly liquid financial
instruments that are so near their maturity and
there is insignificant risk of change in value due
to interest rates. It matures normally within 3
months or less, from date of acquisition.
- Details comprising cash and cash
equivalents should be disclosed in the
notes to financial statements
Temporary investments in equity shares – not
included as part of cash equivalents because
these equity securities do not have any
maturity dates. They are classified either as
equity investments at fair value through
profit or loss or equity investments at fair
value through comprehensive income
Redeemable preference shares – that are to be
reacquired by issuing corporation at a
determined redemption date, are in substance
debt instruments, and such, may qualify to be
reported as cash equivalents if purchased
within three months.
Presentation and Measurement of Cash in the
Statement of Financial Position
- Cash is generally measured at face
value, which is its amortized cost and
fair value at the same time.
- Cash deposits in foreign currency are
measured using the exchange rate in
effect of the end of the reporting
period.
- If the statements are not prepared for
special purpose, it is not necessary to
classify cash to distinguish between
currencies on hand, cash in banks, or
deposits at various locations (details are
disclosed on notes)
1. Foreign currency. Cash in foreign currency
and deposits in foreign banks.
- which are subject to immediate and
unrestricted withdrawal, should be
translated to Philippine currency using
the exchange rate at the end of the
reporting period.
- Deposits in foreign investment which
are subject to foreign exchange
restriction, if material, should be
classified separately among noncurrent
assets and the restriction clearly
indicated.
2. Cash in closed banks or in banks having
financial difficulty or in bankruptcy –
should be reclassified as receivable and
written down to recoverable amount.
3. Customers’ postdated checks, NSF checks
(no sufficient fund checks are those that
cannot be covered by the funds in the
debtor’s bank account) and IOUS –
should be reported as receivables.
DAIF – drawn against insufficient funds;
DAIF – drawn against unclear deposits
4. Postage stamps and expense advances –
prepaid expenses
5. Bank overdraft – reported as a liability. A 11. In banking practice, checks become stale if
bank overdraft occurs when a depositor has not encashed within 6months from the
written checks for a sum greater than the time of issuance
amount in the depositor’s bank account - If stale check is immaterial, it is
- The credit balance in the cash in bank simply accounted for as a
account results from the issuance of miscellaneous income.
checks in excess of the deposits—
Cash XX
overdraft
- Overdraft is not permitted in the Miscellaneous Income XX
Philippines - If material and liability is expected to
- If entity maintains two or more continue, cash is restored and liability
accounts in one bank and one account is again set up
results in an overdraft, such overdraft
can be offset against the other bank Cash xx
account with debit balance in order to Account payable/appropriate account xx
show, cash, net of bank overdraft
- An overdraft can also be offset - When the cash account shows cash,
against the other bank account if the which is less than the balance per
amount is immaterial book, A cash shortage is to be
6. Undelivered or unreleased checks – recorded:
should be reverted back to cash balance.
Cash short/over xx
An adjusted entry is required to restore
the cash balance and set up the liability: Cash xx
Cash xx
Account payable/appropriate account 12. Cash short/over account is a temporary
xx account. When we already know the cause
7. Company’s postdated checks – reverted of such shortage or overage, we then cancel
back to cash and the corresponding liability d cash short/over account and replace it with
shall be recognized the “real cause”.
8. Compensating balances – minimum - Nominal account that is debited for
amounts checking or demand deposit that shortages
accompany agrees to maintain as support or - And credited for overages in the petty
collateral for a loan (when not restricted, the cash fund
amount can be reported as cash) - The debit balance in Cash short and
- If the deposit is legally restricted over account should be reported as a
because of a formal compensating miscellaneous expense
balance agreement, the compensating - A credit balance in the account is
balance is classified separately as “cash reported as a misc. revenue
held as compensating balance” under - Cash shortage resulting from
current assets if the related loan is negligence or theft should be charged as
short term, otherwise, it is classified as receivable if probable of recovery
noncurrent investment. - If the cashier or cash custodian is held
9. Cash set aside for long-term purpose or responsible for the cash shortage, the
for acquisition of a non-current asset – is adjustments should be:
reported as non-current financial asset
Due from cashier xx
10. Stale Check – is a check not enchashed by
the payee within a relatively. Cash short/over xx
- If the reasonable efforts fail to disclose No formal journal entries are made
the cause of the shortage, the adjustment
- Whenever the petty cash fund runs low,
is:
a check is drawn to replenish the fund
Loss from cash shortage XX - Petty cash disbursement should be
replenished only by means of check and
Cash short/over XX
not from undeposited collection
ACCOUNTING FOR CASH OVERAGE - At this time that the petty cash
disbursement is recorder.
- When the cash account shows cash,
which is more than the balance per book, Expenses xx
A cash overage is to be recorded:
Cash in bank xx
Cash xx
- If not replenished, the entry is to state
Cash short/over xx the correct cash fund is:

- The cash overage is treated as Expenses xx

miscellaneous income if there is no claim
Petty cash fund xx
on the same.
- An Increase in the fund is recorded
Cash short/over xx normally.

Miscellaneous over xx Petty cash fund xx

- But where the cash overage is properly
Cash in bank xx
found to be the money of the cashier, the
journal entry is: - A decrease in the fund is recorded
normally.
Cash short/over xx
Cash in bank xx
Payable to cashier xx
Petty cash fund xx
Imprest system – system of control of cash
which requires that all cash receipts should be Under fluctuating fund system, checks drawn
deposited intact and all cash disbursement to replenish the fund do not necessarily equal the
should be made by means of check. petty cash disbursement.
- In imprest system, payment of expenses - Expenses are immediately recorded and
requires no formal entries. PCF fluctuates from to time.
- Petty cashier generally, requires a signed a) Establishment of the fund
petty cash voucher for such payments and
prepares memo entry in the petty cash Petty cash fund xx
journal. Cash in bank xx
- daily deposit of all cash receipts intact to
the bank and making disbursements b) Payment of expenses out of the petty cash
through issuance of checks. fund
- A check is drawn to established the fund. Expenses xx
Petty cash fund xx Petty cash fund xx
Cash in bank xx c) Replenishment or increase of fund
- Payment of expenses out of fund
 Petty cash fund xx - Time deposit may be pregerminated or
withdrawn on demand or after a certain
Cash in bank xx
period of time agreed upon.
d) At the end of the reporting period, NO
▲ Bank Reconciliation
ADJUSTMENT is necessary because the
petty cash expense is recorded outright. - A bank reconciliation is necessary only for a
e) Decrease of the fund is reverted to the demand deposit or checking account.
general cash - When an account is opened at the bank, the
person authorized to draw checks against the
Cash in bank xx
account will be required to sign cards
Petty cash fund xx furnished by the bank, to show the specimen
signatures to be used on the checks.
- These specimen signatures will be filed by
Bank reconciliation the bank so that any teller who may be
unfamiliar with a depositor's signature can
CHAPTER 2 test the authenticity of a check by comparing
▲Kinds of Bank Deposits the depositor's signature on the card with the
signature on the check.
Demand deposit – the current account or - If the depositor is a corporation, the bank
checking account or commercial deposit where will request that the directors pass a
deposits are covered by deposit slips and where resolution authorizing certain officers of the
funds are withdrawable on demand by drawing corporation as signatories of checks and that
checks against the bank. a copy of this resolution be filed with the
bank.
- A demand deposit is noninterest
bearing Fundamental Transactions Affecting the
Depositor and the Bank.
Assume that Company X (the depositor)
Saving deposit
collected P100,000 from a customer in
- In a saving deposit, the depositor is given a settlement of an account. The collection is
passbook upon the initial deposit. The deposited at the First Bank.
passbook is required when making deposits
Book
and withdrawals.
- Withdrawals are made anytime but the bank Cash (or cash in bank) 100,000
sometimes may require notice of
withdrawal. Accounts receivable 100,000
- A saving deposit is interest bearing. Bank
Time deposit Cash 100,000
- The time deposit is similar to saving deposit Company X 100,000
in the sense that it is interest bearing.
- A time deposit is evidenced, however, by a  The journal entry on the books of the bank
shows the credit is Company X account.
formal agreement embodied in an
This is made, for our purpose, to facilitate,
instrument called certificate of deposit.
the illustration.
 In practice, however, the account credited by
the bank is demand deposit account but the
same is posted to the subsidiary ledger of
Company X.
 When the bank credits the account of the
depositor, Company X, it recognizes its
liability to the depositor.
 Legally, when a deposit is made, there exists
a debtor-creditor relationship between the
bank and the depositor, the bank being the
debtor, and the depositor being the creditor.
 Hence, when the account of the depositor is
increased the same is credited.
 Let us assume further that Company X
subsequently issued a check for P30,000
in payment of an account payable.
Book Accounts payable 30,000
Cash 30,000
Bank Company X 30,000
Cash 30,000
- When a check is issued, the payee will
present the same to the bank for payment.
- The depositor is actually ordering the bank
to pay the payee out of its deposit in the
bank.
- This is the reason the bank debits the
account of the depositor thereby reducing its
liability to the depositor.
- Thus, when the depositor's account is
decreased, the same is debited.
- At this point, when balances are extracted,
the cash in bank account on the depositor's
book has a balance of P70,000 and the
Company X account on the book of the bank
has also a balance of P70,000.
Explanation
The two accounts have equal or the same
balances because they are reciprocal accounts.
- This means that when one account is
debited, the other account is credited or vice
versa.
- The reason for this is that the two accounts
cover or reflect the same items or
transactions.
- Thus, if no errors are committed in
recording, and the same information has
been recorded by both accounts, the two
should have equal or the same balances.
- But very frequently, there are items on the
depositor’s book which do not appear on the
bank records as of the same date.
- For example, checks issued by the depositor
are not yet presented for payment to the
bank or deposits may have been made after
the bank records are sent out to the
depositor. And less frequently, there are
items on the bank records which do not
appear on the depositor's book.
 Bank reconciliation – a statement which
brings into agreement the cash balance per
book and cash balance per bank.
- The reconciliation is usually prepared
monthly because the bank provides
the depositor with the bank statement
at the end of every month.
 Bank statement – a monthly report of the
bank to the depositor showing:
a)The cash balance per bank at the beginning
b) The deposits made by the depositor and
acknowledged by the bank
c)The checks drawn by the depositor and
paid by the bank
d) The daily cash balance per bank during
the month
- The bank statement is an exact copy of the
depositor's ledger in the records of the
bank.
- When the bank statement is received,
attached thereto are the depositor's cancelled
checks and any debit or credit memoranda
that have affected the depositor's account
- The cancelled checks are the checks issued
by the depositor and paid by the bank
during the month.
- These are called cancelled checks because
they are literally cancelled by stamping or
 punching to show that they have been i. No Sufficient Fund Checks (NSF) –
paid. checks deposited but returned by the bank
because of insufficiency of fund.
- The other name for NSF is DAIF or
▲ Reconciling Items
drawn against insufficient fund
• Book reconciling items: ii. Technically Defective Checks – check
deposited but returned by the bank because
■ Credit memos of technical detects such as absence of
■ Debit memos signature or countersignature, erasures not
countersigned, mutilated checks, conflict
■ Errors between amount in words and amount in
figures.
• Bank reconciling items
iii. Bank Service Charges – include bank
■ Deposits in transit charges for interest, collection, checkbook
and penalty.
■ Outstanding checks iv. Reduction of Loan – pertains to amount
■ Errors deducted from the current account of the
depositor in payment for loan which the
depositor owes to the bank and which has
already matured.
 Credit memos – items not representing
deposits credited by the bank to the account
 Deposits in Transit – collections already
of the depositor but not yet recorded by the
recorded by the depositor as cash receipts
depositor as cash receipts.
but not yet reflected on the bank statement
- The credit memos have the effect of
increasing the bank balance.

■ Inclusion in Deposits in Transit

■ Examples of Credit Memos i. Collections already forwarded to the bank
for deposit but too late to appear in the bank
i. Notes receivable collected by bank in favor
statement.
of the depositor and credited to the account of
ii. Undeposited collections or those still in the
the depositor.
hands of the depositor. In effect, these are
ii. Proceeds of bank loan credited to the
cash on hand awaiting delivery to the bank
account of the depositor
for deposit.
iii. Matured time deposits transferred by the
bank to the current account of the depositor.
 Outstanding checks – checks already
recorded by the depositor as cash
 Debit memos – items not representing
disbursements but not yet reflected on the
checks paid by bank which are charged or
bank statement.
debited by the bank to the account of the
depositor but not yet recorded by the ■ Inclusion in Outstanding Checks
depositor as cash disbursements.
- The debit memos have the effect of I. Checks drawn and already given to
decreasing the bank balance. payees but not yet presented for payment.
II. Certified checks – a check where the
■ Examples of Debit Memos bank has stamped on its face the word
 "accepted" or "certified" indicating Less: Outstanding checks xxx
sufficiency of fund
Adjusted bank balance xxx
- When the bank certifies a check, the
account of the depositor is immediately  The reconciling items of the book are
debited or charged to insure the eventual simply termed as credit memos and debit
payment of the check. memos. No details are shown to simplify the
- Certified checks should be deducted from illustration.
the total outstanding checks (if included  In actual formal reconciliation, details will
therein) because they are no longer have to be shown. Moreover, errors are
outstanding for bank reconciliation excluded because no definite rule can be
purposes. made whether these are to be added or
deducted.
▲ Forms of Bank Reconciliation
 Errors will have to be analyzed for proper
Adjusted Balance Method – under this method, treatment. However, errors are reconciling
the book balance and the bank balance are items of the party which committed them.
brought to a correct cash balance that must  It will be observed that under the adjusted
appear on the balance sheet. balance method, the credit memos are
always added to the book balance and the
Book to bank method – under this method, the debit memos are always deducted from the
book balance is reconciled with the bank balance book balance.
or the book balance adjusted to equal the bank  Deposits in transit are always added to the
balance. bank balance and the outstanding checks are
Bank to book method – under this method, the always deducted from the bank balance.
bank balance is reconciled with the book balance Explanation
or the bank balance is adjusted to equal the book
balance.  The adjusted balance method means that
the book balance and the bank balance
- The first method is preferred over the are adjusted to equal the correct cash
other two. balance
▲ Proforma reconciliation  Credit memos already increased the bank
balance but have no effect on the book
• Adjusted balance method balance because the credit memos are not
yet recorded by the depositor.
Book balance xxx
 Consequently, the book balance is
Add: Credit memos xxx understated in relation to the correct cash
balance.
Total xxx  Hence, credit memos are added to the
Less: Debit memos xxx book balance.
 Debit memos already decreased the bank
Adjusted book balance xxx balance but have no effect on the book
balance because the debit memos are not
yet recorded by the depositor.
Bank balance xxx  Consequently, the book balance is
overstated in relation to the correct cash
Add: Deposits in transit
balance.
xxx
 Hence, debit memos are deducted from
Total xxx the book balance.
 Deposits in transit already increased the check is deducted from the bank balance, it
book balance but have no effect of the is now added to the book balance.
bank balance because the deposits are not
Explanation of Reversal Rule
yet recorded by the bank.
 Consequently, the bank balance is  The book to bank method means that the
understated in relation to the correct cash book balance is adjusted to equal the bank
balance. balance.
 Hence, deposits in transit are added to the  Deposits in transit already increased the
bank balance book balance but have no effect on the bank
 Outstanding checks already decreased the balance because the deposits are not yet
book balance but have no effect on the recorded by the bank.
bank balance because the checks are not  Consequently, the book balance is
yet paid by the bank. overstated in relation to the bank balance.
 Consequently, the bank balance is Hence, deposits in transit are deducted from
overstated in relation to the correct cash the book balance following the book to bank
balance. method.
 Hence, outstanding checks are deducted  On the other hand, outstanding checks
from the bank balance. already decreased the book balance
 but have no effect on the bank balance
because the checks are not yet paid by the
▲ Book to Bank Method bank. Consequently, the book balance is
understated in relation to the bank balance.
Book balance xxx
 Hence, outstanding checks are added to the
Add: Credit memos xxx book balance, following the book to bank
method.
Outstanding checks xxx xxx
▲Bank to book method
Total xxx
Bank balance xxx
Less: Debit memos xxx
Add: Deposits in transit xxx
Deposits in transit xxx xxx
Debit memos xxx xxx
Bank balance xxx
Total xxx
- When the reconciliation starts with the book
balance and ends with the bank balance, the Less: Outstanding checks xxx
usual book reconciling items are treated in Credit memos xxx xxx
the same manner they are treated in the
"adjusted balance method", that is, credit Book balance xxx
memos are added and debit memos are
- When the reconciliation starts with the bank
deducted.
balance and ends with the book balance, the
- However, with respect to the bank
usual bank reconciling items are treated in the
reconciling items the treatment is simply
same manner they are treated in the "adjusted
"reversed."
balance method", that is, deposit in transit is
- Thus, since the deposit in transit is added to
added and outstanding check is deducted.
the bank balance, it is now deducted from
the book balance, and since the outstanding - However, with respect to the book reconciling
items, the treatment is simply "reversed".
- Thus, since the credit, memos are added to the  If the Beginning balance are omitted then
book balance they are now deducted from the the formulas should simply be reversed or
bank balance, and since the debit memos are just work back
deducted from the book balance, they are now
Book Debits – refers to cash receipts or to all
added to the bank balance.
accounts debited to cash in bank account
Explanation of Reversal Rule
Book credits – Refers to cash disbursement or
 The bank to book method means that the to all accounts credited to cash in bank account.
bank balance is adjusted to equal the
T – ACCCOUNT Cash in Bank
book balance.
 Debit memos already decreased the bank Balance – beginning book credit
balance but have no effect on the book
balance because they are not yet recorded Book debits Balance– ending
by the depositor.
 Consequently, the bank balance is
understated in relation to the book ▲ COMPUTATION OF BOOK BALANCE
balance. Hence, debit memos are added to
Balance per book – beginning months xx
the bank balance.
 On the other hand, credit memos already Add: Book debits during the months xx
increased the bank not yet recorded by
the depositor book balance Total xx
 Hence, credit memos are deducted from Less: book credit during the months xx
the bank balance but have no effect on
the book balance because they are not yet Balance per book – end of month xx
recorded by the depositor
 Consequently, the bank balance is
overstated in relation to the book balance. Bank credit – refers to all credited to the
Hence, credit memos are deducted from account of depositor which includes deposit
the bank balance acknowledge by bank and credit memos.
Proof of Cash Bank debit – refers to all account debited to
the account of depositor which includes check
CHAPTER 3
paid by the bank and debit memos.
 Bank reconciliation is called “two -date”
T – ACCOUNT Company X
because it literary involves two dates.
 One date reconciliation is the same for a Bank debits Balance – beginning
two-date reconciliation
 Two date Reconciliation becomes Balance– ending Bank credits
complicated ONLY when certain
facts/Data are omitted.
 But If all the facts are available then the ▲ COMPUTATION OF BANK BALANCE
reconciliation statements will simply be Balance per bank – beginning months xx
prepared as of the two dates required.
 If the Ending Balance are not given, then Add: Bank credit during the months xx
the formulas may help
Total xx
Less: bank debit during the months xx
Balance per bank – end of month xx

▲ COMPUTATION OF DEPOSIT IN
TRANSIT
Deposit in transit – Beginning of month
Add: Cash Receipt deposited during the month
Total:
Less: Deposits acknowledge by bank during the
month.
Deposit in transit – End of month

▲ COMPUTATION OF OUTSTANDING
CHECKS
Deposit in transit – Beginning of month
Add: Cash drawn by depositor during the month
Total:
Less: Check paid by bank during the month.
Deposit in transit – End of month