TRADE AND OTHER RECEIVABLES • Subsequent measurement > net realizable value

WHAT ARE RECEIVABLES? CASH DISCOUNTS

- Claims that an entity expects to be settled by customers or other - In selling of goods, an entity may record receivables either by:
parties through receipt of cash. • Gross method (gross of cash discounts)
- Amount collectible from sale of goods or services on account or as • Net method (net of cash discounts)
evidenced by a note of promise to pay.
- Receivables arising from other income such as interest,
commissions, and rentals (accrued revenue)
- Loans and advances to company officers and employees, and all
other claims.

• CLASSIFICATION OF RECEIVABLES
- Trade receivables
- Nontrade receivables

WHEN TO RECOGNIZE RECEIVABLES?

- Receivables are recorded at the same time when the entity

recognizes revenue involved in the transaction, recorded at the UNCOLLECTIBLE ACCOUNTS
transaction price.
- The seller issues a business document to the buyer called the - Accounts receivable, at times, becomes uncollectible due to various
INVOICE that details the transaction happened. It includes the date reasons. An entity can record uncollectible accounts in two
of transaction, quantity and prices, and total amount payable by the methods:
buyer. • Direct write-off method
• Allowance method
ACCOUNTS RECEIVABLES
DIRECT WRITE-OFF METHOD
- The normal business operations of an entity of selling of goods and
services where an account receivable arises when a transaction in - An immediate recognition of a particular uncollectible account
on account. No direct cash payment was made by the buyer to the removed directly from accounts receivable
seller.
Uncollectible expense xxx

• Measurement at initial recognition > original transaction price Accounts receivable xxx
 ALLOWANCE METHOD RECEIVABLE FINANCING

- The way entities obtain cash to finance their operations should their
- Allows estimates of uncollectible accounts
cash balances deemed to be lacking.
- Year-end adjustment:
- Receivable financing can take on the following forms:
Uncollectible accounts expense xxx 1. Pledge- accounts receivable serve as collateral for a loan
arrangement
Allowance for uncollectible accounts xxx 2. Assignment- transfer of rights in an account receivable in
• Write-off during the year: consideration for a loan
Allowance for uncollectible accounts xxx 3. Factoring- sale of accounts receivable
Accounts receivable xxx 4. Notes receivable discounting- obtaining cash before maturity
• In case of reinstatement: date of the loan through discounting the note to a financing
Accounts receivable xxx company.
Allowance for uncollectible accounts xxx
• Recovery and receipt of payment: PROBLEM 1
Cash xxx
Accounts receivable xxx

NOTES RECEIVABLE

- A receivable that is supported by notes of promise to pay

(promissory note) is called a note receivable. It has two kinds:
• Interest-bearing > carries a stated rate of interest
• Non-interest bearing > interest forms part of the face amount

LOANS RECEIVABLE

- Amount owned from a debtor to a creditor. These creditors are

usually banks or other financial institutions. It is a financial asset
from a loan transaction granted by an entity to a borrower.
• Initial measurement > fair value + transaction costs
• Subsequent measurement > amortized costs PROBLEM 2
PROBLEM 3

PROBLEM 4

CASH AND CASH EQUIVALENTS

CURRENT ASSETS: - If the excess cash is invested to earn interest income, the actual cash
invested shall be classified as follows:
- It expects to realize the asset, or intends to sell or consume it, in its
• With term of three months or less >> cash equivalents
normal operating cycle
• More than three months but less than one year >> short-term
- It holds the asset primarily for the purpose of trading
investments as current assets but not as cash
- It expects to realize the asset within twelve months after the
• More than one year >> long-term investments as noncurrent
reporting period
assets, most certainly not as cash
- The asset is cash and cash equivalent unless the asset is restricted
from being exchanged or used to settle a liability for at least 12 COMPENSATING BALANCES
months after the reporting period.
- Generally takes the form of minimum checking or demand deposit
CASH account balance that must be maintained in connection with a
borrowing arrangement with a bank.
- Compensating balances will be classified as follows:
- Cash is measured at face value
• No legal restrictions to withdraw (informal) >> cash
- To qualify cash as cash presented as current asset, cash items must
• With legal restrictions on withdrawal (formal) >> cash held as
be generally unrestricted
compensating balance or long-term investment, depending if
• Cash items include:
the loan made is short-term or long-term.
- Cash on hand (currently on hand, undeposited collections,
customers’ and managers’ checks, bank drafts and money orders) POSTDATED CHECKS
- Cash in bank without restrictions on withdrawals.
- Checks drawn, recorded and already given to the payee but they
- Working funds (petty cash fund, change fund, dividend fund, payroll
bear a date subsequent to the end of the reporting period.
fund)
- They shall be reverted back to cash as at the end of the reporting
CASH EQUIVALENTS period. Reversing entry is as follows:
Cash xxx
Accounts payable xxx
- Short-term highly liquid investments that are readily convertible into
cash. CASH SHORT OR OVER
- Apply the three-month rule for cash equivalents where the duration
• Cash count < recorded cash cash shortage
is from the date of purchase up to the date of maturity.
• Cash count > recorded cash cash overage
- Three months time deposits and commercial papers
- Cash shortages are initially debited to cash short/over (CSO) account
- BSP treasury bills purchased three months before maturity
and credited cash
- These shortages are then credited to the CSO account where the
TEMPORARY INVESTMENTS OF CASH amount of the shortage is debited to the “reason” for the shortage
- Cash overages are initially credited to CSO account and debited to
cash
- These overages are then debited to the CSO account where the BANK RECONCILIATION AND PROOF OF
amount of the overage is credited to the reason for the overage.
CASH
CASH ACCOUNTING MALPRACTICES CASH-IN-BANK
• Cash receipts >> deposited altogether
1. Lapping- practice used for concealing cash shortage. It consists of • Cash payments >> made through checks
misappropriating a collection from one customer and concealing - Sources of details about cash in bank:
this defalcation by applying a subsequent collection made from 1. Cash in bank ledger account of the entity
another customer. 2. Bank statement issued by the bank
2. Kiting- occurs when a check is drawn against a first bank and - Rules of debit and credit:
depositing the same check in a second bank to cover the shortage in • Bank statement
the latter bank. No entry is made for both the drawing and deposit ➢ Increase in entity’s cash > credit
of the check. ➢ Decrease on entity’s cash > debit
3. Window dressing- occurs when some entities open their books even • Ledger
beyond the end of the accounting period for the purpose of showing ➢ Increase in cash > debit
a better picture of the financial highlights and profit activities of the ➢ Decrease in cash > credit
business.
- Usually accomplished by recording as of last day of the accounting BANK RECONCILIATION STATEMENT
period the transactions made subsequent to the close of the period.
- Prepared by an entity to reconcile the cash-in-bank account balance
INTERNAL CONTROL ON CASH: IMPREST in the entity’s books versus the balance by the bank in the bank
SYSTEM statement.

• Cash receipts >> deposited altogether

• Cash payments >> made through checks
- There are occasions when the issuance of checks becomes
impractical; or inconvenient such as when small amounts are paid.
Therefore, it becomes necessary to establish petty cash fund.
• Petty cash fund- money set aside to pay small expenses which
cannot be paid conveniently by means of check. There aretwi BANK BALANCE RECONCILING ITEMS
methods:
1. Fluctuating fund system
2. Imprest fund system
 BANK-TO-BOOK METHOD

LEDGER BALANCE RECONCILING ITEMS

BOOK-TO-BANK METHOD

METHODS USED FOR BANK

RECONCILIATION
1. Adjusted balance method
2. Bank-to-book method
3. Book-to bank method
ADJUSTED BALANCE METHOD
PROBLEM 1
 - Expanded reconciliation in that it includes proof of receipts and
disbursements.
- This approach may be useful in discovering possible discrepancies in
handling cash particularly when cash receipts have been recorded
but have not been deposited.
PROBLEM 3

PROBLEM 2

PROOF OF CASH