PART IV.

BANK RECONCILIATION

I. OBJECTIVES (Define and discuss)

 a. Bank Reconciliation
A statement which brings into agreement the cash balance per book
and cash balance per bank. It is usually prepared monthly because the
bank provides the depositor with the bank statement at the end of every
month.
b. Bank Statement
It is a monthly report of the bank to the depositor showing:
a. Cash Balance per Bank at the beginning
b. Deposits made by the depositor and acknowledge by
the bank
c. Check drawn by the depositor and paid by the bank
d. Daily cash balance per bank during the month
c. Book Reconciling items
i. Credit Memos (BOOK)
• Items not representing deposits credited by the bank to the
account of the depositors but not yet recorded by the
depositors as cash receipts. (effect: increase in bank balance)
• Notes receivable collected by the bank
• Proceeds of bank loan
• Matured time deposits transferred by the bank to
the current account
ii. Debit Memos (BOOK)
• Items not representing checks paid by the bank which are
charged or debited by the to the account of the depositors but
not yet recorded by the depositors as cash disbursement
(Effect: decrease in bank balance)
• NSF Check (No Sufficient Fund) / DAIF (Drawn Against
Insufficient Fund) : checks deposited but returned by
the bank because of insufficiency of the fund.
• Technically defective checks: checks deposited but
returned by the bank because of absence of
signature or countersignature, erasures not
countersigned, mutilated checks, conflict between
amount in words and amount in figures.
• Bank Service Charges: charges for interest collection,
checkbook and penalty
• Reduction of loan: the amount deducted from the
current account of the depositor in payment for loan
which depositor owes to the bank and already
matured.
i. Deposit in Transit (BANK)
a. Collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.
i. Collections already forwarded to the bank for deposit but too late to
appear in the bank statement
ii. Undeposited collections or cash on hand awaiting for f=delivery to the
bank for deposit.
ii. Outstanding Checks
a. Checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.
i. Check drawn and already given to payees but not yet presented for
payment
ii. Certified Checks: where the bank has stamped on its face the word “
accepted” or “certified” indicating sufficiency of fund
iii. Errors
a. Excluded because no definite rule canbe made whether these are ti be added or
deducted.
Forms of bank reconciliation
d. Adjusted balance method
The book balance and the bank balance are brought to correct cash
balance that must appear on the balance sheet
e. Book to bank method
 The book balance is reconciled with the bank balance or the book balance
is adjusted to equal the bank balance
f. Bank to book method
The bank balance is reconciled with the book balance or the bank balance is adjusted to
equal the book balance.

PART 6: NOTES RECEIVABLE

I. OBJECTIVES (Define and discuss)
a. Definition of Notes Receivable
This are claims (expressing of right - asset that belongs to you) supported formal
promises to pay usually in the form of notes. It represents claims only from the
sale of merchandise and services in the ordinary course of business. [Notes
received from officers, employees, shareholders and affiliates is separately
designated.]
 Maker is a one person that written a contract of a promissory note.
 Payee is the one that promises to pay another person in a definite sum of
money.
DISHONORED NOTES
It is when a promissory note matures and it is not paid. It is transferred to
accounts receivable so that it would be removed in the notes receivable accounts
[which include the face amount, interest and other charges]
b. Initial measurement of notes receivable
Notes receivable is measured initially at present value.
- Present value is the sum of all future cash flows discounted using the
prevailing market rate of interest [ which is also known as effective interest
rate]
Short term notes receivable shall be measured at face amount
- Cash flows related to short term notes receivable are not discounted
BECAUSE the effect of discounting is usually not material.
i. Interest-bearing
A long term notes as interest bearing is measured at face amount which is actually
the present value upon issuance.
- INTEREST BEARING it when a notes receivable is earning an interest
computed separately.
ii. Noninterest-bearing
A long term notes as noninterest bearing are measured at present value which is
discounted value of the future cash flows using the effective interest rate.
- “Noninterest bearing” is a misnomer (inaccurate designation) because all
notes contain interest.
- It is simply indicating that the interest being included in the face amount
rather than being stated as a separate rate.
c. Subsequent measurement
i. Amortized cost
Notes receivable that is measured in amortized cost using the effective interest must
be in accordance and measured initially: (Subsequently at amortized cost)
 Minus principal repayment
 Plus or minus cumulative amortization of any difference
between the initial carrying amount and the principal
maturity amount
 Minus reduction for impairment or uncollectibility
 For a long term noninterest bearing notes receivable, the amortized cost Is the present
value plus amortization of the discount / face amount minus the unamortized unearned
interest income.

PART 7: LOAN RECEIVABLE

I. OBJECTIVES
a. Loan Receivable
It is financial asset arising from a loan granted by the bank or other financial
institution to a borrower or client. It is a way of lending money to other entity, or
person.

UPDATES WEEKY WEEK

RECEIVABLE FINANCING
Is a financial flexibility or capability of an entity to raise money out of its receivable.
 PURPOSE: If a business may come to a decline or down fall, because of
sales decrease and customers are not paying on time. It is said that, if the
credit standing of an entity is not suffer, it must maintained its currents
accounts and continue to pay its notes payable or obligation. Since the
collections of receivables are in delayed but cash payments for obligation is
maintained, under these circumstances entity is under financial distress and
may be forced to look for cash by financing its receivables.

o Forms of Receivable Financing

o Pledge of accounts receivable
 When loans is obtained from a bank or any lending institution,
the accounts receivable may be pledged (or guaranteed) as a
security or collateral security (a types of assets accepted by
lenders and act as security for the borrowed amount) for the
payment of loan. [Difference of Collateral or mortgage payable:
Mortgage is a type of loan that you can use to finance the
purchase of a property but collateral is an asset that a borrower
gives to a lender as a security or a guarantee that the loan will be
repaid.]

 LOAN RECORDING: DEBIT: CASH and DISCOUNT ON

NOTE PAYABLE if loan is discounted, CREDIT: NOTE
PAYABLE.
 PAYMENT: DEBIT: NOTE PAYABLE CREDIT:
CASH
 PLEDGE ACCOUNTS: NO ENTRY (sufficient
disclosure is made in a note to financial statement.)
 STRAIGHT LINE METHOD ( Discount on note payable is
amortized as INTEREST EXPENSE)
 DEBIT: INTEREST EXPENSE ( Discount x Months
since acquisition) CREDIT: DISCOUNT ON NOTE
PAYABLE
 If it is amortized less the amortized to the discount on
notes payable to get the ending balance of discount on
note payable.
 To present in statement of financial position, it must be
presented as current liability (discount on notes payable)
 To get the carrying amount: Note payable (Face
amount) less the ending discount on note payable.
 Recorded the discount on noted payable that is amortized.
DEBIT : INTEREST EXPENSE (Ending balance)
CREDIT : DISCOUNT ON NOTE PAYABLE
o Assignment of Accounts Receivable
 It means na si borrower (assignor) transfers rights in SOME
accounts receivable to a lender (Assignee) in consideration of a
loan.
 It is actually similar to Pledging, but pledging is general because
it transfers ALL accounts receivable to serve as a collateral
security for a loan.
 This only means that Assignment is MORE FORMAL TYPE of
Pledging of accounts receivable. It must have an evidenced of
financing agreement and a promissory note both sign by
assignor (Borrower).
 Wherein the Assignment is specific rather than general because
SPECIFIC account receivable is serve as collateral security for a
loan. (meaning nag aassign si borrower ng specific AR to serve
as a collateral security)
 NONNOTIFICATION
o Customer is NOT notified that his/her account has
been assigned. It means that customer continue to
make payments to the borrower (ASSIGNOR), who
in return make remits the collections to ASSIGNEE
(Lender).
 NOTIFICATION
o Customer is notified to make their payments
directly to ASSIGNEE (Lender).
Assignee usually lend a certain percentage of the Face
Value of the accounts, because accounts may not be
fully realized by reason of sales discount, sales return,
and allowances and uncollectible accounts. Usually
percentage maybe at 70%, 80% or 90% depending on
the quality of such accounts.
Assignee usually charge INTEREST for the loan
that it makes and requires a SERVICE or FINANCING
CHARGE or COMMISION for the assignment
agreement.
o Factoring
o It is sale of accounts receivable usually on a without recourse (the
lender would take the full risk of nonpayment of the account),
notification basis (of course it is in a notification basis since it is a
must that a customer must be notified to whom he/she should
transact his/her obligation.)
o An entity sells accounts receivable to a bank or finance entity
called FACTOR.
o Factoring differs from the assignment in a way that entity
transfers ownership of the accounts receivable to the factor (It
assumes the full responsibility for uncollectible factored accounts,
keeping the receivables records and collecting the accounts)
o GAIN or LOSS : recognized for the difference of Proceeds
Received and the Net Carrying Amount of Receivables Factored
 CASUAL FACTORING
 It an entity is under a cash shortage, it may be forced to
factor SOME or ALL its AR at substantial discount to
a bank or finance entity to obtain the needed cash.
 FACTORING as a CONTINUING AGREEMENT
 
It is where a finance entity purchases ALL of the
accounts receivable of an entity.
 In this way before a merchandise is shipped to a
customer the entity must then requests the factor’s
credit approval, once approved by the factor he is
sold immediately to the factor after the shipment of
the goods, factors then assumed the collection and
credit function of the accounts.
 COMPENSATION: factor charges a COMMISION
or FACTORING FEE of 5% to 20% for its services
of credit approval, billing, collecting, and assuming
uncollectible factored accounts.
 FACTOR’s HOLDBACK: A predetermined amount
as a protection against customer returns and
allowances and other special adjustments.
(CURRENT ASSET), final settlement is made after
the factored receivables have been fully collected.
o DISCOUNTING OF NOTES RECEIVABLE
o CREDIT CARD
 A plastic card enables the holder to obtain credit up to
predetermined limit from the issuer of the card for the
purchase of goods and services.
DISCOUNTINUING OF NOTE RECEIVABLE
Form of receivable financing, discounting specifically a NOTE RECEIVABLE.
 MAKER : one liable
 PAYEE: entitles to payment on the date of maturity.
 Payee may obtain cash before maturity date by discounting the note at a
bank or other financing company.
Discount note: payee must endorse it; legally payee become endorser and the bank become
an endorsee.

LOWER COST AND NET REALIZABLE VALUE

Inventory shall be measured at
Subsequently measure inventories at:
PAS 2 paragraph 9, inventories shall be measured at the lower of cost and net realizable
value.
Net Realizable Value
Estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.
 Cost of inventories may not be recoverable, under the circumstances
o Inventories are damaged
o Inventories have become wholly and partially obsolete (no longer in use)
o Selling price have declined
o Estimated cost of completion / estimated cost of disposal has increased
In writing inventories down below cost to net realizable value is consistent that assets
shall not be carried in excess of amounts expected to be realized from their sale or use.
Determination of net realizable value
 Inventories are write down to net realizable value on an item by item of
individual basis (kase it is not appropriate to write down an inventories based on a
classification) it is appropriate to group similar or related items.
 This relates to a same profuct line item that have similar purposes, are produced and
marketed in the same geographical area and cannot be practically evaluated separately.
Accounting for inventory writedown
 If cost is lower than net realizable value no accounting problem because the inventory is
measured at cost and the increase in value is not recognized
 If the net realizable value is lower than cost inventory is measured at net realizable
value and decrease in value is recognized.
Methods of Accounting for the inventory writedown
a. Direct method or cost of goods sold method
Inventory is recorded at the lower of cost or net realizable value.
(Any loss on inventory writedown or gain on reversal of inventory writedown is not
accounted separately but buried in the COGS.)
b. Allowance method or loss method
Inventory is recorded at cost and any loss on inventory writedown is accounted for
separately.
(A loss account / loss on inventory writedoen is debited and valuation account or
allowance for inventory writedown is credited.)
*Write-down: the reduction in the book value of an asset when the asset's fair market value
(FMV) has dropped below the carrying book value*