FINANCIAL

ACCOUNTING 1

HARLEY DAVE I. PUNZALAN

BRANCHES OF ACCOUNTING:
 Financial Accounting- needs of external users. It is concerned with the
recognition, measurement and communication of economic resources,
economic obligations & changes in economic resources & economic
obligations.
 Management Accounting- needs of internal users
 Cost Accounting- measurement and recognition of cost of services provided
or products manufactured
 Tax Accounting- computation of taxes and preparation of tax returns
submitted to taxing authority.
 Government Accounting- encompasses the process of analyzing, classifying,
summarizing and communicating all transactions involving the receipt and
disposition of government funds and property.
BOOKKEEPING VS. AUDITING
 Bookkeeping- refers only to one phase of
accounting, the recording phase.

 Auditing- is an independent examination of the

financial statements conducted by Certified
Public Accountant for the purpose of rendering
opinion as to the fairness of the presentation of
the financial statements.
 economic resources controlled by the entity as a result of past
events. Such economic resource is a right that has the potential
to produce economic benefits embodied in any of the following
ways (a) used singly or with other assets in the production of
revenues; (b) used to acquire other assets or settle a liability, or
distribute to the enterprise owners.
 The nature of an asset is a factor that determines which
accounting standard is applicable to its recognition and
measurement. One such nature is the group of financial assets
that are evidenced by financial instruments.
Financial Instrument
 is any contract that gives rise to a financial asset of one entity (par. 11,
IAS 32). Therefore, from the point of view of the holder, the
instrument is a financial asset; while from the point of view of the
issuer, the same instrument is a financial liability or a component of
shareholders’ equity.
 It encompasses a financial asset, financial liability and equity
instrument.
 Characteristics of financial instrument:
1. There must be a contract
2. There are at least 2 parties to the contract
3. The contract shall give rise to a financial asset of one party and
financial liability or equity instrument of another party
Examples of Financial Instrument:
Cash in the form of notes and coins
Cash in the form of checks
Cash in Bank
Trade accounts
Notes and loans
Debt securities
Equity securities
Financial Asset
Any asset that is:
a. Cash
b. A contractual right to receive cash or another financial asset from another entity
c. A contractual right to exchange financial instruments with another entity under conditions that are
potentially favorable. An example is an option to purchase shares of another entity at less than market
price.
d. An equity instrument of another entity

Financial Liability
Any liability that is a contractual obligation:
a. To deliver cash or other financial asset to another entity
b. To exchange financial instruments with another entity under conditions that are potentially unfavorable.
 IN G
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IA LA
NC
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HARLEY DAVE I. PUNZALAN

CASH AND CASH EQUIVALENT
1. CASH ON HAND
 Undeposited collections including customers’ check
 Undelivered checks and delivered past dated checks (PDC)
 Travelers' check
 Manager’s checks- drawn by the bank’s manager in the name of the bank
 Bank drafts-written order to pay to the order of the maker.
 Postal money orders- instrument issued by government through post office.
 Does not include customers’ PDC, stale checks and other technically
defective checks.
2. CASH IN BANK
-Savings Account- interest bearing
-Demand deposit or Current / Checking – non-interest
bearing

3. Cash Funds used in normal operations

- such as Petty Cash Fund (PCF), Dividend Fund,
Tax Fund, Interest Fund, Payroll Fund and Travel
Fund.
CASH EQUIVALENT
 These highly liquid financial instruments that are so near their maturity and that
there is insignificant risk of charge in value due to fluctuation of interest rates.
 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. (IAS 7).
 Short term commitments rather than investment purposes
 3 months or less from date of acquisition
 Equity cannot qualify unless cash equivalents in substance
 Examples are:
-Time deposit
-Money market placement or commercial paper
-Treasury bills and treasury bonds
-Redeemable preference shares (debt instrument in substance)
 Regardless of management’s policy, the determination of the maturity
date starts from the date of the acquisition f the instrument and not
from the indicated on the face of the instrument. For example, a
company may adopt the policy to treat as cash equivalents debt
instruments with maturity of not more than 90 days from the date of
acquisition. For this company, treasury bills purchased on December
15, 2018 and maturing on or before March 15, 2019 qualify to be
reported as cash equivalents in the company’s December 31, 2018
statement of financial position. On the other hands, treasury bills
purchased on July 15, 2018 and maturing on January 15, 2019 would
not qualify as cash position, even if they are maturing in only 15 days
from reporting date, because the instruments have a remaining term of
6 months from the date of acquisition.
MEASUREMENT
• On the statement of financial position, Cash is
generally measured at face value, which is its fair
value. Demand deposits denominated in foreign
currency are measured using the exchange rate in
effect at the end of the reporting period.
• Foreign Currency at spot exchange rate
• Closed Bank- at lower of estimate realizable value
or face amount
• Customers; post-dated checks, NSF checks (no sufficient
fund checks are those that cannot be covered by funds in the
debtor’s bank account), and IOUs (“I owe you” notes)
should be reported as receivables rather than cash. NSF
checks, in the Philippines, are oftentimes described as DAIF
checks or DAUD checks. DAIF means “drawn against
insufficient funds,” while DAUD literally means “drawn
against unclear deposits.”
• Postage stamps and expense advances, such as advances for
employees’ travel, are not cash, but are reported as prepaid
expenses.
 A bank overdraft that cannot be offset against another
account is reported as a liability. A bank overdraft
occurs when a depositor has written checks for a sum
greater than the amount in the depositor’s bank
account, resulting in a credit balance in that cash
account. A bank overdraft may be offset against a
positive balance in another bank account with the same
bank if a right of offset exists between the bank and the
depositor. In such a case, the depositor reports the net
positive amount as “Cash”.
 Undelivered or unreleased checks are the company’s checks drawn and
recorded as disbursed but are not actually issued or delivered to the payees as of
the reporting date. Technically, checks drawn by a company should not be
deducted from the company’s cash balance until they have been mailed or
otherwise delivered. Therefore, these checks should be reverted to the cash
balance. As a result, liabilities that the checks are intended to liquidate still
exists= and should be reported as current payables.
 Company’s postdated check, which has been recorded as issued and delivered
to payee before or at the end of the reporting period should be reverted to cash
and the corresponding liability shall continue to be recognized, because there is
no actual payment yet, as of that date. Such a check cannot possibly clear with
the bank until the date indicated in the check.
 Compensating balances are minimum amounts that a company agrees
to maintain in a bank checking account as support or collateral for a
loan by the depositor.
When the compensating balance is not legally restricted as to
withdrawal by the depositor and the loan for which it is used as a collateral
is a short-term loan, the amount is reported as part of Cash. The nature of
the arrangement is disclosed in the notes to financial statements.
 A compensating balance that is legally restricted should be
classified separately either as current asset or non-current asset
depending on the nature of the loan for which the compensating
balance is set up
 Cash set aside for long-term specific purpose or for acquisition of a
non-current asset, such as bond sinking fund and plant expansion fund,
is reported as non-current financial asset.
Stale check or check long outstanding
Cash in Bank
 Foreign – Cash unless restricted as to withdrawal and exchange rate
 Closed- non current asset if measured below face amount
 Overdraft (negative balance)- current liability (not offset to cash)
unless: immaterial, more than one account in a single bank or integral part of
management
 Compensating (minimum) balance
-if legally restricted, not cash
-if illegally restricted, part of cash
CASH FUND
 Set aside for a specific purpose
1. Used in normal operations- part of cash
2. Not used in normal operations- not part of cash
-Bond sinking fund (parallels the related liability)
-Preference share redemption fund (parallels the related liab.)
-Pension Fund (parallels the related liab.)
-Plant Expansion Fund (always non current asset)
-Contingency fund (usually non current asset)
SUMMARY:
WINDOW DRESSING
 It is a practice of opening the books of accounts beyond the
close of the reporting period for the purpose of showing a
better financial position and performance. It is accomplished
as follows:
1. By recording as of the last day of the reporting period
collections made subsequent to the close of the period.
2. By recording as of the last day of the reporting period
payments of accounts made subsequent to the close of the
period.
LAPPING
 Itconsists of misappropriating a
collection from one customer and
concealing this defalcation by
applying a subsequent collection made
from another customer. It involves
postponement of the entries for the
collection of receivables.
KITING
 It is possible when an entity maintains
current accounts in different banks.
Kiting is usually employed at the end of
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
CASH MANAGEMENT
 Segregation of duties for handling cash and recording cash
transactions. No one person should be on complete control of a
transaction. The employee handling cash receipts should not have
access to the accounting records for cash. This prevents simultaneous
misappropriation and manipulation of accounting records to cover up
stolen cash.
 Imprest system, which is characterized by daily deposit of all cash
receipts intact to the bank and making disbursements through issuance
of checks. This system prevents the presence of significant amount of
cash balance within the business vicinity. Expenditures involving
small amounts, on the other hand, are made from petty cash fund.
 Voucher system, which is a system to control cash
disbursements. Under the voucher system, all
disbursements must be supported by properly approved
vouchers, which must be recorded in the voucher register.
Actual payments are recorded in the check register.
 Internal affairs at irregular intervals. Cash counts
conducted by the internal control department are made
without advance notice to the cash custodian, such that the
cash custodian is always conscious of his accountability,
keeping the cash on hand intact. A cash count involves test
checking of transactions and record-keeping, which
prevents connivance among employees and manipulation of
cash records.
 Periodic reconciliation of bank statement balance and
cash balance in the company’s accounting records.
Regular reconciliation of bank balance and book balance for
cash uncovers immediately any error or irregularities in
recording cash transactions. Any error or irregularity is,
therefore, immediately rectified.
 These measures may not totally eliminate the possibilities
of misappropriation or errors but can significantly reduce
the chances of theft, loss, or inadvertent errors in the
management of cash.
EXERCISES:
PROBLEM 1
PROBLEM 1
PROBLEM 2
PROBLEM 2
PROBLEM 3
PROBLEM 3
PROBLEM 4
PROBLEM 4
ACCOUNTING FOR
PETTY CASH FUND

HARLEY DAVE I.
PETTY CASH FUND
Methods of handling petty cash:
 1. Imprest fund system-all cash
receipts should be deposited intact
and all cash disbursements should be
made by means of check.
 2. Fluctuating fund system- checks
drawn to replenish the fund do not
necessarily equal the petty cash
disbursements
PETTY CASH VOUCHER
ILLUSTRATION:
Imprest Fluctuating
IMPREST FUND

FLUCTUATING
FUND
ACCOUNTABILITY VS.
ACCOUNTED
CASH SHORT AND OVER
HOW DO WE JOURNALIZE CASH
SHORTAGE?
HOW DO WE JOURNALIZE CASH
OVERAGE?
SUMMARY
HARLEY DAVE I.
Three kinds of bank deposits:

1. Demand deposit- non-interest

bearing
2. Savings deposit-interest
bearing
3. Time deposit-interest bearing
WHAT IS BANK RECONCILIATION?

It is 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.
 BANK STATEMENT

• Beginning-of-month cash balance,

• total deposits made by the depositor and
other bank credit during the month,
• total checks paid by the bank and other
bank charges during the month, and
• end-of-month cash balance.
BANK RECONCILING ITEMS:
 1. Deposit in transit or undeposited collection. This is a cash receipt that has been
added to the company’s cash balance but has not been added to the balance reported on
the bank statement, either because it is not yet received by the bank as of cut-off time
(deposit in transit) or it has not yet been deposited as of the end of the month
(undeposited collection). The amount of the deposit in transit or undeposited collection
can be determined by comparing the receipts as reflected in the company’s accounting
records with the deposits as reflected in the bank statement. The amounts reflected in
the accounting records but not in the bank statement are totaled as either deposits in
transit or undeposited collections. These are usually the receipts towards the end of the
month. Deposits in transit or undeposited collections understate the bank balance.
 In order to correct this understatement, the collections awaiting deposit or are in transit
should be added to the bank balance in arriving the correct cash balance.
 2. Outstanding checks. These are checks that were written by the company, issued to
the payees, and deducted from the company’s cash balance but they have not yet been
reflected in the bank statement since that they have not been presented yet to the bank
for payment. The amount of the outstanding checks is determined by comparing the
checks written during the month as reflected in the company’s check register or cash
disbursements journal with the cancelled checks included in the bank statement. The
amounts of the checks issued (as reflected in the check register or cash disbursement
journal) but have not been presented for payment (as reported in the bank statement) are
the totaled and referred to as outstanding checks. Outstanding checks at month-end
result in an overstatement of the bank balance.
 In order to correct the overstatement, the amount of the outstanding checks should be
deducted from the bank balance.
 BOOK RECONCILING ITEMS
 1. Debit memos. Debit memos are charges of the depositor’s account made directly by the bank. Typical
examples of debit memos are: No sufficient fund (NSF) checks (otherwise known as DAIF or DAUD) that
were previously credited by the bank as deposits, technically defective checks (e.g., checks that lack authorized
signatures, checks with alterations), bank service charge, charge for the cost of check booklets and payment of
bank loans.
 NSF, DAIF and DAUD are terms used for a customer’s check that has been deposited in a company’s bank
account but has not been paid by the customer’s bank because there is insufficient fund in the customer’s bank
account. Ideally, the bank should immediately inform the company of each NSF check to enable the latter to
update its accounting records. In such a situation, the balances per books and per bank statement are in
agreement, thereby requiring no adjustment. However, there may be some NSF checks included in the bank
statement that have not been recorded by the company. Thus, the balance per books is apparently overstated.
 2. Credit memos. These are deposits made directly by the bank to the company’s account. Typical
examples of credit memos are: notes or drafts collected by bank in favor of the depositor, proceeds of bank
loan credited directly to the account of the depositor, and interest earned on the company’s checking account.
 A bank often acts as a collecting agent for its depositors on items such as notes receivable. When a note is
collected, the bank records the principal and interest as an increase in the depositor’s bank account.
Generally, the bank immediately informs the company of the deposit to enable the depositor to update its
records. Otherwise, the cash balance per books does not reflect this collection of notes receivable.
 Many checking accounts nowadays earn interest. The company, however, does not typically know the
amount of interest earned by them, until it receives the bank statement. The interest on this checking account
is directly credited by the bank to the depositor’s account.
 These credits made by the bank increased the bank statement balance and, therefore, should be added to the
cash balance per books in order to obtain the correct cash balance.
ERRORS
 Despite the internal control procedures
established by the bank and the company,
errors may still arise in either the bank’s
records or the company’s records. These errors
may not be detected until the bank
reconciliation is prepared. Errors are
reconciling items of the party which
committed them.
ERRORS
 For example, the bank may include in the bank statement a charge
for a check written by another company (say, the company’s
name is ABC Corporation, but a check written by ABC Trading
was erroneously charged to ABC Corporation’s account). Since
the bank erroneously deducted the amount of ABC Trading’s
check from the account of ABC Corporation, in the bank
reconciliation for ABC Corporation, this ABC Trading’s check
should be credited or added back to the bank statement balance in
order to obtain the correct cash balance.
 In another situation, the company may have recorded a customer’s check for
P24,500 whereas the correct amount is P25,400. a customer’s check
represents a collection; therefore, the error resulted in an understatement of
cash balance per books for the difference of P900. in order to arrive at the
correct cash balance, the amount of P900 is added to the cash balance per
books.
 The amount of the error, or the discrepancy caused by the error is, therefore,
either added to or deducted from the balance of the party that committed the
error (either bank or books), depending on whether said balance is overstated
or understated as a result of the error.
DEPOSIT IN TRANSIT
OUTSTANDING CHECKS
Types of bank reconciliation statement:

1. Reconciliation of ending balances, where the balance

per bank and the balance per company’s records are
reconciled as of the end of a period. This is otherwise
known as single-date bank reconciliation.
2. Reconciliation of beginning cash balances, of
receipts and disbursements during the period and of
ending cash balances. This is more popularly known as
proof of cash, or four-column reconciliation, or
reconciliation of receipts, disbursements and bank
balances.
FORMS OF BANK RECONCILIATION
STATEMENT:
 1. Both bank and book balances are reconciled to a correct balance. “Adjusted balance
method” This form is prepared in two sections: the bank statement balance being adjusted to
the correct cash balance in the first section, and the book balance being adjusted to the same
corrected cash balance in the second section. The first section (bank section) reflects items not
yet recognized by the bank (e.g. deposits in transit or outstanding checks) as well as corrections
for any errors made by the bank.
 The second section (book section) contain items that the depositor has not yet recognized (e.g.
debit and credit memos by bank for direct deposits, NSF, bank service charges, notes and drafts
collected by bank in behalf of the depositor and repayment of loans) and any corrections for
errors made on the depositor’s books.
 2. Bank balance reconciled with book balance. This form reconciles the bank balance to
the unadjusted balance of the depositor’s cash account in the general ledger. This is the form
frequently used by many auditors to trace the accounting entries taken up by the company’s
bookkeeper.
 3. Book balance reconciled with bank balance. This form starts with the cash balance per
ledger and reconciled to the balance per bank statement.
1. Bank and book balances reconciled to a correct cash balance
(Adjusted Balance Method):
2. Bank balance reconciled with book
balance:
3. Book balance reconciled with bank
balance:
Adjusting Entries:
PROOF
OF CASH
Proof of cash is a “two-date” bank reconciliation
because it literally involves two dates. It is an
expanded reconciliation in that it includes proof of
cash receipts and disbursements. This approach
maybe useful in discovering possible discrepancies in
handling cash particularly when cash receipts have
been recorded but have not been deposited.
Book Balance & Bank Balance