“The recognition of financial statement

Intermediate elements depends on the attributed of

relevance and faithful representation.”
Accounting 1
“An entity shall recognize a financial asset
Chapter 1 – Cash and Cash Equivalents in its statement of financial position when
(Part 1) and only when the entity becomes a party
to the contractual provisions of the
Assets
instrument.”
Assets are economic resources controlled
 The entity has the enforceable right
by the entity as a result of past events
to the inflow of economic benefits
 Economic resource – a right that has from the instrument, as this inflow is
the potential to produce economic embodied in the agreement with the
benefits embodies in any of the other entity.
following ways.
a) Used singly or with
other assets in the
production of revenues Cash
b) Used to acquire other An item is considered “Cash” if it is
assets, or a liability, or acceptable by bank or other financial
distribute to the institutions for deposit at face value
enterprise owners
Examples:
Financial Assets
 Bills
A group of assets evidenced by financial
 Coins
instruments are called financial assets
 Demand credit instrument
 Financial Instrument – any contract
that gives rise to a financial asset of  Examples: checks, bank drafts,
one entity and a financial liability or postal money orders, and
equity instrument of another entity currency demand deposits
with banks
 Financial Asset – arises from a
contract entitles the holder to To qualify as cash:
receive cash or another financial
asset  Must be unrestricted

Examples of Financial Asset  Must be immediately available for

use in current operations
 Cash and Cash Equivalents
 Payment for operating
 Investments in equity instruments of expense
other entities (stocks)
 Payment for current liabilities
 Contractual rights to receive from
another entity cash or another  Payment for acquisition of
financial asset (trade receivables, current assets
loans and other receivables) The account title “CASH” includes:
 Investment in debt instruments of  Cash on Hand
another entity classified by the latter
entity as a financial liabilities  Working funds (Petty Cash Fund)
(investment in bonds and
 Cash in Bank
commercial papers)
Measurement of Cash
 Derivatives
Recognition of Financial Assets
Cash is generally measures at face value, checking account as a company
which is its amortized cost and fair value at agrees to maintain in a bank
the same time checking account as a support or
collateral for a loan by the depositor
Cash deposits denominated in foreign
currency are measured at the exchange  If not legally restricted and
rate in effect at the end of the reporting the loan is a short-term loan,
period then it should be reported as
cash
Cash Equivalents
 If legally restricted, depending
Cash equivalents are short-term, highly
on the nature loan should be
liquid investment assets that are readily
reported as either current or
convertible into a known cash amount or
non-current asset
sufficiently close to their maturity date
(usually within 90 days) so that the market 9. Cash set aside for long-term specific
is not sensitive to interest rate changes purpose or for acquisition of a non-
current asset should be reported a
Examples: Short-term trust funds in banks
non-current asset
and Philippine treasury bills
Cash Management
The determination of the maturity date
starts from the “date of acquisition” of the Cash should be maintained sufficiently but
instrument and not from the date indicated not excessively
on the face of the instrument
The purpose of cash internal controls is to
Presentation: avoid theft and misappropriations
“Although Cash Equivalents are not cash, System of Cash Control:
they are generally presented in the
1. Segregation of duties for handling
Statement of Financial Position together
cash and recording cash transactions
with cash using the account title “Cash and
Cash Equivalents.” 2. Imprest system. Daily cash receipts
should be deposited and cash
1. Cash in foreign currency should be
disbursements should be made
translated to Philippine currency
through issuance of checks
2. Cash in closed banks or bankrupt
3. Voucher system. All disbursements
banks should be classified as
must be supported by properly
receivable and should be written
approved vouchers
down to its recoverable amount
4. Internal audits at irregular intervals
3. Customer’s post-dated checks, NSF
checks and IOUs should be reported 5. Periodic reconciliation of bank
as receivables statement balance and cash balance
in the company’s accounting records
4. Postage stamps and expense
advances are prepaid expenses
5. A bank overdraft is a liability (w/ Petty Cash Fund
exception)
Under the Imprest system of cash control,
6. Undelivered or unreleased checks where all cash receipts are deposited intact
should be reverted back to the cash and all cash payments should be made by
balance means of checks, an enterprise considers it
inconvenient and impractical to write
7. Company’s postdated checks should
checks for small items, thus, expenditures
be reverted back to cash
involving small amounts are made from the
8. Compensating balances petty cash fund.
Minimum amount that a company
agrees to maintain in a bank
  Petty Cash – is a small amount of
cash maintained in a fund to pay
Cash Shortage
minor and immediate expense
 Petty Cash Voucher Year-end journal entry:
Expenses (various) xxx
Petty Cash Fund Journal Entries Cash Short or Over xxx
Petty Cash Fund xxx
Establishment of Petty To document cash shortage, a petty cash
Cash Fund voucher will be issued.
Petty Cash Fund xxx
Cash in Bank xxx Cash Overage

Cash disbursement from Year-end journal entry:

petty cash Expenses (various) xxx
No Entry Petty Cash Fund xxx

Petty Cash reimbursement Cash Short or Over xxx

Expenses (various) xxx Miscellaneous Income xxx
Cash in Bank xxx The cash overage is deposited in the bank
account of the company. The company will
Year-end adjusting entry: issue an official receipt afterwards to
(reversed at the beginning document the cash overage.
of the next period)
Disclosure Relating to Cash and Cash
Expenses (various) xxx
Equivalents
Petty Cash Fund xxx
IAS 1 requires, “Cash and Cash Equivalents”
When Petty Cash Fund (either combined or separate account titles)
Balance is increased: as a separate line presentation on the face
Petty Cash Fund xxx of the statement of financial position.
Cash in Bank xxx
The entity shall disclose its policy in
When Petty Cash Fund determining which financial instruments
Balance is decreased: shall qualify to be reported as cash
Cash in Bank xxx equivalents
Petty Cash Fund xxx
Chapter 1 – Cash and Cash Equivalents
(Part 2)
Cash Short and Over
Bank Reconciliation; Proof of Cash
Cash Short and Over is a nominal account
that is debited for shortages and credit for Bank Reconciliation
overages Regular reconciliation of bank balance and
Causes: failure to obtain receipts, errors, book balance for cash uncovers
lost or stolen immediately any error or irregularities in
recording cash transactions. Any error or
At the end of the period: irregularity is, therefore, immediately
 Debit Balance of Cash short and over rectified.
account is reported as a cash Reconciling items are caused by time-lapse
Miscellaneous Expenses differences and possible errors.
 Credit Balance of Cash short and Depositor uses “Cash in Bank” (Debit
over account is reported as a normal balance)
Miscellaneous Revenue
The Bank uses a Liability account (Credit
 If Cash shortage is recoverable to normal balance)
employee, it is charged to receivable
amount Types of Bank Reconciliation
1. Single-date bank reconciliation
 2. Proof or cash or four-column
reconciliation
Book Reconciling Items
Forms of Bank Reconciliation
Debit Memos
Statement
- Book Balance
a. Both bank and book balances are
reconciled to a correct balance These are charges to the depositor’s
(mostly used) account made directly by the bank
b. Bank balance reconciled with book Example: NSF checks (No sufficient funds /
balance DAIF or DAUD checks)
c. Book balance reconciled with bank Defective checks
balance
Bank service charge
Payment for bank loans
Bank Statement
Other charges
A monthly report provided by the bank to
the depositor which shows the following:
a. Beginning-of-month cash balance
b. Total deposits made by the depositor
c. Total checks paid by the bank Credit Memos

d. Other bank credits during the month + Book balance

e. Other bank charges during the These are deposits made directly by the
month bank to the company’s account

f. End-of-month cash balance Examples:

Bank Reconciling Items Notes or drafts collected by the bank

Deposit in transit or undeposited collection Proceeds of Bank Loan

+ Bank balance Interest earned

This is a cash receipt that has been added Balance per xx Bal. per bank xx
to the company’s cash balance but has not books, end. statement,
been added to the balance reported on the end.
Add: Credit xx Add: Deposits xx
bank statement, either because it has not
memos (CM) in transit (DIT)
yet been received by the bank as of cut-off
Less: Debit (x Less: (x
(deposit in transit) or it has not yet been
memos (DM) x) Outstanding x)
deposited as of the end of the month checks (OC)
(undeposited collection). Add/Less: Book xx Add/Less: Bank xx
Outstanding Check errors errors
Adjusted xx Adjusted xx
- Bank Balance balance balance
Adjusted book balance should be equal to
These are checks that were written by the adjusted bank balance after bank
company, issued to the payees, and reconciliation
deducted from the company’s cash but
they have not yet been reflected in the Proof of Cash
bank statement since they have not been
Proof of cash is a more detailed bank
presented yet to the bank for payment
reconciliation
Outstanding checks = checks written
A proof of cash reconciles the beginning
during the month less cancelled checks
and ending balances of cash for the month
indicated in the bank statement
and the recorded receipts and
disbursements made by the bank and the companies, customers, or
depositor company other outside parties;
Proof of Cash – Per books  Legitimate claims against
suppliers and insurance
Concealment of cash shortages
companies; and
Lapping – occurs when collection of
 Other claims arising from
receivable from one customer is
nonrecurring transactions such
misappropriated and then concealed by
as calls for subscription
applying a subsequent collection from
receivables disposal of
another customer
property
Kitting occurs when cash shortage is
Classification of Receivables
concealed by overstating the balance of
cash by exploiting the float period.  Trade Receivables arise from
selling goods or services in the
(The time it takes for a check to clear at the
ordinary course of business
bank where it was drawn)
Should include only charges for
Window Dressing – a form of fraudulent
actual sales completed (when there
financial reporting and not primarily a
has already been actual or
method of concealing cash shortage. It
constructive delivery of goods or
occurs when books are not closed at year-
performance or services) on or
end and transactions in the subsequent
before the end of the reporting
period are deliberately recorded in the
period
current period in order to improve the
entity’s financial performance or financial Trade receivables on open accounts
ratios. and are not evidenced by promissory
notes or time drafts are called
Accounts Receivables
 Non-trade Receivables arise from
sources other than from the sale of
goods or services in the ordinary
course of business
Examples of Non-Trade Receivables
a. Loans to officers and employees
Chapter 2 – Receivables Part 1 b. Advances to affiliates
c. Accrued interest and dividends
Examples of Receivables d. Deposits to guarantee performance
or payment or to cover possible
1. Amounts collectible from customers damages or losses
and others, most frequently arising e. Subscriptions for the entity’s equity
from merchandise sales, claims for securities
money lent, or the performance of f. Claims for losses and damages
services. They may be on open g. Claims for tax refunds or rebates
accounts or evidenced by time drafts h. Claims against common carriers for
or promissory notes. damaged or lost goods
2. Accrued revenues, such as accrued
interest, commissions, rental, and
others.
3. Other items, such as: Trade Receivables
 Loans
Trade Receivables in the Statement of
 Advances to officers, Financial Position
employees, affiliated
Trade receivables are generally classified gross sales price. When the discount
as current assets because they are is taken, sales discount is debited
collectible within the entity’s normal
operating cycle  Gross method is the simplest and
most widely used method but it lacks
 The normal operating cycle is the conceptual validity. It may not
period an entity converts cash into faithfully represent the amount of
inventories through purchase and sales reported in the statement of
production, inventories into comprehensive income.
receivables through sale, and Year-end adjustment is
receivables back into cash or cash required
equivalents through collection Sales Discount xx
 Exception: where the normal x
operating cycle of the business Allowance for Sales X
extends beyond 12 months (e.g. Discount xx
appliance stores), these receivables Cash Discounts: Net Price Method
will still be classified under current  Under the Net Price method, BOTH
assets with disclosures on the the accounts receivable and the
amount or estimate of how much is sales are recorded at the sales price
beyond 12 months. less the available cash discount (the
Initial Recognition net price).

Trade receivables are initially measured at  Year-end adjustment is required

the transaction price
Accounts Receivable xxx
 Transaction price – the amount an Sales Discounts Forfeited xxx
entity expects to be entitled to in “The net method is theoretically superior to
exchange for the transfer of goods the gross method because it initially
and services (par. 47, IFRS 15) recognizes the accounts receivable at their
amortized cost. This method recognizes the
Accounting for Accounts Receivables accounts receivable at their amortized cost.
Types of Discounts This method strictly adheres to IFRS 15,
which requires an entity to estimate the
1. Trade Discounts (Volume or Quantity variable considerations resulting-from
discounts) discounts, rebates, refunds, credits, price
concessions, incentives, penalties, or other
 Are means of converting a similar items to minimize reversal of
catalog list price to the prices revenue in the future when uncertainty has
actually charged to the buyer been resolved.”
 Not recognized in financial *Sales Discounts Forfeited is reported as
accounting “Other Operating Income (or Finance
 Expressed as: 10%, 10% and Income) in the profit or loss section of the
5% statement of comprehensive income.

2. Cash discounts (Sales discounts) Cash Discounts: Allowance method

 Are reductions from the sales  Under the Allowance method, an

price as an inducement for entity records the accounts
prompt payment of an receivable at the gross sales price,
account the sales revenue at the net amount,
and the available cash discount using
 Expressed as: 2/10, n/30 “2% the valuation account, Allowance
discount is granted if account for Sales Discounts.
is paid within 10 days from the
invoice date, gross amount is  Year-end adjustment is required
due in 30 days”
Allowance for Sales Discounts xxx
Cash Discounts: Gross Price Method Sales Discounts Forfeited xxx
*Allowance for Sales Discounts is a contra-
 Both the accounts receivable and asset account, it reduced the Accounts
sales are initially recorded at the Receivable to its amortized cost
Credit Card Sales  A note or draft that provides
for the payment of interest for
 Credit card sales involving a national the period between the
credit card company result in issuance date and the due
accounts receivable in the name of date
the card-issuing company. Credit card
fees, typically ranging from 1% to 5%  On the date of receipt of the
of net credit card sales, reduce the note:
value of the accounts receivable. The
account Credit Card Service  Fair value = Face value
Charge would be reported as an  Face value = Present
operating expense in profit or loss. value
 There are some credit card 2. Non-interest-bearing note (zero-
companies that allow the retailer to interest bearing note)
deposit credit card drafts / receipts
directly to a current account. These  When a note makes no
transactions are recorded as Cash provision for interest
Sales
 The promissory note is simply
Accounting for Notes Receivables written in a form where the
face value already includes an
Notes Receivable imputed interest for the term
Formal claim against another that is of the note
evidenced by a written promise, called a Non-interest-bearing note
promissory note, or a written order, called a
time draft, to pay at a later date  If non-interest-bearing note is
exchanged solely for cash:
 Usually arises from sale involving
high peso amounts where the buyer Present value* = cash proceed
wants to extend payment period exchanged
beyond usual credit period
(*Present value is also the amortized
cost of the note on the date it is
received)
Type of Notes
 If non-interest-bearing note is
 Interest-bearing note exchanged for property, goods, or
 Non-interest-bearing note services:

Initial Recognition The note is recorded to the Fair value

of the goods or services received
Notes receivable are initially recognized at
the transaction price based on the  If both the fair value is not
circumstance that gives rise to the receipt determinable:
of the note Present value is determined using an
The transaction price is: imputed rate

a. The amount of cash given up in

exchange for the note; or
b. The fair value of the non-cash Non-Interest-Bearing Note:
consideration given up in exchange
for the note, or if such fair value Present value is determined using an
cannot be practically determined, the imputed rate
fair value of the note received, which
 If the interest rate is significantly
is the discounted cash flow of future
different from prevailing interest for
collections, based on an implicit
similar notes (face value of the note
interest rate.
is significantly different from Market
Types of Notes value)

1. Interest-bearing notes  Amortized cost = present

value of the principal and
 interest “discounted at the the unamortized discount using the
imputed rate” effective interest method, and minus
any reduction (directly or through the
 Imputed rate – market rate of
interest of similar instruments use of an allowance account) for
impairment or uncollectibility.
 Difference of the face amount of the
note and its present value is Impairment of Receivables
recorded as Discount or Premium
Two methods of uncollectible amounts:
If Face value > Present value;
 Direct write-off method
Discount on Notes Receivable
If Present value > Face value;  Allowance method
Premium on Notes Receivable Direct Write-off Method
 The discount or premium is Entry recognize impairment:
amortized to interest
revenue over the term of the Bad debts expense (or xx
using the Effective Interest uncollectible accounts expense x
Method or Impairment loss)
Accounts Receivable (or notes xx
Chapter 2 – Receivables (Part 2)
receivable) x
Other Concepts Entry when previously impaired receivable
is recovered:
Loans Receivables
Accounts Receivable xx
Loans receivable are similar to notes x
receivable. It is more appropriately used by Bad debts recovery (or xx
entities whose main operations involve recovery of previous impairment x
lending or money. of receivable)
 E.g. Banks, financing companies,
lending companies, insurance Cash xx
companies, pawnshops and the like x
Accounts Receivable xx
Accounting of Loans Receivables: x
 Similar to Notes Receivable, EXCEPT
that loan transactions usually involve Allowance Method
transaction costs
To recognize impairment:
 Receivables are initially recognized
at fair value plus transaction costs Bad debts expense (or xx
impairment loss) x
 Direct origination costs are Allowance for bad debts xx
added to the carrying amount x
of a loan receivable. Indirect To write-off the receivable:
origination costs are expensed
when incurred Allowance for bad debts xx
x
 Origination fees are deducted Accounts receivable xx
from the carrying amount of a x
loan receivable To recover account previously written-off:

Subsequent Measurement of Accounts receivable xx

Receivables x
Allowance for bad debts xx
Notes and Accounts Receivables are Reinstatement of an account x
subsequently measured at amortized cost recovered
 Amortized cost – the principal
amount plus accrued interest and Cash xx
any unamortized premium and minus x
 Accounts Receivable xx Loss allowance – allowance for expected
x credit losses on financial assets that are
within the scope of the impairment
requirements of PFRS 9
Impairment of Receivables:
Expected credit losses – is the weighted
Expected credit loss
average of credit losses with the respective
“Under Expected Credit Loss model, an risks of a default occurring as the weights
entity will always estimate expected credit
Credit loss – is the difference between all
losses using a multi-factor and holistic
contractual cash flows that are due to an
analysis of credit risk that considers not
entity in accordance with the contract and
only past events but also forward-looking
all the cash flows that the entity expects to
information on current conditions and
receive (i.e., all cash shortfalls), discounted
forecasts future economic conditions”
at the original effective interest rate (or
credit-adjusted effective interest rate for
purchased or originated credit-impaired
financial assets).
12-month expected credit losses –
portion of lifetime expected losses that
represent the expected credit losses that
Expected Credit Loss Model result from default events on a financial
instrument that are possible within the 12
Type of Approach
Asset/Exposure months after the reporting date
1. Trade Simplified approach Credit risk – risk that one party to a
receivables, financial instrument will cause a financial
contract assets and loss for the other party by failing to
lease receivables
discharge an obligation
2. Originated or Changes in lifetime
purchased credit- expected credit Lifetime expected credit losses –
impaired financial losses approach expected credit losses that result from all
assets possible default events over the expected
3. Other General approach life of a financial instrument
assets/exposures (i.e., ‘three-stage’
or ‘three-bucket’
approach)
Events that indicate that a financial
asset is credit impaired:
Simplified Approach
 Significant financial difficulty if the
An entity shall always measure the loss borrower
allowance at amount equal to lifetime
expected credit losses for its trade  A breach of contract, such as default
receivables or contract assets that do not or delinquency
contain a significant financing component  Grant by the holder (the entity
Examples: Provision matrix and Single loss holding the financial asset) of
rate concession to the issuer that the
former would not otherwise grant
General Approach under normal circumstances
It requires an entity to recognize expected  the probability that the borrower will
credit losses at all times and to update its enter bankruptcy proceedings or
estimate of expected credit losses at each financial reorganization; and
reporting date to reflect the changes in the
credit risk of financial instrumentals  the disappearance of an active
market for securities that were
Definition of Terms previously traded
Receivable Financing
Companies requiring cash to finance their debtors will remit assignor/borrower.
operating needs may find it necessary or payments to the Assignments are
desirable to accelerate cash inflows from assignee/lender more commonly
receivables by selling them or using them made on a non-
as collateral for a loan arrangements notification basis

I. Secured Borrowing
a. Pledging Discounting of Notes Receivable
b. Assignment
c. Discounting of notes  By discounting a note receivable, an
receivable with recourse entity is endorsing a promissory note
II. Sale of Receivables to a bank or financing company, the
a. Discounting of notes latter advancing the maturity value
receivable without recourse of the note less a charge called
b. Factoring discount

 Discounting of notes receivable with

recourse – the endorsing company
still has a continuing involvement on
the discounted note, the transaction
does not qualify for derecognition of
receivable

 Discounting of notes receivable

without recourse – the endorser is
relieved of the responsibility for the
note that is dishonored on maturity.
The discounting is, therefore treated
as a sale and the note would qualify
for derecognition.

Pledging Factoring
 Pledging refers to the use of
receivables as collateral for a loan Factoring is the transfer of receivables
 No special accounting problem without recourse, and is there, an outright
 Journalize the loan obtained from the sale of receivables
financing company only
 Factor’s holdback – the factor retains
a portion of the purchase price to
cover probable sales discounts,
returns and, and allowances such
Assignment of Accounts Receivable amount is charge to “Receivable from
 Assignment of accounts receivable is Factor”
a more formal borrowing
arrangement in which specific When customers make a return:
receivables are identified and used Sales returns and allowances xxx
as security loan Receivable from factor xxx
 Forms of assignment
Notification basis Non-notification When all of the receivables are collected,
basis and no returns, discounts, or allowances
The The were made,
assignor/borrower assignor/borrower
notifies the debtors does not notify the Final settlement with the factor is
whose receivables debtors. journalized as:
have been assigned Accordingly, the
abut the debtors will Cash xxx
assignment. continue to remit Receivable from factor xxx
Accordingly, the payments to the
Disclosure Requirements

1. An entity shall disclose the following

in its financial statements (based on
IFRS 7 Financial Instruments:
Disclosures):

a. Information that enables users of

its financial statements to
evaluate the significance of
receivables for its financial
position and performance,
including significant terms and
conditions that may affect the
amount, timing, and certainty of
future cash flows;

b. The accounting policy and

method adopted

c. Information about its exposure to

credit risk

d. Information about its exposure to

interest rate risk

2. Disclosures for Accounts Receivable

pledged or assigned and notes
receivable discounted:

a. Risks and rewards of ownership

b. The carrying amount of pledged

receivables

c. The terms and conditions relating

to its pledge

3. Disclosures relating to collaterals.

When the entity is permitted to sell
or repledge the collateral in the
absence of default by the owner of
the collateral

4. Any material items of income and

expense, and gains and losses
resulting from receivables

5. Disclosures on the nature and

amount of any impairment loss
recognized in profit or loss (bad debt
expense)