CHAPTER 1

Intermediate Accounting 1 by Robles and Empleo

 Nature of Financial Assets
• A financial asset includes cash and
cash equivalents, equity instrument of
another entity (investments in equity
shares of other entities), contractual
right to receive from another entity
cash or another financial asset (trade
receivables, loans and other
receivables), and investments in debt
instruments of another entity classified
by the latter entity as financial
liabilities (investments in bonds and
commercial papers).
Recognition of Financial Assets
• An entity shall recognize a financial
asset in its statement of financial
position when and only when the
entity becomes a party to the
contractual provisions of the
instrument (par. 3.1.1, IFRS 9)
• Any item that is acceptable by bank
or other financial institution for
deposit at face value.
• Cash Items
 Cash on Hand
- Includes undeposited collections such as bills and coins,
customer’s checks, manager’s checks, traveler’s checks,
cashier’s checks, bank drafts and money order.
 Cash in Bank
- Includes demand deposit or checking account and
saving deposit which are unrestricted as to withdrawal.
 Cash Fund
-working funds segregated for current purposes such as
petty cash fund, change fund, payroll fund, dividend fund,
tax fund, and interest fund.
 Cash Items

Unrestricted and Restricted and

immediately
for use other
available for use
than for current
in current
operations.
operation.

For payment of operating expenses Reported under

other non
For payment of current liability
current financial
For acquisition of current asset assets.

Reported as
“Cash” in the
current asset
section.
• Short term highly liquid financial
instruments that are so near their
maturity and that there is insignificant
risk of change in value due to
fluctuation of interest rates.
• Only highly liquid investments that
are acquired three months
before maturity can qualify as
cash equivalents.
• Examples: 3-month BSP Treasury Bill, 3-month
Time deposit, 3-month money market
instrument or commercial paper.
CASH EQUIVALENT- matures 3 months
or less from the date of acquisition.
SHORT TERM/TEMPORARY
INVESTMENT- matures less than 1 year
from the date of acquisition.
LONG TERM INVESTMENT- matures
more than 1 year from the date of
acquisition.
“Temporary investments in equity shares are not
included as part of cash equivalents because these
securities do not have maturity dates. Except for
Redeemable Preference share(considered as debt
instrument), it can be reported as cash equivalent if
purchased within 3 months or less before redemption
date.”
• Cash is generally measured at face
value, which is its fair value.
• The caption “Cash and Cash
Equivalents” should be shown as the
first item among the current assets.
• Considerations in reporting cash
balance in the balance sheet:
 Foreign Currency- If it is unrestricted, then it
should be translated to Philippine currency using
the exchange rate at the end of the reporting
period. However, if it is restricted as to
withdrawal, then it should be reported as non-
current asset.
 Cash in closed banks or in banks having
financial difficulty or in bankruptcy- it should be
reclassified as receivable and should be written
down to its recoverable amount.
 Customer’s Post-dated Checks, NSF (No
Sufficient Fund checks), IOU’s (“I Owe You” notes)-
they should be reported as receivables rather than
cash. NSF checks in the Philippines are often
described as DAIF (Drawn Against Insufficient
Funds) and DAUD (Drawn Against Unclear
Deposits) checks.
Entry:
Receivables xxx Cash in
Bank xxx

 Postage Stamps and expense advances- They

are not cash, but they are reported as prepaid
expenses.
 Bank Overdraft- when the Cash in Bank account
has a credit balance, it is said to be an overdraft.
The credit balance in the cash in bank account
results from the issuance of checks in excess of
deposits (deposits<disbursements). Under PFRS
overdraft should be reported as a liability and it
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.
Moreover, an overdraft can also be offset against
the other bank account if the amount is not
material. However, overdrafts are not permitted in
the Philippines.
Example:
WASHURPROBLEM Co. had the following cash
balance items listed in its trial balance at
12/31/21:
BDO savings and loan P 50,000
RCBC Bank (5,000)
Metrobank 10,000

• If WASHURPROBLEM Co. reports under PFRS, its

12/13/21 balance sheet would show that cash
balance?
a. (P5,000) c. P55,000
b. P60,000 d. None of the Above
: The credit balance of (P5,000) should be
recorded
under liabilities.
 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. These
checks 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 exist and should be
reported as current payables.

Entry:
Cash in Bank xxx
Accounts Payable xxx
 Company’s Postdated Check- are company’s
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.

Entry:
Cash in Bank xxx
Accounts Payable xxx

 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.
 • Not legally restricted- the amount is reported
as part of Cash. The nature of the arrangement
is disclosed in the notes of the financial
statements.
• Legally Restricted- the amount should be
classified separately either as current asset
or non-current asset depending on the
nature of the loan.
 Cash set aside for long-term specific purpose
or acquisition of a non-current asset (Bond
Sinking Fund and Plant expansion Fund)-
reported as non-current asset.
 Stale Check or Check Long Outstanding- is
a check not encashed by the payee within six
months from the time of issuance. Thus, even
after three months only, the entity may issue a
“stop payment order” to the bank for the
cancelation of a previously issued check.
Entries:
•If the amount of stale check is immaterial
Cash xxx
Miscellaneous Income xxx

• If the amount is material and liability is

expected to continue
Cash xxx Accounts
Payable xxx
• Effective cash management requires
controls to protect cash from loss
through theft or fraud. The following are
some characteristics of a system of cash
control:
 Segregation of duties for handling cash and
recording cash transactions
 Imprest System- characterized by daily deposit of
all cash receipt intact to the bank and making
disbursements through issuance of checks.
Expenditures involving small amounts are made
from Petty Cash Fund.
 Voucher System- all disbursements must be
supported by properly approved vouchers, which
must be recorded in the voucher register.
 Internal Audits at irregular intervals
 Periodic Bank Reconciliation
• 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.
• Window dressing is usually
accomplished as follows:
a.By recording as of the last day of the
reporting period collections made
subsequent to the close of the period.
b.By recording as of the last day of the
reporting period payments of accounts
made subsequent to the close period.
• Such practices are unacceptable and
undesirable. The entries made to
window dress must be reversed to
correct the statements.
• In a very broad sense, window
dressing is any deliberate
misstatement of the assets, liabilities,
equity, income, and expenses.
• When the statements contain any
untruth or falsity, the statements are
said to be window dressed.
• Is a practice used for concealing cash
shortage.
• Consists of misappropriating a
collection from one customer and
concealing this defalcation by
applying a subsequent collection
made from another customer.
• Involves a series of postponements of
the entries for the collection of
receivables.
• Is another device used to conceal a
cash shortage.
• It is possible when an entity maintains
current accounts in different banks.
Kiting is usually employed at the end
of the 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 of the check.
• Entry when cash count shows cash is
less than the balance per book:
Cash short or over xxx
Cash xxx

(The Cash short or over account is only a

temporary or nominal account. It means
that when financial statements are prepared
the same should be adjusted.)
• Adjustment entry if the cashier or
cash custodian is held responsible for
cash shortage:
Due from cashier xxx
Cash short or over

xxx

• Adjustment entry if reasonable efforts

fail to disclose the cause of the
shortage:
Loss from cash shortage xxx
Cash short or over xxx (If the cash
shortage is not material, it can be debited
• Entry when cash count shows cash which is
more than the balance per book:
Cash xxx
Cash short or over xxx

• Adjusted entry if the cash overage is found

to be the money of the cashier:
Cash short or over xxx
Payable to cashier xxx

• Adjusted entry if the cash overage has no

claim:
Cash short or over xxx
Miscellaneous expense xxx
• A system of cash control which
requires all cash receipts should
be deposited intact and all cash
disbursements should be made
by means of check.
• However, an enterprise considers it
impractical to write checks for small
items such as taxi fares, postage,
express charges, and minor supplies.
A company usually pays for these
kind of items from a petty cash
fund.
• It provides simple but effective
control over small amounts of
• Is money set aside to pay small
expenses which cannot be paid
conveniently by means of check.

• Two methods of handling the petty

cash:
a. Imprest Fund System- is the one
usually followed by many.
b. Fluctuating Fund System
• Entry for establishment of PCF:
Petty Cash Fund xxx Cash In
Bank xxx
• Entry for payment of expenses out of
the fund:
NO ENTRY

• Entry for replenishment of petty cash

payments:
Various Expenses xxx
Cash In Bank xxx
• Adjusting entry for the unreplenished
expenses at the end of the accounting
period:
Various Expenses xxx
Petty Cash Fund xxx
• Entry for increase in fund:
Petty Cash Fund
xxx
xxx
• Entry for decrease in fund:
Cash in Bank
Cash In Bank xxx Petty Cash
Fund xxx
• Entry for establishment of PCF:
Petty Cash Fund xxx Cash In
Bank xxx
• Entry for payment of expenses out of
the fund:
Various Expenses xxx
Petty Cash Fund

xxx
• Entry
Petty for
Cashreplenishment
Fund of petty cash
xxx
payments:
Cash In Bank xxx
• Adjusting entry for the unreplenished expenses at the
end of the accounting period:

NO ENTRY
(No adjustment necessary because the
petty cash expenses are recorded
outright.)
• Entry for increase in fund:
Petty Cash Fund
xxx
xxx
Cash in Bank
• Entry for decrease in fund: xxx
Cash In Bank
 Reconciliation of Bank Balances
 A bank statement is a monthly report provided
by the bank to the depositor which shows the
following information:
(a) beginning-of-month cash balance,
(b) total deposits made by the depositor and
other bank credits during the month,
(c) total checks paid by the bank and other
bank charges during the month, and
(d) end-of-month cash balance
 Ideally, any debit balance in the Cash in Bank
account maintained by the depositor should
equal the credit balance of the depositor’s account
maintained by the bank.
 Reconciliation of Bank Balances
 A bank reconciliation is prepared to explain any
differences between a company’s book balance
of cash and the bank statement balance for the
depositor company. Items that may cause the
difference are any or combination of the ff:
• 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 or it
has not yet been deposited as of the end of the
month. This would understate the bank balance.
 Reconciliation of Bank Balances

• 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 they have not been
presented yet to the bank for payment.
This will result in an overstatement of the
bank balance.
 Reconciliation of Bank Balances

• Debit memos
These are charges to the depositor’s account
made directly by the bank. Examples: NSF,
technically defective checks, bank service
charge, charge for the cost of check booklets
and payment of bank loans. This will result
to overstatement of the balance per books.
 Reconciliation of Bank Balances

• Credit memos
These are deposits made directly by the bank
to the company’s account. Examples: 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.
This will result to understatement of the
balance per books.

• Errors
 Reconciliation of Bank Balances

• Credit memos
These are deposits made directly by the bank
to the company’s account. Examples: 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.
This will result to understatement of the
balance per books.

• Errors
 Deposit in Transit

To compute deposit in transit:

Deposits in transit, beg. of the month Pxx
Add: Cash receipts reflected in the
company’s records during the month xx
Total Pxx
Less: Deposits during the month as
reflected in the bank statement xx
Deposits in transit, end of the month Pxx
 Outstanding checks

To compute outstanding checks:

Outstanding checks, beg. of the month Pxx
Add: Checks drawn by the company
during the month xx
Total Pxx
Less: Checks paid by the bank during
the month xx
Outstanding checks, end of the month Pxx
 Types of Bank Reconciliation
Statement
1. Reconciliation of ending balances, 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
The first section (bank section) reflects items
not yet recognized by the bank as well as
corrections for any errors made by the bank.
The second section (book section) contains
items that the depositor has not yet
recognized and any corrections for errors
made on the depositor’s books.
 Forms of Bank Reconciliation
Statement
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.

3. Book balance reconciled with bank balance

This form starts with the cash balance per
ledger and reconciled to the balance per bank
statement.
 Illustrative Problem

The ff unadjusted cash balances are available for Pilar

Company for the month ended September 30,
2019.
Cash balance per bank statement P124,611.50
Cash balance per company records 124,379.40

The bank statement disclosed the ff information:

1. Charges by bank included a returned
customer’s check for P1,381.40 because of
insufficient funds (NSF) and service charge for
September of P150.
 Illustrative Problem

The bank statement disclosed the ff information:

2. Credits by the bank included a customer’s
note for P12,000 plus interest of P120 that
was collected on September 29, 2019.

A review of the company records disclosed the ff

Information:
3. A deposit for P11,428.70 made on September
29, 2019 did not appear on the bank statement.
2. Customers’ checks totaling P3,274 were still on
hand at September 30, 2019 awaiting deposit.
 Illustrative Problem

A review of the company records disclosed the ff

Information:
3. The ff company checks were still outstanding
as of September 30, 2019:
Check #0157823 P 961.90
Check #0157827 1,471.80
Check #0157830 2,632.50
4. Check #0157805 for P912.00 in payment of a
creditor account and included with the canceled
checks in the bank statement has been
erroneously recorded in the company records as
P192.00