CHAPTER 6 – FINANCIAL ASSETS instrument.

Transaction costs include: (a) fees and commissions paid to agents, advisers,
brokers and dealers; (b) levies by regulatory agencies and securities exchanges; and to
Introduction transfer taxes and duties.
Financial instrument – is any contract that gives rise to both the financial asset of one entity
and a financial liability or equity instrument of another entity. Our succeeding discussions on financial assets are subdivided into the following:
a. Cash and cash equivalents
Financial asset – is any asset that is: b. Receivables
a. Cash; c. Investments
b. An equity instrument of another entity; d. Derivatives
c. A contractual right to receive cash or another financial asset from another entity;
d. A contractual right to exchange financial instruments with another entity under Cash and Cash Equivalents
conditions that are potentially favorable or
e. A contract that will or may be settled in the entity’s own equity instruments. Cash – compromises cash on hand, cash in bank and cash treasury account.

Financial liability – is any liability that is: Adjustments for Unreleased Commercial Checks
a. A contractual obligation to deliver cash or another financial asset to another entity; Unreleased checks are checks drawn but not yet given to the payees as of the end of the
b. A contractual obligation to exchange financial assets or financial liabilities with period. Unreleased checks are reverted back to cash as follows:
another entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments. Date Cash in Bank, Local Currency-Current xx
Accounts payable (or other liability account) xx
Equity Instrument – is any contract that evidences a residual interest the assets of an entity
after deducting all of its liabilities.
Unreleased checks are not physically cancelled. At the start of the following year,
The issuer of a financial instrument shall classify the instrument, or its component the adjusting entry above is reversed to recognize the availability of the checks for release.
parts, on initial recognition as a financial asset, a financial liability or an equity instrument in This procedure does not apply to the “Cash-Modified Disbursement System (MDS)” account
accordance with the substance of the contractual arrangement and the definitions of a because there is no actual cash with the Government Servicing Bank. Recall that any unused
financial asset, a financial liability and an equity instrument. NCA is reverted back to the National Government,, and therefore, the balance of the “Cash-
Modified Disbursement System (MDS)” account is zeroed-out at the end of each period.
Example:
Bank deposit is a financial instrument. It is a contract that gives due to both a financial asset Accounting for Cancelled Checks
(i.e., Cash in bank) on the part of the depositor and a financial liability (i.e., Deposit liability) on Checks are cancelled when they become stale, voided or spoiled. A check is considered stale
the part of the bank. The depositor has a contractual right to withdraw his cash while the bank if it has been outstanding for over 6 months from its date. Replacement checks may be issued
has a contractual obligation to deliver cash when the depositor withdraws. for cancelled checks that were already released to payees, upon submission of the cancelled
Cash is the most basic financial instrument because it is the medium of exchange checks to the Accounting Unit. Cancelled checks are reverted back to cash as follows:
and the basic of measurement of all financial statement elements
The cancelled check pertains to:
Initial Recognition Current year Prior period
A financial asset is recognized when an entity becomes a party to the contractual provisions of Cash-Modified Disbursement Accumulates Surplus/(Deficit) xx
the instrument. System (MDS), Regular xx Accounts payable xx
Accounts payable xx To recognize the cancellation of
Initial Measurement To recognize the cancellation of stale/voided/spoiled MDS checks in prior
Financial assets are initially measured at fair value plus transaction costs, except for financial stale/voided/spoiled MDS checks
assets at fair value through surplus or deficit whose transaction costs are expensed.
Transaction costs are incremental costs that are directly attributable to the
acquisition, issue, or disposal of a financial instrument. An incremental cost is one that would
not have been incurred if the entity had not acquired, issued or disposed the financial
 For prior period MDS checks, the “Accumulated Surplus/(Deficit)” account is (MDS), Regular 50,000
debited. This is because, again, the “Cash-Modified Disbursement System (MDS)” account is To record the establishment of PCF
zeroed-out at the end of each period.
For cancelled commercial checks, the “Cash in Bank-Local Currency, Current” Just like the accounting by business entities, no journal entries are made as
account is debited for both current year and prior period. disbursements are made out of the PCF. Journal entries will be made when the PCF is (a)
If a replacement check is issued, the replacement check is recorded in the regular replenished or (b) adjusted at the end of the period for unreplenished expenses.
manner, i.e., debit to accounts payable and credit to cash.
Case 1: The PCF is replenished
Petty Cash Fund
Petty Cash Fund (PCF) refers to the amount granted to duly designated Petty Cash Fund Date Office Supplies Expenses xx
Custodian for payment of authorized petty or miscellaneous expenses which cannot be Fuel, Oil and Lubricants xx
conveniently paid through checks or ADA. Postage and Courier Expenses xx
Other Maintenance and Operating Expenses xx
Guidelines: Cash-Modified Disbursement System (MDS), Regular xx
a. The Head of Agency shall approve the amount of PCF to be established, which shall To record the replenishment of the PCF
be sufficient to defray recurring petty expenses for 1 month.
b. The PCF Custodian shall be properly bonded(a) whenever the established amount of Case 2: The PCF is not replenished
PCF exceeds P5,000.
”Bonded” means an insurance shall be taken on the custodian. In the event that
(a)
Date Office Supplies Expenses xx
the custodian misuses the funds, the entity can claim from the insurance company, and the Fuel, Oil and Lubricants xx
insurance company in turn will go after the custodian. Postage and Courier Expenses xx
Other Maintenance and Operating Expenses xx
c. The PCF shall be maintained using the Imprest System. At all times, total cash on Petty Cash xx
hand and unreplenished expenses shall be equal to the PCF ledger balance. To adjust the PCF for unreplenished disbursements.
d. The PCF shall be kept separately from other advances or collections and shall not
be used to pay for regular expenses such as rentals, electricity, water, and the like.
Case 3: The PCF Custodian retires and the PCF is closed.
e. PCF payments shall not exceed P15,000 for each transactions except when
otherwise authorized by law or by the COA Splitting of transactions to avoid
Date Cash-Collecting Officer xx
exceeding the ceiling is prohibited.
Petty Cash xx
f. A canvass from at least 3 suppliers is required for purchases amounting to P1,000 To record the return of unusual PCF upon retirement of the
and above, except for purchases made while on official travel. Petty Cash Custodian
g. PCF disbursements shall be supported by properly accomplished and approved
Petty Cash Vouchers, invoices ORs, or other evidence of disbursements. Accounting for Cash Shortage/Overage of Disbursing Officer
h. Replenishment shall be made as soon as disbursements reach at least 75% or as The disbursing officer is liable for any cash shortage while any cash overage that he cannot
needed. satisfactorily explain to the auditor is forfeited in favor of the government.
i. At the end of the year, the PCF Custodian shall submit all unreplenished Petty Cash
Vouchers to the Accounting Unit for recording in the books of accounts.
j. The unused balance of the PCF shall not be closed at year-end. It shall be closed Relevant provision of law:
only upon the termination, separation, retirement or dismissal of the PCF Custodian, “The failure of a public officer to have duly forthcoming any public funds or
who in turn shall refund any balance to close his/her cash accountability. property with which he is chargeable, upon demand by any duly authorized
officer, shall be prima facie evidence that he has put such missing funds or
Registration: property to personal use.”
After careful estimates of recurring monthly petty expenses, the liked of Entity A approves the 
establishment of a P50,000 petty cash fund. Cash shortage
Date Due from Officers and Employees xx
Date Petty Cash 50,000 Advances for/to..(Appropriate account) xx
Cash-Modified Disbursement System To recognize cash shortage of disbursing officer
 Date Cash-Collecting Officers xx Other receivables xx Other receivables xx
Due from Officers and Equipment xx Cash—Treasury/Agency Deposit, Regular xx Accumulated Surplus/(Deficit) xx
To recognize restitution of cash shortage To recognize the cancellation of current year’s To recognize the cancellation of prior year’s
deposited collections due to dishonored checks deposited collections due to dishonored checks
Date Cash-Treasury/Agent Deposit, Regular xx
Cash-Collecting Officers xx  Collections remitted to Authorized Government Depository Bank
To recognize the remittance of Restituted cash Current year Prior year
shortage to the BTr Other receivables xx Other receivables xx
Cash in Bank-Local Cash in Bank-Local
 Cash overage Currency, Currency Account xx Currency, Currency Account xx
Date Cash-Collecting Officers xx
Miscellaneous Income xx
To recognize forfeiture of cash overage of the Bank Reconciliation
disbursing officer
A bank reconciliation statement is a report that is prepared for the purpose of bringing the
Date Cash-Treasury/Agency Deposit, Regular xx balances of cash (a) per records and (b) per bank statement into agreement.
Cash-Collecting Officers xx A bank statement is a report issued by a bank which shows the credits and debts to
To recognize the remittance of forfeited cash overage
to the BTr the depositor’s account during a period as well as the account’s cumulative balance.

Dishonored Checks Guidelines:

A dishonored check is a check that is not accepted when presented for payment, e.g., a check a. Bank reconciliations shall be prepared as internal control to ensure the correctness
returned by the bank because of lack of sufficient funds – ‘bounced’ check. of cash records and as deterrent to fraud.
The drawer of the dishonored check is liable for the amount of the check and all
penalties resulting from the dishonor, without prejudice to his criminal liability for a ‘bounced’
check.

Guidelines:
a. When a check is dishonored, the Collecting Officer shall:
i. Issue a Notice of Dishonored Checks to the drawer and any endorser; and
ii. Cancel the related OR.
b. If the Collecting Officer fails to issue the notice, the dishonored check becomes his
personal liability. The drawer and any endorser not given the notice will be relieved
from any liability.
c. A check refused by the drawee bank when presented within 90 days from its date is
a prima facie evidence that the drawer has knowledge about the insufficiency of his
funds, unless the drawer pays the check in full or makes arrangement with the
drawee bank for the full payment of the check within banking days after receiving
the notice of the dishonor.
d. A dishonored check shall be settled by payment in cash or certified check. The
dishonored check shall not be returned for the payor unless he returns first the
previous OR therefor.

Journal entries
Dishonored checks are recorded to the “Other receivables” account as follows:

 Collections remitted to BTr

Current year Prior year