INTERMEDIATE ACCOUNTING PART 1A

INTERMEDIATE ACCOUNTING 1A  Book of accounts – Journal, Special Journal,

Ledger, Subsidiary Ledger and other important
THE ACCOUNTING PROCESS books.
 ACCOUNTING - The process of identifying, i. DUALITY – two-fold effect on values and
measuring, and communicating economic using at least two accounts.
information to permit informed judgments and ii. EQUILIBRIUM – equal debits and credits.
decisions by users of the information. ~American
Association of Accountants 2. SINGLE ENTRY SYSTEM – simple narrative.
 Effected through an entity’s information system  Profit or loss is determined through the “capital
maintenance approach” or by comparing the
 ACCOUNTING INFORMATION SYSTEM – the beginning and ending balances of equity.
system of collecting and processing transaction data  Not in line with PFRS.
and disseminating financial information to  Internal control is not enhanced because records
interested parties. are inadequate.
 Subsystem of Management Information System  Accounts – Cash, Accounts Receivable, Accounts
(MIS) Payable and Equity.
 MANAGEMENT INFORMATION SYSTEM – set of  Book of Accounts – Cash books and Subsidiary
data gathering, analyzing, and reporting functions Ledgers (personal acct)
designed to provide management with the
information it needs to carry out its functions.  Accrual basis and Cash basis of accounting can be
COMPONENTS of MIS: applied under both.
 Accounting/Financial Information System  ACCRUAL BASIS – income and expenses are
 Personnel Information System recognized when earned or incurred, regardless
 Logistics Information System of when cash is received or paid.
 CASH BASIS – income and expenses are
COMPONENTS OF AIS recognized when received or paid, regardless of
1. Personnel directly involved in accounting work. when earned or incurred.
2. Accounting Policies and Standards (disclosed in
notes to FS).  JOURNAL – also called the book of original entry
3. Procedures or set of interrelated activities. where the transactions are initially recorded
4. Equipment and devices used in the system. chronologically through journal entries.
5. Records and reports necessary to financial and
other information. TYPES OF JOURNALS
1. General Journal
THE ACCOUNTING CYCLE – steps or procedures used 2. Special Journal
in recording transactions and preparing financial a. Sales journal
statements. b. Purchase journal
1. Identifying and analyzing business documents or c. Cash receipts journal
transactions. d. Cash disbursement journal
2. Journalizing accountable events.
3. Posting from journal to ledger to classify the effects TYPES OF JOURNAL ENTRIES
of transaction. 1. SIMPLE – single debit and single credit.
4. Preparing the unadjusted trial balance. 2. COMPOUND – two or more debits and credits.
5. Preparing the adjusting entries. 3. ADJUSTING – entries to update certain accounts to
6. Preparing the adjusted trial balance or worksheet reflect correct balances.
preparation. 4. CLOSING – entries to zero-out the balances of
7. Preparing the financial statements. nominal accounts.
8. Closing the books (temporary accounts are closed) 5. REVERSING – to reverse certain adjusting entries in
9. Preparing the post-closing trial balance. preceding period.
10. Recording of reversing entries (made on the 1 st day 6. CORRECTING – to correct accounting errors.
of accounting period). 7. RECLASSIFICATION – entries made to transfer an
amount that best describes the nature of the
ACCOUNTING RECORDS OF A BUSINESS ENTITY transaction.
1. Business or source documents evidencing a
transaction.  LEDGER – also called the book of secondary entries
2. Book of accounts (Journal & Ledger) or book of final entries is a systematic compilation
of a group of accounts.
SYSTEMS OF RECORDING TRANSACTIONS
1. DOUBLE ENTRY SYSTEM – debit and credit. KINDS OF LEDGER
 In line with PFRS because profit or loss is a. GENERAL LEDGER – contains all accounts
determined through the “transaction approach” appearing in the trial balance.
(income-expense). b. SUBSIDIARY LEDGER – provides a breakdown of
 Accounts – Assets, Liabilities, Equity, Income the balances of controlling accounts.
and Expenses.

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 INTERMEDIATE ACCOUNTING PART 1A

 CONTROLLING ACCOUNT – consists of a group of 2. To split mixed accounts into their real and nominal
accounts with similar nature. Only those whose elements.
balances necessarily need a breakdown are
considered. METHODS OF INITIAL RECORDING OF INCOME AND
EXPENSES
 ACCOUNT – basic storage of information. INCOME
 T-ACCOUNT – left side is debit, right side is credit. 1. LIABILITY METHOD – advanced collections of
 CHART OF ACCOUNTS – list of all the accounts income are initially credited to a liability account. At
used by the entity. To promote comparability, the end of the period, the earned portion is
account titles should conform to PFRSs and industry recognized as income while the unearned portion
practices. remains as liability.
2. INCOME METHOD – advanced collections of
TYPES OF ACCOUNTS income are initially credited to an income account.
1. REAL / PERMANENT – not closed at the end of At the end of the period, the unearned portion is
accounting period and shown on the financial recognized as liability while the earned portion
position. remains as income.
2. NOMINAL / TEMPORARY – closed at the end of EXPENSE
accounting period. 1. ASSET METHOD – prepayments of expense are
3. MIXED – both real and nominal account initially debited to an asset account. At the end of
components subjected to adjustments having both the period, the incurred portion is recognized as
expired and unexpired components. expense while the unused portion remains as asset.
4. CONTRA – deducted from a related account. 2. EXPENSE METHOD – prepayments of expense are
5. ADJUNCT – added to a related account. initially debited to an expense account. At the end
of the period, the unused portion is recognized as
 TRIAL BALANCE – list of general ledger account asset while the incurred portion remains as
and their balances. It is prepared to check the expense.
equality of total debits and credits.  WORKSHEET – analytical device used to facilitate
the gathering of data for adjustments and the
TYPES OF TRIAL BALANCE preparation of financial statements and closing
1. UNADJUSTED – this is prepared before adjusting entries.
entries containing real, nominal and mixed
accounts. HEADING OF WORKSHEET
2. ADJUSTED – this is prepared after the adjusting a. Name of the entity
entries containing real and nominal accounts. b. Title of the report
3. POST-CLOSING – this is prepared after the closing c. Date covered by the report
process containing only the real accounts.
 FINANCIAL STATEMENTS – means by which the
ERRORS REVEALED BY A TRIAL BALANCE information accumulated and processed in financial
1. Journalizing / posting one-half of an entry (debit w/o accounting is periodically communicated to the
credit). users. End products of the accounting process.
2. Recording one part of entry with different amount.
3. Transplacement error / Slide error on one side of an COMPLETE SET OF FS
entry. (10 = 100) 1. Statement of financial position (dated as of / at).
4. Transposition error on one side of an entry. (15,625 2. Statement of profit or loss and other comprehensive
= 15652) income
3. Statement of changes in equity
ERRORS NOT REVEALED BY A TRIAL BALANCE 4. Statement of cash flows
1. Omitting entirely the entry for a transaction. 5. Notes
2. Journalizing or posting an entry twice. 6. Additional statement of financial position
3. Using a wrong account with the same normal
balance as the correct account. HEADING OF FS
4. Wrong computation with the same erroneous a. Name of the reporting entity
amount posted to both the debit and credit sides. b. Title of the financial statement
c. Reporting period
 CORRECTION – made on per account basis.
 OVERSTATEMENT – corrected by deduction.  CLOSING ENTRIES –this is done so that the
 UNDERSTATEMENT – corrected by addition. transactions in a period will not commingle with the
next period’s transactions. Closing the books is an
 ADJUSTING ENTRIES – involve at least statement application of the periodicity concept.
of financial position and one statement of profit or
loss and other comprehensive income account.  Dividends account is directly closed to retained
earnings.
PURPOSE OF ADJUSTING ENTRIES  Accrued interest expense and accrued interest
1. To take up unrecorded income and expense of the income refers to “interest payable”
period.

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 INTERMEDIATE ACCOUNTING PART 1A

 Unrealized gains is a real account that is 3. Cash funds not available for current operations
accumulated in equity. a. Sinking fund
b. Plant expansion fund
 POST-CLOSING TRIAL BALANCE – contains the c. Depreciation fund (form of asset replacement
balances that are extended to the next accounting fund)
period. d. Preference share redemption fund
e. Contingency fund
 REVERSING ENTRIES - to reverse certain adjusting f. Insurance fund
entries in preceding period. 4. Postage stamps (treated as prepaid supplies)

PURPOSE OF REVERSING ENTRIES  POSTDATED CHECKS RECEIVED – do not qualify

1. To facilitate recording of cash receipts and as cash because it is not presently available for
disbursements in the next accounting period. immediate use.
2. To promote convenience in recording the next  UNUSED CREDIT LINE – not included in cash but
period’s year-end adjustments for accruals. rather disclose only in the notes. It is the difference
3. To promote consistency of accounting procedure. between amount of line of credit and amount
ADJUSTING ENTRIES THAT MAY BE REVERSED borrowed.
1. Accruals for income or expense.  UNRELEASED CHECKS DRAWN AND
2. Prepayments initially recorded using the expense POSTDATED CHECKS DRAWN – unreleased or
method. undelivered to the payee and postdated checks
3. Advanced collections initially recorded using the issued are added back as cash.
income method.  STALE CHECKS – included in cash. Checks
delivered to payees but not encashed within a
relatively long period of time (6mos or more).

 CASH EQUIVALENTS – short-term highly liquid

CASH AND CASH EQUIVALENTS investments that are readily convertible to known
 CASH – includes money or its equivalent that is amounts of cash and which are subject to an
readily available for unrestricted use. insignificant risk of changes in value.
 MONEY – standard medium of exchange and basis
of accounting measurements.  Only debt instruments acquired within 3 months or
CASH INCLUDES less before their maturity date can qualify as cash
a. Cash on hand – undeposited collections and other equivalent.
current funds.
b. Cash in bank – deposits in banks available for EXAMPLES OF CASH EQUIVALENTS
immediate withdrawal. 1. Treasury bills, notes and bonds acquired 3 months
before maturity date.
EXAMPLES OF CASH a. Treasury bills – short-term obligation issued by
1. Coins and currencies the government at a discount normally have
2. Demand deposits (checking or current accounts) maturity of 90 days to less than a year.
and savings accounts b. Treasury notes and bonds – long-term
3. Bank drafts (if unrestricted qualifies as cash) obligations issued also by government. Notes
4. Money orders – drawn from post offices have maturity of 1 year to less than 10 years.
5. Checks Bonds have a maturity of 10 years or more.
a. Cashier’s checks
b. Personal’s checks 2. Money market instrument/commercial paper
c. Manager’s checks acquired before maturity date
d. Traveler’s checks a. Investment in portfolios of short-term securities.
e. Certified checks received from customers or b. Commercial papers consist of short-term,
other constitutions unsecured, notes payable issued in large
6. Cash funds set aside for use in currents operations denominations by large companies with high
a. Petty cash fund credit ratings to other companies and
b. Revolving fund (limited for specific purpose) institutional investors. Maturity date is normally
c. Payroll fund less than 270 days and acquired 3 months or
d. Change fund less before its maturity date may qualify as cash
e. Dividend fund equivalents.
f. Tax fund (set aside to be used in paying taxes)
g. Travel fund 3. 3-month time deposit
h. Interest fund a. Form of a bank deposit normally made in fixed
i. Other types of imprest bank accounts used in denomination, bears interest higher than that of
current operations regular deposits, and has a pre-agreed maturity.
NOT INCLUDED AS CASH Evidenced by a certificate of deposit.
1. Postdated checks (checks dated at future date,
treated as receivables)
2. I owe you (IOU) or advances to employees (treated
as receivables)
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 INTERMEDIATE ACCOUNTING PART 1A

 CHECKS AND EQUITY SECURITIES – checks and

banks drafts cannot qualify as cash equivalents EXAMPLES OF INTERNAL CONTROLS OVER CASH
unless it is unrestricted. 1. SEGREGATION OF INCOMPATIBLE DUTIES
 Equity securities (investments in stock) cannot a. Authorization (manager)
qualify as cash equivalent because it does not b. Execution (purchasing department)
have a maturity date. c. Recording (accountant)
 Redeemable preference shares that are d. Custody over cash (treasurer)
acquired 3 months or less before their maturity
date may qualify as cash equivalents (debt 2. IMPREST SYSTEM
instrument). a. Collections should be deposited intact within a
reasonable period of time from the date of
 FINANCIAL STATEMENT PRESENTATION collection and should not be used for any type
Cash and cash equivalents are normally presented as of disbursement.
current assets unless they are restricted from being b. Disbursements should be made through checks
exchanged. and not from cash collections. Disbursements
for small amounts are made through the petty
MEASUREMENT OF CASH cash fund.
 Cash is measured at face amount (face value).
 Cash denominated in foreign currency is translated 3. BANK RECONCILIATION – should be prepared
at the current exchange rate at the reporting date. regularly, immediately upon the receipt of the
 Cash maintained in bank undergoing bankruptcy is monthly bank statement, to reconcile on a timely
excluded from cash and presented as receivable basis the differences between the cash balance per
measured at realizable value (expected amount to book and per bank statement. The difference should
recover). be duly investigated and accounted for.

DEPOSIT IN FOREIGN BANKS 4. CASH COUNTS – should be performed to provide

 Unrestricted deposits in foreign banks are included reasonable assurance that actual cash tallies with
as cash at face amount translated at the current the balance per records. Surprise counts should also
exchange rate as of the reporting date. be performed at irregular intervals as part of
 Restricted deposits in foreign banks are excluded internal audit.
from cash and presented as receivable.
5. MINIMUM CASH BALANCE – should be
 COMPENSATING BALANCE – minimum amount maintained, especially for cash funds, sufficient only
that must be maintained in an entity’s bank account to defray specific business requirements.
as support for funds borrowed from the bank. Maintaining excessive cash balances may increase
 When legally restricted, excluded from cash. the risk of embezzlement.
 When not legally restricted, included in cash.
 Restricted or not, disclosed in notes. 6. LOCKBOX ACCOUNTS – to expedite cash
 Increase the yield rate for lender and effective collections and to ensure that cash collections are
interest rate for borrower. deposited intact. Rented for a fee and customers are
advised to remit their payments directly to the
 BANK OVERDRAFT – negative or credit balance in lockbox account. The bank empties the box at least
the cash bank account resulting from overpayment once a day and immediately credits the entity’s
of checks in excess of the amount deposit. accounts for collections.
 Overdrafts are payable on demand and
presented as current liabilities. 7. NON-ENCASHMENT OF PERSONAL CHECKS
 Bank overdraft that are repayable on demand FROM PETTY CASH FUND – prohibited to
and form an integral part of the entity’s cash discourage concealment of cash shortages.
management, are included as component of
cash and cash equivalent as deduction or offset. 8. VOUCHER SYSTEM – internal control over all cash
 Offsetting is appropriate only when permitted by disbursements.
a PFRS:  Business document or written authorization that
o A legal right to setoff supports every disbursement made by an entity.
o An intention to settle the amounts on a net  Supporting documents are attached to the
basis or simultaneously. voucher to form the “voucher package”.
 Zero-balancing checking account is one of the  Unpaid vouchers are filed in the order of their
example. required payment dates so that available cash
discounts are not missed.
 INTERNAL CONTROLS OVER CASH – any action  The individual preparing the check stamps the
or process effected by management that is supporting document as “paid” to ensure that
designed to help an entity achieve its objectives. they are not presented for payment more than
a. Reliability of financial reporting once.
b. Effectiveness and efficiency of operations  The check number and journal entry are
c. Compliance with laws and regulations indicated in the voucher.
d. Safeguarding assets

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 INTERMEDIATE ACCOUNTING PART 1A

 One check is drawn for each voucher to ensure current period, the ending balance of
proper audit trail. cash is understated.
 Vouchers are pre-numbered to help ensure their o Does not indicate kiting but rather
completeness. DIT or OC.
 Cancelled vouchers or checks are not destroyed
or removed. 3. WINDOW DRESSING – form of fraudulent financial
reporting and not primarily a method of concealing
ACCOUNTING FOR CASH SHORTAGES AND cash shortages.
OVERAGES a. Occurs when books are not closed at year-end
 When cash count is less than the balance per transactions in the subsequent period are
records, there is shortage. Debited to suspense deliberately recorded in the current period in
account called “Cash shortage or overage”. order to improve entity’s financial performance
o The shortage may be: or ratios.
 Closed to a receivable account if it was due b. Also called cooking the books.
to the fault of the employee.  Can also be used to conceal cash shortages
 Charged to loss if the investigation was by:
without merit. o Including collections in the subsequent
 When cash count is more than the balance per period to current period.
records, there is overage. Credited to a suspense o By deferring the recording of current
account called “Cash shortage or overage”. year’s disbursements to the subsequent
o The overage may be: period.
 Closed to payable account of it was due to
cash belonging to an employee that  PETTY CASH FUND – money set aside to defray
commingles with entity’s cash. relatively small amounts of disbarments.
 Gain if the investigation was without merit.
ACCOUNTING FOR PCF
 Suspense account should not appear in the financial a. PCF is established – the check is typically drawn
statements. to the order of petty cash custodian who is
CONCEALMENT OF CASH SHORTAGES responsible for the custody of the fund.
1. LAPPING – occurs when collection of receivable
from one customer is misappropriated and then b. Disbursements out of the PCF – no journal
concealed by applying a subsequent collection from entries are recorded instead petty cash
another customer. payments are initially recorded in a petty cash
a. Possible when the incompatible duties of register and supported by a signed petty cash
recording and cash custody are combined. vouchers.
b. May be discovered through various audit
procedures like analytical procedures and c. Replenishment of petty cash disbursement –
confirmation using proper sampling technique. replenished when its balance becomes low
through check supported by a check
2. KITING – occurs when cash shortage is concealed disbursement voucher. Journal entry is made for
by overstating the balance of cash. the disbursements and the petty cash custodian
a. Possible by exploiting the float period. shall not retain the supporting documents but
b. May be detected by preparing rather surrenders them to the accounting
 Bank transfer schedule – shows the dates of department.
all transfer of cash among various bank
accounts. d. Adjustment for unreplenished fund at reporting
 Cut-off bank statement – prepared few days date – should be adjusted in order not to
after month-end to help the auditors verify overstate cash and not to understate expenses.
the reconciling items.
 Proof of cash
 To detect kiting compare the:
a. Disbursement date per book with BANK RECONCILIATION
receipt date per book.  BANK RECONCILIATION STATEMENT – report
b. Disbursement date per bank with prepared for bringing the balance of cash per
receipt date per bank. records and bank statement into agreement.
 Receipt per book or bank should be  Prepared to explain the difference between cash
recorded in the same period with balance in accounting records and on the bank
disbursement per book or bank. statement.
 If receipt is recorded in the current  Arrive at the adjusted (correct) cash balance to be
period, but disbursement is recorded in shown in the FS.
the next period, the ending balance of  Provide information for reconciling entries.
cash is overstated.  Required only for checking accounts.
o It indicates kiting.
 If receipt is recorded in the next period  BANK STATEMENT –report issued by a bank that
but the disbursement is recorded in the shows the deposits and withdrawals during the
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 INTERMEDIATE ACCOUNTING PART 1A

period and the cumulative balance of depositor’s in book debit. ent (deduct)
bank account. h. Overstatement  Understate  Credit
in book credit. ment (add)
 CREDIT MEMOS – additions (bank credits) made by
the bank to the creditor’s bank account but not yet
recorded by the depositor.
1. Collections made by the bank. ACCOUNTS RECEIVABLE
2. Interest income earned by the deposit.
 RECEIVABLES – assets that represent contractual
3. Proceeds from loan directly credited.
rights to receive cash or other asset.
4. Unrolled-over matured time deposits transferred.
 Accounts receivables – oral or informal promise to
pay.
 DEBIT MEMOS – deductions (bank debits) made by
 Notes receivable – written or formal promise to pay
the bank to the depositor’s bank account but not yet
(postdated checks)
recorded by the depositor.
 Loans receivable – promissory notes with collateral
1. Bank service charges (interest, penalties and
or postdated checks.
surcharges)
 Advances to – advances to officers, employees,
2. No sufficient fund checks (NSF) / Drawn against
suppliers & affiliates.
insufficient funds check (DAIF)
 Accrued income – income earned but not yet
3. Automatic debits (payment of bill on behalf of the
collected (interest, dividend).
depositor)
 Deposits – reimbursable deposits / returnable.
4. Payment of loans
 Claims receivable – from insurance companies.
 BOOK ERRORS – errors committed by the
 TRADE RECEIVABLES – arising from the sale of
depositor.
goods or services in the ordinary course of business.
 DEPOSIT IN TRANSIT – deposits made but not yet
 Classified as current assets if expected to be
credited by the bank to the depositor’s bank. Check
realized within the normal operating cycle or one
has not yet cleared or made after the bank’s cut-off.
year, whichever is longer.
 OUTSTANDING CHECK – check drawn and
released to payees but are not encashed with the
 NON-TRADE RECEIVABLES – arising from other
bank. It excludes:
sources.
 Certified checks and Stale checks
 Classified as current assets if expected to be
realized within one year.
 BANK ERRORS – errors committed by the bank.
 Credit memos, debit memos, book errors = book
 NORMAL OPERATING CYCLE – the time between
reconciling items.
acquisition of asset and their realization in cash or
 Deposit in transit, outstanding check, bank errors =
cash equivalent.
bank reconciling Items.
 When it is not clearly identifiable, it is assumed to
be 12 months.
 PROOF OF CASH – expanded bank reconciliation
that includes proof of cash receipts and cash
 Financial institutions need to classify theirs
disbursements.
receivables because their financial position is
 Useful in discovering discrepancies in handling cash
presented based on liquidity.
over a period of time.
 The financial statement presentation on the
 Prepared only when needed – usually in fraud
statement of financial position combined all the
investigations involving cash.
currently collectible and presented in a single line
item described as “Trade and other receivables”.
BOOK ERRORS
Effect on ABNORMAL BALANCE IN ACCOUNTS
ending a. Credit balance in accounts receivables
Nature of error Correction
balance of o Resulting from overpayments, advance
cash payments, or errors.
a. Understatemen  Understate  Debit o Eliminate the credit balance.
t in book debit. ment (add) o Presented as current liabilities as “Advances
b. Understatemen  Overstatem  Credit
from customers”.
t in book credit. ent (deduct)
c. Overstatement  Overstatem  Credit
b. Debit balance in accounts payable
in book debit. ent (deduct)
d. Overstatement  Understate  Debit o Resulting from overpayments, advance
in book credit. ment (add) payments, or errors.
o Eliminate the debit balance and not offset
BANK ERRORS
against payables.
e. Understatemen  Understate  Credit o Presented as currents assets as “Advances to
t in book debit. ment (add)
suppliers” on NTR.
f. Understatemen  Overstatem  Debit
t in book credit. ent (deduct)
g. Overstatement  Overstatem  Debit  Scanning is an analytical procedure performed by
the auditor.
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 CAAT means computer assisted audit techniques. c. Net method - accounts receivables and sales are
initially recorded at amounts net of cash
INITIAL MEASUREMENT OF RECEIVABLES discounts.
 Fair value plus transaction costs.
 Trade receivables that do not have a significant  Customers who pays within the discount period
component are measured at their transaction price actually purchase at cash price.
in accordance with PFRS 15.  Those who pay beyond the discount period pay a
 Transaction price is the amount of consideration to penalty for the delay (excess).
which an entity expects to be entitled in exchange
for transferring promised goods or services SUBSEQUENT MEASUREMENT OF A/R
excluding amounts collected on behalf of third  historical cost or net realizable value (NRV)
parties.  Recoverable historical cost (NRV) represents the
 PFRS 15 allows the non-discounting of the amount amount of cash expected to be recovered from the
of consideration if it is due within 1 year from the contractual cash flows of the receivable.
date of transfer of goods or services.  NRV is computed as transaction price less
repayments of principal less any reduction for
RECOGNITION OF TRADE RECEIVABLES uncollectability or impairment.
 Recognized when the entity has right to
consideration that is unconditional.  SALES DISCOUNT – the amount may not be wholly
 Unconditional if only the passage of time before recoverable when it is probable that customer will
payment of that consideration is due even if the avail of the cash discounts in the future.
amount subject to refund in the future.
 The case when the control over the goods / services  DOUBTFUL ACCOUNTS / BAD DEBTS – risk of loss
is transferred to customer. when customers fail to pay their dues.
 An allowance account (contra-asset) is provided to
TERMS OF SALE CONTRACT write-down the receivables to their recoverable
1. FOB SHIPPING POINT – ownership over the goods amount.
sold transferred to the buyer upon shipment (A/R &  Assets should not be recognized at more than their
Sales are recognized on shipment date). recoverable amount.
2. FOB DESTINATION – ownership transferred only
when the buyer receives the goods (A/R & Sales are ACCOUNTING FOR BAD DEBTS
recognized when the buyer receives the goods). 1. ALLOWANCE METHOD – an allowance is
recognized for bad debts expense when the
ACCOUNTING FOR FREIGHT CHARGES collectability of accounts becomes doubtful or
1. FREIGHT PREPAID – freight is already paid in questionable.
advance by the seller.  Conforms to the concepts of accrual basis of
2. FREIGHT COLLECT – the freight is not yet paid accounting.
upon shipment. The carrier will collect the shipping  When it becomes certain that accounts are
cost from the buyer upon delivery. uncollectible or worthless, the account are
 The entity who owns the goods being shipped written off.
should pay for the shipping costs.  When account being recovered, reverse the
entry.
TRADE DISCOUNTS – given to encourage orders in  Write-off and recoveries do not affect profit.
large quantities or to avoid frequent changes or to hide  Net accounts receivable, current assets, working
the true invoice price from competitors. capital, and current ration were unaffected by
 Deducted from list price when determining invoice the write-off.
price (not recorded).  Total current assets, working capital and current
ratio were unaffected by the recovery.
CASH DISCOUNTS – given to encourage prompt
payment. 2. DIRECT WRITE-OFF METHOD – bad debts
 Deducted from invoice price when determining net expense is directly written-off from the balance of
amount collectible within the period (accounted for A/R only when the accounts are deemed worthless.
separately).  Does not conform to the concepts of accrual
basis.
ACCOUNTING FOR CASH DISCOUNTS  Receivables may be overstated prior to the
1. IN ACCORDANCE WITH PFRS 15 – the entity write-off.
considers any discounts that are expected to be  Not acceptable for financial reporting except for
taken by customers when recognizing A/R. micro entities.
2. TRADITIONAL GAAP  Favored for taxation purposes.
a. Gross method – accounts receivables and sales  When account being recovered, recognized as
are initially recorded at amounts gross of cash gain.
discounts.  Write-off and recoveries affect profit, working
b. Cash discounts are recorded only when they are capital and current ratio.
taken.

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 WRITE-OFF – directly reducing the gross carrying  Receivables are translated at the exchange rate at
amount of financial asset when the entity has no the end of the reporting period.
reasonable expectations of recovering a financial  Excess in exchange rates are recognized in profit or
asset in its entirely or portion thereof. loss as foreign exchange gain or loss.
 Sales revenue on the receivables is not adjusted.
ESTIMATING DOUBTFUL ACCOUNTS
1. PERCENTAGE OF CREDIT SALES (SINGLE LOSS-  RISK OF ACCOUNTING LOSS – risk that the
RATE APPROACH) – bad debts expense is carrying amount of a recognized asset will not be
computed by applying a percentage on the net recovered.
credit sales during the period.  OFF-BALANCE SHEET RISK – potential loss that
 Favors the income statement in that a strict may exceed the amount recognized as an asset
adherence to matching principle is attained. (possible losses are disclosed only).

2. PERCENTAGE OF RECEIVABLE (SINGLE LOSS-

RATE APPROACH) – required balance of allowance
for doubtful accounts is computed by applying a NOTES RECEIVABLE
percentage on the ending balance of the  Claim supported by a promissory note.
receivables.  Can be a negotiable instrument that a maker signs
 Favors the statement of financial position and in favor of a payee who may legally transfer or sell
does not strictly adhere to the concept of the note to other.
matching.  May also be required from high-risk or new
 The recovery of an account previously written customers.
off does not actually affect the balance of gross  Considered fairly liquid, even if long-term because
receivable. entities may easily convert them to cash, although a
fee might be paid to do so.
3. AGING OF RECEIVABLES - required balance of  All notes contain an interest element.
allowance for doubtful accounts is computed by o Interest bearing – notes have a stated interest
applying various estimated percentages to the rate
breakdown of the ending receivable according to  Other terms are Nominal rate, Coupon rate
ages. & Face rate
 Favors the statement of financial position in that o Noninterest-bearing – notes do not have a
provides reasonable approximation of the
stated interest rates because they include the
receivables net realizable value.
interest as part of the face amount.
 After 30 days, unpaid accounts are considered
 Unspecified principal
past due.
 Unspecified interest

How bad How INITIAL MEASUREMENT

Amt.
debts is ending  Fair value plus transaction costs.
computing
Method exp. bal. of
by
compute allow.
applying % CLASSIFICATION OF NOTES RECEIVABLES
d Computed
1. Short-term receivables – fair value of short-term
1. % of net  Bad debts  % x net  By
receivable may be equal to its face amount. If the
credit expense credit preparing
sales sales T-account transaction contains a significant financing
2. % of  Req.  Squeeze  By component, the fair value is equal to its present
receiva balance of d from applying value.
bles allowance T- the %
account 2. Long-term receivables – fair value of long-term
3. Aging  Req.  Squeeze  By receivable that bears a reasonable interest rate is
method balance of d from applying equal to the face amount.
allowance T- the % o If non-interest bearing receivable or having
account unreasonable interest rate, fair value is
equal to the present value of the future cash
DOUBTFUL ACCOUNT EXPENSE flows from the receivable discounted using
 Presented using the function of expense method as an imputed interest rate.
administrative expense.  Imputed interest rate is the prevailing
rate for a similar instrument of an issuer
DEBIT IN ALLOWANCE FOR DOUBTFUL ACCOUNTS within a similar credit rating;
 The amount needed to be written-off exceeds the  A rate of interest that discounts the
existing balance of the allowance. nominal amount of the receivable to the
 In abnormal balance current cash sales price of the goods.
RECEIVABLES DENOMINATED IN FOREIGN  Other terms are effective interest rate,
CURRENCY market rate & yield rate.
 Initially translated at the exchange rate at the date
of transaction.  The difference between the present value and face
amount is initially recognized as unearned interest
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 INTERMEDIATE ACCOUNTING PART 1A

and amortized as interest revenue under effective 3. FUTURE VALUE OF AN ANNUITY – answers the
interest method. question: “If I make a series of equal deposits over
several periods, how much will they accumulate to
 EFFECTIVE INTEREST RATE - the rate that exactly in the future?”
discounts estimated future cash payment or  Several deposits and one withdrawal.
receipts through the expected life of the financial  Two types of Annuities:
instrument or when appropriate, a shorter period to 1. Ordinary annuity – deposits are made at the
the net carrying amount of the financial asset or end of each interest period.
financial liability. 2. Annuity due – deposits are made at the
beginning of each interest period, the first
 EFFECTIVE INTEREST METHOD – method of deposit is made immediately or in advance.
calculating the amortized cost of a financial asset or
a financial liability and of allocating the interest 4. PRESENT VALUE OF AN ANNUITY OF 1 – answers
income or interest expense over the relevant period. the question: “How much do I have to deposit today
to be able to make several equal withdrawals of 1
 Carrying amount of a note at any given point of time each over equal periods in the future?”
is equal to the present value of the remaining future  One deposit and several withdrawals.
cash flows discounted at the original effective
interest rate. SUBSEQUENT MEASUREMENT
 Total interest income recognized over the life of a  Receivables initially measured at face amount are
non-interest bearing note is equal to the unearned subsequently measured at recoverable historical
interest income on initial recognition. cost or net realizable value.
 Only post-acquisition accrued interests are o Recoverable historical cost (net realizable
recognized as interest income. value) – the amount of cash expected to be
recovered from the principal amount of the
 CASH PRICE EQUIVALENT – the amount that receivable.
would have been paid if the transaction was settled  Receivables initially measured at present value are
outright on cash basis, as opposed to installment subsequently measured at amortized cost.
basis or other deferred settlements. o Amortized cost – amount at which the
financial asset or financial liability is
CONCEPT OF TIME VALUE MONEY measured at initial recognition minus
 It connotes a relationship between the value of principal repayments, plus or minus the
money and time. cumulative amortization using the effective
 Provides the contractual agreement to receive (or interest method of any difference between
pay) cash in the future will earn (or incur) interest that initial amount and the maturity
due to passage of time. amount, and for financial asset adjusted for
any loss allowance.
TWO TYPES OF INTEREST  If the initial measurement of cash price equivalent
1. SIMPLE INTEREST – interest is earned only on the of the non-cash asset given up, the subsequent
principal. measurement is amortized cost.
2. COMPOUND INTEREST – interest is earned on the
principal and the interest. CURRENT AND NON-CURRENT PORTIONS OF A
NOTE RECEIVABLE
TWO TERMS OFTEN USED IN CONJUNCTION WITH  From the amortization table, the current portion is
TIME VALUE OF MONEY the amortization in the immediately following year.
1. FUTURE VALUE OF AN AMOUNT (FV OF 1) –  The non-current portion is the present value in the
answers the question: “If I deposit 1 peso today in immediately following year.
the bank, how much will it be worth in the future?”
 Applicable on lump-sum basis or one-time DEFERRED ANNUITIES
basis.  Annuity in which periodic cash flows begin only after
two or more periods have passed.
2. PRESENT VALUE ON A FUTURE AMOUNT (PV OF o Future value of a deferred annuity is the
1) – answers the question: “How much do I have to same as the future value on an annuity that
deposit today to receive 1 peso in the future?” is not deferred (straightforward).
 Based on the concept that all notes receivable o Present value of a deferred annuity
contain an unspecified principal and an recognizes interest that accrues during the
unspecified interest. deferral period.
 Applicable on lump-sum basis or one-time basis.
o Principal Element - the measurement of the
RECEIVABLES – ADDITIONAL
note receivable.
o Interest Element – initially recognized as CONCEPTS
unearned interest and amortized over the LOAN RECEIVABLES – supported by promise to pay.
life of the note as interest income.  Appropriately used by entities whose main
operations involve lending of money.
 Loan transaction usually involve transaction costs.

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 INTERMEDIATE ACCOUNTING PART 1A

o Transaction cost – incremental cost directly contract assets and

attributable to the acquisition of financial asset lease receivables
or financial liability. It includes fees and 2. Originated or purchased  Change in lifetime
commissions paid to agents, advisers, brokers credit-impaired financial expected credit losses
and dealers, levies by SEC and transfer taxes assets approach
and duties. It does not include debt premiums or 3. Other assets / exposure  General approach or 3
discounts, financing costs or internal stage / bucket
administrative or holding cost. approach
o Incremental cost – one that would not have
been incurred if the entity had not acquired, GENERAL APPROACH
issued or disposed of the financial instrument.  Intended to reflect the credit deterioration and
improvement of a financial instrument.
ORIGINATION COSTS AND FEES
1. DIRECT ORIGINATION COSTS – added to the Stage 1 Stage 2 Stage 3
carrying amount of the loan and subsequently  Credit risk has  Credit risk  Credit risk has
amortized using the effective interest method. not increased has increased
 Decreases both the carrying amount of the loan significantly increased significantly
and interest income. since initial significantly since initial
recognition. since initial recognition
2. ORIGINATION FEES – deducted from the carrying
 Low credit risk recognition plus there is
amount of the loan and subsequently amortized
expediency objective
using effective interest method. evidence of
 Increases both the carrying amount of the loan impairment
and interest income.  Recognize 12-  Recognize  Recognize
month Lifetime Lifetime
3. INDIRECT ORIGINATION COSTS – are not included expected credit expected expected
in the measurement of receivables and expensed losses credit losses credit losses
immediately.  Interest  Interest  Interest
Direct origination cost and fees are treated as revenue is revenue is revenue is
adjustments to the effective interest rate. computed on computed computed on
the gross on the gross the net
TRIAL AND ERROR APPROACH carrying carrying carrying
 DISCOUNT – initial carrying amount is less than its amount of the amount of amount (gross
face amount. asset the asset CA– allowance)
 Effective interest rate is higher than nominal
rate.  LOSS ALLOWANCE – allowance for expected credit
 PREMIUM – initial carrying amount is greater than losses on financial assets that are within the scope
its face amount. of the impairment requirement of PFRS 9.
 Effective interest rate is lower than its face
amount.  EXPECTED CREDIT LOSSES – the weighted
There is no discount or premium when the initial average of credit losses with the respective risks of
carrying amount is equal to the face amount. Also a default occurring as the weights.
the effective interest rate is equal to nominal rate.  CREDIT LOSS – the difference between all
contractual cash flows that are due to an entity in
IMPAIRMENT accordance with the contract and all the cash flows
1. OLD MODEL – an entity recognizes impairment only that the entity expects to receive, discounted at the
when there is objective evidence of a loss event. original effective interest rate.

2. NEW MODEL – an entity will always estimate  12-MONTH EXPECTED CREDIT LOSS – the portion
expected credit losses using a ‘multi-factor and of lifetime expected credit losses that represent the
holistic’ analysis of credit risk that considers not expected credit losses that result from default
only the past events but also forward-looking events on a financial instrument that are possible
information on current conditions and forecasts of within the 12 months after the reporting date.
future economic conditions.
 The recognition of impairment does not  CREDIT RISK – the risk that one party to a financial
necessarily depend on the identification of loss instrument will cause a financial loss for the other
events. party by failing to discharge an obligation.

SCOPE
 The expected credit loss model shall be applied to  LIFETIME EXPECTED CREDIT LOSSES – result
all debt instruments that are not measured at fair from all possible default events over the expected
value through profit or loss. life of a financial instrument.

THE EXPECTED CREDIT LOSS MODEL (ECL) MEASUREMENT OF EXPECTED CREDIT LOSSES
Type of asset / exposure Approach
1. Trade receivables,  Simplified approach
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 INTERMEDIATE ACCOUNTING PART 1A

1. An unbiased and probability-weighted amount that  The loss allowance recognized at the reporting date
is determined by evaluating a range of possible is equal to the cumulative change in lifetime
outcomes. expected credit losses since initial recognition.
2. The time value of money.
3. Reasonable and supportable information that is  CREDIT-ADJUSTED EFFECTIVE INTEREST RATE –
available without undue cost or effort at the The rate that exactly discounts the estimated future
reporting date about past events, current conditions cash payments or receipts through the expected life
and forecasts of future economic conditions. of the financial asset to the amortized cost of a
financial asset that is a purchased or originated
Stag Nature of Measurement of credit credit-impaired financial asset.
e instrument losses
Financial Present value of the SIMPLIFIED APPROACH
asset that is difference between:  An entity always measures the loss allowance equal
not credit- a. The contractual cash to the lifetime expected credit losses for trade
Stage
impaired flows due under the receivables or contract assets that do not contain a
1& 2
contract significant financing component.
b. The cash flows  The entity is not required to determine whether
expected to be received credit risk has increased significantly since initial
Financial The difference between: recognition.
asset that is a. The asset’s gross
credit- carrying amount
APPLYING THE SIMPLIFIED APPROACH
Stage impaired (but b. The present value of
3 not purchased estimated cash flows  PFRS 9 does not require specific procedures in
or originated discounted at the estimating lifetime expected credit losses.
credit- original effective  PFRS 9 allows practical expedients and refers to the
impaired) interest rate example of a “provision matrix” (the aging method).
 Another possible practical expedient is the use of a
CREDIT-IMPAIRED FINANCIAL ASSETS “single-loss rate” approach.
 One or more events that have detrimental impact DERECOGNITION OF A RECEIVABLE
on the estimated future cash flows of that financial a. The contractual rights to the cash flows from the
asset have occurred. financial asset expire.
a. Significant financial difficulty of the issuer. b. The financial asset is transferred and the transfer
b. Breach of contract. qualifies for derecognition.
c. The lender, for economic or legal reasons
relating to the borrower’s financial difficulty,  DERECOGNITION - refers to the removal of a
granting to the borrower a concession that the previously recognized asset or liability from the
lender would not otherwise consider. entity’s statement of financial position.
d. It becoming probable that the borrower will
enter bankruptcy. TRANSFER
e. The disappearance of an active market. a. A contractual rights to receive the cash flows of the
f. The purchase or origination of a financial asset financial asset
at a discount that reflects the incurred credit b. Retains the contractual rights to receive the cash
losses. flows of the financial asset, but assumes an
obligation to remit the collections to a recipient in
 The carrying amount of a loan or note receivable an arrangement that meets all of the conditions
before impairment includes any interest receivable listed below:
accrued up to the date the loss event has been  The entity is not obligated to pay the recipient
determined. unless it collects an equivalent amount from the
 The original effective interest rate is the effective original asset.
interest rate on the date the receivable was initially  The entity is prohibited from selling or pledging
recognized. the original asset except as security in favor of
 Impairment loss in deducted from the carrying the recipient.
amount of the impaired loan or note receivable  The entity is obligated to remit collections to the
either directly through an allowance account. eventual recipients without any delay. The entity
 After impairment, interest income is computed by is prohibited from reinvesting the collections,
multiplying the original effective interest rate by the except in cash or cash equivalents during the
net carrying amount of the impaired receivable. short period from the collection date to the
 When there is no accrued interest included in the required remittance date, and any interest
carrying amount of an impaired receivable, the earned on the investment also remitted to the
allowance for impairment is equal to the impairment recipient.
loss recognized. EVALUATION OF TRANSFER
 If the entity transfer substantially all the risks and
CHANGES IN LIFETIME EXPECTED CREDIT LOSSES rewards of the ownership of the financial asset, the
APPROACH entity derecognizes the financial asset and
 Applicable to originated or purchased credit- recognizes separate as assets or liabilities any
impaired financial assets.

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 INTERMEDIATE ACCOUNTING PART 1A

rights and obligation created or retained in the 3. The transferor does not maintain effective control
transfer. over the transferred asset through an agreement to
 If the entity retains substantially all the risks and repurchase or redeem them before their maturity.
rewards of the ownership of the financial asset, the
entity continues to recognize the financial asset. SALE OR SECURED BORROWING
(obligated to repurchase) a. A transfer of receivable that qualifies for
 If the entity neither transfer nor retains substantially derecognition is treated as sale (when the above is
all the risks and rewards of the financial asset: met). The receivable is derecognized in its entirely.
o If the entity has not retained control, it The difference between the consideration and the
derecognizes the financial asset and recognizes carrying amount of the receivable is recognized as
separately as assets or liabilities any rights and gain or loss.
obligations created or retained in the transfer. b. A transfer the does not qualify for derecognition is
o If the entity has retained control, it continues to treated as secure borrowing. The receivable is not
recognize the financial asset to the extent of its derecognized but continues to be recognized. A
continuing involvement in the financial asset. liability is recognized for the consideration received.
No gain or loss is recognized on the transaction.
TRANSFER THAT QUALIFY FOR DERECOGNITION
o If a financial asset is transferred in its entirely but  RECEIVABLE FINANCING – refers to the act of
the transferring entity retains the right to service inducing cash inflows from receivables other than
the financial asset for a fee, a financial asset or from their normal or scheduled payments.
liability is recognized for the service contract. 1. Pledge
o If the fee is considered inadequate to compensate 2. Assignment
for the services, a servicing liability is recognized at 3. Factoring
fair value. 4. Discounting
o If the fee is more than adequate, a service asset is
recognized by allocating the carrying amount of a PLEDGE / HYPOTHECATION
larger financial asset to the part that is  No specific receivable is stated in the loan contract.
derecognized and part that continues to be  Receivables are used as collateral security for loans.
recognized based on the relative fair value of those  Does not qualify as transfer of financial assets for
parts on the date of transfer. derecognition because the pledger/borrower retains
o If the transfer results to obtaining a new financial the control over the pledged receivables.
asset or assuming a new financial liability, or a  Pledge receivables are neither derecognized nor
servicing liability, the entity recognizes these items specifically identified from other receivables.
at fair value.  Pledge is treated as secured borrowing.
a. The consideration received (including any new  Only the loan transaction is recorded.
asset obtained less any new liability assumed)  No entry is made for the pledged receivables.
b. The carrying amount (measured at the date of  Only a note disclosure is made for pledge
derecognition) transaction.

TRANSFER THAT DO NOT QUALIFY FOR ASSIGNMENT

DERECOGNITION  Formal form of pledge wherein the receivables
 If the transfer does not result in derecognition assigned or used as collateral security for borrowing
because the entity has retained substantially the are specifically identified and stated in the loan
ownership of the transferred asset, the entity shall contract.
continue to recognize the transferred asset in its  Transfer of a financial asset that does not normally
entirely and shall recognize a financial liability for qualify for derecognition because the assignor
the consideration received. usually retains control over the receivables
transferred.
 Receivables assigned are not derecognized.
OFFSETTING A FINANCIAL ASSET AND LIABILITY  Also treated as secured borrowing.
 Permitted only when the entity has a legal right to  The equity in assigned receivables is disclosed in
offset; and notes.
 An intention to settle the amounts on a net basis or
simultaneously. FORMS OF ASSIGNMENT
 When a transfer of financial asset does not qualify a. NOTIFICATION BASIS – debtors whose receivables
for derecognition, the retained asset shall not be have been assigned are notified of the assignments.
offset to the associated liability. The debtors will remit payments on the receivables
not to the assignor but to the assignee. The
SIMPLER GUIDE ON TRANSFER (US GAAP) assignee will periodically inform the assignor of
1. The transferred asset has been isolated from the collections made on the assigned receivables.
transferor (put beyond reach of the transferor and b. NON-NOTIFICATION BASIS – debtors whose
its creditor). receivables have been assigned are not notified of
2. The transferee has obtained the right to pledge or the assignment. The debtors will continue to remit
exchange either the transferred asset or beneficial payments on the receivables to the assignor.
interest in the transferred asset.

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 INTERMEDIATE ACCOUNTING PART 1A

Assignments are made commonly on non-

notification basis.

FACTORING
 Instead of borrowing money, pledging or assigning
an entity sometime sell the receivables to a
financial institution known as “factor”.
 Usually done in notification basis and either without
recourse or with recourse basis.

FACTORING WITHOUT RECOURSE

 The factor assumes the risk of uncollectability and
absorbs any credit losses.
 The transferor in not held liable in case the debtor
fails to pay.
 An outright sale or ordinary sale of receivable, both
in form (title) and substance (control).
 Transfer of asset that qualifies for derecognition of
its entirely.
 Treated as a sale and not a secured borrowing.
 Most factoring transactions are done on a without
recourse basis.

FACTORING WITH RECOURSE

 The transferor guarantees payment to the factor in
the event the debtor fails to pay.
 The transferor is held liable up to the guaranteed
amount in case the debtor fails to pay.
 Transfer of financial asset wherein the transferor
neither transfer not retains substantially all the risks
and rewards of ownership of the financial asset.
 This type of transaction is recorded using a financial
components approach because of the transferor’s
continuing involvement with the receivables.
 Each party to the factoring recognizes only the
assets and liabilities that it controls after the
transfer.

FACTOR HOLDBACK / ALLOWANCE

 The transferor is responsible for any reduction in
the collection of the receivables due to sales
returns and discounts whether the factoring is on a
without recourse or with recourse basis.
 The factor records a corresponding liability for the
holdback.
 The factor returns the “holdback” to the transferor
when the receivables are fully collected or when
there are no further sales returns and discounts
expected.

COMMISSIONS AND INTEREST CHARGES

 If the factoring is an isolated event or made on a
casual basis, the transferor records service fees and
interest charges as “loss on sale of receivables”.
 If the transferor usually uses factoring as a regular
means of financing, service fees and interest
charges are recorded as regular expenses.
 The transferor’s cost of factoring consists of service
fees and interest expenses plus, in case of default
by the debtor, any amount that the transferor is
obligated to pay.

13