ACCCOB NOTES

What is Financial The Financial Statements:

A complete set of financial statements provides
Accounting? a structured representation of an entity's
financial position and performance. It includes
Financial accounting involves recording, the following components:
classifying, and summarizing financial
transactions and events in terms of money. Its a. Statement of Financial Position (formerly
purpose is to provide useful financial information known as the Balance Sheet):
to both external users (primary users) and ● Presents the entity's assets, liabilities,
internal users (other users) of the information. and equity at a specific point in time.
External users rely on financial accounting for
● Assets are controlled by the entity,
investment and lending decisions, while internal
which are expected to provide future
users use it for internal decision-making.
economic benefits.
Financial accounting follows the guidelines and
framework set by the International Accounting ● Liabilities are the present obligations of
Standards Board (IASB). the entity to transfer economic
resources.
● Equity represents the residual interest in
the assets of the entity after deducting
GAAP and Conceptual liabilities.

Framework for Financial b. Statement of Profit or Loss and Other

Reporting: Comprehensive Income:
● Reports the entity's revenues,
The Generally Accepted Accounting Principles expenses, gains, and losses
(GAAP) are a set of standards, principles, and ● Revenues are inflows of economic
procedures that provide a framework for benefits arising from the ordinary
financial accounting. In the context of the activities of the entity.
Philippines, the Philippine Financial Reporting ● Expenses are outflows of economic
Standards (PFRS) are the local adaptation of benefits incurred to generate revenue.
the International Financial Reporting Standards
● Gains and losses result from
(IFRS) issued by the IASB. These standards
transactions or events outside the
ensure consistency and comparability in
ordinary activities of the entity.
financial reporting.
c. Statement of Changes in Equity:
The Conceptual Framework for Financial
Reporting serves as the foundation for ● Presents the changes in equity, showing
developing accounting standards. It provides the contributions from and distributions
overarching principles and concepts for to owners.
preparing and presenting financial statements. It ● Includes transactions with owners and
defines the fundamental characteristics of useful changes in accounting policies or errors.
financial information (relevance and faithful
representation) and enhancing characteristics d. Statement of Cash Flows:
(comparability, verifiability, timeliness, and ● Provides information about the entity's
understandability). cash inflows and outflows.
● Classifies cash flows into operating,
Underlying Assumption: investing, and financing activities.
Financial statements are prepared under the
assumption that the entity is a going concern e. Notes to the Financial Statements:
and will continue its operations in the ● Contains additional information and
foreseeable future. This assumption implies that disclosures that are essential for a
the entity will not liquidate its assets or cease its comprehensive understanding of the
operations. financial statements.
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Cash and Cash Equivalents
What is Cash?
Cash is a financial asset – a financial asset allows Traveler’s Check
us to receive cash or another financial asset of ★ Used by people traveling to foreign
another company countries
★ Can be used to buy goods or services or
Cash is a medium of exchange – cash is either be exchanged for cash
received or given up in every cash transaction. ★ Can be purchased from banks, credit
Cash is the MOST LIQUID asset. unions and at American Express Travel
Offices.
How is cash considered as cash?
Bank Draft
Cash should be readily available – one can use it
★ “Asking a bank to write a check for you”
anytime and anywhere as the need arises
★ Account owner gives the bank money,
★ Payment of current obligations
and the bank gives the check for the
★ Use for current operations
amount that is to be given.
★ Avoids risks such as bouncing, as the
Portions of cash in bank accounts that are legally
check comes from the bank itself.
restricted for withdrawal are not considered cash
either (Maintaining Balance.)
Cash in Bank
If one makes a deposit of a certain amount Comprised by savings and checking accounts
whether in bank notes or check, his account
should increase by the same amount, no more no
less. Cash Set Aside for Current Use
Include, but not limited to;
General Categories of Cash ★ Petty cash fund, payroll fund, interest
fund, dividend fund, and tax fund.
Cash on Hand
Cash inside one’s wallet or purse. (Cash readily
available to give or take)
RA 6426
★ Ex. checks on hand, manager’s checks, Foreign Currency Deposit Act of the Philippines
traveler’s check, cashier’s check, bank Any person, natural or juridical, may open foreign
drafts. currency deposit accounts with any Philippine bank
in good standing. Should the depositor wish to get
Personal Checks the peso equivalent of his withdrawal, the bank
★ Check booklet is issued upon opening of buys back the foreign currency based on the bank’s
a demand deposit account consisting of buying rate for the day.
blank check slips
★ Account holder fills the check, then bank The difference between the initial converted peso
transfers the money to the recipient’s amount, and the year-end converted peso amount
account is recorded on the financial statement as either gain
or loss on foreign currency translation
Manager’s Check
★ Issued by the bank’s manager upon the ★ Gain or less is presented as part of profit or
bank itself, promising to pay to the payee loss on the Statement of Comprehensive
a certain amount of money at a certain Income
date.
★ Typically used if large amounts of money
is involved, to avoid bouncing checks and
other risks.

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Cash and Cash Equivalents
What are Cash Equivalents? postdated checks as collection from
Cash Equivalents are short-term highly liquid customers
investments readily convertible to cash. Only highly ★ Must be recorded as payment or collection
liquid investments that are acquired 3 months only on the specified date written on it, and
before maturity can qualify as cash equivalents. not before
★ The date on the postdated check signifies
Philippine Accounting Standards the time when it can already be negotiated
As a general rule, PAS 7 allows investments with the bank.
purchased 3 months (90 days or less) before
maturity date to be classified as cash equivalents. Stale Checks
★ Received by an entity but not yet negotiated
with the bank within a significant period of
Examples of Cash Equivalents
time after the date of issue
★ If the check is not negotiated with the bank
★ 90-day time deposits
after 6 months from the date written on its
★ Time deposits purchased 3 months prior
face, it is considered stale check and not
to maturity
acceptable by the bank
★ Treasury bills
★ Should not be part of the cash balance of
★ Commercial papers
the holder
★ Certificate of deposits
★ Unless it is replaced with a new check
★ Money market placements
within the current accounting period, stale
checks should be deducted from the cash
account for financial statement purposes.
CONCEPT:
NSF Checks
★ Check previously received by an entity from
its customer as collection of the customer’s
account
★ IF the customer’s bank account does not
have sufficient balance at the time the entity
presents the check to the bank, it will not be
honored and subsequently returned to the
entity-depositor with the notation of “NSF” or
“no sufficient fund”
Compensating Balance ★ In this case, check should not be
★ The minimum balance that an account considered part of the cash balance of the
holder should maintain in his bank account entity; previous entry recording the
at all times collection from the customer must be
★ Aka. minimum balance / maintaining reversed to reduce cash balance.
balance
★ Included in an entity’s cash balance if they Cash Set Aside for Acquisition of
could be withdrawn by the depositor without NCA
dire penalties.
★ Set aside for acquisition of Noncurrent
★ Compensating balance is still considered as
Assets.
cash if there is not legal restriction as to its
★ Fund should not be part of the entity’s cash
withdrawal, otherwise it is treated as other
and cash equivalents.
assets.
★ This is because it doesn’t meet the
requirements of cash being readily available
Postdated Checks either for use or for settlement of obligations
★ Checks that bear a future date on its face. ★ Should be reclassified as non-current asset
Practice is to issue postdated checks as
payment of liabilities and to receive

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Cash and Cash Equivalents
Bank Overdraft Voucher System
★ Negative balance caused when an entity A method for authorizing and controlling cash
makes withdrawals or checks that exceed disbursements.
the balance of its account. ★ Cash Voucher – a document that supports a
★ Generally no accepted by banks in the cash transaction, filled out to identify what is
Philippines, but should this occur, an to be paid, the amount to be paid, and the
overdraft should be recognized as a current accounts to be recorded.
liability, and not as a negative balance in an ★ Once the voucher is approved, the
entity’s cash account. authorized disbursing employee prepares
the payment check.
★ Voucher system prevents indiscriminate and
Internal Control unauthorized purchases/expenses with the
While cash is one of the most significant resources
use of verifying and recording by the various
of a company, it is also most vulnerable to theft and
employees and departments
misappropriation. A company must implement
effective internal control measures to minimize
employee fraud and accounting errors involving
cash

CONTROL OF CASH

Imprest System
A control measure for both cash receipts and cash
disbursements
★ Cash receipts are deposited intact daily to
Limitations of Internal Control the bank
★ All payments of assets, liabilities and
expense should be made by check except
Human Error for small / petty expenditures
★ Negligence ★ Control of cash receipts become more
★ Fatigue effective if a merchandising concern
★ Misjudgement business is using special journals – Cash
★ Confusion Receipts Journal (CRJ)

Petty Cash Fund

Human Fraud
Used for small expenditures – set up by the entity
★ Intent to defeat internal controls for
for the petty expenses such as office supplies, fare,
personal gain
snack items. Petty cash funds are an essential part
of the imprest system.

Basic Internal Control Measures Why use Petty Cash Fund?

1. Separation of Cash Duties
2. Limiting Access to Cash
Reduces workload of cashier by delegating to
3. Proper Documentation of Cash Receipts
another person – petty cashier
4. Strict Control of Voucher System

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Cash and Cash Equivalents
It is easier to control if similar transactions are Reconciling items due to errors Made by
dealt with together Depositor:

Efficiency – reduce the number of postings by

adding transactions together
★ Although transactions are individually
insignificant, they still need to be
accounted for as a whole

Reconciling items due to errors Made by Bank:

Bank Reconciliation
A report which compares the bank balance as per Format of Bank Reconciliation Statement
company’s accounting records to the balance ★ Book to Bank Balance Method
stated in the bank statement. It is done to make ★ Bank to Book Balance Method
detailed comparisons of all transactions recorded ★ Adjusted Balance Method
by the entity against those recorded by the bank ○ Presents the cash balance that
statement. – Correcting Errors should be presented on the
statement of financial position
★ As part of internal control, the accountant
prepares a bank reconciliation – a process
that shows the items and factors which
caused two cash balances to be unequal
★ These factors are called reconciling items

Reconciling Items

Reconciling items due to timing difference

★ Deposit in Transit – added to balance per
bank
★ Outstanding Check – Deducted from the
balance per bank
★ Bank Debit Memos – Deducted from the
balance per book (NSF checks, cost of
checkbooks, service and penalty charges,
reduction of loans)
★ Bank Credit Memos – added to the cash
balance per book

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Receivables
What are Receivables? Net Realizable Value
★ Financial assets, represent a contractual ★ Estimated amount that could be collected
right to receive cash or other financial ★ Gross receivables - allowance for doubtful
assets from another entity accounts
★ Presented under the CURRENT ASSETS ○ Allowance for doubtful accounts is a
section of the SFP contra-receivables account
○ Under the heading “Trade and Other (deduction from receivables)
Receivables” ★ Affected by:
★ Recognized due to the accrual assumption ○ Sales discounts
in accounting ○ Sales returns and allowances
○ Recognize income when goods are
sold or when services have been
rendered, not when cash is received Methods on Estimating Loss on A/R
Allowance for Doubtful Accounts is Updated
Trade Receivables by Percentage of Accounts Receivables
★ Accounts receivable and Notes receivable
○ Arise from ordinary course of 1. Allowance for doubtful is estimated at a
business operations certain percentage of the A/R
2. Allowance for doubtful is estimated to a
certain percentage of the A/R
Accounts Receivable
3. Allowance for doubtful is estimated by a
Short-term receivables that arise when a
certain percentage of the A/R
merchandiser sells goods or services on credit.
The credit term or agreement is considered an
open account – no formal written promise to pay
or promissory note is required to the
customer-debtor – DOES NOT EARN INTEREST

Initial recognition:
★ Receivables are recognized at face value
+ transaction costs that are directly
attributable to the acquisition

Subsequent recognition:
★ At the end of the reporting period, A/R are
reported at their Net Realizable Value –
Aging of Accounts Receivables
no longer carried at initial face value, but
★ Estimation of bad debts through creation
an amount expected to be collected from
of categories or groups showing the
them through an adjustment that
number of days the accounts are already
recognizes probable loss
past due
○ Anticipating probable loss on
★ Analyzes the probability of collection or
receivables is supported by the
non-collection based on the credit terms
principle of PRUDENCE
★ Longer the period past due, higher
estimated loss rate
Derecognition:
★ When contractual rights to the cash flow
expire
Percentage of Sales Method
★ Entity transfers the receivables, and the
★ Uses either the net sales or net credit
transfer qualifies for derecognition.
sales as a basis in computing the
estimated amount of loss on accounts
when cash sales are minimal.

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Receivables
Notes Receivables
Similar to accounts receivable, but more formal
claim against another party – a written promise to
pay a certain sum of money at a specific future
date
★ May be short term or long term
★ Interest Bearing
★ Written promise to pay

Initial Recognition
★ Present value using effective interest
method
★ Short-term, interest-bearing notes
receivable are recognized like accounts
receivable.
★ Long-term notes are initially recognized at
their present value, considering the
effective interest rate.
★ Present value is used to account for the
future value vs. current value due to
factors like inflation.
★ The effective interest rate determines
interest income, while the nominal rate
relates to regular cash payments.
★ Understanding the note's cash flows and
using the appropriate present value
formula is crucial for determining its
present value.

N/R recorded at a discount if

Effective Rate > Nominal Rate
Discount - PV is lower than face amount
N/R recorded at a premium if
Effective Rate < Nominal Rate
Premium - PV is higher than face value

Subsequent recognition
★ Carrying amount

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Receivables

Receivable Financing
Technique undertaken by entities to expedite cash
flows from their receivable – involve selling,
pledging, assigning and factoring of customer
accounts

Cash can also be obtained through discounting of

notes receivables.

Pledging
★ A/R offered as collateral against an
existing loan.
★ Ownership and control transfer if debtor
defaults.
★ PFRS 7 requires disclosure of pledged
receivables.

Assignment
★ Entity obtains a loan from a creditor.
★ Responsibility of collecting accounts may
be given to the creditor.
★ IFRS 7 requires disclosure of net position
in assigned accounts.

Factoring
Analysis of Accounts Receivable ★ Entity sells accounts receivable to a
factor.
★ Factor pays a portion, not full face value,
due to collection risk.
★ Derecognition of transferred receivables.

DISCOUNTING OF NOTES RECEIVABLES:

★ Notes turned into cash before maturity
through endorsement.
One can evaluate an entity’s financial performance ★ Proceeds depend on remaining term,
and financial condition with regard to its accounts interest rate, and face value.
and notes receivable using FINANCIAL RATIOS. ★ Recourse: bank can collect from the entity
if note dishonored.
Non-Trade Receivables ★ Non-recourse: bank cannot collect from
★ Arise from services other than goods or the entity if note dishonored.
rendering of services
★ Examples:
○ Claims Receivable
○ Interest Receivable
○ Advances to Affiliates / IOUs from
officers and employees

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