Intermediate Accounting 1

Lessons under Conceptual Framework, Cash and Cash Equivalents, and Bank Reconciliation

Bank Reconciliation

It explains the difference between the bank balance per bank statement and the balance shown in the entity's records.

Deposit in transit

Deposits recorded in the cash account in one period but not credited by the bank until the next period. These normally include late deposits and collections not yet paid.

Checks written and recorded as payment by the entity but not yet debited to the entity's account by the bank.

Outstanding checks

Unrecorded debit memos

Charges made by the bank, such as for service and NSF checks, from the entity's account but not yet recorded by entity.

Unrecorded credit memos

Credits made by the banks, such as collections deposited directly to the bank, to the entity's account but not yet recorded by the entity.

Error

It made by the entity or the bank.

Forms of bank reconciliation

Bank to book
Book to bank
Adjusted balance

Bank to book method

Under this method, the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance.

Book to bank method

Under this method, the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank balance.

Adjusted Balance Method

Under this method, the book balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet.

There is shortage (cash is overstated) if;

Adjusted bank balance is less than book balance

There is overage (cash is understated) if;

Adjusted bank balance is greater than book balance

3 Kinds of Bank Deposits

Demand Deposit
Saving Deposit
Time Deposit

Current or checking account where deposits are covered by deposit slips and funds are withdrawable on demand; non-interest bearing.

Demand Deposit

Saving Deposit

The depositor is given a passbook upon the initial deposit; it is an interest bearing.

Time Deposit

A formal agreement is embodied in an instrument called a certificate of deposit. It is preteminated or withdrawn on demand after a certain period of time agreed upon; with high-interest bearing, evidenced by a certificate of deposit.

Book reconciling items

-credit memos
-debit memos
-errors

Bank reconciling items

deposits in transit
outstanding checks
bank errors

Credit Memos

It refers to items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. It have the effect of increasing the bank balance.

Debit Memo

It refers to items not representing checks paid by the bank which are charged by the bank to the account of the depositor as cash disbursement. It has the effect of decreasing the bank balance.

Uncredited items

They are deposits paid into the bank. These items occurred too close to the cut-off date of the bank statement and so do not appear on the statement.

Unpresented checks

They are checks issued by the firm that have not yet been presented to its bank for payment.

Standing orders

They are standing instructions from the firm to the bank to make regular payments.

Bank charges

They are charges made by the bank to the company for banking services used.

Dishonored checks

They are checks deposited but subsequently returned by the bank due to the failure of the drawer to pay.

Credit transfers

They are money received from customers directly through the banking system.

Interest allowed by the bank

They are interest received for deposits or fixed
deposits.

Outstanding Checks

Checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement.

Cash

It compromises cash on hand and demand deposits.

Cash on Hand

It includes undeposited currencies, checks, and working funds such as petty cash and change funds.

Demand Deposits

It is unrestricted funds that can be withdrawn upon demand from a bank where they have been deposited.

Cash

An item must be readily available and not restricted for use in the payment of current obligation.

Post-dated Checks

A check which bears a date later than the current date.

A post-dated check received is not \________ and still included as part of \_________?

cash and receivables

NSF check received is not \________ but included in \____________.

cash and receivables

NSF Check

The checking account does not have enough funds to cover the transaction.

NSF Check

It is also known as 'bounced' or 'drawn against insufficient fund' check.

Bank Draft

It is a payment on behalf of the payor, which is guaranteed by the issuing bank.

Money Order

It is a document, usually issued by a bank or government institution, that allows by the stated payee too receive cash on demand.

Traveler's Check

It is a form of money order.

Foreign currency bank deposits

Reported as part of cash in Philippine Peso equivalent if unrestricted as to withdrawal. Otherwise, reported either as other current or non assets depending on expected recovery.

Compensating Balance

Is a minimum balance to be maintained as deposits with a bank. This is normally related to borrowing arrangements.

Bank Overdraft

Generally reported under current liabilities as short-term borrowing. Can be offset against demand deposit balances in other accounts if maintained in the same bank.

IOU from Employees

This is an informal document containing a promise to pay.

Cryptocurrencies

It is held by an entity can be treated as inventories or intangible assets but not cash.

Cash Equivalents

A short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Face value

Cash is measure at \________?

Current exchange rate

Cash in foreign currency is valued at the \_________?

Commercial Papers

It is often considered a cash equivalent because it is a highly liquid and low-risk asset that can be easily converted into cash. It is frequently traded in the secondary market, which makes it easy to buy and sell

Certificate of Deposits

This are a type of time deposit offered by banks and other financial institutions, often considered a cash equivalent because they are highly liquid and low-risk investments that can be easily converted into cash before the maturity date, although this may result in a penalty or loss of interest.

statement of cash flow

Inflows and outflows of cash and cash equivalents are reported in the \_________?

Operating activities

It is the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

Operating activities

They generally result from the transactions and other events that enter into the determination of profit and loss.

Investing Activities

This refers to the purchase or sale of long-term assets that are held for income or capital appreciation. This is the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Acquisition

This refers to the purchase of one company (the "target") by another company (the "acquirer").

Expenditures

This refer to the money spent by a company or organization for a specific purpose, such as the purchase of goods or services, payment of salaries or wages, or investment in capital assets.

Financing Activities

This activities result in changes in the size and composition of the contributed equity and borrowings of the entity.

Money

It is a standard medium of exchange in business transaction.

Cash

It includes money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit.

Cash items included in cash

Cash on hand
Cash in bank
Cash fund

Cash on Hand

This includes undeposited cash collections and other cash items awaiting deposit.

Cash in Bank

This includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal.

Cash Fund

This is set aside for current purposes such as petty cash fund, payroll fund, and dividend fund.

Cash Equivalents

A short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rate.

Cash Equivalents

The standard further states that only highly liquid investments acquired 3 months before maturity can qualify as \_________?

Cash and Cash Equivalents

This should be shown in the first line item under current asset.

Notes to Financial Statements

The details comprising the cash and cash equivalents should be disclosed in the \________________?

Cash Fund

This is set aside for use in current operations or for the payment of current obligation, it is a current asset.

Undelivered Check

The one that is merely drawn and recorded but not given to the payee before the end of reporting period.

Post-dated check delivered

The check is drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period.

Stale Check

Check not encashed by the payee within a relatively long period of time

Cash Shortage

Where the cash count shows cash which is less than the balance per book, a \__________ is to be recorded.

Cash Short or Over

Only a temporary or suspense account.

Imprest System

A system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check.

There are two methods of handling the petty cash, namely:

Imprest Fund System and Fluctuating Fund System

Petty Cash Fund

A money that is set aside to pay small expenses which cannot be paid conveniently by means of check.

Imprest Fund System

A system that is the one usually followed in handling petty cash transaction.

Accounting assumptions

These are the basic notions or fundamental premises on which the accounting process is based.

What are the two underlying assumptions specifically mentions the ASC conceptual framework?

Accrual and going concern

Accrual

The effects of transaction and other events are recognized when they occur and not as cash or its equivalent is received or paid, and they are recorded and reported in the financial statements of the period to which they relate.

Continuity assumption

If a business is not being sold or closed, the amounts reported in the accounts for assets used in the business operations are based on the cost of the assets. This practice is justified by:

Relevance

Information that has no bearing on an economic decision to be made is useless.

Comparability

It is the ability to bring together for the purpose of noting points of likeness and difference.

Understandability

It requires that users have some knowledge of the complex economic activities of the entities, the accounting process and the technical terminology in the statements

Neutrality

Preparers of statements should not try to increase the usefulness of the information to a few users to the detriment of others who may have opposing interest

Substance over Form

Incase of conflict between economic substance and legal form of a transaction; the economic substance shall prevail.

Materiality

Small expenditures for tools are expensed immediately

Conservatism

When in doubt, recognize all losses and don't recognize gains.

Timeliness

The older the information, the less useful.

Relevance

It is the capacity of the information to influence a decision.

Comparability

It is the goal achieved by consistency.

To assist the Board of Accountancy in promulgating rules and regulations affecting the practice of Accountancy in the Philippines is \------ of conceptual framework.

not a purpose

Going concern

It is a assumption may not be followed when an entity in bankruptcy reports financial results.

When does the concept of accounting entity is applicable?

whenever accounting is involved

In the Conceptual Framework for Financial Reporting, \_________ provides the "why" of accounting.

Objective of financial reporting

Income

It is not associated with the statements of financial position.

Financial Accounting is the area of accounting that emphasizes reporting to?

creditors and investors.

What is the underlying theme of the conceptual framework?

decision usefulness.

Financial accounting can be broadly defined as the area of accounting that prepares financial statements to be used by parties both \___________ to the business enterprise.

internal and external

The responsibility for the proper preparation of a company's financial statements rests with its \______?

management