THEORETICAL FOUNDATION OF ACCOUNTING AND THE PHILIPPINE ACCOUNTANCY PROFESSION

THEORETICAL FOUNDATION OF ACCOUNTING AND THE PHILIPPINE ACCOUNTANCY PROFESSION

• Accounting is a service activity. The accounting function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. (Accounting Standards Council)
• Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof. (Committee on Accounting Terminology of the American Institute of Certified Public Accountants)
• Accounting is the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information (A statement of basic accounting theory of American Accounting Association)
• Accounting is an information system that measures, processes and communicates financial information about an economic entity. (Statement of Financial Accounting Concepts of Financial Accounting Standards Board)

COMPONENTS (A statement of basic accounting theory of American Accounting Association)

1. Identifying - analytical component; this involves recognition or non- recognition of business activities as accountable events. An event is accountable or quantifiable when it has an effect on assets, liabilities and equity. Accountable events can be:

• External or Exchange Transactions - economic events involving one entity and another entity.
• Internal Transactions - economic events involving the entity only.

2. Measuring - technical component; this involves assigning peso amounts to the accountable economic transactions and events. Measurement can be categorized as follows:

1. Valuation by opinion - this happens when measurement is affected by estimates.
2. Valuation by fact - this happens when measurement is unaffected by estimates.

3. Communicating - formal component; this involves preparing and distributing accounting reports to potential users of accounting information. It also involves interpreting the significance of the processed information. This component involves three aspects:

1. Recording- journalizing; this is the process of systematically maintaining a record of all economic business transactions after they have been identified and measured.
2. Classifying- posting; this is sorting or grouping of similar and interrelated economic transactions into their respective classes.
3. Summarizing- this is the preparation of financial statements.

OVERALL OBJECTIVE

• To provide quantitative financial information about a business that is useful to statement users in making economic decisions

HISTORY

INFORMAL ERA

(bullae, clay tablets, code of hammurabi, Quipu)

8500 B.C. - Tokens sealed in clay balls (called bullae) representing commodities were found in modern Iraq (formerly Mesopotamia). These are considered as the first form of bill of lading.

• Bullae - tokens sealed in clay balls found in modern iraq. First form of bill of lading

3600 B.C. - Clay tablets recorded payment of wages and tracked costs of labor and materials used in building structures.

• Clay tablets - used in 3600 BC to record payment of wages

2286-2242 B.C. - A portion of the Code of Hammurabi requires merchants trading goods to give buyers a sealed memorandum containing the agreed price before it can be considered enforceable.

• Code of Hammurabi - a sealed memorandum containing agreed price in trading goods.

11th - 14th Century A.D. - Inca Empire from South America used knotted cords of different lengths and colors called quipu to keep accounting records.

• Quipu - knotted cords used in inca empire from south america to keep accounting records

DEVELOPMENT ERA

(Amatino Manucci, Luca Pacioli, Jacques Savary, Nicolas Petri)

1211 - Earliest evidence of business bookkeeping was found in Florence, France. However, It was observed that accounts used were not related in any special way (in terms of equality for entries) and balancing of the accounts was lacking.

• 1211 in Florence, France - place where the earliest evidence of business bookkeeping was found

1299-1300 - Amatino Manucci (partner in Giovanni Farolfi and Company) kept financial records of his firm's branch showing enough detail to be identified as double-entry bookkeeping-displaying use of debits and credits and duality of entries. These are the oldest known existing examples of the double-entry system. Because of this, Manucci was considered the father of double-entry bookkeeping.

• Amatino Manucci - kept financial records of his firm’s branch which is identified to be double-entry bookkeeping
• Amatino Manucci - was considered the father of double-entry bookkeeping
• Double entry Bookkeeping - the use of debits and credits and duality of entries.
• 1299-1300 - year where the oldest known existing examples of the double-entry system first existed.

1494 - Luca Pacioli published his book Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, Proportions and Proportionality) which includes Particularis de Computis et Scripturis (Details of Calculation and Recording) describing double-entry bookkeeping. This reflected the practices of Venice accounting practices at the time, which became known as the Method of Venice or the Italian Method.

• Luca Pacioli - prominent person during developmental era of accounting history who narrated in his work the method of venice
• Luca Pacioli - he wrote the book Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, Proportions, and Proportionality) includes Particularis de Computis et Scripturis (Details of Calculation and Recording) describing double-entry bookkeeping.
• Luca Pacioli - in 1494 he reflected the practices of Venice or known as the Method of Venice or the Italian Method.

1673 - The France government introduced the submission of an annual fair value statement of financial position to protect the economy from bankruptcies in the document Ordonnance de Commerce of 1673 (French. Principal author of this code was Jacques Savary making the code popularly known as the Code Savary.

• France government - introduced the submission of an annual fair value statement of financial statement to protect the economy from bankruptcy
• Ordonnance de Commerce of 1673 - the document which introduced the submission of annual fair value statements of financial position.
• Jacques Savary - a french author of the code popularly known as Code Savary

17th Century - Nicolas Petri was the first person to group similar transactions in a separate record and enter the monthly totals in the journal, rather than recording all transactions in a series.

• Nicolas Petri - the first person to group similar transactions in separate record and enter monthly totals in the journal

FORMAL ERA

(United States, The Accounting Profession, Eugen Schmalenbach)

18th Century - Formation of an accounting profession started as influenced by the rise of a modern industrial society in Britain.

1903 - United States Steel published consolidated financial statements.

1909 - US corporate income tax law permitted a deduction for depreciation charges in the calculation of taxable income.

1920s- Eugen Schmalenbach published The Model Chart of Accounts to address comparability of financial data across different companies.

GLOBALIZATION ERA

1973 - International Accounting Standards Committee (IASC) was established.

1978 - Code of Ethics for Professional Accounts was released.

2001 - International Accounting Standards Board (IASB) replaced IASC.

2002 - FASB and IASB entered into a memorandum of understanding called the Norwalk Agreement committing themselves to the convergence of US GAAP and IFRS.

• Norwalk Agreement - memorandum of understanding entered by FASB and IASB committing themselves to the convergence of US GAAP and IFRS
• DICTIONARY: Convergence - means (of a number of things) gradually change so as to become similar or develop something in common:

2014 - ASEAN Mutual Recognition Arrangements for Accountancy was signed

ACCOUNTANCY PRACTICE IN THE PHILIPPINES

(law passed for accountants and established organizations for Filipinos)

1923 - Act. No. 3105 was passed into law which paved the way for Filipino accountants to be recognized as Certified Public Accountants in the Philippines. In 1923, there were 43 registered accounts.

• Act No. 3105 - law in 1923, which helped filipino accountants to be recognized as Certified Public Accountants
• 1923 - Act No. 3105 was passed into law
• 1923 - there were 43 registered accounts.

1967 - Republic Act No. 5166 (The Accountancy Act of 1967) was enacted replacing the 1923 law.

• Republic Act No, 5166 - or known as The Accountancy Act of 1967 was enacted to replace the 1923 law or known as Act No. 3105

1975 - Presidential Decree No. 692 (The Revised Accountancy Law) was enacted replacing the 1967 law.

1975 - Philippine Institute of Certified Public Accountants (PICPA) was accredited as the bona fide professional organization representing CPAs in the Philippines.

1981 - Accounting Standards Council (ASC) was created.

1987 - Guidelines for the mandatory continuing professional education (CPE) program for CPAs.

2004 - Republic Act No. 9298 was enacted replacing the 1975 law. This is the existing law for the practice of Accountancy Profession in the Philippines.

2004 - Financial Reporting Standards Council (FRSC) was established and replaced ASC.

2013 - Guidelines for Continuing Professional Development (CPD) was established and replaced CPE.

2017 - CPD law was implemented.

EVOLUTION FOR THE LAW OF ACCOUNTING IN THE PHILIPPINES

1. 1923 Republic Act No. 3105
2. 1967 Republic Act No. 5166 (The Accountancy act of 1967)
3. 1975 Presidential Decree No. 692 (The Revised Accountancy Law)
4. 2004 Republic Act No. 9298 (Existing Law for Accounting Profession in the Philippines)

PHILIPPINE ACCOUNTANCY ACT OF 2004

This is also known as Republic Act no. 9298. This is the law regulating the practice of accountancy in the Philippines. The act is comprised of five (5) articles which are as follows:

1. Title, declaration of policy, objective and scope of practice (Sections 1-4)
2. Professional Regulatory Board of Accountancy (Sections 5-12)
3. Examination, Registration and Licensure (Sections 13-25)
4. Practice of Accountancy (Sections 26-35)
5. Penal and Final Provisions (Sections 36-44)

OBJECTIVES (SECTION 3) - Examination, Registration and Licensure

1. The standardization and regulation of accounting education;

2. The examination for registration of certified public accountants; and

3. The supervision, control, and regulation of the practice of accountancy in the Philippines

FOUR AREAS OF ACCOUNTANCY PROFESSION (SECTION 4) - Practice of Accountancy

1. Public practice- aka practice of public accountancy; composed of individual practitioners, small accounting firms and large multinational organizations rendering independent and expert financial services to the public which include:

1. Auditing- primary service offered by most public accounting practitioners; specifically known as external auditing; this refers to examination of financial statements by independent certified public accountant for the purpose of expressing an opinion as to the fairness with which the financial statements are prepared; also known as attest function.
2. Taxation- includes preparation of annual income tax returns and determination of tax consequences of certain proposed business endeavors.
3. Management Advisory Services- generally refers to services to clients on matters of accounting, finance, business policies and many other phases of business conduct and operations. (this services can be prepared by any profession)

2. Private Practice - aka practice in commerce and industry; major objective of private accountant is to assist management in planning and controlling the entity’s operations.

3. Government accounting - aka practice in government: encompasses the process of analyzing, classifying, summarizing and communicating all transactions, involving the receipt and disposition of government funds and property and interpreting the results thereof. Its focus is custody and administration of public funds

4. Accounting in Education - aka practice in academe; focuses on teaching accounting, taxation, business law, finance, business management and other related fields in any higher education institutions.

PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCY (SECTIONS 5-12)

Definition: This is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession in the Philippines. This body is shortly referred to as the Board of Accountancy (BOA).

COMPOSITION: TOTAL: 1 CHAIRMAN, 1 VICE CHAIRMAN WHICH IS ALSO A MEMBER, AND 5 MEMBERS = TOTAL OF 7 MEMBERS

Composition: One (1) chairman and six (6) members with one (1) vice-chairman from the members to be elected by the body Qualification: The chairman and the board, to be appointed, should possess the following:

1. Must be a natural-born citizen and a resident of the Philippines;
2. Must be a duly registered Certified Public Accountant with a least ten (10) years of work experience in a scope of practice of accountancy;
3. Must be of good moral character and must not have been convicted of crimes involving moral turpitude; and (Turpitude - anything that relates to money in short corruption)
4. Must not have any pecuniary interest, directly or indirectly, in any school, college, university or institution conferring an academic degree necessary for admission to the practice of accountancy or where review classes in preparation for the licensure examination are being offered or conducted, nor shall he/she be a member of the faculty or administration thereof at the time of his/her appointment to the Board.

Term of Office: Complete term of three (3) years; the chairman or the member can be re-appointed for a maximum of two successive complete terms. However, to those who completed two successive complete terms can be re-appointed, provided that there is a lapse of one year. Furthermore, no person shall serve in BOA for more than twelve (12) years.

Superior Office: BOA is under Professional Regulatory Commission (PRC).

PRACTICE OF ACCOUNTANCY (SECTIONS 26-35)

Certificate of Accreditation to Practice Public Accountancy: This certificate signifies that the CPA can now principally practice public accountancy. This certificate is issued to a CPA who (a) has already acquired a minimum of three (3) years of meaningful experience in any areas of public practice and (b) has earned at least 120 units of continuing professional development (CPD) program. Lastly, this certificate is valid for three years and can be renewed Indefinitely unless it is disallowed by BOA for just cause.

(CPD) Continuing Professional Development: This refers to the inculcation and acquisition of advanced knowledge, skill, proficiency and ethical and moral values after the initial registration of the Certified Public Accountant for assimilation into professional practice and lifelong learning.

ADDITIONAL INFORMATION REGARDING CPD:

• Based on latest rulings, renewal of the CPA license requires 15 CPD credit units which should be earned in a compliance period of three (3) years.
• For renewal of accreditation to practice public accountancy, it is required to earn 120 CPD credit units which should be earned in a compliance period of three (3) years.
• An exemption to earn CPD credit units for license renewal is granted to CPAs reaching the age of 65 years. The exemption doesn't cover CPD credit unit requirement for accreditation to practice public accountancy.
• CPAs who are working or practicing the profession or furthering their studies abroad shall be temporarily exempted from compliance with CPD credit units, provided that they have been out of the country for at least two years immediately prior to the date of renewal.

2018 CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

CONCEPTUAL FRAMEWORK: DEFINITION

• 2018 - This describes the objective of, and the concepts for, general- purpose financial reporting.
• 2010 - This is a summary of the terms and concepts that underlie the preparation and presentation of financial statements.
• This is an attempt to provide an overall theoretical foundation for accounting.
• This is the underlying theory for development of accounting standards and revision of previously issued accounting standards.

THE CONCEPTUAL FRAMEWORK PROVIDES THE FOUNDATION FOR STANDARDS THAT:

1. Promote transparency - through enhanced international comparability and quality of financial information.
2. Strengthen accountability - through reduced information gap between providers of capital and people to whom they have entrusted money.
3. Contribute to economic efficiency - through helping investors in identifying opportunities and risks across the world.

PURPOSES OF CONCEPTUAL FRAMEWORK

1. Assist the IASB to develop IFRS (Standard) that are based on consistent concepts
2. Assist financial statement preparers to develop consistent accounting policies (a) when no Standard applies to a particular transaction, event or issue, or (b) when a standard allows a choice of accounting policies.
3. Assist all parties to understand and interpret the Standard.

AUTHORITATIVE STATUS OF CONCEPTUAL FRAMEWORK

• This is not a Standard. In case when there is a conflict, requirements of Standards shall prevail over the Conceptual Framework.
• Even though the Conceptual Framework is used as a guide in developing Standards, there will be times that some provisions in the Standards will depart from the Framework. This is allowed but the departure should be explained in the ‘Basis for Conclusions’ provision of that Standard.
• In the absence of a standard or an interpretation that specifically applies to a transaction, management shall consider the applicability of the Conceptual Framework in developing and applying an accounting policy that results in information that is relevant and reliable.
• Revision of the Conceptual Framework happens from time to time. In such cases, existing Standards won't necessarily be affected by such revision.

OTHER DETAILS

- It is released by the International Accounting Standards Board (IASB).

- This document, a.k.a. Framework (2018) or the Conceptual Framework, is composed of 8 chapters which are as follows:

CHAPTER 1 - OBJECTIVE OF FINANCIAL REPORTING

OVERALL OBJECTIVE

General-purpose financial reporting’s objective is “to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity."

• The financial information provided by general- purpose financial reporting is about reporting entity.
• The financial information is being addressed to primary users, i.e., existing and potential investors, lenders and other creditors. It is being addressed to them because they are the users who provide resources to the entity.
• The decisions being made by the primary users generally relate to providing resources to the entity.

USERS OF FINANCIAL INFORMATION

1. Primary Users

1.1. Existing and Potential Investors- They are concerned with risk inherent in and return provided by their investments.

1.2. Lenders and Other Creditors - They are concerned with information which enables them to determine whether their loans, interest thereon and other amounts owing to them will be paid when due.

1. Other Users

2.1. Employees - They are interested in information about stability and profitability of the entity.

2.2. Customers - They are interested in information about continuance of an entity especially when they have a long-term involvement with or are dependent on the entity.

2.3. Government and Their Agencies - They are interested in allocation of resources and therefore activities of the entity.

2.4. Public - They are interested in information about trends and range of its activities.

SPECIFIC OBJECTIVES OF FINANCIAL REPORTING

1. To provide information useful in making decisions about providing resources to the entity
2. To provide information useful in assessing cash flow prospects of the entity
   1. Cash flow prospects may be dividends and/or share in net income (for investors) or principal and interest payments (for lenders and other creditors). Financial reporting may provide relevant information regarding this matter.

To provide information about entity resources, claims and changes in resources and claims

• Economic resources and claims pertain to a company's financial position whereas changes in resources and claims pertain to companies to both (1) financial performance and (2) other events or transactions such as issuance of debt or equity instruments.

RELATED CONCEPTS TO SPECIFIC OBJECTIVES OF FINANCIAL REPORTING

• Financial position - It pertains to the information about an entity's economic resources and claims against it, i.e., assets, liabilities and equity.
• Financial performance - It relates to information about the return the entity has produced from its economic resources, i.e., income and expenses. This helps the users to understand the return that the entity has produced on the economic resources.
• Cash Flows - This talks about inflow and outflow of cash arising from any kind of transaction an entity undergoes.
• Accrual Basis of Accounting- It depicts the effects of transactions and other events and circumstances on a reporting entity's economic resources and claims in the periods in which those effects occur (when income is earned or when expense is incurred), even if the resulting cash receipts and payments occur in a different period.

LIMITATIONS OF GENERAL-PURPOSE GP FINANCIAL REPORTING

1. GP financial reports do not and cannot provide all of the information that primary users need.
2. GP financial reports are not designed to show the value of a reporting entity but these reports provide information to help users estimate the value of the reporting entity.
3. GP financial reports are intended to provide common information to users and cannot accommodate any request for information
4. To a large extent, GP financial reports are based on estimate and judgment rather than exact depiction.

MANAGEMENT STEWARDSHIP

a.k.a. management performance; this can be assessed through information about how efficiently and effectively management has discharged its responsibilities to use the entity's economic resources. In effect, such information is also useful for predicting how management will use an entity's economic resources in future periods.

CHAPTER 2 - QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

DEFINITION

• Qualitative characteristics are attributes that make financial accounting information useful to the users.

CLASSIFICATION

1. Fundamental Qualitative Characteristics - These directly relate to the content or substance of financial information; these qualitative characteristics dictate whether information is useful or not. These include:

1. Faithful Representation.
2. Relevance.

2. Enhancing Qualitative Characteristics - These directly relate to the presentation or form of the financial information; these qualitative characteristics intend to increase the usefulness of the financial information. Included in this classification are the following:

1. Comparability
2. Understandability
3. Verifiability
4. Timeliness

CONCEPT OF RELEVANCE

Relevance- This refers to the capacity of the information to influence a decision. An information is considered relevant if it is related or pertinent to the economic decision to be made. Ingredients of relevance include:

1. Predictive Value- It means that information has this when it can be used as an input to processes employed by users to predict future outcome.
2. Confirmatory Value- It states that information has this when it provides feedback about previous evaluations.

Materiality

• This is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision and fairness of the financial statements.
• According to IASB, information is material if omitting, misstating, or obscuring it could reasonably be expected to influence the economic decisions that primary users of general - purpose financial statements make on the basis of those statements which provide financial information about a specific reporting entity.
• This is also known as the doctrine of convenience and sub-quality of relevance.
• Applying materiality is based on either nature, magnitude (relative size) or both of the items to which the information relates.
• Observing materiality is dependent on good judgment, professional expertise and common sense.

CONCEPT OF FAITHFUL REPRESENTATION

Faithful Representation -This means that financial reports represent economic phenomena or transactions in words and numbers. Ingredients of faithful representation include:

1. Completeness - This quality dictates that relevant information should be presented in a way that facilitates understanding and avoids erroneous implication. Thus, this is a result of the principle of full disclosure (also called an adequate disclosure standard). Furthermore, this leads to accompaniment of general purpose financial statements of notes to financial statements.
2. Neutrality -This characteristic means that the financial statements should not be prepared so as to favor/bias one party to the detriment of another party.
3. Free From Error - This tells that no material error or omission in description of transaction. It also says that the process used to produce the reported information has been selected and applied with no error in the process.

OTHER CONCEPTS AFFECTING FUNDAMENTAL QUALITATIVE CHARACTERISTICS:

1. Substance Over Form - This means that transactions should be accounted for in accordance with their substance and reality and not merely their legal form.
2. Prudence - This concept observes exercise of care and caution when dealing with uncertainties in the measurement process such that assets or income are not overstated and liabilities or expenses are not understated. By exercising prudence, neutrality is observed.
3. Conservatism - This is synonymous with prudence. It means that when alternatives exist, the alternative which has the least effect on equity shall be chosen.

CONCEPTS OF COMPARABILITY

This pertains to the ability of information to be brought together for the purpose of noting points of likeness and difference.

This can either be:

• Intra-comparability - this is comparability within an entity; aka horizontal comparability
• Inter-comparability - this is comparability across entities; aka dimensional comparability

Connected to comparability is consistency which refers to use of the same method for the same item, either from period to period within an entity, or in a single period across entities. This can be violated if such change would result in more useful and meaningful information (though such change should be fully disclosed).

OTHER ENHANCING QUALITATIVE CHARACTERISTICS

1. Understandability - This requires that financial information must be comprehensible or intelligible if it is to be most useful, with the assumption that users of the information have reasonable knowledge of business and economic activities of the entity.

2. Verifiability - This means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

2.1. Direct Verification - This is applied through direct observation.

2.2. Indirect Verification - This is applied through use of model, formula or other technique to recalculate inputs.

3. Timeliness - This means that financial information must be available or communicated early enough when a decision is to be made.

BARRIERS IN ACHIEVING QUALITATIVE CHARACTERISTICS

Measurement Uncertainty

• This arises when monetary amounts in financial reports cannot be observed directly and must instead be estimated.
• In case the level of uncertainty in providing an estimate is high, clearly and accurately describe and explain the process of estimation in order for usefulness of that information not to be sacrificed.

Cost

• This is a pervasive constraint on information that can be provided by financial reporting.
• It is a consideration of cost incurred in generating financial information against benefit to be obtained from having information.
• It also states that benefits derived from information should exceed the cost incurred in obtaining information.
• This promotes application of professional judgment in assessing whether cost of reporting outweighs or falls short of the benefit because assessing the same is difficult to measure.

CHAPTER 3 - FINANCIAL STATEMENTS AND REPORTING ENTITY

OBJECTIVE OF FINANCIAL STATEMENTS

To provide information about elements of financial statements useful to users in:

1. Assessing future cash flows to the reporting entity
2. Assessing management stewardship of the entity's economic resources

TYPES OF FINANCIAL STATEMENTS

1. Consolidated Financial Statements - these are the financial statements prepared when the reporting entity comprises both parent and its subsidiaries.

• What it provides - This provides consolidated information (both parent and subsidiary) used by primary users of the parent in assessing future net cash inflows.
• Limitation - There's no information about a particular subsidiary. This information is provided by a separate FS of subsidiary.

2. Unconsolidated Financial Statements - these are financial statements prepared when the parent only is a reporting entity.

• What it provides - This provides information related to the parent only:
• Limitation - This is not a substitute to consolidated FS because it is not sufficient to meet information needs of primary users.

3. Combined Financial Statements - these are the financial statements when the reporting entity comprises two or more entities that are not linked by a parent - subsidiary relationship.

REPORTING ENTITY

• Any economic unit that is required or chooses to prepare financial statements (not necessarily a legal entity).

FORMS OF REPORTING ENTITY

1. Individual corporation, partnership or sole proprietorship
2. Parent corporation alone
3. Parent and its subsidiaries as single reporting entity
4. Two or more entities without parent and subsidiary relationship as a single reporting entity
5. A reportable business segment of an entity

REPORTING PERIOD

This pertains to a timeframe when financial statements are prepared for general purpose financial reporting. This can be an interim basis (less than one year) but FS must be prepared on an annual basis. Interim reports are optional.

ACCOUNTING ASSUMPTIONS

These are also known as accounting postulates. These refer to basic notions or fundamental premises on which accounting process is based: These include:

1. Going Concern - This is the only assumption mentioned in the 2018 Framework. This concept, aka continuity assumption, means that in the absence of evidence to the contrary, the accounting entity is viewed as continuing in operation. indefinitely. Also, this serves as the foundation of cost principle.
2. Accounting Entity -This assumption, aka separate entity or economic entity, states that entity is separate from the owners, managers, and employees who constitute the entity.
3. Time Period -This postulate, also called as periodicity or accounting period principle, requires that the indefinite life of an entity is subdivided into accounting periods which are usually of equal length for the purpose of preparing financial statements.

This period can either be:

1. Calendar year - twelve- month period that ends on December 31
2. Natural business year - also known as fiscal year; twelve- month period that ends on any month when the business is at lowest or experiencing slack season
3. Monetary Unit - This is defined by these two aspects:
4. Quantifiability - This states that elements of financial statements should be stated in terms of a uniform unit of measure.
5. Stability of Peso - This means that purchasing power of the peso is stable or constant and that its instability is insignificant and therefore may be ignored. In return, it becomes an amplification of the going concern assumption.

CHAPTER 4- ELEMENTS OF FINANCIAL STATEMENTS

DEFINITIONS

• Elements of Financial Statements - refer to quantitative information reported in the statement of financial position and income statement.
• ASSET- This is an element of FS that represents a present economic resource controlled by the entity as a result of past events. In relation to this, an economic resource is defined as a right that has the potential to produce economic benefits.
• RIGHT - This is a capacity to impose an act to other party.
• LIABILITY - This is an element of FS that represents the present obligation of the entity to transfer an economic resource as a result of past events. In relation to this, obligation is a duty or responsibility that an entity has no practical ability to avoid.
• EQUITY - This is an element of FS that represents a residual interest in the assets of the entity after deducting all its liabilities
• INCOME - This is an element of FS that represents increases in assets or decreases in liabilities that result in increases in equity, other than contributions from holders of equity claims. This can further be classified into:

1. Revenue - This arises in the course of ordinary regular activities which include sales, fees, interest, dividends, royalties and rent.
2. Gain- This does not arise in the course of the ordinary regular activities

• EXPENSES - This is an element of FS that represents decreases in assets or increases in liabilities that result in decreases in equity, other than distribution to holders of equity claims. This can further be classified into:

1. Expenses - This arises in the course of ordinary regular activities.
2. Loss - This does not arise in the course of the ordinary regular activities

ESSENTIAL CHARACTERISTICS OF ASSET

1. Present Economic Resource

2. Potential to produce economic benefits

3. Control- present ability to direct the use of economic resources and obtain the economic benefits that may flow from it.

ESSENTIAL CHARACTERISTICS OF LIABILITY:

1. Entity has an obligation.

2. Obligation is to transfer an economic resource.

3. Obligation is a present obligation that exists as a result of past events.

NATURE OF OBLIGATION:

• It is always owed to other party
• An obligation to transfer of one entity has always a counterpart of a right to receive of another entity.
• An entity has no practical ability to avoid an obligation if any means doing so would have economic consequences significantly more adverse than the transfer itself or it could only be avoided by liquidating the entity.

CHAPTER 5 - RECOGNITION AND DERECOGNITION

RECOGNITION

• This is the process of capturing for inclusion in the financial statements an item that meets the definition of any element of financial statements.
• This also includes depicting the item in words and by a monetary amount.
• This links the elements to the statement of the financial position and statement of financial performance

RECOGNITION CRITERIA

An item is recognized if:

1. it meets the definition of an asset, liability, equity, income or expense; and
2. recognizing it would provide useful information, that is, relevant and faithfully represented information.

INCOME RECOGNITION PRINCIPLE (Independent on income)

This means that income shall be recognized when earned which is generally at point of sale. Though, at times, income shall be recognized at point of production, during production and at point of collection, as the case may be.

EXPENSE RECOGNITION PRINCIPLE (dependent on income)

This states that expenses shall be recognized when incurred which observes the matching principle. Matching principle requires that those costs and expenses incurred in earning a revenue shall be reported in the same period.

APPLICATION OF MATCHING PRINCIPLE

1. Cause and Effect Association - This states that expense is recognized when revenue is already recognized; also called as matching of cost with revenue.
2. Systematic and Rational Allocation - This means that costs are expensed by simply allocating them over the periods benefited.
3. Immediate Recognition - This states that cost incurred is expensed outright because of uncertainty of future economic benefits or difficulty of reliably associating certain costs with future revenue.

DERECOGNITION

This pertains to the removal of all or part of a recognized asset or liability from an entity's statement of financial position.

Derecognition normally occurs:

1. For an asset- when the entity loses control of all or part of the recognized asset. This happens when the asset expired, or has been consumed, collected or transferred.
2. For a liability- when the entity no longer has a present obligation for all or part of the recognized liability.

CHAPTER 6 - MEASUREMENT

DEFINITIONS

• Measurement - This is the process of quantifying the elements recognized in financial statements in monetary terms.
• Entry Value - This reflects prices in acquiring an asset or incurring a liability.
• Exit Value - This reflects prices in selling or using an asset or transferring or fulfilling a liability.

CATEGORIES OF MEASUREMENT BASES

1. Historical Cost - This entry price or entry value measurement base is commonly adopted in preparing financial statements.

This provides monetary information about elements of financial statements using information derived from the price of the transaction or other event that gave rise to them. Furthermore, this is measured as:

1. Historical cost of an asset - This is equal to acquisition cost or cost of creating the asset PLUS transaction costs.
2. Historical cost of a liability - This is equal to consideration received or assumed MINUS transaction costs.

2. Current Value - This provides monetary information about elements of financial statements using information updated to reflect conditions at measurement date. This measurement base is not derived from the price of the transaction or other event that gave rise to the asset or liability. This include the following:

1. Fair Value - exit value measurement base; This is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. (market perspective)
2. Value in use for assets and fulfillment value for liabilities - exit value measurement base.

i. Value in use - This refers to the present value of cash flows that an entity expects to derive from use of an asset and from its ultimate disposal. Transaction cost included refers to transaction cost on disposal of asset. (entity's perspective)

ii. Fulfillment value - This is the present value of cash that an entity expects to be obliged to transfer as it fulfills a liability.

Transaction cost included refers to transaction cost on fulfillment of a liability. (entity's perspective)

1. Current cost - entry value measurement base.

i. For an asset - This is the cost of an equivalent asset at the measurement date, comprising the consideration that would be paid at the measurement date plus the transaction costs that would be incurred at that date.

ii. For a liability - This is the consideration that would be received for an equivalent liability at the measurement date minus transaction costs that would be incurred at that date.

FACTORS TO BE CONSIDERED IN SELECTING A MEASUREMENT BASIS

1. Relevance
2. Faithful Representation

Note: IASB did not mandate a single measurement basis because different measurement bases could produce useful information under different circumstances.

CHAPTER 7-PRESENTATION AND DISCLOSURE

DEFINITIONS

Presentation - This is the process of including in the face of the set of financial statements (except in Notes) an item that meets the definition of any element of financial statements and is deemed useful.

Disclosure - This refers to the process of providing explanatory information related to the items presented in the set of financial Statements, except in Notes where the explanatory information is found.

Classification- This is the sorting of elements of financial statements on the basis of shared characteristics for presentation and disclosure purposes.

Offsetting- This the process of preparing assets and liability at net amounts. This is generally inappropriate but there are exceptions.

Opposine)

Aggregation- This is adding together elements of financial statements that have shared characteristics and are included in the same classification.

CONCEPTS ABOUT PRESENTATION AND DISCLOSURE

Information included in the financial statements (including notes) must:

1. both be useful, that is, relevant and faithfully represented; and
2. requires the following:
3. focusing on presentation and disclosure objectives and principles rather than on rules.
4. classifying information by grouping similar items and separating dissimilar items.
5. Aggregating information to make the information not obscured either due to unnecessary detail or due to excessive summarization.

CHAPTER 8 - CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

TWO APPROACHES OF DETERMINING FINANCIAL PERFORMANCE

1. Transaction Approach - This is the traditional preparation of income statements.
2. Capital Maintenance Approach - This approach means that net income occurs only after capital used from the beginning of the period is maintained. This is how an entity defines the capital that it seeks to maintain.

2.1. Financial Capital (a.k.a. Net assets approach)

2.2. Physical Capital

Overview of Accounting Standards

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

• These are rules, procedures, practice, and standards followed in the preparation and presentation of financial statements.
• The principles have developed on the basis of experience, reason, custom, usage and practical necessity.
• The process of establishing GAAP is a social process which incorporates political actions of various interested user groups as well as professional judgment, logic and research.
• On a strict sense, GAAP is the accounting standards followed by a specific region / country.

PURPOSE OF ACCOUNTING STANDARDS

• To identify proper accounting practices for preparation of financial statements
• To create a common understanding between prepares and users of financial statements particularly the measurement of assets and liabilities

STANDARDS IN INTERNATIONAL SETUP

• International Accounting Standards Committee (IASC) - This is an independent private sector body, established in 1973, with the objective of achieving uniformity in the accounting principles which are used by business and other organizations for financial reporting around the world. The pronouncements of ASC are referred to as International Accounting Standards (IAS) which are still used in today's time.

Specific objectives of IASC are as follows:

• Formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance
• Work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements
• Standing Interpretations Committee (SIC) - this is a group under IASC which role is to interpret the application of IAS to ensure consistent accounting practices throughout the world and to provide timely guidance on financial reporting issues that are not specifically addressed in IAS, within the context of the lASC's Conceptual Framework.
• International Accounting Standards Board (IASB) - This is an independent body which replaced IASC last 2001 and continues its objectives. The pronouncements of IASB are referred to as International Financial Reporting Standards (IFRS). Currently, IASB follows a due process in the development of financial reporting standards. This involves interested individuals and organizations around the world and comprises the following stages:

IFRS Interpretations Committee (IFRSIC) - this is a group under IASB, previously named International Financial Reporting Interpretations Committee (IFRIC), which replaced SIC and continues its objectives.

INTERNATIONAL SETUP SHIFTING OF ORGANIZATIONS (from first to current org.)

1. IASC to IASB
2. SIC to IFRIC to IFRSIC

STANDARDS IN THE PHILIPPINES

• Accounting Standards Council (ASC) - This is an accounting standard-setting body established in 1981 whose main function is to establish and to improve accounting standards that will be generally accepted in the Philippines.
• Interpretations Committee (IC) - This is a body created in 2000 under ASC whose sole function is to provide timely guidance on financial reporting issues not specifically addressed in current accounting standards.
• Financial Reporting Standards Council (FRSC) - This is an accounting standard-setting body created in 2004 by the Professional regulation Commission (PRC) upon recommendation of BOA, to replace ASC, to assist the BOA in carrying out its powers and functions provided under RA 9298 and to continue objectives set by ASC. This group includes a Chairman (should be a senior accounting practitioner in any area of accountancy profession) and 14 representatives from:

Philippine Interpretations Committee (IC) - This is a body created in 2006 by FRSC to replace IC and continue its objectives, subject to approval of FRSC.

Philippine Institute of Certified Public Accountants (PICPA) - This is the professional organization of the accounting professionals established in 1929. This body actively participates in policy making of BOA and FRSC.

DEVELOPMENT OF PHILIPPINE GAAP OBSERVED IN THE PHILIPPINES

• Pre- 1996: Formerly, accounting standards followed in the Philippines were called Statement of Financial Accounting Standards (SFASs). These were based from existing US GAAP during that time.
• 1996: ASC started shifting the basis of accounting standards from US GAAP to IAS. SFAS, in effect, were reissued as Philippine Accounting Standards (PAS). This shift was due to the following factors:
  • Support of IAS by Philippine Organizations
  • Increasing Internationalization of Business
  • Improvement of lAS
  • Increasing Recognition of IASB Standards
• 1997: ASC decided to totally move to adoption of lAS.
• 2004: SEC indicated in SEC Memorandum Circular #19, series of 2004 requires the adoption of the lAS, PAS and IFRS in audited financial statements.
• 2005: Effective January 2005, Philippines is fully compliant with IFRS.
• 2009: SC resolved to adopt PFRS for SMEs as part of its rules and regulations

PHILIPPINE SETUP SHIFTING OF ORGANIZATIONS (from first to current org.)

1. ASC to FRSC
2. IC to Philippine IC

COMPARISON OF ORGANIZATIONS AND TERMS

PHILIPPINE GAAP / ACCOUNTING STANDARDS IN THE PHILIPPINES

Philippine Financial Reporting Standards (PFRS) - This is the current Philippine GAAP which collectively include the following:

1. Full PFRS (released by FRSC and are based from IFRS)
2. PAS (released by ASC and are based from IAS)
3. Philippine Interpretations (released by IC and PIC and are based from releases of SIC and IFRSIC)
4. PFRS for SMEs (released by FRSC)

Cash and Cash Equivalents

CASH CONCEPTS

Definition

• includes money and other negotiable instruments that are payable in money and acceptable by bank for deposit and immediate credit. This includes (a) cash on hand, (b) cash in bank; and (c) cash funds.

Rules

• cash should be unrestricted or is reserved to settle current purposes and not be subject to any other restrictions, contractual or otherwise.
• For cash to be unrestricted, this should be capable of being used by the company to whatever transaction the company wants to use it.
• For cash to be reserved to settle current purposes, it should be intended to settle current obligations or operating expenses.
• Cash should be measured at face value. For cash in foreign currency, it should be measured at the current exchange rate as of the balance sheet date

CASH EQUIVALENTS CONCEPTS

Definition

• These are 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 rates. (PAS 7, paragraph 6). These may include time deposit, commercial paper, treasury bill or note, money market placement or instrument, and redeemable preference shares.
• NOT CASH, BUT ALMOST CASH

Rules

• Change in fair value is immaterial. Cash equivalents should be measured at face value.
• 3-Month Rule: To qualify as cash equivalent, it should be acquired 3 months or less before its maturity.

Notes:

• If the problem stated a year beside the item such as 1-year treasury bill but the problem also stated that it is acquired before 3 months, it is still included in cash equivalent
• If the item is included in the cash equivalent and did not stated any maturity date or year, it will be included in cash equivalent
• Long-term funds include contingent fund, insurance fund, PPE acquisition fund and pension fund.
• Sinking funds are typically reported as long-term funds. However, if the related bonds payable are currently maturing, sinking funds are reported as part of cash.
• If there is no date indicated to determine if a possible CE item meets the 3-month rule, all possible items (see page 1 under definition) are typically treated as part of cash equivalent.
• 1-year time deposit and commercial paper cash equivalents under exclusion do not qualify the required characteristics (see page 1). Instead, these will be classified as investments.
• Postage stamps are reported under office supplies.
• Travel advances and IOU of an employee are reported under other receivables.
• Equity securities, listed common shares, and cash surrender value are investment accounts.

OTHER ITEMS AFFECTING CASH CLASSIFICATION

1. Bank Overdraft - This refers to cash in bank with negative balance which results from issuance of checks in excess of the deposits. Overdrafts are not permitted in the Philippines. Generally, these should be presented as current liability. However, these can be presented as a deduction to cash in bank, with the net amount labeled as "Cash, net of bank overdraft", IF any of the following case is present in the problem:

1. Entity maintains two accounts in the same bank with which the other account has a positive balance.
2. Bank overdraft is not material. - cash as a deduction
3. Overdraft occurs payable on demand and is an integral part of cash management.

2. Compensating Balance - This is the portion of the deposit which the depositor should maintain. Usually, this is required by the bank in connection with borrowing arrangements. This can be presented as follows:

1. Part of Cash and Cash Equivalents - If the compensating balance is informal or does not have legal restriction.
2. Part of Other Current Assets - If the compensating balance has short-term (12 months or less) legal restriction.
3. Part of Other Non-Current Assets - If the compensating balance has long-term (more than 12 months) legal restriction. This is labeled as "Cash held as compensating balance."

3. Deposit in Questionable Bank - This pertains to account to a specific bank which is no longer accessible or usable due to its incapacity to conduct normal banking operations. This is reported as other receivable. Questionable banks may include banks closed by the government and/or its agencies, banks under financial difficulty, and banks with restricted operations.

CHECKS WITH IRREGULARITIES

This includes the following:

1. Undelivered checks of the company - These are disbursement checks not forwarded to the respective payee. These are also called unreleased checks.

2. Postdated checks - These are checks in which the indicated date is for a future period, thus, it can't be used by the holder of the check once received until the indicated date arrives.

3. Stale checks - These are also referred to as checks long outstanding. These are checks that are already usable but the holder of the check forgets to encash it.

4. No Sufficient Fund (NSF) checks - These are either (a) checks received by the company representing cash inflow or (b) disbursement checks issued by the company, but the account from which the amount of the check will be charged has no or insufficient funds. This check is also called as drawn against uncleared deposit (DAUD) check and drawn against insufficient fund (DAlF) check.

TREATMENT OF UNDELIVERED CHECKS

Since this is for payment of a liability of the company, entry upon signing of the check is:

Accounts Payable/ Liability Account XX

Cash XX

At the end of the period, the said check is not handed over to the appropriate payee, thus, no liability is actually settled. Because of that, adjustment involves reversing the previously provided entry as shown above. The adjustment is as follows:

Cash XX

Accounts Payable/ Liability Account XX

TREATMENT OF POST DATED CHECKS

• Basically, the amount stated in this check is still owned by the issuer of the check. With that, adjustment of the company depends on who is the issuer of the said check which can either be the company itself (meaning, disbursement) or a customer (meaning, receipt).
• If the postdated check is issued by the company, it has the same adjustment as the undelivered check of the company.
• If the postdated check is issued by the customer, adjustment becomes necessary IF and only IF upon receipt of the check, company records collection. Given that, adjustment is as follows:

Accounts Receivable/ Receivable Account XX

Cash XX

TREATMENT OF STALE CHECKS

Same with post dated checks, adjustment to be applied depends on who issues the check.

If the issuer is the company, the signed check pertains to a disbursement transaction. The payee, a supplier or a creditor, failed to encash the check. Upon recognition of the check being long outstanding, adjustment to be applied is as follows:

Cash XX

Accounts Payable/ Liability Account XX

However, it is to be noted that this adjustment can be skipped if the company contacts the payee to whom the check is given to remind that the check be withdrawn. If the payee withdraws the check, then adjustment is no longer necessary.

On the other hand, if the issuer of the check is a customer, the signed check pertains to a receipt transaction. The payee which is the company failed to encash the check. Upon recognition of the check being long outstanding, adjustment to be applied is as follows:

Accounts Receivable/ Receivable Account XX

Cash XX

However, it is to be noted that if the company previously did not record the receipt transaction, then, no adjustment is to be made. The company may also contact the customer to inform him/her that the company intends to encash the check amidst the fact that it is stale already. If the company successfully withdraws the check, then, no adjustment is necessary.

TREATMENT OF NSF CHECKS

If it is a check received by the company, treatment depends whether the NSF check was initially recorded as a receipt or not. If the NSF check was recorded as an increase in cash upon receipt of the check, the company needs to prepare an adjustment which is as follows:

Accounts Receivable/ Receivable Account XX

Cash XX

• However, if the NSF check is cleared within the same period (on or before the balance sheet date), meaning, the account from which the check will be charged has been resolved, an adjustment is no longer necessary.
• Needless to say, if the date the NSF check is cleared occurred on a different period (after the balance sheet date), preparation of the adjustment as shown above is necessary.
• If the NSF check was not initially recorded as an increase in cash upon receipt of the check, adjustment is no longer necessary. However, if the NSF check is cleared within the same period (on or before the balance sheet date), meaning, the account from which the check will be charged has been resolved, an entry to record the collection should be made which is as follows:

Cash XX

Accounts Receivable/ Receivable Account XX

• Needless to say, if the date the NSF check is cleared occurred on a different period (after the balance sheet date), there is no need to prepare the entry for collection.
• If it is a check issued by the company, treatment depends whether the NSF check was initially recorded as a disbursement or not. If the NSF check was recorded as a decrease in cash upon release of the check, the company needs to prepare an adjustment which is as follows:

Cash XX

Accounts Payable/Liability Account XX

• However, if the NSF check is cleared within the same period (on or before the balance sheet date), meaning, the account from which the check will be charged has been resolved, an adjustment is no longer necessary.
• Needless to say, if the date the NSF check is cleared occurred on a different period (after the balance sheet date), preparation of the adjustment as shown above is necessary.
• f the NSF check was not initially recorded as a decrease in cash upon release of the check, adjustment is no longer necessary.
• However, if the NSF check is cleared within the same period (on or before the balance sheet date), meaning, the account from which the check will be charged has been resolved, an entry to record the disbursement should be made which is as follows:

Accounts Payable/Liability Account XX

Cash XX

Needless to say, if the date the NSF check is cleared occurred on a different period (after the balance sheet date), there is no need to prepare the entry for collection.

IMPREST SYSTEM AND PETTY CASH FUND

• Imprest System - This is a system of control in managing company cash which involves two major aspects:
  • Cash receipts should be deposited in the bank; and
  • Cash disbursements should only be in check.

Due to impracticability of preparing checks in relation to small amounts of disbursements, a fund is established to cover these petty expenses. This fund is called PETTY CASH FUND. This fund is handled by a petty cash custodian.

This fund is handled in these two methods:

1. Imprest Fund System - This is the typical system used by companies. Under this system, petty cash fund account is updated during (a) establishment, (b) replenishment, (c) increase/ decrease in established balance, and (d) recognition of unreplenished disbursement every end of the period. Daily disbursement is not reflected in the said account until replenishment or end of the period, whichever comes first.
2. Fluctuating Fund System - This system shows 'fluctuating' balance of the petty cash fund account, meaning, effect of every transaction that affects the said account is reflected during the period.

Established Balance - this amount, a.k.a. imprest balance, is the total petty cash fund that is not yet disbursed.

TERMS RELATED TO PETTY CASH FUND

Petty cash fund accounted:

This pertains to all items found in the PCF storage during the petty cash count. This could be in the following form:

(a) Bills and coins

(b) Checks drawn by company or payable to company (including checks with irregularities)

(c) Unreimbursed vouchers / unreimbursed proof of disbursement and IOUs

(d) Funds of employees (unclaimed but intact employee pay slip and intact employee contributions)¹

(e) Unused stamp²

¹ - If these are not intact, it means that the amount present in the envelope or attachment is mixed up with bills and coins, thus, should not be separately counted.

²- This would only be added if and only if there is no unreimbursed voucher for postage / postal expenditure.

RATIONALE OF BANK DEPOSITS

There are two parties involved in a bank deposit: the depositor and the bank, the former being the owner of the deposit while the latter the keeper of the deposit. Ending balance reflected in the depositor's (company) books should be equal to the ending balance reflected in the bank records. In the depositor's books, the balance is presented as cash in the bank where increases and decreases are reflected as debit and credit, respectively.

On the other hand, in the bank records, the balance is presented as an equity account (example: Juan Dela Cruz, Deposit where increases and decreases are reflected as credit and debit, respectively. This means that when the company deposits to its bank account, the same is recorded by the company as a debit while the bank records it as a credit. When it comes to withdrawal, the company records it as a credit while the bank records it as a debit. However, there will be times that either the company or the bank is first informed of the transaction before the other thus creating an imbalance between the depositor's balance, also known as cash balance per book/ledger, and the bank's balance, also known as cash balance per bank.

CONCEPTS OF BANK RECONCILIATION

Bank Reconciliation - This is a statement which brings into agreement the cash balance per book and cash balance per bank. This has three types which are as follows:

1. Adjusted balance method - The goal is to bring both unadjusted book and bank balances to adjusted balances. The reconciling items are classified first as book or bank items. Then, these are further classified as an addition or deduction to achieve the said goal.
2. Book to bank balance method - The goal is to compute the unadjusted bank balance. Same with the first type, reconciling items are classified first as book or bank items. Then, these are further classified as addition or deduction. Difference is that bank reconciling items are treated in reverse, meaning that bank items which should be added in the adjusted balance method are deducted while bank items which should be deducted in the adjusted balance method are added to achieve the goal.
3. Bank to book balance method - The goal is to compute for the unadjusted book balance. Same with the first type, reconciling items are classified first as book or bank items. Then, these are further classified as addition or deduction. Difference is that book reconciling items are treated in reverse, meaning that, book items which should be added in adjusted balance method are deducted while book items which shoutd be deducted in adjusted balance method are added to achieve the goal.

Reconciling Item - This is a transaction which is not recognized at the same time in the company and bank records. This is classified as:

1. Book reconciling items - Transactions which are not recognized in the company records. These include:
2. Credit memos - These are items which should be added to balance per book. These include:

i. Receivable collected by bank in favor of the company and deposited in company account

ii. Proceeds of bank loan credited in the deposit's account

iii. Time deposits maturing and credited in company account

iv. Interest earned - interest income

1. Debit memos - These are items which should be deducted to balance per book. These include:

i.Irregular checks (NSF and defective)

il. Bank service charge

iii. Payment of liability automatically deducted by bank to depositor's account

iv. Interest expense related to loan - interest incurred

1. Book errors - These refer to irregular recording of the transactions committed by the company. It can be added or deducted depending on the nature of the irregularity.
2. Bank reconciling items - Transactions which are not recognized in the bank records. These include:
3. Deposit in transit - These are items which should be added to balance per bank. These include:

i.Midnight deposit

ii.End-of-month deposit

ili.Undeposited collections

1. Outstanding checks - These are items which should be deducted to balance the bank. These include:

i.Delivered checks of company but not yet presented in bank

ii.Certified checks (treated as deduction to outstanding checks)

1. Bank errors - These refer to irregular recording of the transactions committed by the company. -bank bank aoc. then It can be added or deducted depending on the nature of the irregularity.

PRO-FORMA BANK RECONCILIATION METHODS

1. Adjusted balance method is also called as Cash balance per book

RULES ON TREATING BOOK OR BANK ERRORS

To compute the adjustment necessary for each error, 'right minus wrong' approach is usually applied. To do this, you should analyze the following:

1. Identify who committed the error. It is in that party's record where you'll implement the correction.
2. Determine if the error relates to a receipt or disbursement transaction. A positive sign is assigned to the amount if it is a receipt transaction while a negative sign is assigned to the amount if it is a disbursement transaction.
3. Provide the correct amount that should be reflected in the transaction.
4. Look for how much the transaction is recorded in the problem. This is the error committed by either party.
5. Amount in rule (3) is deducted by the amount in rule (4). Do not forget the sign as discussed in rule (2). It is to be emphasized that is always "amount in (3) MINUS amount in (4)", thus, the approach is called the 'right MINUS wrong' approach, regardless of whether it is a receipt or disbursement transaction.

Proof of Cash / Two date Bank reconciliation

DEFINITION AND TYPES

Proof of Cash - This process involves reconciliation of two ending balances of two different periods with inclusion of total receipts and disbursements in between these two balances. This, also known as the two-date bank reconciliation, has three types which are as follows:

1. Adjusted Balance Method - The goal of this type of proof of cash is to bring all the balances of the depositor and bank records from unadjusted balances to adjusted balances.
2. Book to Bank Balance Method - The goal of this type of proof of cash is to bring the unadjusted book balances to unadjusted bank balances. Bank reconciling items are treated in 'reverse'.
3. Bank to Book Balance Method - The goal of this type of proof of cash is to bring the unadjusted bank balances to unadjusted book balances. Book reconciling items are treated in 'reverse'.

Book Debits - These refer to all transactions recorded by the depositor with a debit to cash in the bank. These, also known as book receipts, include the following:

1. deposits recorded by the entity
2. credit memos of the previous period

Book Credits - These refer to all transactions recorded by the depositor with a credit to cash in bank. These, also known as book disbursements, include the following:

1. disbursement checks recorded by the entity
2. debit memos of the previous period

Bank Debits - These refer to all transactions recorded by the bank with a debit to equity account. These, also known as bank disbursements, include the following:

1. disbursement checks acknowledged by the bank
2. debit memos of the current period

Bank Credits - These refer to all transactions recorded by the bank with a credit to equity account. These, also known as bank receipts, include the following:

1. deposits acknowledged by the bank
2. credit memos of the current period

Adjusted Balance Method

Note: Prev. stands for previous period; Cur. Stands for current period.

• Notice that in the Debit or Credit column of either the book or bank, reconciling items of the previous period are marked as deductions. The rationale for such deduction is that reconciling items of the previous period are 'deemed' recorded in the current period. These should have been recorded in the previous period that's why these are being 'removed' or deducted from either debit or credit column.
• On the other hand, reconciling items of the current period are marked as additions as shown in either Debit or Credit column of both the book and the bank. This is done because these items should be recorded in the current period that's why these are being 'included' or added from either debit or credit column.
• The adjusted balances under book or bank should all be equal
• Like in one-date bank reconciliation, bank reconciling items are reversed in effect under book to bank method while book reconciling are reversed in effect under bank to book method.

PRACTICAL RULES IN ACCOMPLISHING THE PROOF OF CASH

1. The first and last column of the proof of cash is solved like a typical bank reconciliation and observes the same treatment on reconciling items including error.
2. Identification of the period when the reconciling item relates is necessary to properly compute the adjusted balances of the first and fourth column.
3. The second and third column is solved by (1) relating the items as either receipt (second column) or disbursement (third column) transaction and (2) understanding whether the reconciling item increases or decreases the affected column.
4. As a tip in marking the effect of the reconciling item on either receipt or disbursement column, one needs to consider the effect of that item to either previous or current balance column. If the effects are written side by side, it should show the opposite sign (+/-).

RULES ON TREATING ERRORS

• Treatment of errors in accomplishing the proof of cash is much the same as the treatment applied in one-date bank reconciliation (Kindly refer to previous course file), with additional questions in mind to be answered. Under proof of cash, you should identify the (a) period when the error was committed, and (b) its cause.
• If the error was committed in the previous period, correction should be placed in the previous period column.
• If the error was committed in the current period, correction should be placed in the current period column.
• When committed, an error will either result in an understatement or overstatement to receipt column or disbursement column. It doesn't usually affect the adjustment of the error. However, If the error causes overstatement and the error was committed in the previous period, the adjustment is applied on the opposite column of what is originally identified (receipt or disbursement).

DEPOSIT IN TRANSIT AND OUTSTANDING CHECK COMPUTATION

Trade and Other Receivable

BASIC CONCEPTS

Receivables are financial assets that represent a contractual right to receive cash or another financial asset from another entity.

For Manufacturers and Retailers:

• Trade Receivables - claims arising from sale of merchandise or services in the ordinary course of business.
• Accounts Receivable - open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes. Other names are customer's accounts, trade debtors, and trade accounts receivable.
• Notes Receivable - supported by formal promises to pay in the form of notes.
• Nontrade Receivable - claims arising from sources other than the sale of merchandise or services in the ordinary course of business. Examples include:

For Banks and Other Financial Institutions:

Loans Receivable - loans made to heterogeneous customers and the repayment periods are frequently longer or over several years.

Classification: (In accordance with PAS 1, Presentation of Financial Statements)

• Trade receivables which are expected to be realized in cash within the normal operating cycle or one year, whichever is longer, are classified as current assets.
• Nontrade receivables which are expected to be realized in cash within one year, the length of the operating cycle notwithstanding, are classified as current assets.
• If collectible beyond one year, nontrade receivables are classified as noncurrent assets.
• Presentation: Trade receivables and nontrade receivables which are currently collectible shall be presented on the face of the statement of financial position as one line item called trade and other receivables.

However, the details of the total trade and other receivables shall be disclosed in the notes to financial statements.

Initial Measurement: Accounts receivable shall be measured initially at face amount or original invoice amount.

Subsequent Measurement: In accordance with PFRS 9, Financial Instruments, after initial recognition, accounts receivable shall be measured at amortized cost.

Net Realizable Value

Assets, like accounts receivable, should not be carried at above their recoverable amount. In estimating the net realizable value of trade accounts receivable, the following deductions are made:

1. Allowance for freight charge - this refers to anticipated shipping fees incurred by the company (as seller) upon sale of goods.
2. Allowance for sales return - this refers to the estimated portion of sales which would eventually be returned to the company.
3. Allowance for sales discount - this refers to estimated cash discount to be granted to buyers of goods of the company. This can be accounted for as:

• Gross method - the accounts receivable and sales are recorded at gross amount of the invoice. problem Silent
• Net method - the accounts receivable and sales are recorded at net amount of the invoice, meaning the invoice price minus the cash discount.

1. Allowance for doubtful accounts - this refers to the estimate of the company of a portion of its receivable account which would no longer be recovered / collected. This can be accounted for as:

• Allowance method - requires recognition of a bad debt loss if the accounts are doubtful of collection. The allowance account is a deduction from accounts receivable. If the doubtful accounts are subsequently found to be worthless or uncollectible, the accounts are written off. It is required by the GAAP to be used because it conforms with the matching principle.
• Direct write-off method - requires recognition of a bad debt loss only when the accounts are proved to be worthless or uncollectible. This method is not permitted under IFRS. It violates the matching principle because bad debt loss is recognized in later accounting periods than the period in which the related sales revenue was recognized.

Net realizable value = Accounts receivable minus Allowance for freight charge, sales return, sales discount, and for doubtful accounts

Doubtful accounts in the income statement

Doubtful accounts shall be classified as Administrative Expense. If the granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as Distribution Costs.