ACCOUNTING PROCESS

1. It is the basic storage of information in accounting.

Account

2. A trial balance --
*proves that debits and credits are equal in the ledger.
*provides a listing of open accounts and their balances which are used in
preparing financial statements.
*is usually prepared three times in the accounting cycle.

3.When an item of expense is paid and recorded in advance before it is incurred, it is

normally called a(n).
prepaid asset/expense.

4. An accounting record into which the essential facts and figures in connection with all
transactions are initially recorded is called the –

5. These are entries made at the end of the accounting period to update certain
amounts so that they reflect correct balances at the designated time.
Adjusting entries

6. ABC Co. prepared its unadjusted trial balance and determined that the totals of debits
and credits do not equal. Further investigation revealed the following: • The debit
posting for a cash sale was omitted. 6,000• The balance of Inventory was listed as a
credit instead of debit 36,000• The balance of Insurance expense was listed as Rent
expense 9,000• Unearned interest income was listed as a debit instead of credit 15,000.
How much is the difference between the total debits and total credits in the trial
balance?
48,000
7. The credit total of a trial balance exceeds the debit total by ₱700. In investigating the
cause of the difference, the following errors were determined: (a) A credit to accounts
receivable of ₱660 was not posted; (b) A ₱6,000 debit to be made to the Purchases
account was debited to Accounts payable instead; (c) A ₱3,600 credit to be made to the
Sales account was credited to the Accounts receivable account instead; (d) The Interest
payable account balance of ₱5,040 was included in the trial balance as ₱6,400. The
reconciled balance from the given information is.
8,940

8. On January 1, 20x1, an entity collects a 3-year advance rent of ₱360,000. If the entity
uses the liability method of initial recording, the 20x1 year-end adjusting journal entry
will include.
a debit to unearned rent for ₱120,000.
9. On January 1, 20x1, an entity collects a 3-year advance rent of ₱360,000.9. If the
entity uses the income method of initial recording, the 20x1 year-end adjusting journal
entry includes
a. a debit to rent income for ₱240,000

10. On January 1, 20x1, an entity collects a 3-year advance rent of ₱360,000. If the
entity uses the income method of initial recording, how much is the rent income for the
year 20x1?
120,000

11. On January 1, 20x1, an entity collects a 3-year advance rent of ₱360,000. If the
entity uses the liability method of initial recording, how much is the unearned rent as of
December 31, 20x1?
240,000

12. On August 1, 20x1, an entity prepays one-year insurance for ₱240,000. If the entity
uses the asset method of initial recording, the 20x1 year-end adjusting journal entry will
include
a credit to prepaid insurance for ₱100,000.
13. On August 1, 20x1, an entity prepays one-year insurance for ₱240,000. If the entity
uses the expense method of initial recording, the 20x1 year-end adjusting journal entry
will include.
a debit to prepaid insurance for ₱140,000

14. Reversing entries are -- (1) normally prepared for prepaid, accrued, and estimated
items. (2) necessary to achieve a proper matching of revenue and expense. (3)
desirable to exercise consistency and establish standardized procedures.
3

Cash & Cash Equivalents/ Bank Reconciliation

1. Which of the following should not be considered as cash for financial reporting
purposes?
Postdated checks and IOUs

2. The journal entries for bank reconciliation

may include a debit to office expense for bank service charges

3. Compensating balance agreements … (choose the incorrect one)

Always involves legal restrictions on the compensating balance.

4. A cash short or over account –

c. is debited when the petty cash fund proves out short.

5. Cash control systems are the methods and procedures used to ensure.
The safeguarding of cash

6. Bank reconciliation –
Explains the difference between the bank balance and the balance shown in the
depositor’s records
7. Bank reconciliations are normally prepared on a monthly basis to identify adjustments
in the depositor’s records and to identify errors. Adjustments should be recorded by the
depositor for.
All items, except bank errors, outstanding checks and deposits in transits

8. Which of the following would not be classified as cash?

Postdated checks

9. Which of the following should be considered as cash?

Certificates of deposits

10. The following statements relate to cash. Which statement is true?

Classification of a restricted cash balance as current or noncurrent should
parallel the classification of the related obligation for which the cash was
restricted.

11. The petty cash fund account under the Imp rest fund system is debited
When the fund is created and when the size of the fund is increased.

12. Entries to record the replenishment of petty cash fund results in a debit to various
expense accounts and a credit to cash in bank. This accounting procedures typically
exemplifies
Imp rest petty cash system

13. When preparing a bank reconciliation, bank credits are.

Added to the balance per book

14. Petty cash fund is.

Money kept on hand for making minor disbursements of coin

15. All cash receipts are deposited intact and all cash disbursements are made by
means of check. This internal control is known as -
Imp rest system
 SUMMATIVE QUIZ
1. On December 31, 2017, how much should be reported as “cash and cash
equivalents”?
5,500,000

2. What should be reported as “cash and cash equivalents” on December 31, 2017?

3. What is the adjusted bank balance on June 30, 2017?

351,587

4. The corrected balance per bank on June 30 is

92,350

5. The corrected June receipts per book is ---

133,750

6. The corrected June disbursements per books is –

111,700

7. What entry would be required to record replenishment of the petty cash fund on
December 31, 2017?
c. Miscellaneous expense 364
Cash short and over 8
Cash 356

8. What is the correct cash balance to be shown on Eastern Company’s statement of

financial position at July 31, 2017?
120,585

9. What are the total cash disbursements per books for the month of July 2017?
212,517
10. What are the total cash receipts per books for the month of July 2017?
245,537

Bank Reconciliation

1. In a bank reconciliation, deposits not recorded by the bank are:

added to the balance according to the bank statement

2. These are deductions made by the bank to the depositor’s bank account but not yet
recorded by the depositor.

Debit memos (DM)

3. Bank statements provide information about all of the following except
A. checks cleared during the period.
B. NSF checks.
C. bank charges for the period.
D. errors made by the company.

4. Accompanying the bank statement was a credit memorandum for a short-term,

noninterest-bearing note collected by the bank. What entry is required in the depositor’s
accounts?
Debit Cash; credit Notes Receivable

5. In preparing its bank reconciliation on December 31, 20x1, Sun Co. has made
available the following data:
Balance per bank statement, 12/31/x1 38,075
Deposit in transit, 12/31/x 15,200
Outstanding checks, 12/31/x 16,750
Amount erroneously credited by the bank to Sun's account, 12/28/x
1400
Bank service charges for December 75
*Sun's adjusted cash in bank balance on December 31, 20x1 is
36,125
6. In preparing its August 31, 20x3 bank reconciliation, Morning Co. has made available
the following information:
Balance per bank statement, 8/31/x3 18,050
Deposit in transit, 8/31/x 33,250
Return of customer’s check for insufficient funds, 8/31/x3 600
Outstanding checks, 8/31/x 32,750
Bank service charges for August 100

*What is the correct cash balance of Morning on August 31, 20x3?

18,550
7. How much is the deposit in transit? 160,000

8. How much is the credit memo? 760,000

9. How much is the adjusted cash balance? 1,904,000

10. How much are the deposits in transit on November 30? 5,820

11. How much are the outstanding checks on November 30? 8,280

12. How much is the adjusted balance of cash on November 30? 3,000

13. How much is the adjusted cash receipts in July? 30,750

14.How much is the adjusted cash disbursements in July? 27,600

15. How much is the adjusted cash balance as of July 31? 12,000
 Accounts Receivable

1. Which of the following should be recorded in Accounts Receivable?

A. Receivables from officers representing employee loans
B. Receivables from subsidiaries
C. Dividends receivable
D. None of these

2. When the allowance method of recognizing bad debts expense is used, the entry to
record the write-off of a specific uncollectible account would decrease
the net realizable value of accounts receivable.

3. Information from the records of Stormfall Co. is shown below:

• Accounts receivable - net of ₱8,000 credit balance in customers' accounts 100,000
• Notes receivable (trade) 15,000
• Notes receivable (non-trade), ₱15,000 collectible within one year 30,000
• Dividends receivable 2,000
• Subscriptions receivable 2,000
• Advances to officers and employees (due in 10 months) 4,000
• Accounts payable - net of ₱10,000 debit balance in
suppliers' accounts 3,000
How much are the following?
Total trade receivables Total current receivables
B. 123,000 154,000

4. On December 27, 20x1, ABC Co. received a sale order for a credit sale of goods with
selling price of ₱3,000. The goods were shipped by ABC on December 31, 20x1 and
were received by the buyer on January 2, 20x2. The related shipping costs amounted to
₱20. ABC Co. collected the receivable on January 5, 20x2. If the term of the sale is
FOB destination, freight collect, how much net cash is collected on January 5, 20x2?
c. 2,980
5. Soap Co. has the following information on December 31, 20x1 before any year-end
adjustments.
Allowance for doubtful accounts, Jan. 1 30,400
Write-offs 19,000
Recoveries 3,800
Sales (including cash sales of ₱380,000) 2,280,000
Sales returns and discounts (including ₱3,800 sales
22,800
returns on cash sales)
Accounts receivable, Dec. 31 570,000
Percentage of credit sales 3%
How much is the recoverable historical cost of accounts receivable?
a. 498,370

6. Washing Co. has the following information on December 31, 20x1 before any year-
end adjustments.
Accounts receivable, Jan. 1 80,000
Net credit sales 270,000
Collections from customers (including recoveries) 140,000
Allowance for doubtful accounts, Jan. 1 10,000
Write-offs 5,000
Recoveries 1,000
Percentage of receivables 5%
How much is the bad debt expense?
b. 4,300

7. Fabric Co. sells to wholesalers on terms of 2/15, net 30. An analysis of Fabric Co.’s
trade receivable balances on December 31, 20x1, revealed the following:
Age in days Receivable balances
0 – 15 180,000
16 – 30 108,000
31 – 60 90,000
61 – 90 72,000
91 – 120 54,000
121 – 150 36,000
Total accounts receivables 540,000
Fabric Co. uses the aging of receivables method. The estimated percentages of
collectability based on past experience are shown below:
Accounts that are overdue for less than 31 days 97%
Accounts that are overdue 31 – 60 days 90%
Accounts that are overdue 61 – 90 days 85%
Accounts that are overdue 91 – 120 days 65%
Accounts that are overdue for over 120 days 40%

The allowance for doubtful accounts has a balance of ₱18,000 as of January 1, 20x1.
Write-offs and recoveries during the year amounted to ₱6,000 and ₱3,000, respectively.
How much is the doubtful accounts expense for the year?
a. 15,600

Use the following information for the next two questions:

ABC Co. has the following information on December 31, 20x1 before any year-end
adjustments.
Net credit sales 6,300,000
Accounts receivable, December 976,500
Allowance for doubtful accounts, Dec. 31 (before any
53,550
necessary year-end adjustments)
Percentage of credit sales 2%

The aging of receivables is shown below:

Days outstanding Receivable balances % uncollectible
0 – 60 378,000 1%
61 – 120 283,500 2%
Over 120 315,000 6%
Total accounts receivables 976,500
Additional information:
ABC Co. uses the percentage of credit sales in determining bad debts in monthly
financial reports and the aging of receivables for its annual financial statements.
Accounts written-off during the year amounted to ₱119,700 and accounts recovered
amounted to ₱28,350.
As of December 31, ABC Co. determined that ₱63,000 accounts receivable from a
certain customer included in the “61-120 days outstanding” group is 95% collectible and
a ₱31,500 account included in the “Over 120 days outstanding” group is worthless and
needs to be written-off.

8. How much is the balance of the allowance for doubtful accounts on January 1, 20x1?
b. 18,900

9. How much is the adjusted bad debt expense to be reported in the year-end financial
statements?
d. 132,300

10. ABC Co. has the following information before any year-end adjustment.
Accounts receivable, Dec. 31 600,000
Allowance for doubtful accounts, Jan. 18,000 (Dr.)
Percentage of receivables 2%
Write-offs and recoveries during the year amounted to ₱22,800 and ₱3,000,
respectively. How much is the bad debts expense for the year?
49,800
 Chapter 1: Framework of accounting
Definition and purpose of the framework of accounting
It is a summary of the terms and concepts that underline the preparation and
presentation of financial statements. Its purpose is to assist the Financial Reporting
Standards Council (FRSC) and those who are interested in the work of FRSC, auditors,
preparers and users of financial statements.

Status of the framework of accounting

It is not a Philippine Accounting Standard (PAS) and Philippine Financial
Reporting Standards (PFRS), and hence does not define standards for any particular
measurement or disclosure issue. Nothing in the framework overrides any specific PAS
and PFRS. In case of conflict, the requirements of the PAS and PFRS prevail over
those of the framework of accounting.

Scope of the framework of accounting

1. Objective of Financial Statements-
To provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making
economic decisions.
A. Basic Financial Statements-
• Statement of Financial Position
• Income Statement
• Statement of Cash Flows
• Statement showing either:
-All changes in Equity, and
-Changes in Equity except those arising from Transactions with Equity Holders acting in
their capacity as Equity Holders.
• Notes, comprising a summary of significant accounting policies and other
explanatory notes
B. Elements of Financial Statements
Financial position:

Assets - is a resource controlled by the enterprise as a result of past events and

from which future economic benefits are expected to flow to the
enterprise.
Liabilities - is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
Equity - is the residual interest in the assets of the enterprise after deducting all
its liabilities.
Performance:
Income - encompasses both revenues and gains. Revenue arises in the course of the
ordinary activities of an enterprise. Gains represent other items that meet the definition
of income and may or may not arise in the course of the ordinary activities of the
enterprise.
Expenses - encompasses losses as well as those expenses that arise in the course of
the ordinary activities of the enterprise.

C. Recognition:
Asset recognition-It is probable that future economic benefits will flow to the enterprise
and the cost or value of the asset can be measured reliably.
Liability recognition-It is probable that an outflow of economic benefits will be required
for the settlement of a present obligation and the amount of obligation can be measured
reliably.
Income recognition-It is probable that future economic benefits will flow to the
enterprise and the economic benefits can be measured reliably.
Expense recognition-It is probable that a decrease in future economic benefit has
occurred and the decrease in economic benefits can be measured reliably.
D. Measurement: Historical Cost, Current Cost, Realizable (settlement) Value, and
Present Value.
2. Accounting Assumption- basic notion or fundamental premises on which the
accounting process is based- Going Concern
3. Implicit Assumptions -
a) Accounting Entity
b) Time Period
c) Monetary Unit
4. Qualitative Characteristics of Financial Statements
These are the attributes that make the information provided in financial statement useful
to users.
• Fundamental qualitative characteristics – pertains to content of the financial
statements
a) Relevance
b) Faithful representation

• Enhancing qualitative characteristics – pertains to presentation of the financial

statements
c) Understandability
d) Comparability
e) Verifiability
f) Timeliness

USERS AND THEIR INFORMATION NEEDS

Investors, Employees, Lenders, Suppliers and Other Trade Creditors, Customers,
Government and their Agencies, and Public.

Philippine Accounting Standards (PAS)

PAS NO. TITLE

Preface to Philippine Financial Reporting Standards (PFPS)
PAS 1 Presentation of
Financial Statements

PAS 2 Inventories
PAS 7 Cash Flow Statements
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
PAS 10 Events After Balance Sheet Date
PAS 11 Construction Contracts
PAS 12 Income Taxes
PAS 16 Property, Plant and Equipment
PAS 17 Leases
PAS 18 Revenue
PAS 19 Employee Benefits
PAS 20 Accounting for Government Grants and Disclosure of Government
Assistance
PAS 21 The Effects of Changes in Foreign Exchange Rates
PAS 23 Borrowing Costs
PAS 24 Related Party Disclosures
PAS 26 Accounting and Reporting by Retirement Benefit Plans
PAS 27 Consolidated and Separate Financial Statements
PAS 28 Investments in Associates
PAS 29 Financial Reporting in Hyperinflationary Economies
PAS 31 Interest in Joint Ventures
PAS 32 Financial Instruments: Disclosure and Presentation
PAS 33 Earnings Per Share
PAS 34 Interim Financial Reporting
PAS 36 Impairment of Assets
PAS 37 Provisions, Contingent Liabilities and Contingent Assets
PAS 38 Intangible Assets
PAS 39 Financial Instruments: Recognition and Measurement
PAS 40 Investment Property
PAS 41 Agriculture

Philippine Financial Reporting Standards (PFRS)

PFRS NO. TITLE

PFRS 1 First-Time Adoption of Philippines Financial Reporting Standards
PFRS 2 Share-Based Payment
PFRS 3 Business Combinations
PFRS 4 Insurance Contracts
PFRS 5 Non-Current Assets Held for Sale and Discontinued Operations
PFRS 6 Exploration and evaluation of mineral resources
PFRS 7 Financial Instruments: Disclosures
PFRS 8 Operating Segments

Intermediate Accounting 1 - Cash and Cash Equivalents

Definition:
1. Cash – includes money and negotiable instruments (such as checks, money
orders, etc.) that are acceptable by the bank for deposit and immediate encashment. To
be classified as cash (current assets), an item must be unrestricted and immediately
available for current operations.

2. Cash equivalents – are short term, highly liquid investments that are readily
convertible into cash and so near their maturity that they represent insignificant risks of
changes in interest rates.

Composition:
1. Cash – currency coins and bills (cash awaiting deposit, cash deposited with bank
checking,
savings, demand deposit), cash funds, checks, drafts, money order, etc.
2. Cash equivalents – time deposit, treasury bills and notes, money market accounts
etc.

Valuation:
1. Benchmark – at face value.
2. Alternative – at estimated realizable value (if the financial institution holding the cash
and cash equivalents is suffering from major financial difficulties)
Classifications:
1. As current asset
a) Cash and cash equivalents – for presentation purposes only (details are shown in
the notes to financial statements.)
b) Separately shown
2. As non-current asset
a) Long term investment
b) Other Non-current asset
 Special Treatments:

1. Investments in time Deposit, Treasury Bills & Notes, Money Market Instruments
If 3 months or less-Cash and cash equivalents
In more than 3 months but within 1 year-Short term Investments
If more than 1 year-Long term investments
2. Compensating balance
a. If not legally restricted as to withdrawal -Cash and cash equivalents
b. If legally restricted to as withdrawal
* Related to a short-term borrowing
-Current asset (separately shown) *Related to as long-term borrowing
-Non-current asset (long term-investment)
3. Bank Overdraft
1. If amount is material
Of the same bank - apply the rule of offset
Of different banks - Current Liability
If amount is not material - Apply the rule of offset

4. Checks
a. Undelivered – means not yet given to payees.
b. Postdated – means given or not yet given to payees but withdrawal at a certain
future date.
c. Stale – means cannot be withdrawn because they have been long outstanding.

5. Cash in foreign banks

a. if not subject to exchange restrictions - Cash and cash equivalents
b. if subject to exchange restrictions -Non-current asset (as long as term
investment or another non-current asset)
6. Cash in closed banks -Presented as non-current asset.

7. Proper Treatment of Non-Cash Items

a. Employees values and advances (IOUs) & Advances to salesmen – Non-Trade
receivables.
b. Postdated customers checks - Trade Receivables
c. NSF customer check – Trade Receivable
d. Cash due memoranda for money advances –Non-Trade Receivable
e. Note or draft left with bank for collection – Trade Receivable, before collection; Cash,
after collection.
f. Postage Stamps – Supplies inventory
g. Documentary Stamps – Prepaid taxes
h. Stocks, Bonds, government securities – Long term or short-term investments
I, Time deposits (not subject to pre-termination) – Long term or short-term investments

Petty Cash Fund

It represents bills and coins that are set aside to accommodate small disbursements of
cash.

It may be accounted for using:

Imprest System:
Establishment of the Fund:
Petty Cash fund xx
Cash in bank xx

Petty Cash Expenses:

No Journal Entry

Replenishment of petty cash vouchers:

Expenses xx
Cash in Bank xx
Adjustment for no replenishment:
Expenses xx
Petty Cash Fund xx

Fluctuating System:
Establishment of the fund:
Petty Cash Fund xx
Cash in Bank xx
Petty Cash Expenses:
Expenses xx
Petty Cash Fund xx
Replenishment of Petty cash vouchers:
Petty Cash Fund xx
Cash in bank xx
Adjustment for no Replenishment:
No Journal Entry

Bank reconciliation:
It is prepared to reconcile the cash in bank balances per client and per bank.
Adjustments are made only in the books of the client after compromising the balances
reflected in the client’s books of accounts and the bank statement.

The (3) methods in bank reconciliation are:

a. Adjustment balance method
b. Book to bank balance method
c. Bank to book method

Adjusted Balance Method

Balance per book xx Balance per bank xx
Add: Credit memos xx Add Deposit in transit xx
Book errors xx Bank errors xx
Total: xx Total: xx
Less: Debit memos xx less: Outstanding checks xx
Book errors xx Bank errors xx
Adj. Balance per book xx Adj. balance per book
xx

Book to Bank Balance Method Bank to Book Balance Method

Balance per book xx Balance per bank xx

Add: Credit Memos xx Add: Debit memos
xx
 Outstanding Checks xx Deposit in transit
xx
Book errors xx Book errors xx
Bank errors xx Bank errors
xx
Total: xx Total xx
Less: Debit memos xx Less: Credit Memos
xx
Deposit in transit xx Outstanding checks xx
Book errors xx Book errors xx
Bank errors xx Bank errors xx
Balance per Bank xx Balance per book xx