intermedi

INTERMEDIATE

ate 1
ACCOUNTING
The Accounting Process

accountin
Learning Objectives
-Enumerate the steps in the accounting cycle and explain each briefly.
-State the different types of accounting records used in the recording process.
-Enumerate the components of a complete set of financial statements.

Accounting Cycle
- The accounting cycle represents the steps or accounting procedures normally
used by entities to record transactions and prepare financial statements.
Steps in the Accounting Cycle
Angela mae Rafanan Identifying and analyzing transactions
Journalizing
Bachelor of science in accountancy 2b Posting
Preparing the unadjusted trial balance
Preparing the adjusting entries
Preparing the adjusted trial balance
Preparing the financial statements
Closing the books
Preparing the post-closing trial balance
Preparing the reversing entries
The Double-Entry System
Under the Double-entry system system, each transaction is recorded in two parts –
debit and credit. The double-entry system makes use of the following concepts:
Duality – this concept views each transaction as having a two-fold effect on values – a
value received and a value parted with, and each transaction is recorded using at least
two accounts.
Equilibrium – this concept requires each transaction to be recorded in terms of equal
debits and credits.
Accounting Records
Journal – “book of original entry” Account
 General Journal –used to record transactions other than those that are -is the basic storage of information in accounting, e.g., “cash,” “land,” “accounts
recorded in the special journals. payable,” etc. Accounts in the ledger follow the format of a T-account.
 Special Journal – used to record transactions of a similar nature. Chart of accounts - list of all the accounts used by the entity.
Ledger – “book of final entry” Real accounts, Nominal accounts, Mixed accounts, Contra accounts, and Adjunct
– is a systematic compilation of a group of accounts. accounts.
 General ledger – contains all accounts appearing in the financial statements. Trial balance
 Subsidiary ledger – supporting ledger for controlling accounts in the general – is a list of general ledger accounts and their balances. It is prepared to check the
ledger. equality of total debits and total credits in the ledger.
Adjusting entries
-entries made prior to the preparation of financial statements to update certain
accounts so that they reflect correct balances as of the designated time.
Financial statements
-are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.
A complete set of financial statements consists of:
- Statement of financial position;
- Statement of profit or loss and other comprehensive income;
- Statement of changes in equity;
- Statement of cash flows;
Notes;
(5a) Comparative information; and Additional statement of financial position
(required only when certain instances occur).
Methods of initial recording of income and expenses
Income
(a) Liability method
(b) Income method
Expenses
(a) Asset method
(b) Expense method
Reversing entries
May be made on the following:
(a) all accruals,
(b) prepayments initially recorded using the expense method, and
(c) unearned income initially recorded using the income method.
CASH AND CASH EQUIVALENTS

Learning Objectives
 To understand the concept of “Cash and Cash Equivalents” .
 To identify items considered “Cash and Cash Equivalents”.
Cash
 Money or its equivalent that is readily available for unrestricted use.
 includes any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit
Items included in cash:
-Cash on hand
-Cash in bank
-Cash fund

Undelivered or Unreleased check

-This is merely drawn and recorded but not given to the payee before the end of
reporting period
Postdated check
-Check drawn, recorded and already given to the payee but it bears a date subsequent
to the end of reporting period
Stale check or check long outstanding
-Check not encashed by the payee within a long period of time
-In banking practice, a check becomes stale if not encashed within six month from the
time of issuance
Cash equivalents
PAS 7 paragraph 6 defines cash equivalents as short term and highly liquid
investment that are readily convertible into cash and so near their maturity that they
present significant risk of changes in value because of changes in interest rates.
* Only highly liquid investments that are acquired 3 months or less before
maturity can qualify as cash equivalents.
Examples:
-Three-month treasury bill
-Three-month time deposit
-Three-month money market instrument
Financial statement presentation
 Items of cash and cash equivalents are aggregated and presented in the
statement of financial position under a single line item described as “Cash
and cash equivalents.”
 Cash and cash equivalent should be shown as the first line item under current
assets.
Measurement
 Cash is measured at face amount.
 Cash denominated in foreign currency is translated at the current exchange
rate as of reporting date.
 Cash maintained in a bank undergoing bankruptcy is excluded from cash and
presented as receivable measured at realizable value.
Bank overdraft
There is an overdraft when the cash in bank account has a credit balance.
It is classified as a current liability and should not be offset against other accounts
with debit balances
Example:
a. First Bank – CIB is overdrawn by P20,000
b. Second Bank – CIB has a debit balance of P50,000
Exception:
Two or more accounts in one bank – can be offset
Compensating balance
- generally takes the form of minimum checking or demand deposit account balance
that must be maintained in connection with a borrowing arrangement
 Compensating balances that are legally restricted as to withdrawal by the
borrower are excluded from cash. the compensating balance is classified
separately as “cash held as compensating balance” under current asset
 Compensating balances that are not legally restricted as to withdrawal are
included in cash.
 Whether restricted or not, compensating balances are disclosed in the notes.
Accounting for cash shortage
Cash shortage - Cash is less than the balance per book
It is recorded as:
Cash short or over xx
(Receivable from Cashier)
Cash xx
Accounting for cash overage
Cash overage – Cash is more than the balance per book
It is recorded as:
Cash xx
Cash short or over xx
(Miscellaneous income)

 Savings and current accounts (P132,600+P81,000) ₱213,600

Undeposited customer checks (P22,200-P3,000) 19,200
Currency and coins on hand 3,480
Petty cash 1,200
Two-month Treasury bill 90,000
Time deposit 100,000
Total cash and cash equivalent ₱427,480
Petty Cash Fund
-It is a money set aside to pay small expenses which cannot be paid conveniently by
means of check.
Two methods of handling petty cash fund:
1. Imprest Fund System
2. Fluctuating Fund System
Imprest fund system:
It requires all the cash receipts should be deposited intact and all cash disbursements
should be made by means of check. Expenses are already recognized. (commonly
used)
Fluctuating fund system:
It requires that checks should be drawn to replenish the fund that do not necessarily
equal the petty cash disbursement. Petty Cash Fund is immediately updated.
Imprest Fund System Vs Fluctuating Fund System
  Imprest fund Fluctuation
To establish fund Petty Cash Fund   Petty Cash Fund    
XX XX
    Cash In Bank             Cash In Bank          
XX XX
Disbursement  No entry Expense                  XX
out of fund      Petty Cash Fund    
XX
Replenishment Expense                XX Petty Cash Fund    
     Cash In Bank        XX
XX     Cash In Bank          
XX
Adjustment of Expense                XX No entry
the petty cash       Petty Cash Fund 
fund XX
To increase the Petty Cash Fund   Petty Cash Fund    
balance of PCF XX XX
    Cash In Bank             Cash In Bank          
XX XX
To decrease the Cash In Bank        XX Cash In Bank          XX
balance of PCF      Petty Cash Fund       Petty Cash Fund   
XX XX
solution:
1. How much is the petty cash shortage or overage?
 Currency 1,650

Petty Cash Fund 3,960

(420 + 900 + 340 + 800 + 1,500)  

Replenishment check 7,200

Employee’s NSF check 1,000

Petty cash accounted 13,810

Petty cash fund per ledger (custodian’s accountability) 16,000

Petty cash shortage 2,190

Problem 2:
2. What is the adjusted balance of the petty cash fund at July 31, 2010?
 Currency 1, 650
Replenishment check 7,200
Adjusted Petty Cash Balance 8,850