BANK RECONCILIATION

You are the auditor of EB, Inc. You obtained the bank statement and paid checks directly from the bank. In reconciling
the bank balance at December 31, 2018, you observed the following facts:
1 Balance per general ledger, 12/31/18 28,064
2 Balance per bank statement. 12/31/18 11,046
3 Outstanding checks, 12/31/18 (including a certified check of P15,000) 45,500
4 Receipts of 12/31/18, deposited 1/2/19 22,482
5 Proceeds of bank loan, 12/31/18, discounted for 90 days at 10% per year,
Omitted from records 48,750
6 Deposit of 12/23/18, omitted from the bank statement 12,871
7 Check 143 of BE, Inc. charged by the bank in error to EB, Inc. 7,200
8 Deposit of AB, Inc. credited in error to EB, Inc. on 12/06/18 8,755
9 Debit memo for the cost of a checkbook 150
10 Check of EB, Inc. in payment of accounts payable had been recorded
by the Bookkeeper as P1,230, the correct amount is 12,300
11 The ledger account for Cash in bank included petty cash fund amounting to 4,200
12 Proceeds from cash sales for July 18 were stolen. The company expects
to recover this amount from the insurance company. The cash receipts
were recorded in the books, but no entry was made for the loss 15,700
13 The company's account was charged on December 26 for a customer's
Uncollectible check amounting to 31,350

Prepare a bank reconciliation statement to arrive at the adjusted balances at December 31, 2018.
1. Adjusting journal entries as of December 31, 2018. Submit it to my inbox using excel format

Balance per bank 11,046 Balance per book 28,064

Add: Deposit in transit 22,482 Add: Bank loan 48,750
Deposit in transit 12,871 76,814
Check 143 Bank error 7,200 42,553 Less: Debit Memo 150
53,599 A/P 11,070
Less: Outstanding 30,500 Petty Cash 4,200
Credited in error 8,755 39,255 Receivable for Insurance 15,700
14,344 Uncollectible 31,350 62,470
14,344

2. Provide the adjusted balance of cash and cash equivalents as your answer below.

Adjusting Entry
Cash 48,750
Interest Expenses 1,250
Bank Loan 50,000

Bank Charges 150

Accounts Payable 11,070
Receivable for Insurance 15,700
Accounts Receivable 31,350
Petty cash fund 4,200
Cash 62,470
BANK RECONCILIATION

CASH AND CASH EQUIVALENTS

Cash is the standard medium of exchange in business
transactions. Cash is also known as money in physical form.
Cash is used to acquire goods and services or to pay
obligations. Cash is the most liquid of all assets.
To qualify as cash, an item must be unrestricted. Unrestricted
means that cash must be readily available for use without any
restrictions.
services. People traveling in foreign countries generally use
them instead of cash, as many businesses accept traveler's
checks as currency.
g. Cash funds set aside for use in current operations, such as:
Petty cash fund – a fund set aside to cover small business
expenses.

Payroll fund – a fund set aside to pay salaries and wages of

a. Coins and bills
employees.
b. Demand deposit - is money that is deposited into a bank
Change fund – a fund set aside to provide change to
account and can be withdrawn at any time. A demand
customers who purchase goods or services.
deposit is also called a checking or current account. A
checking account allows you to write and issue checks. Tax fund – a fund set aside for the purpose of paying taxes.
c. Savings deposit - also known as a savings account, is an On the other hand, cash funds not available for use in current
interest-bearing deposit account at a bank. Deposits and operations are excluded from cash. Examples are:
withdrawals can be made online, over the phone, by mail, or
in person at a bank branch or ATM. Sinking fund – a fund set aside to pay off a debt or bond (to
be discussed further in Intermediate Accounting II).
d. Bank drafts - is a convenient and safe way to make large
payments without having to withdraw cash from one's Plant expansion fund – a fund set aside for future business
account. Bank drafts are guaranteed by banks and can be expansion.
used by individuals and businesses to make payments to third
Preference shares redemption fund – a fund set aside for the
parties.
redemption or buyback of preference shares (to be discussed
e. Money orders - is a certificate that allows the named further in Intermediate Accounting II).
payee to receive cash on demand. Money orders can be
Contingency fund – cash fund set aside to cover possible
purchased from financial institutions such as Western Union.
unforeseen future expenses.
f. Checks received from customers, such as:
Postdated checks Issued by the entity A postdated check
a. Personal checks - are individual slips of paper that are issued by the entity is a check that has been drawn, recorded,
issued by a bank. The date, payee, check amount, and
and delivered to the payee (recipient) but is dated after the
signature line are all left blank for the account holder to fill
out when the check is written and issued. end of the reporting period.

b. Cashier's checks - is a check written from the bank's own

Example: Pinnacle Corporation issued checks totaling
funds and signed by a teller or cashier. It is more secure than
a personal check for the recipient. This is because a bank will P250,000 to its suppliers on December 1, 2025. The entry to
only issue it if there is enough money in the account to record the issuance of checks is as follows:
guarantee it. Cashier's checks are ideal for large purchases,
such as the sale of a car or a house.

c. Manager's checks - is a secure check that a bank issues on

behalf of the individual who has purchased the check. The
bank verifies and guarantees that the account holder has
On December 31, Pinnacle discovered that one of the checks
enough funds to cover the amount of the check before the
check is issued. Then the bank usually sets the amount of the amounting to P150,000 is postdated, i.e., dated January 15,
check aside. 2026. The supplier can only present the check to the bank for
encashment starting January 15, 2026.
d. Certified checks - is a type of check in which the issuing
bank guarantees that there will be enough cash in the Therefore, the original entry for the P150,000 shall be
holder's account when the check is encashed. A certified reversed as follows:
check also verifies the authenticity of the account holder's
signature on the check. Basically, it is a bank-guaranteed
personal check

e. Traveler’s checks - is a check that can be used in place of

Thus, postdated checks issued by the entity are reported as
paper currency. It is for a pre-paid fixed amount and works
like cash, so the buyer can use it to purchase goods or “CASH”. On December 31,2025, Pinnacle shall report Cash of
P150,000.
Received from customers
A postdated check received from a customer is a check that
has been drawn, received, and recorded but is dated after the
end of the reporting period.
Example: Pinnacle Corporation received checks from
customers totaling P300,000 on December 1, 2025.
The entry to record the receipt of the checks is as follows:
On December 31, Pinnacle Corporation determined that a
customer's check amounting to P130,000 is postdated (dated
January 15, 2026).
An adjustment is necessary to revert the postdated check of
P130,000 to accounts receivable
Postdated checks received from customers do not qualify as
‘Cash’ because they are not available for immediate use.
On December 31, Pinnacle shall report ‘Cash’ of P170,000
(P300,000 - P130,000).
Undelivered or unreleased checks
An undelivered or unreleased check is a check that has been
drawn and recorded but has not yet been delivered to the
payee by the end of the reporting period.
Example: On December 1, 2025, Pinnacle Corporation issued
a P500,000 check to a supplier dated December 1, 2025, but
to be delivered on January 15, 2026.
The entry for the check drawn is as follows:
However, no payment has been made as of December 31,
2025, because the check has not yet been delivered. A
reversing entry is required as follows:
As a result, checks issued by the entity that have not been
delivered or released are reported as ‘Cash’.
Pinnacle must report ‘Cash’ of P500,000 on December 31,
2025.
Stale checks - is a check that has not been cashed by the
payee for an extended period of time. The amount of time
before checks become stale is determined by company policy,
but in banking practice, a check becomes stale if it is not
encashed within six (6) months from date of issuance.
Example: On June 1, 2025, Pinnacle Corporation issued a
P150,000 check to a supplier.
The journal entry is as follows:
As of December 1, 2025 (after 6 months), the check has not
yet been cashed and is considered stale.
If the amount is immaterial, the stale check may be recorded
as miscellaneous income as follows:
If the amount is material, the original entry is reversed as
follows:
As a result, stale checks are reported as ‘Cash’.
Therefore, on December 31, 2025, Pinnacle shall report ‘Cash’
of 150,000.
Compensating balance - is the minimum amount that must
be kept in a company's bank account as collateral or security
for bank loans.
Illustration: Pinnacle Corporation borrowed P1,000,000 from
a bank and agreed on a 10% compensating balance.
To comply with the banks’ requirement, Pinnacle must
maintain P100,000 (P1,000,000 x 10%) in its bank account.
Compensating balances that are not legally restricted as to
withdrawal are reported as part of ‘Cash’.
Compensating balances that are legally restricted as to
withdrawal are excluded from ‘Cash’ and are reported as
‘Other Current Assets’ or ‘Other Noncurrent Assets’,
depending on the nature of the related loan. If the related
loan is short-term, the compensating balance is reported
under ‘Other Current Assets’. If the related loan is long-term,
the compensating balance is reported under ‘Other
Noncurrent Assets’. Bank overdraft
Bank overdraft - is a negative balance in a bank account
caused by overpayment of checks in excess of the deposit
amount. Overdrafts are payable on demand, therefore,
overdrafts are reported as current liabilities, unless offsetting
is permitted.
When two or more bank accounts are maintained in the same
bank and one account overdrafts, the overdraft may be offset
or deducted from the other bank account with a positive
balance, provided that the other bank account is unrestricted.
If the other bank account with a positive balance is restricted,
offsetting is not permitted.
Measurement on Cash
Cash denominated in local currency (peso) is measured at
face amount or face value.
Cash denominated in foreign currency is measured at the
exchange rate on the reporting date (i.e., December 31
exchange rate).
Cash maintained in a bank undergoing bankruptcy is excluded
from ’Cash’ and presented as ‘Other Receivable’ measured at
net realizable value. The net realizable value of a deposit is
the amount expected to be recovered from it, which is
usually determined by reference to the deposit's insured
amount.
Restricted bank deposits that are not immediately available
for withdrawal are excluded from ‘Cash’ and reported as
‘Other Assets’.
The classification of the restricted deposit as current or
noncurrent mirrors the nature of the restriction. If the
restriction is short-term (12 months or less), the bank deposit
is reported as ‘Other Current Assets’. If the restriction is long-
term (more than 12 months), the bank deposit is reported as
‘Other Noncurrent Assets’.
Mini quiz : Identify whether items should be included on cash
balance or not.
1. Cash on Hand – Included
2. Petty Cash Fund – Included
3. Postdated checks from customers- Not Included
4. Coins and currency- Included
5. Demand Deposit (restricted) – Not included
6. 1,000,000 cash appropriated for plant expansion-
Not Included
7. Savings Account- Included
8. Postdated checks issued- Included
9. Compensating balance of 500,000 legally restricted-
Not Included
10. Bank overdrafts- Not Included
Cash equivalents
Cash equivalents are assets that can be readily converted
into cash.
Only debt instruments acquired within three (3) months or
less before their maturity date can qualify as cash
equivalents.
Examples of cash equivalents are:
Treasury bills, notes, or bonds acquired 3 months before
maturity
Treasury bill - is a short-term obligation issued by the
government at a discount. Treasury bills typically have
maturities ranging from 90 days to less than a year.
Treasury notes and treasury bonds are both long-term
obligations issued by the government. Treasury notes have
maturities ranging from one year to less than ten years.
Treasury bonds have a maturity of ten years or more.
Money market instrument or commercial paper acquired
three (3) months before maturity date
Money market instruments are investments in portfolios of
short-term debt securities.
A commercial paper is a commonly used type of unsecured,
short-term debt instrument issued by corporations, typically
used for the financing of payroll, accounts payable, and
meeting other short-term liabilities.
Maturities on commercial paper typically last several days,
and rarely range longer than 270 days.
3-month time deposit
A time deposit is a type of bank deposit that is normally
made in fixed denominations, pays higher interest than
regular deposits, and has a pre-determined maturity date. A
time deposit is evidenced by a certificate of deposit.
Equity securities or stock investments generally do not qualify
as cash equivalents because shares of stocks do not have a
maturity date.
Cash and cash equivalents are normally presented as current
assets unless they are restricted from being exchanged or
used to settle a liability for at least twelve months after the
reporting period.
Unrestricted cash and cash equivalents are combined and
reported on the Statement of Financial Position as a single
line item titled "Cash and cash equivalents." The line item's
breakdown is disclosed in the Notes.

As defined in PAS 7, cash equivalents are "short-term, highly

liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk
of changes in value."
Illustration: Cash and cash equivalents
Pinnacle Corporation reported the following items for the
year ended December 31, 2025:
Requirement: Determine the Cash and Cash Equivalents to be
reported in the December 31, 2025 Statement of Financial
Position.
Other items not included in Cash and Cash Equivalents should
be presented as follows:
• The BPI current account is a bank overdraft and must be
reported as current liability.
• The foreign bank account is restricted and not available for
immediate use. It must be presented as other noncurrent
assets.
• Postage stamps are reported as supplies.
• Post-dated check from customer is still an accounts
receivable.
• IOUs are advances to employees and must be presented as
other receivable.
• Not sufficient funds (NSF) checks are checks with not
enough balance in the bank. NSF checks are reported as
accounts receivable.
• Treasury bills, due January 31, 2025 which was purchased
on February 1, 2024 has a maturity date of one (1) year. It
must be presented as short-term investments. Take note of
the 3-month rule for Cash Equivalents.
• The unused credit line with Security bank is disclosed only
in the Notes
Proof of Cash
A proof of cash is a two-month bank reconciliation that
includes proof of cash receipts and cash disbursements.
In a proof of cash, the current month's book receipts and
disbursements and the current month's bank receipts and
disbursements are adjusted to equal the correct (adjusted)
receipts and disbursements.
It is also called a ‘two date' or ‘four-column’ bank
reconciliation.
A proof of cash is useful in identifying discrepancies in the
handling of cash over a specific time period. It is only
prepared when necessary, which is usually in discovering cash
related fraud
Illustration: Proof of cash
Requirement: Prepare a Proof of Cash.
Note that the proof of cash pertains to the receipts and
disbursements for the current month of December.
Credit memos
• Credit memos in November have no effect on December
bank receipts but increased December book receipts
because credit memos in November are only recorded by
the depositor in December. This does not represent a
December receipt but rather a November receipt that was
only recorded in December.
• The December book receipts are higher than the correct
receipts. Accordingly, it is deducted from the December
book receipts.
• As a result, the P37,500 note collected in November is
deducted from the December book receipts.
• Credit memos in December have already increased bank
receipts in December but have no effect on book receipts
because the depositor has not yet recorded the credit
memos in December. This represents a December receipt
that is already recorded by the bank but not yet in the
books
• The December book receipts are lower than the correct
receipts. Accordingly, it is added to the December receipts.
• As a result, the P50,000 note collected in December is
added to the December book receipts.
Debit memos
• Debit memos in November have no effect on the December
bank disbursements but increased the December book
disbursements because the debit memos in November are
recorded only by the depositor in December.
• These are November disbursements that were only
recorded in December.
• The December book disbursements are higher than the
correct disbursements. Accordingly, it is deducted from the
December book disbursements.
• As a result, the November NSF of P12,500 and November
service charge of P2,500 are deducted from the December
book disbursements.
• Debit memos in December have no effect on the December
book disbursements but increased the December bank
disbursements because the debit memos in December are
not yet recorded by the depositor in December.
• These are December disbursements that were not yet
recorded.
• The December book disbursements are lower than the
correct disbursements. Accordingly, it is added to the
December book disbursements.
• As a result, the December NSF of P25,000 is added to the
December book disbursements.
Deposits in transit
• Deposits in transit in December have no effect on book
receipts but increased bank receipts in December because
deposits are only recorded by the bank in December.
• Bank receipts in December are higher than the correct
receipts. Accordingly, deposits in transit in November are
deducted from the bank receipts in December.
• As a result, the November deposit in transit of P100,000 is
deducted from the December bank receipts.
• Deposits in transit in December already increased book
receipts but have no effect on the bank receipts in
December because the deposits are not yet recorded by
the bank in December.
• The bank receipts in December are lower than the correct
receipts. Accordingly, deposits in transit in December are
added to the bank receipts in December.
• As a result, the December deposit in transit of P187,500 is
added to the December bank receipts.
Outstanding checks
• Outstanding checks in November have no effect on book
disbursements but increase bank disbursements in
December because outstanding checks are only paid by the
bank in December.
• The bank disbursements in December are higher than the
correct disbursements in December. Accordingly,
outstanding checks in November are deducted from the
bank disbursements in December.
• As a result, the November outstanding check of P162,500 is
deducted from the December bank disbursements.
• Outstanding checks in December increased book
disbursements but have no effect on bank disbursements
because the checks are not paid by the bank in December.
• The bank disbursements in December are lower than the
correct disbursements in December. Accordingly,
outstanding checks in December are added to the bank
disbursements in December.
• As a result, the December outstanding check of P297,500 is
added to the December bank disbursements.
The final Proof of Cash is presented below: Adjusted cash balance as of November 30

Adjusted cash balance as of December 31

Adjusted bank receipts for December

Adjusted book disbursements for December

Accordingly, we can work back for the missing value as

follows:

*Disbursements per book = P265,000 + P220,000 – P340,000

= P145,000

llustration: Proof of cash (computation of adjusted balances)

Pinnacle Corporation prepared the following information:

Accordingly, we can work back for the missing value as

follows:

*Receipts per bank: P345,000 + P165,900 – P270,000) =

P240,000

Final answers:

a. Adjusted cash balance as of November 30

The bank statements and the company’s cash records show
P300,000
these totals:
b. Adjusted cash balance as of December 31
Disbursements in December per bank statement P165,000
P400,000
Cash receipts in December per Pinnacle’s books 220,000
c. Adjusted bank receipts for December
Requirement: Prepare a Proof of Cash and compute for the P250,000
following items:
d. Adjusted book disbursements for December
P150,000
Accounts Receivable
Receivables are financial assets that represent a contractual
right to receive cash or another type of financial asset from
another entity.
Trade vs. nontrade receivables
For merchandising and manufacturing entities, receivables
are classified into trade and nontrade receivables.
Trade receivables are those that result from the sale of goods
or services in the ordinary course of business. Trade
receivables include accounts receivable and notes receivable.
Accounts receivables are receivables resulting from the sale
of goods and services in the ordinary course of business
which are not supported by promissory notes.
Notes receivables are receivables supported by written or
formal promises to pay in the form of promissory notes.
Loans receivables are receivables resulting from loans
extended by financial institutions such as banks. Loans
receivables are also supported by promissory notes. Financial
institutions need not classify their receivables as trade or
non-trade.
Nontrade receivables are claims arising from sources other
than the sale of goods or services in the ordinary course of
business.
Examples of nontrade receivables include:
a. Advances - are receivables resulting from advances made
to officers, employees, shareholders, directors, suppliers and
affiliates.
Advances are classified as current assets if collectible within
one year. Otherwise, they are classified as noncurrent assets.
If the problem silent, advances to affiliates are classified as
noncurrent assets. Examples of affiliates are investments in
associates and subsidiaries (to be discussed further in
Intermediate Accounting II and Business Combination).
b. Accrued income - are receivables resulting from income
earned but not yet collected, such as accrued interest
receivable, dividend receivable and rent receivable.
Accrued income are classified as current assets.
c. Deposits - are receivables derived from refundable
deposits paid to cover potential damages or losses. Examples
are security deposits on rent and deposits for returnable
items such as containers.
Deposits are classified as current assets if collectible within
one year. Otherwise, they are classified as noncurrent assets.
d. Claims receivable - Claims receivable are claim against
common carriers (companies that transport goods) for
damaged or lost goods, claim for tax refunds and claim from
insurance.
Claims receivable are classified as current assets.
e. Subscriptions receivable - are receivables from
shareholders from their stock subscriptions.
Subscriptions receivable are classified as current assets if
collectible within one year. Otherwise, they are presented as
a deduction from subscribed share capital. This topic shall be
discussed further in Intermediate Accounting II.
f. Debit balances in suppliers’ accounts - are accounts
payable with debit balances resulting from overpayment or
returns and allowances.
Debit balances in suppliers’ accounts are classified as current
assets.
Classification
According to PAS 1, trade receivables are classified as current
assets if they are expected to be realized in cash within the
normal operating cycle or one year, whichever is longer.
The normal operating cycle of an entity is the time between
the acquisition of assets for processing and their realization in
cash or cash equivalents. When an entity's normal operating
cycle cannot be clearly determined, it is assumed to be 12
months.
Non-trade receivables are classified as current assets only if
they are expected to be realized in cash within one year,
regardless of the length of the operating cycle.
Presentation
Trade and nontrade receivables that are currently collectible
are aggregated and reported in the Statement of Financial
Position as a single line item titled "Trade and other
receivables".
The composition of the total trade and other receivables shall
be disclosed in the notes to financial statements. The
disclosure may appear as follows:
Methods of estimating doubtful accounts
The three acceptable methods for estimating doubtful
accounts are as follows:
• Percentage of sales
• Percentage of accounts receivable
• Aging of accounts receivable
Percentage of sales method
Under the percentage of sales method, bad debt expense is
computed by multiplying a percentage to net credit sales
during the period.
Bad debt expense = Percentage x Net credit sales
The percentage used is determined by the entity's previous
historical experience with customers. Normally, the
percentage is calculated by dividing past bad debt expenses
net of past recoveries by past credit sales.
The percentage of sales method achieves proper matching of
cost against revenue. This is because bad debt expense is
directly related to sales recognized in the year of sale.
This method is also known as the “Income Statement
approach” because it favors the income statement.
Illustration: Percentage of credit sales method
Pinnacle Company reported the following information on
December 31, 2025, before any year-end adjustments:
Determine the following:
Bad debt expense
Allowance for doubtful accounts on December 31, 2025
Net realizable value of accounts receivable
Solution:
The entry to record bad debt expense is as follows:
Take note that the bad debt expense is calculated without
considering the beginning balance of the allowance for
doubtful accounts, write-offs and recoveries recorded during
the year.
Requirement (b) Allowance for doubtful accounts on Dec. 31,
2025
The allowance for doubtful accounts on December 31, 2025 is
computed as follows:
The ending balance of the allowance for doubtful accounts is
equal to the beginning balance in the allowance account plus
bad debt expense recognized during the period minus write-
offs plus recoveries.
Requirement (c) NRV of accounts receivable
The net realizable value of accounts receivable as of year-end
is computed as follows:
Analysis:
Cash sales are deducted because they are already collected;
thus, no allowance is necessary. The percentage is applied to
net credit sales.
Sales returns are also deducted because the related
receivables have already been derecognized; thus, no
allowance is also necessary. Again, the percentage is applied
to net credit sales.
If this method is used, the computed amount is already the
amount of the doubtful accounts expense, not the required
allowance.
In determining the doubtful accounts expense to be
recorded, the allowance balance before adjustment is
ignored.
Percentage of accounts receivable method
Under the percentage of accounts receivable method, a
percentage is applied to the ending balance of accounts
receivable to determine the required or ending balance of
allowance for doubtful accounts.
The bad debt expense for the period is calculated as the
difference between the required or ending balance and the
unadjusted balance of the allowance for doubtful accounts
(before recognizing bad debt expense).
This method has the advantage of presenting accounts
receivable at their estimated NRV. This method is also called
as the “Statement of Financial Position approach” because it
favors the Statement of Financial Position.
It does not, however, strictly adhere to the of matching
because bad debts are recognized based on the ending
balance of receivables rather than directly on the credit sales
revenue recognized in the period.
Illustration: Percentage of accounts receivable method
Pinnacle Company reported the following information on
December 31, 2025 before any year-end adjustments:
Requirements: Compute for the following:
Bad debt expense
Net realizable value of accounts receivable
Solution:
Requirement (a) Bad debt expense
Formula: Required balance of allowance = Percentage x
Accounts receivable, end.
The ending balance of accounts receivable is computed as
follows:
Remember that the journal entries to record a recovery
involve a debit and a credit to accounts receivable. As a
result, the recovery of a previously written-off account has no
effect on the balance of gross accounts receivable.
The required balance of allowance for doubtful accounts as of
December 31, 2025 is computed as follows:
The bad debt expense for the year is computed as follows:
The entry to record the bad debts expense is as follows:
Requirement (b) NRV of accounts receivable
Aging of accounts receivable
Under the aging of accounts receivable, the required balance
of allowance for doubtful accounts is computed by applying
various estimated percentages to the breakdown of the
ending receivable according to ages.
The age of receivables is typically calculated based on the
number of days the receivables have been past due. The
credit terms will determine whether an account is already
past due.
For example, if the credit terms are 2/10, n/30, and the
account is 45 days old, the account is 15 days past due. Past
due refers to the period beyond the maximum credit term of
30 days.
The required or ending balance of the allowance for doubtful
accounts is then calculated by multiplying the total of each
classification by the entity's percentage of uncollectability.
Bad debt expense is computed the same as the percentage of
receivables method. The bad debt expense for the period is
calculated as the difference between the required or ending
balance and the unadjusted balance of the allowance for
doubtful accounts (before recognizing bad debt expense).
The aging of receivables method, like the percentage of
receivables method, favors the Statement of Financial
Position because it provides a reasonable approximation of
NRV of the receivables.

It does not, however, strictly adhere to the concept of

matching because bad debts are recognized based on
receivable balances rather than directly on credit sales
revenue recognized in the period.

Illustration: Aging of accounts receivable

Pinnacle Company provided the following information on

December 31, 2025:

During the year, Pinnacle wrote off P50,000 receivables and

recovered P20,000 that had been written-off in prior years.
The allowance for doubtful accounts has a beginning balance Quiz (1 item)
P60,000.

Compute for the following:

Doubtful accounts expense for the year

Net realizable value or carrying amount of accounts
receivable

Solution:

Requirement (a) Doubtful accounts expense

Solution:

The doubtful accounts expense is computed as follows:

Notes Receivable
A notes receivable is a claim that is supported by a formal
Requirement (b) NRV or carrying amount of accounts
promise to pay, typically in the form of promissory notes.
receivable
A promissory note is a written contract in which one person
The net realizable value or the carrying amount of the
(the maker) promises to pay another person (the payee), a
accounts receivable amounts to P973,000.
specific amount of money at a future date.
Notes receivable refers only to claims arising from the sale of
goods or services in the ordinary course of business. Non-
trade notes receivable is receivable from other sources, such
as notes receivable from officers, employees, shareholders,
and affiliates.
Initial measurement
cash flows discounted using the effective interest rate. This is
called the effective interest method.
Under the effective interest method, the difference between
the present value and the face amount of the receivable is
initially recognized as unearned interest income and
subsequently amortized as interest income.

Notes receivable is measured initially at present value. The The term "noninterest-bearing" is misleading because all
present value is the sum of all future cash flows discounted notes contain interest. Here, the interest is imputed in the
using the prevailing market rate of interest. face amount.

The prevailing market rate of interest is the effective interest Time value of money
rate. It is the rate that exactly discounts estimated future
The concept of present value is based on the idea that all
cash payments or receipts through the expected life of the
notes receivable have two components: principal and
financial instrument.
interest. The principal and interest are accounted for
Other terms for effective interest rate are imputed interest separately.
rate, market rate and yield rate.
There are two types of annuities: ordinary annuity and
Receivables are classified as follows for measurement annuity due (also called annuity in advance).
purposes:
In an ordinary annuity, payments are made at the end of each
• Short-term receivable period. In an annuity due, payments are made at the
• Long-term receivable bearing a reasonable interest rate beginning of each period.
(interest-bearing)
• Long-term receivable bearing no interest (noninterest-
bearing) or unreasonable interest rate (below-market
interest rate)
• A short-term receivable has a maturity date of one (1)
year or less. A long-term receivable has a maturity date
beyond one (1) year.

Short-term receivable

Cash flows from short-term notes receivable are not

discounted anymore because the effect of discounting is
usually immaterial. Therefore, short-term notes receivable
shall be measured initially at face value.
Simple vs. compound Interest
Long-term receivable bearing a reasonable interest rate
Interest is classified into two types: simple and compound
Interest bearing notes have a stated interest rate. This is the
interest.
rate written on the face of the promissory note. Other terms
for stated interest rate are nominal rate and coupon rate. Simple interest earns interest only on the principal.
Compound interest earns interest on both the principal and
The present value of a long-term receivable that bears a
the interest.
reasonable interest rate is equal to the face amount, which is
the present value upon issuance. Cash price equivalent

An interest rate is considered reasonable if it approximates
the market rate at date of issuance.
Long-term receivable bearing no interest or unreasonable
interest rate
The present value of a long-term receivable with no interest
(noninterest-bearing receivable) or an unreasonable interest
rate is equal to the present value of the receivable's future
Notes receivables may be measured at the cash price
equivalent of the asset given up in exchange for the
receivable. The cash price equivalent is the amount that
would have been paid if the transaction had been settled
outright on a cash basis rather than an installment basis.
To compute for the cash price equivalent, the cash discount
for outright payment in cash is deducted from the regular
selling price.
Illustration: Cash price equivalent The journal entries relating to the note receivable are as
follows:
Pinnacle Company sold goods for P600,000 to a customer
who was granted a credit period of one year. The entity
regularly sells the goods for P550,000 with a P20,000
discount for cash basis.

The initial measurement of the receivable is computed as

follows:

Subsequent measurement

Accordance to PFRS 9, long-term notes receivable shall be

subsequently measured at amortized cost using the effective
interest method.

As defined in PFRS 9, amortized cost is the "amount at which

the financial asset or financial liability is measured at initial
recognition minus principal repayments, plus or minus the
cumulative amortization using the effective interest method
of any difference between that initial amount and the
maturity amount and, for financial assets adjusted for any
loss allowance."

Basically, the amortized cost is the amount at which the note

receivable is initially measured:

• Minus principal repayment

• Plus or minus cumulative amortization of any difference
between the initial carrying amount and the principal
maturity amount
• Minus reduction for impairment or uncollectibility

Illustration: Measurement of notes receivable

Scenario 1: Interest-bearing note (Simple interest)

On April 1, 2025, Pinnacle Company received a P6,000,000,

10%, 3-year receivable in exchange for land with carrying
amount of P4,500,000. The principal plus interest is due in
three equal installments annually starting April 1, 2026.

Analysis:

Type of receivable: Long-term receivable bearing reasonable

interest rate

Initial measurement: Face amount (the stated rate of 10% is

equal to the current market rate)

Subsequent measurement: Amortized cost which is equal to

the face amount
Notes:
Type of interest: Simple interest - interest is computed based
The notes receivable is not discounted to its present value
only on the outstanding principal balance
because it bears a reasonable interest rate. On April 1, 2025,
the stated rate of 10% is equal to the current market rate of
10%.
Under simple interest, interest is computed only on the
outstanding principal balance.
Initially and subsequently, the notes receivable is measured
at face amount.
Scenario 2: Interest-bearing note (Compound interest)
January 1, 2025, Pinnacle extended a P2,500,000 loan to one
of its officers evidenced by a promissory note. The note is due
on January 1, 2028 and bears 10% interest compounded
annually.
Analysis:
Type of receivable: Long-term receivable bearing reasonable
interest rate - stated rate of 10% is assumed equal to the
current rate on initial recognition because no additional
information is given.
Initial measurement: Face amount
Subsequent measurement: Amortized cost which is equal to
the face amount
Type of interest: Compounded interest - interest is computed
based on both principal and accrued interest balances.
The journal entries relating to the note receivable are as
follows:
Scenario 3: Noninterest-bearing note (installment)
On January 1, 2025, Pinnacle sold an equipment with a cost of
P750,000 and accumulated depreciation of P450,000 in
exchange for cash of P50,000 and a noninterest-bearing note
receivable of P200,000 due in 4 equal annual installments
starting on December 31, 2025 and every December 31
thereafter. The prevailing rate of interest for this type of note
is 12%
Analysis:
Type of receivable: Long-term noninterest-bearing receivable
Initial measurement: Present value
Present value factor: PV of ordinary annuity of P1 because
the note is collectible in installments and the first installment
is due after one period from initial recognition.
Subsequent measurement: Amortized cost using the effective
interest method.
The present value of the note as of January 1, 2025 is
computed as follows:
The difference between the face amount and the present
value of the note represents the unearned interest income.
The unamortized balance of the unearned interest income is
a valuation account (deduction) to the note receivable when
determining its carrying amount
The note receivable is initially recorded as follows:
An amortization table is prepared to serve as basis for
subsequent journal entries:

The journal entries relating to the note receivable are as

follows: