CHAPTER 6: FINANCIAL ASSETS Accounting for Cancelled Checks
Learning Objective
1. Define a financial assets and give example
2. Account for cash and cash equivalent
3. Account for receivables
4. Account for inventories
Financial instrument
• Is any contract that give rise to both a financial asset
of one entity and a financial liability or equity
instrument of another entity.
Financial asset – is any asset that is:
a. Cash
b. An equity instrument of another entity
c. A contractual right to receive cash or another
financial asset from another entity
d. A contractual right to exchange financial instruments
with another entity under conditions that are
potentially favorable
e. A contract that will or may be settled in the entity’s
own equity instruments
Financial liability – is any liability that is:
a. A contractual obligation to deliver cash or another
financial asset to another entity
b. A contractual obligation to exchange financial assets
or financial liabilities with another entity under
conditions that are potentially unfavorable to the
entity
c. A contract that will or may be settled in the entity’s
own equity instruments
Equity instrument – is any contract that evidences a residual
interest in the assets of an entity after deducting all of its
liabilities
The issuer of a financial instrument shall classify the
instrument, or its component parts, on initial recognition as a
financial asset, a financial liability or an equity instrument in
accordance with the substance of the contractual
arrangement and the definitions of a financial asset, a
financial liability and an equity instrument
Initial recognition
A financial asset is recognized when an entity becomes a
party the contractual provisions of the instrument
Initial Measurement
 Financial assets are initially measured at fair value
plus transaction costs, except for financial assets at
fair value through surplus or deficit whose
transaction costs are expensed.
 Transaction costs are incremental costs that are
directly attributable to the acquisition, issue or
disposal of a financial instrument.
 Incremental cost is one that would not have been
incurred if the entity had not acquired, issued or
disposed the financial instrument.
 Transaction costs include, (a) fees and commissions
paid to agents, advisers, brokers and dealers, (b)
levies by regulatory agencies and securities
exchanges and (c) transfer taxes and duties
Cash and cash equivalents
 Cash – comprises cash on hand, cash in bank and
cash treasury accounts
 Adjustments for Unreleased Commercial Checks
 Unreleased checks are checks drawn but not yet
given to the payees as of the end of the period.
Unreleased checks are reverted back to cash as
follows:
Cash in bank, local currency – current xx
Accounts payable (or other liability acct) xx
 Checks are cancelled when they become stale,
voided or spoiled,
 A check is considered stale if it has been outstanding
for over months from its date.
 Replacement checks may be issued for cancelled
checks that were already released to payees, upon
submission of the cancelled checks to the
Accounting Unit
 Cancelled checks are reverted back to cash as
follows:
Petty Cash Fund
 Petty Cash Fund (PCF) refers to the amount granted
to duly designated Petty Cash Fund Custodian for
payment of authorized petty or miscellaneous
expenses which cannot be conveniently paid
through checks or ADA.
 Petty Cash Fund (PCF) refers to the amount granted
to duly designated Petty Cash Fund Custodian for
payment of authorized petty or miscellaneous
expenses which cannot be conveniently paid
through checks or ADA.
Petty Cash Fund - Guidelines
a. The Head of Agency shall approve the amount of PCF
established, which shall be sufficient to defray
recurring expenses for 1 month.
b. The PCF Custodian shall be properly bonded(a)
whenever established amount of PCF exceeds 5,000.
c. The PCF shall be maintained using the Imprest
System. At all times, total cash on hand and
unreplenished expenses shall equal to the PCF ledger
balance.
d. The PCF shall be kept separately from other
advances or collections and shall not be used to pay
for regular expenses, such as rentals, electricity,
water, and the like
e. PCF payments shall not exceed 15,000 for each
transaction, except when otherwise authorized by
law or by the COA. Splitting of transactions to avoid
exceeding the ceiling is prohibited.
f. A canvass from at least 3 suppliers is required for
purchases amounting to ₱1,000 and above, except
for purchases made while on official travel.
g. PCF disbursements shall be supported by properly
accomplished and approved Petty Cash Vouchers,
invoices, ORs, or other evidence of disbursements.
h. Replenishment shall be made as soon as
disbursements reach at least 75% or as needed.
i. At the end of the year, the PCF Custodian shall
submit all uneplenished Petty Cash Vouchers to the
Accounting Unit for recording in the books of
accounts.
j. The unused balance of the PCF shall not be closed at
year-end. It shall be closed only upon the
termination, retirement or dismissal of the PCF
Custodian, who in turn shall refund any balance to
close his/her cash accountability.
Illustration:
After careful estimate of recurring monthly petty expenses,
the Head of Entity A approves the establishment of a P50,000
petty cash fund:
No journal entries are made as disbursement are made out of
the PCF.
Journal entries will be made when the PCF is (a) replenished
or (b) adjusted at the end of the period for unreplenished
expenses.
A cash count of the PCF reveals the following:
Case 1: The PCF is replenished
Case 2: The PCF is not replenished
Case 3: The PCF Custodian retires and the PCF is closed
Accounting for Cash Shortage/Overage of Disbursing Officer
 The disbursing officer is liable for any cash shortage
while any cash overage that he cannot satisfactorily
explain to the auditor forfeited in favor of the
government.
 Relevant provision of law: The failure of a public
officer to have duly forthcoming public funds or
property with which he is chargeable, upon demand
by any duly authorized officer, shall be prima facie
evidence that he has, put such missing funds or
property to personal use.“ (Revised Penal
Code.Art.217)
Cash Shortage
Cash Overage
Dishonored Checks
 A dishonored check is a check that is not accepted
when presented for payment, e.g., a check returned
by the bank because of lack of sufficient funds -
'bounced' check.
 The drawer of the dishonored check is liable for the
amount of the check and all penalties resulting from
the dishonor, without prejudice to his criminal
liability for a 'bounced' check.
Dishonored Checks – Guidelines:
a. When a check is dishonored, the Collecting Officer
shall:
i. issue a Notice of Dishonored Checks to the
drawer and any endorser; and
ii. cancel the related OR.
b. If the Collecting Officer fails to issue the notice, the
dishonored check becomes his personal liability. The
drawer and any endorser not given the notice will be
relieved from any liability.
c. A check refused by the drawee bank when presented
within 90 days from its date is a prima facie evidence
that the drawer has knowledge about the
insufficiency of his funds, unless the drawer pays the
check in full or makes arrangement with the drawee
bank for the full payment of the check banking days
after receiving the notice of the dishonor.
d. A dishonored check shall be settled by payment in
cash or certified check. The dishonored check shall
not be returned to the payor unless he returns first
the previous OR therefor.
Journal entries
Journal entries
Bank Reconciliation
 A bank reconciliation statement is a report that is
prepared for the purpose of bringing the balances of
cash (a) per records and (b) per bank statement into
agreement.
 A bank statement is a report issued by a bank which
shows the credits and debits to the depositor's
account during as well as the account's cumulative
balance.
Bank Reconciliation - Guidelines
a. Bank reconciliations shall be prepared as internal
control to ensure the correctness of cash records
and as deterrent to fraud.
b. The Chief Accountant or designated staff shall
prepare bank reconciliations for each bank account
separate maintained by the entity within 10 days
from receipt of the monthly bank statement
c. The Adjusted Balance Method shall be used. Under
this method, the unadjusted book and bank balances
are brought to an adjusted balance that is reported
on the Statement of Financial Position.
d. Bank reconciliations shall be prepared in 4 copies to
be submitted within 20 days from receipt of bank
statement to the following: COA Auditor, Head of
Agency, Accounting Division, and Bank, if necessary.
e. A Journal Entry Voucher (JEV) shall be prepared to
record any reconciling items.
Cash equivalents
 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.
 Only debt instruments acquired within 3 months
before their scheduled maturity date can qualify as
cash equivalents.
Receivables
Receivables represent claims for cash or other assets from
other entities. Examples:
- Accounts receivable-refers to amounts due from
customers arising from regular trade and business
transactions.
- Notes receivable - represents claims, usually with
interest, for debt, such as promissory notes.
- Loans receivable- used in the BTr-NG books
Government toto recognize loan extended by the
National or GOCCs, covered Government Financial
Institutions 'GFIs' receivable, agreements
- Other receivables, such as, interest receivable, due
from employees/officers/other NGAs, lease
receivables, dividends receivable, and the like.
Receivables are initially measured at fair value plus
transaction costs and subsequently measured at amortized
cost
Investments
Categories of Financial Assets
For purposes of subsequent measurement, financial assets
are classified as follows:
a. Financial asset at fair value through surplus or
deficit-is one that is either:
a. Held-for-trading, or
b. Designated as at fair value through surplus
or deficit on initial recognition. Any financial
asset can be classified in this category if its
fair value can be reliably measured.
b. Held-to-maturity investments -are non-derivative
financial assets with fixed or determinable payments
and fixed máturity that an entity has the
positiveintention and ability to hold until maturity.
c. Loans and receivables-are non-derivative financial
assets with fixed or determinable payments and are
not quoted in an active market
d. Available for sale financial assets – are non-
derivative financial assets that are designated as
available for sale or are not classifiable under the
other categories
Summary of Measurements:
Illustration 1:Initial measurement
Illustration 2: Subsequent measurement
Illustration 3: Held-to-maturity investments
Variation: Available-for-sale financial assets
 Assume the bonds are classified as available-for-sale
financial assets and the fair value at year-end is
1,010,000. The unrealized gain that is recognized in
net assets would have been 44,651 (1,010,000 fair
value- P965,349 carrying amount adjusted for
discount amortization). The same amount of interest
income would be recognized.
Impairment of Financial Assets
 An entity shall assess at the end of each reporting
period whether there is any objective evidence that
a financial asset or group of financial assets is
impaired. If any such evidence exists, the entity shall
measure the amount of loss as the difference
between the carrying amount of the asset and the
present value of estimated future cash flows
discounted at the financial asset’s original effective
interest rate. The carrying amount of the asset shall
be reduced either directly or through the use of an
allowance account. The amount of the loss shall be
recognized in surplus or deficit.
 In case of Accounts Receivable, the Allowance for
Impairment shall be provided in an amount based on
collectability of receivable balances and evaluation
of such factors as aging of accounts, experiences
collection experiences of the agency, expected loss
and identified doubtful accounts.
Derecognition of Financial Assets
Derecognition is the process of removing a previously
recognized asset liability or equity from the statement of
financial position.
A financial asset is derecognized when:
a. The contractual rights to the cash flows from the
financial asset expire or are waived; or
b. The financial asset is transferred and the transfer
qualifies for derecognition, such as when the risks
and rewards of ownership and control of the
financial asset are relinquished.
The derecognition of financial assets is subject to the
provisions of the State Audit Code of the Philippines (P.D. No.
1445) on the writing off of receivables and other policies
issued by the COA.

Illustration: Impairment and Derecognition

Derivatives
A derivative is a financial instrument or other contract that
derives its value from the changes in value of some other
underlying asset or other instrument.
Characteristics of a derivative
a. Its value changes in response to the change in an
underlying;
b. It requires no initial net investment (or only a very
minimal initial net investment);and
c. It is settled at a future date.
An "underlying" is a specified price, rate, or other variable
(e.g., interest rate, security or commodity price, foreign
exchange rate, index of prices or rates, etc.),including
scheduled event (e.g, a payment under contract) that may or
may not occur.

Purpose of a derivative
The very purpose of derivatives management. Risk
management is the process of identifying risk of risk is the
desired level the latter to equal identifying the actual level of
risk and altering the former

Hedging
 Hedging is a method structuring of a transaction to
reduce risk involving financial instruments.
 Hedge accounting recognizes the offsetting effects
on and surplus or deficit of changes in the fair values
of the hedging instrument and the hedged item.

Hedging Relationships
a. Fair value hedge -a hedge of the exposure to
changes in fair value of a recognized asset or liability
or an unrecognized firm commitment, or an
identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk
and could affect surplus or deficit.
b. Cash flow hedge-a hedge of the exposure to
variability in cash flows that (i) is attributable to a
particular risk associated with a recognized asset or
liability (such as all or some future interest payments
on variable rate debt) or a highly probable forecast
transaction and (ii) could affect surplus or deficit.
c. Hedge of a net investment in a foreign operation.

Components of a Hedging Relationship

a. Hedging Instrument-a designated derivative or a
designated non-derivative financial asset or non-
derivative financial liability whose fair value or cash
flows are expected to offset changes in the fair value
or cash flows of designated hedged item.
b. Hedged Item - an asset, liability, firm commitment,
highly probable forecast transaction or net
investment in a foreign operation that (a)exposes
that entity to risk of changes in fair value or future
cash flows and (b) is designated as being hedged.