MODULE 0.

1: ELEMENTS OF FINANCIAL
STATEMENTS - One party’s obligation normally
corresponds to another party’s rights.
ASSETS 2. Transfer of an economic resource
“A present economic resource controlled by the - Liability is the obligation that has the
entity as a result of past events. An economic potential to require the transfer of an
resource is a right that has the potential to produce economic resource to another party and
economic benefits.” not the future economic benefits that the
obligation may cause to be transferred.
THREE ASPECTS: - Obligations may be: pay cash, deliver
goods, render services; exchange assets;
1. Right transfer assets; issue a financial
- an entity has (i) rights that correspond to instrument that obliges the entity to
an obligation of another party and (ii) transfer an economic resource.
rights that do not correspond to an
obligation of another party. 3. Present obligation as a result of past
- Normally arise from law, contract, or events
similar means. - The entity has already obtained economic
- Not all rights are assets. It must have the benefits or taken an action and as a
potential to produce economic benefits consequence, the entity will or may have
and must be controlled by the entity. to transfer an economic resource that it
- An entity cannot have a right to obtain would otherwise not have had to transfer.
economic benefits from itself.
- The asset is a set of rights and not the EQUITY
physical object itself. “The residual interest in the assets of the entity after
deducting all its liabilities.”
2. Potential to produce economic benefits
- Ways to produce economic benefits: sell, INCOME
lease, transfer or exchange; use in “Increases in assets, or decreases in liabilities, that
combination with other assets to produce result in increases in equity, other than those
goods; use to enhance the value of other relating to contributions from holders of equity
assets; used to promote efficiency and claims.”
cost savings; used to settle a liability.
- An asset can be obtained for free. EXPENSES
“Decreases in assets, or increases in liabilities, that
3. Control results in decreases in equity, other than those
- The entity has the exclusive right over the relating to distributions to holders of equity claims.”
benefits of an asset and the ability to Direct adjustments to equity: contributions and
prevent others from accessing those distributions to entity owners.
benefits.
Unit of Account
- Control links an economic resource to an - “right or the group of rights, the obligation
entity and indicates the extent to which an
or the group of obligations, or the group of
entity should account for that economic rights and obligations, to which recognition
resource.
criteria and measurement concepts are
- Physical possession is also not always applied.” ; a unit of account is selected for
necessary for control to exist (ex: an asset or liability when determining how
consigned goods). that asset or liability, and the related
income or expense, will be recognized and
LIABILITY measured.
“A present obligation of the entity to transfer an - It is how individual items of assets and
economic resource as a result of past events. liabilities are grouped
- The account titles and line items
THREE ASPECTS:
1. Present Obligation Executory Contracts
- A duty or responsibility that an entity has - a contract that is equally unperformed –
no practical ability to avoid. It can either neither party has fulfilled any of its
be: obligations, or both parties have partially
a. Legal Obligation – results from a fulfilled their obligations to an equal extent
contract or operation of law. - It represents a combined right and
b. Constructive Obligation – results obligation, thus is a single unit of account.
from an entity’s actions. - Examples are leases
- An obligation is always owed to another
party.
 MODULE 0.3: MEASUREMENT
MODULE 0.2: RECOGNITION & DEREGONITION
Recognition requires quantifying an item in
monetary terms, thus necessitating the selection of
Recognition – process of including in the statement an appropriate measurement basis. Accordingly, the
of financial position or the statements of financial Standards prescribe specific measurement bases
performance an item that meets the definition of one for different types of assets, liabilities, income, and
of the financial statement elements. expenses.

MEASUREMENT BASES:
Carrying Amount – the amount at which an asset, 1. Historical Cost – consideration paid to acquire
a liability or equity is recognized in the statement of the asset plus transaction costs; they do not reflect
financial position. changes in value; a measure of value used in
accounting in which the price of an asset on the
Recognition Criteria: balance sheet is based on its nominal or original
1. It meets the definition of an asset, liability, equity, cost when acquired by the company. It recognizes
income, or expense. impairment, depreciation, and interest accrual.
2. Recognizing it would provide useful information
i.e. relevant and faithfully represented.
2. Current Value – measures reflect changes in
value at the measurement date; the concept that
BOTH the criteria above must be met before an item assets and liabilities be measured at the current
is recognized. value at which they could be sold or settled as of the
current date. Include the following:
Cost Constraint – cost-benefit principle; the
usefulness of the information justifies its cost. a. Fair Value – the price that would be
received to sell an asset, or paid to transfer
a liability, in an orderly transaction between
(For relevance) Even if an item that meet the market participants at the measurement
definition of an asset or liability is not recognized, date; not entity-specific since it reflects the
information about that item may still need to be perspective of the market participants.
disclosed in the notes. In such cases, the item is b. Value in use – the present value of the cash
referred to as unrecognized asset/unrecognized flows/other economic benefits that an entity
liability. expects to derive from the use of an asset
Relevance – the recognition of an item may not and from its ultimate disposal; the net
provide relevant information if, for example: present value of the cash flows generated by
a) it is uncertain whether an asset or liability exists an asset as it is currently being used by the
*existence uncertainty. owner; entity-specific.
b) as asset or liability exists, but the probability of an c. Fulfilment Value – the present value of the
inflow/outflow of economic benefits is low *low cash/other economic resources that an
probability of inflows/outflows. entity expects to be obliged to transfer as it
fulfils a liability; entity specific.
B and C do not include past transactions costs
Faithful Representation – adequate disclosure. incurred during acquisition, but they include the
present value of expected transaction costs for
Measurement Uncertainty – An asset/liability must disposal.
be measure for it to be recognized. If it an item does d. Current Cost of an Asset– the cost of an
not have a reasonable estimate, then the item with a equivalent asset at the measurement date,
very high uncertainty cannot be recognized. comprising the consideration that would be
paid at the measurement date plus the
DERECOGNITION: transaction costs that would be incurred at
Derecognition – removal of a previously that date.
recognized asset or liability from the entity’s e. Current Cost of a Liability – the
statement of financial position. consideration that would be received for an
equivalent liability at the measurement date
Derecognition Criteria: minus the transaction costs that would be
When it no longer meets the definition of a specific incurred at that date.
element. Current Cost is different from Historical costs as it
Transfers – derecognition is not appropriate if the reflects the condition at the measurement date
entity retains substantial control of a transferred
Entry Values – reflect prices in acquiring an asset
asset; if there is only a partial transfer, the entity
or incurring a liability; includes current cost and
derecognized only that transferred component and
historical cost.
continues to recognize the retained component.
Exit Values – reflect prices in selling or using an
asset or transferring or fulfilling a liability includes
fair value, value in use, and fulfilment value.
CONSIDERATION WHEN SELECTING A CASH-FLOW BASED MEASUREMENT
MEASUREMENT BASIS TECHNIQUES:
- These are used in applying a
1. Nature of information provided by a measurement base when estimates have
particular measurement basis. to be made.
2. Qualitative characteristics, the cost - It can be used in any of the 3 current value
constraint, and other factors. measurements.
IFRS 13 Fair Value Measurement
MODULE 0.4 THE QUALITATIVE - Effective from January 2013
CHARACTERISTICS & THE COST CONSTRAINT - It guides HOW to apply fair value and not
WHEN (ex. IFRS 9).
Relevance – the relevance of information is - It applies to both initial and subsequent
affected by: measurements at fair value
a. The characteristics of the asset or liability
b. How that asset/liability contributes to future PFRS 13 does not apply to the following:
cash flows 1. Share-based payment transactions (PFRS
2)
From this, it can be understood that measurement 2. Leases (PFRS 16)
bases are chosen according to which one matches 3. Measurements that have some similarities to
a certain account best. fair value but are not fair value such as net
realizable value in PAS 2 or value in use in
Faithful Representation – may be affected by the PAS 36
level of measurement uncertainty (when a measure Objective
cannot be determined directly by observing prices in 1. To define Fair Value
an active market and must instead be estimated). 2. To set out a single framework for measuring
a Fair Value
TWO TYPES OF MEASUREMENT 3. To require disclosures
UNCERTAINTY:
a. Outcome Uncertainty – uncertainty about MODULE 0.5 FAIR VALUE
the amount or timing of any inflow or outflow
of economic benefits that will result from an Fair Value – the price that would be received to sell
asset or liability. an asset or paid to transfer a liability in an orderly
b. Existence Uncertainty – when it is transaction between market participants at the
uncertain whether an asset or liability exists. measurement date. It takes market conditions into
account. Measurement at fair value is also called
ENHANCING QUALITATIVE CHARACTERISTICS “market-to-market-accounting”
AND COST ONSTRAINT:
DEFINITION OF FAIR VALUE:
Comparability – consistently using the same 1. It is a market based instrument
measurement bases for the same items to make 2. It requires the use of assumptions that
financial statements more comparable. market participants would undertake when
pricing the asset or liability under current
Understandability – generally, the more different market conditions
measurement bases are used, the more confusing it 3. It presumes that the entity is a going
is, hence the less understandable. concern
4. Is the price in an orderly transaction and not
Verifiability – information should be disclosed to in a forced transaction
enable users of financial statements to understand 5. It reflects the credit quality of the instrument
how the measure was determined.
REQUIREMENTS OF FAIR VALUE MEASUREMENT
Total Equity is not measured directly because equity 1. The particular asset or liability being
is residual. Some components of it are measured measured
directly such as the total par value of the shares 2. The market in which an ordinary transaction
issued and outstanding. would take place for the asset or liability
3. The appropriate valuation technique
4. For a non financial asset the highest and
best use of the asset and whether the asset
is used in combination with other assets or
on a stand-alone basis
THE ASSET OR LIABILITY - the characteristics of
the asset or liability affect its fair value Transaction Price (Entry Price) - is the price paid
measurement. These characteristics include some to acquire an asset or price received to assume a
of the following: liability.
1. Condition and location of the asset
2. Restrictions if any on the sale or use of the Fair value (Exit Price) - is the price that would be
asset received to sell an asset or paid to transfer a
liability.
In many cases the transaction price is equal to fair value.
However, when the transaction price differs from the fair value
Depending on the unit of account of an asset or
liability, fair value measurement may be applied to: VALUATION TECHNIQUE - It is appropriate once it
1. A stand-alone asset or liability maximizes the use of relevant observable inputs
2. A group of assets or liabilities and minimizes unobservable inputs.

THE MARKET - Fair value measurement requires 3 VALUATION TECHNIQUE

assumptions based on current market conditions 1. Market approach - uses prices and other
relevant information generated by market
this takes place either:
transactions involving similar assets or
liabilities.
1. Principal market - The market with the
2. Cost approach - reflects the amount that is
greatest volume and level of activity for the currently needed to replace the service
asset or liability. capacity of an asset
3. Income approach - converts future amounts
2. Most Advantageous market - the market (Cash flow or income and expenses) to
that maximizes the amount that would be single current (discounted) amounts
received to sell the asset or minimizes the reflecting current market expectations.
amount that would be paid to transfer the
liability, after taking into account transaction Inputs based on Bid and Ask prices
costs and transport costs. It is used in the - The price within the bid-ask spread that is
absence of a principal market. most representative of Fair value in the
When you tell me most advantageous market both circumstances is used to measure fair value
transaction costs and transport costs are considered.
However when measuring fair value, only transport Bid price - represents the maximum price at which
costs are considered.
market participants are willing to buy an asset
.
THE PRICE - The market price (either in the
Ask price - represents the minimum price at which
principal or most advantageous market) used in
market participants are willing to sell an asset
measuring fair value is not adjusted for any
transaction costs but is adjusted for any transport - The use of bid prices for assets positions and ask prices
costs. for liability positions is permitted, but is not required.
- These are not prohibited from using mid-market pricing
Fair Value Computation or other pricing conventions
- When current bid and asking prices are unavailable the
Market price (either in the principal xx
price of the most recent transaction provides evidence of
or most advantageous market
fair value for as long as there has not been a significant
Less: Transport Costs xx change in economic circumstances since the time of
Fair Value xx transaction.

Transaction costs - are costa to sell an asset or FAIR VALUE HIERARCHY

transfer a liability in the principal or most 1. Level 1 Inputs (Most Reliable)
advantageous market for the asset or liability that - Quoted prices for identical assets or
are directly attributable to the disposal of the asset liabilities in active markets.
or the transfer of the liability and meet both of the - Used without adjustment to measure fair
following criteria: value whenever available
1. These result directly from and are essential - If a market price at the exact
to the transaction measurement date is not readily available
2. They would not have been incurred by the the quoted price is to be adjusted to more
entity had the decision to sell the asset or accurately reflect fair value
liability not being made
- They are not a characteristic of an asset or a 2. Level 2 Inputs
liability but are specific to each transaction - Are inputs other than quoted prices
and will differ depending on how the entity included within level 1 that are observable
enters into a transaction. for the asset or liability.
- Similar to “costs to sell” - Examples of Level 2 inputs:
- Do not include Transport costs a. Quoted price for similar assets or
liabilities in an active market
Transport costs - are costs that would be incurred b. Quoted price for similar asset or
the transport and asset from its current location to liabilities in not active markets.
the principal (most advantageous) market.
 c. Interest rates in yield curves
observable at commonly quoted
intervals
d. Inputs that are derived principally
from or corroborated by observable
market data that are determined to
be relevant to the asset or liability
being measured (market-
corroborated data).

3. Level 3 Inputs (Least Reliable)

- Are unobservable inputs such as an
entity's own data or assumptions. These
may be developed using expected cash
flow and present value techniques.

Active market - is a market in which transactions

for the asset or liability take place with sufficient
frequency and volume to provide pricing information
on an ongoing basis

FACTORS OF AN INACTIVE MARKET

1. Insufficient volume or frequency of
transactions
2. Prices are not current
3. Quotations vary substantially overtime and
among market makers
4. Insufficient information is released publicly

FAIR VALUE MEASUREMENT FOR NON-

FINANCIAL ASSETS
- an entity considers the asset's highest and
best use in addition to the other
requirements of PFRS 13.

Highest and best use - is the use of non-financial

asset by market participants that would maximize
the value of the asset or group of assets and
liabilities. It takes into account the following
characteristics:
a. Physical Characteristics – ex. Location or
size of the property
b. Legal Restrictions – ex. zoning regulations
applicable to the property
c. Financial Feasibility - whether the use of
the asset generates adequate income or
cash flows

ADDITIONAL NOTES FOR MODULE 0

 Stale Check
- When checks delivered the payees are not
in cash within a relatively long period of
time, normally six months or more the
checks are referred to as “stale”.
Therefore, they are reverted back to cash.

Unreleased/Undelivered Checks Drawn

- Written/dated already but not yet
delivered, therefore no payment has been
made. An adjusting entry is needed to
revert back the unreleased check or
MODULE 1.1: CASH & CASH EQUIVALENTS postdated check to cash and accounts
payable.
CASH - Any item that is acceptable by bank or other CASH EQUIVALENTS – “short-term, highly liquid
financial institution for deposit at face value. It must investments that are readily convertible to known
be readily available for unrestricted use. amounts of cash and which are subject to an
insignificant risk of changes in value” . Only debt
CASH ITEMS instruments acquired within three months or less
1. Cash on Hand before their maturity date can qualify.
- Includes undeposited collections such as
bills and coins, customer’s checks, CASH EQUIVALENT EXAMPLES
manager’s checks, traveler’s checks, 1. Treasury bills notes or bonds acquired 3
cashier’s checks, bank drafts and money months before maturity date
order. a. Treasury Bill
2. Cash in Bank - is a short term obligation issued by the
- Includes demand deposit or checking government at a discount
account and saving deposit which are b. Treasury Notes and Treasury Bonds
unrestricted as to withdrawal. - are long term obligations issued by the
3. Cash Fund government. TN=1–10 years, TB=10
- working funds segregated for current years+
purposes such as petty cash fund, change
fund, payroll fund, dividend fund, tax fund, 2. Market Instrument or Commercial Paper
and interest fund. acquired 3 months before maturity date
- Includes revolving fund which is similar a. Money Market Instruments
to the petty cash fund but is used for a - are investments in portfolios of short term
limited or specific purpose set by securities
management. b. Commercial Papers
- consist of short term unsecured notes
ITEMS NOT INCLUDED AS CASH payable issued in large denominations by
1. Postdated checks received large companies with high credit ratings to
- checks dated at a future date other companies and institutional
2. IOUs or advances to employees investors.
3. NSF (No Sufficient Funds) checks -
- in the Philippines are often described as 3. 3-month time deposit
DAIF (Drawn Against Insufficient Funds) a. Time Deposit
and DAUD (Drawn Against Unclear - it is a form of bank deposit normally made
Deposits) checks. in fixed denomination bears higher interest
1-3 are treated as receivables then that of regular deposits and has a
4. Cash funds not available for use in current pre-agreed maturity.
operations -
- such as sinking fund, plant expansion 4. Redeemable Preference Shares (debt
fund, depreciation fund, preference share instrument) that are required three months or
redemption fund, contingency fund, and less before their specified redemption date.
insurance fund.
Depreciation funds is a form of asset replacement ITEMS NOT INCLUDED AS CASH EQUIVALENTS
fund that can be used to acquire a replacement of
the depreciated asset. 1. Check and Bank Drafts
5. Postage Stamps and Expense Advances - They cannot qualify because they are not
- Unused postage stamps are treated as short-term investments. However, they
prepaid supplies can be included in cash when they are
available for unrestricted and immediate
Unused Credit Line use.
- It is the difference between the amount of 2. Equity securities
line of credit and the amount that was - Since shares of stocks do not have a
actually borrowed. It is disclosed only in maturity date.
the notes because you have not yet
received it in cash. FINANCIAL STATEMENT PRESENTATION
Cash and cash equivalents are normally presented 2. Effectiveness and efficiency of operations
as current assets unless they are restricted from 3. Compliance with laws and regulations
being exchanged or used to settle a liability for at 4. Safeguarding of assets
least 12 months after the reporting.
CHARACTERISTICS OF A SYSTEM OF CASH
1. Unrestricted Cash and Cash Equivalents CONTROL
- Combined and presented in a single line 1. Segregation of duties for handling cash and
item described as “cash and cash recording cash transactions
equivalents”. Breakdown is disclosed in 2. Imprest System
the notes. - Requires that all cash receipts should be
deposited intact and all cash
2. Restricted Cash and Cash Equivalent disbursements should be made through
- Excluded from cash and presented under checks.
other line item as either current or non- - Disbursements for small amounts are
current asset depending on the nature of made through the petty cash fund.
the restriction.
MEASUREMENT OF CASH 3. Periodic Bank Reconciliation
1. General Rule - To reconcile on a timely basis the
- Face Value difference is between the cash balance
2. Cash in Foreign Currency per books and the cash balance per bank
- Current Exchange Rate statement.
3. Cash in Bank undergoing Bankruptcy 4. Periodic Cash Counts/Internal Audit at
- Realizable Value Irregular Intervals
5. Minimum Cash Balance
DEPOSIT IN FOREIGN BANKS - Should be maintained especially for cash
1. Unrestricted Deposits funds, sufficient only to defray specific
- Included from Cash business requirements.
2. Restricted Deposits - Example: Entities often used in Imprest bank
- Excluded from Cash and is presented as a accounts which are amount specifically set aside
receivable. for a limited purpose. This is done because
maintaining excessive cash balances may increase
- Example: Deposits in Escrow - a restricted the risk of embezzlement.
amount held in trust for another party, like 6. Lockbox Accounts
a deposit required by a court of law for a - Entities used this to expedite cash
pending labor case. collections and to ensure that cash
collections are deposited intact
COMPENSATING BALANCE – or maintaining 7. Non-encashment of personal checks from
balance, is a minimum amount that must be petty cash fund
maintained in an entity's bank account. Whether - To discourage concealment of cash
restricted or not, it is disclosed in the notes. shortages
1. Legally Restricted - Excluded from Cash 8. Voucher System
2. Not Legally Restricted - Included in Cash - All disbursements must be supported by
3. Silent Problem - Included in Cash properly approved vouchers, which must
be recorded in the voucher register.
BANK OVERDRAFT – It is a current liability - A Voucher (check disbursement
account and Is not applicable in the Philippines. it is voucher/CDV) is a business document or
a negative balance in the cash in bank account written authorization that supports every
resulting from overpayment of checks in excess of disbursement made by an entity.
the amount of deposit. May only occur in checking
accounts but not in savings and time deposits.
MODULE 1.3: ACCOUNTING FOR CASH
1. Offset – If 2 or more accounts in the same bank SHORTAGES AND OVERAGES
and the amount is not material.
2. Do not Offset – If (1) does not apply
CASH SHORTAGE
- cash count is less than the balance per
Requirements to Offset (both must be present):
records. It is debited to the “Cash shortage
1. Legal Right to Setoff,
or overage account”.
2. Intention to Settle the amounts on a net basis or (The Cash short or over account is only a
simultaneously temporary or suspense account. It means that when
financial statements are prepared the same should
MODULE 1.2: INTERNAL CONTROL OVER CASH be adjusted.)
Depending on the result of the
Internal Control investigation, it can be closed either as a:
- is any action or process affected by 1. Receivable – fault of employee
management that is designed to help an 2. Loss – investigation without merit
entity achieve its objectives. Initial Entry for Cash Shortage
Cash short or over xx
Objectives of Internal Control Cash xx
1. Reliability of financial reporting Entry to Close the Cash Shortage Suspense
 Account  Disbursement Date per books with
Rec. from Cashier/Loss on Cash Shortage xx the receipt date per books
Cash Shortage or Overage  Disbursement Date per bank with
xx the receipt date per bank
- Receipt(plus) and disbursement(minus)
must be recorded in the same period.
 Plus without minus means
overstated = Kiting
 Minus without plus means
understated = deposit in transit or
outstanding check

3. Window Dressing “cooking the books”

- A form of fraudulent financial reporting.
- It is when books are not closed at year
end and transactions in the subsequent
period are deliberately recorded in the
current period in order to improve the
CASH OVERAGE entity's financial performance
- Cash count is more than the balance per
MODULE 1.5: PETTY CASH FUND
records. It is credited to the “Cash
shortage or overage account”.
Depending on the result of the PETTY CASH FUND (PCF) - money set aside to
investigation, it can be closed either as a: defray relatively small amounts of cash
1. Payable – cash of employee disbursements.
2. Gain– investigation without merit
PCF - IMPREST FUND SYSTEM
Initial Entry for Cash Overage 1. Petty Cash Fund is Established
Cash xx Petty Cash Fund xx
Cash short or over xx Cash in Bank xx
Entry to Close the Cash Overage Suspense 2. Disbursements out of the petty cash fund
Account NO ENTRY. (Initially recorded in a petty cash
Cash Shortage or Overage xx register and signed by petty cash custodian)
Payment to Cashier/ Misc.Expense xx 3. Replenishment of petty cash
disbursements
MODULE 1.4: CONCEALMENT OF CASH SHORTAGE Various Expenses xx
Cash in Bank xx
1. Lapping 4. Adjusting entry for the unreplenished
- Consists of misappropriating a collection expenses at the end of the accounting
from one customer and concealing this period
defalcation by applying a subsequent Various Expenses xx
collection made from another customer. Petty Cash Fund xx
- Involves a series of postponements of the entries 5. Entry for increase in fund:
for the collection of receivables. Petty Cash Fund xx
2. Kiting Cash in Bank xx
- when an entity maintains current accounts 6. Entry for decrease in fund:
in different banks. Kiting is usually Cash In Bank xx
employed at the end of the month. Petty Cash Fund xx
- It exploits the “float period”, the time is
takes for a check to clear at the bank PCF – FLUCTUATING FUND SYSTEM
where it was drawn. 1. Petty Cash Fund is Established
- occurs when a check is drawn against a Petty Cash Fund xx
first bank and depositing the same check Cash in Bank xx
in a second bank to cover the shortage in
2. Disbursements out of the petty cash fund
the latter bank. No entry is made for both
Various Expenses xx
the drawing and deposit of the check.
Cash in Bank xx
- Main purpose is to conceal shortage by
3. Replenishment of petty cash
overstating the cash balance
disbursements
- Kiting can be detected by:
Petty Cash Fund xx
a. Preparing a Bank Transfer Schedule
Cash In Bank xx
- it assists auditors by showing the dates
4. Adjusting entry for the unreplenished
of all transfers of cash among various
expenses at the end of the accounting
bank accounts
period
b. Obtaining a Cut-off Bank Statement
NO ENTRY. (No adjustment necessary
- To help verify reconciling items
because the petty cash expenses are
c. Preparing Proof of Cash
recorded outright.)
d. Comparing per book and per bank
5. Entry for increase in fund:
 Petty Cash Fund xx a. Bank service charges such as fees, interest,
Cash in Bank xx penalties, and subcharges
6. Entry for decrease in fund: b. NSF or DAIF checks
Cash In Bank xx c. Automatic Debits
Petty Cash Fund xx d. Payment of Loans

3. BOOK/BANK ERRORS - errors committed by the

depositor/bank respectively.

4. DEPOSITS IN TRANSIT – are deposits made but

not yet credited by the bank to the depositors bank
account

5. OUTSTANDING CHECKS - are checks drawn

and released to pay years but are not yet in cash
with the bank

Excluded from Outstanding Checks

1. Certified Checks are already automatically
deducted from the account thus they are no longer
MODULE 1.6: BANK RECONCILIATION outstanding
2. Stale checks are reverted back to cash meaning
they are added back to the cash balance per books
BANK RECONCILIATION STATEMENT and are excluded from the outstanding checks
- is a report that is prepared for the purpose
of bringing the balances of cash (a) per Cash in Bank in the General Ledger
records and (b) per bank statement into Beginning Balance
agreement. It is prepared on a monthly Book Receipts – Book Dr.
basis. It is normally required only for Book Disbursements - Book Cr.
checking accounts. Ending Balance

BANK STATEMENT Cash in Bank in the Bank Statement

- Is a report issued by a bank that shows Beginning Balance
the deposits and withdrawals during the Bank Receipts – Bank Cr.
period and the cumulative balance of a Bank Disbursements – Bank Dr.
depositor's bank account. Ending Balance

PRO-FORMA BANK RECONCILIATION STATEMENT Cash in Bank must be per book = per bank
ABC Co. If not equal, then reconciling items must be
Bank Reconciliation identified. This includes (a) unrecorded items and
For the month ended August 31, 2021 (b) errors.

Balance per books, end. xx Bal. per bank statement, end. PRO FORMA FOR RECONCILING ITEMS
xx Entity (depositor) Bank
Add: Credit Memos (CM) xx Add: Deposits in transit(DIT) xx
1. Entity opens checking account
Less: Debit Memos(DM) (xx) Less:Outstanding Check(OC)
(xx) Cash in bank xx Cash on hand xx
Add/Less: Book Errors xx Add/Less: Book Errors xx Cash on hand xx Deposit liability– depositor xx
Adjusted Balance xx Adjusted Balance xx 2. Deposit in Transit - Entity collects P200 from customers
and deposits in overnight depository
PARTS OF BANK RECONCILIATION Cash in bank 200
Accounts receivable 200 No Entry yet. It will be updated
STATEMENT when it receives/acknowledges the
Cash in bank 200 deposit
1. CREDIT MEMOS - are additions (bank credits) Cash on hand 200
made by the bank to the depositor bank account but 3. Credit Memo - Bank collects P500 receivable on behalf of
not yet recorded by the depositor. entity
No Entry yet since entity is not yet Cash on hand 500
aware of the collection Deposit liability – depositor 500
Examples of Credit Memo
4. Book Error – Entity makes payment of P1,000 but
1. Collections made by the bank on behalf erroneously records it as P100. Bank recorded right amount of
2. Interest Income earned P1,000
3. Proceeds from loans directly Accounts payable 100 Depositor liability- depositor 1,000
credited(added) by the bank Cash in bank 100 Cash on hand 1,000
4. Unrolled-over matured time reposits 5. Outstanding Check – Entity wrote checks of P400. However,
only P100 of those checks were encashed
2. DEBIT MEMOS - are deductions (bank debits) Accounts payable 400 Depositor liability- depositor 100
made by the bank to the depositor's bank account Cash in bank 400 Cash on hand 100

but not yet recorded by the depositor.

BOOK ERRORS
Examples of Debit Memo Nature of Error Effects on Correction
ending balance
 of cash Overstatement in
Understatement Debit (Addition)
Understatement in book credit
Understatement Debit (Addition)
book debit
Understatement in BANK ERRORS
Overstatement Credit (Deduction)
book credit Effects on
Overstatement in
Overstatement Credit (Deduction) Nature of Error ending balance Correction
book debit
Overstatement in of cash
Understatement Debit (Addition) Understatement in
book credit Overstatement Debit (Deduction)
bank debit
Understatement in
BANK ERRORS Understatement Credit (Addition)
bank credit
Effects on Overstatement in
Understatement Credit (Addition)
Nature of Error ending balance Correction bank debit
of cash Overstatement in
Overstatement Debit (Deduction)
Understatement in bank credit
Overstatement Debit (Deduction)
bank debit
Understatement in
Understatement Credit (Addition)
bank credit
Overstatement in
Understatement Credit (Addition)
bank debit
Overstatement in
Overstatement Debit (Deduction)
bank credit

MODULE 1.7: PROOF OF CASH

Item Classification
PROOF OF CASH (2-month Bank Reconciliation) Coins and Currencies Cash
Checks
- Or 4-column bank recon. It is an expanded a. Cashier’s Check
bank reconciliation that includes proof of b. Personal Checks
Cash
cash receipts and cash disbursements. It c. Manager’s Check
d. Certified Checks received from
is useful in discovering discrepancies customers
since it is usually prepared only when Bank Drafts Cash
needed. Money Order Cash
Current Cash Funds
a. Petty Cash Fund
Important Formula for Proof of Cash b. Change Fund
BB + R = D + EB c. Interest Fund
d. Payroll Fund
Beginning Balance + Receipts = Disbursements + e. Dividend Fund Cash
Ending Balance f. Tax Fund
g. Revolving Fund
h. Travel Fund
NOTES FOR CREDIT MEMOS & DEBIT MEMOS i. Imprest bank account used in
IN PROOF OF CASH current operations
1. Receipts (Plus), while disbursements (Minus) Non-Current Cash Funds
a. Pension Fund
2. Receipts and Disbursements recorded in the 4 - b. Fund for PPE Acquisition
columns sheet should be current month only. c. Plant Expansion Fund
Last Month Rec. & Dis. DEDUCTED d. Cash Sinking Fund Non-current assets
Current Month Rec. & Dis. ADDED e. Preference Share Redemption
Fund
f. Depreciation Fund
NOTES FOR BOOK ERRORS IN PREVIOUS g. Contingency Fund
MONTH h. Insurance Fund
1. Previous Month Error → Correction & Effect Bank Overdraft Current Liability
(Opposite of Error) → Deduct from Rec/Dis IOUs or advances to
Receivable
employees
(Since it is a previous month error).
NSF/DAIF checks Receivable
Example: Overstatement of check
Book credits overstated(PME) → Book debit increase (CE) Redeposited NSF/DAIF check Cash
→ Deduction in Receipt Column. Unrestricted compensating
Cash
balance
Restricted compensating
BOOK ERRORS Not included in Cash
balance
Effects on Undelivered/Unreleased
Nature of Error ending balance Correction Cash
Checks
of cash Stale Check Delivered Cash
Understatement in Treasury bill, notes, & bonds
Understatement Debit (Addition)
book debit acquired less than 3 months Cash Equivalent
Understatement in maturity
Overstatement Credit (Deduction)
book credit Market Instrument /
Cash Equivalent
Overstatement in Commercial paper
Overstatement Credit (Deduction)
book debit 3-month Time deposit Cash Equivalent
Redeemable Preference Cash Equivalent
Shares
Equity securities Cash Equivalent
Postdated Checks
Cash
Drawn/Delivered/Issued
Postdated Checks Received Not included in Cash
Postage Stamps Prepaid supplies
Cash in closing bank Not included in Cash