JOURNAL

THE ACCOUNTING PROCESS  book of original entry

 Where transactions are initially recorded
THE ACCOUNTING CYCLE
chronologically through journal entries
 Steps or procedures used in recording
transactions and preparing financial statements
Types of Journals
1. Identifying and analyzing business documents
1. General journal
or transactions
2. Special journal
2. Journalizing
a. Sales journal
3. Posting
b. Purchase journal
4. Preparing the unadjusted trial balance
c. Cash receipts journal
5. Preparing the adjusting entries
d. Cash disbursement journal
6. Preparing the adjusted trial balance
7. Preparing the financial statements
LEDGER
8. Closing the books
 book of secondary or final entries
9. Preparing the post-closing trial balance
 Posting is the process of transferring data from
10. Recording of reversing entries
the journal to the appropriate accounts in the
ledger
ACCOUNTING RECORDS OF A BUSINESS ACTIVITY
 Business or source documents
o Original source materials evidencing a Kinds of Ledger
1. General ledger - accounts in the trial balance
transaction.
2. Subsidiary ledger - breakdown of the balances of
o Examples: sales invoices, official receipts,
controlling accounts
vouchers, statement of account, etc.
Example:
 Book of accounts
GL - Accounts receivable
a. Journal
SL - A/R from Customer A
b. Ledger
ACCOUNT
SYSTEM OF RECORDING TRANSACTIONS
Types of Accounts
 Double entry system  Real (Permanent) Accounts
o each transaction is recorded in two parts
o accounts that are not closed at the end of the
- debit and credit
reporting period
o Duality and equilibrium concept
o Shown in the statement of financial position
o In line with PFRS because-
o Tangible and intangible (applicable to all
o P/L is determined through the
assets)
transaction approach - o What comes in (e.g. land and building)
 profit or loss is computed as the o What goes out (e.g. cash)
difference between income and
 Nominal (Temporary) Accounts
expenses.
o accounts that are closed at the end of the
accounting period
 Single entry system
o All expenses and losses
o Each transaction is recorded through
o All income and gains
simple narrative
o e.g. salary, wages, purchases, sales, etc.
o P/L is determined through capital
maintenance approach -  Mixed accounts
 comparing the beginning and  Contra accounts - e.g. accumulated depreciation
ending balances of equity  Adjunct accounts - e.g. premium on bonds
payable
Notes:
 Accrual basis - income and expenses are TRIAL BALANCE
recognized when earned or incurred, regardless of  List of general ledger accounts and their
when cash is received or paid. balances
 Cash basis - income and expenses are recognized  Prepared to check the equality of total debits
when received or paid, regardless of when earned and total credits
or incurred.
Trial balance error and correction
 Account with a normal debit balance (Asset,
Drawing/Dividends, Expenses, Losses)
E. W. Espino
 a. Erroneous debit will overstate the o Loss - if total debits exceeds total credits
account  Statement of financial position columns
b. Erroneous credit will understate the o Profit - if total debits exceeds total
account credits
 Account with a normal credit balance o Loss - if total credits exceeds total debits
(Liability, Equity, Revenue, Gains)
a. Erroneous debit will understate the FINANCIAL STATEMENTS
account 1. Statement of financial position
b. Erroneous credit will overstate the 2. Statement of profit or loss and other
account comprehensive income
3. Statement of changes in equity
 Solution: Re-perform 4. Statement of cash flows
 Overstatement is corrected by deduction 5. Notes
 Understatement is corrected by addition 6. Additional statements of financial position

ADJUSTING ENTRIES Heading of FS

Advance collections of income a. Name of the reporting entity
 Liability method - initially credited to liability, b. Title of the FS
earned portion is recognized as income at the end c. Reporting period
Cash xx
Unearned rent xx
CLOSING ENTRIES
Unearned rent xx  Preparing closing entries for nominal accounts
Rent income xx and ruling and balancing real accounts
 Zero out all temporary or nominal accounts in the
 Income method - initially credited to income ledger
account, unearned portion is recognized as Income accounts xx
Expense accounts xx
liability at the end
Income summary xx
Cash xx
Rent income xx
Retained earnings xx
Income summary xx
Rent income xx
Dividends xx
Unearned rent xx

Prepayment of expenses Notes:

 Income accounts are closed by debiting them
 Asset method - initially debited to an asset account,
 Expense accounts are closed by crediting them
used up or expired portion is recognized as expense
 Dividends accounts is directly closed to retained
at the end
Prepaid insurance xx earnings
Cash xx
POST-CLOSING TRIAL BALANCE
Insurance expense xx
 Prepared to prove the equality of debits and
Prepaid insurance xx
credits in the ledger after the closing process
 Expense method - initially debited to an expense  Contains only the statement of financial position
account, unused portion is recognized as asset accounts
Insurance expense xx
Cash xx REVERSING ENTRIES
Purpose of reversing entries
Prepaid insurance xx
Insurance expense xx
 To facilitate recording of cash receipts and
disbursement in the next accounting period
Notes:  To promote convenience in recording the next
 Unadjusted trial balance - contains real, nominal period's year-end adjustments for accruals
and mixed accounts  To promote consistency of accounting procedure
 Adjusted trial balance - contains real and nominal
accounts Adjusting entries that may be reversed
 Post-closing trial balance - contains real accounts  Accruals for income or expense
only  Prepayments initially recorded using the expense
 Income statement columns method
o Profit - if total credits exceeds total  Advance collections initially recorded using the
debits income method
E. W. Espino
 Cash xx
CASH AND CASH
EQUIVALENTS Adjusting entry (to revert back to cash and A/P):
Cash xx
A/P xx
PRESENTATION:
 "Cash and cash equivalents" - Current assets Stale checks
MEASUREMENT:  Checks delivered to payees that are not encashed
 Face amount (face value) within a relatively long period of time, normally 6
months or more.
CASH - money or its equivalent that is readily available for  reverted back to cash
unrestricted use
Unused credit line
Examples of cash:
 Not included in cash but rather disclosed only in
1. Coins and currencies the notes
2. Demand deposits (checking or current accounts)
 = amount of line of credit - amount that was
and savings accounts
actually borrowed
3. Bank drafts
4. Money orders
 Postdated checks Exclude from cash
5. Checks (e.g. cashier's checks, personal checks,
received from customer
manager's checks, traveler's checks, certified
 Undelivered check drawn Include in cash
checks, etc.)
6. Cash fund set aside for use in current operations  Postdated check drawn Include in cash
(e.g. petty cash fund, revolving fund, payroll fund,  Stale checks Include in cash
change fund, dividend fund, tax fund, travel fund,
interest fund, etc.) Deposit in foreign banks
 Unrestricted deposits in foreign banks
Items not included as cash: o included as cash
1. Postdated checks o at face amount translated at the current
 Checks dated at a future date exchange rate as of the reporting date
 treated as receivables  Restricted deposits in foreign banks
2. IOUs or advances to employees o excluded from cash
 treated as receivables o presented as receivable
3. Cash funds not available for use in current
operations (e.g. sinking fund, plant expansion Compensating balance
fund, deprecation fund, preference shares  minimum amount that must be maintained in an
redemption fund, contingency fund, and entity's bank account as support for funds
insurance fund) borrowed from the bank
 Restricted funds  Not legally restricted as to withdrawal
 treated as part of "other assets" o included in cash
4. Postage stamps  Legally restricted as to withdrawal
 Treated as prepaid supplies o excluded from cash

Postdated checks received Deposit in in escrow

Entry to record receipt of the check:  Restricted amount held in trust for another party
Cash xx  excluded from cash
A/R xx

Bank overdraft (cash overdraft)

Adjusting entry (to revert back postdated checks to A/R):
A/R xx
 Negative (credit) balance in the cash in bank
Cash xx account resulting from overpayment of checks in
excess of the amount of deposit
Note: Report cash less postdated checks in FS.  presented as current liabilities
 offsetting is permitted if the entity has both:
Unreleased checks drawn and Postdated checks drawn o a legal right to setoff and
a. Unreleased or undelivered to the payee o an intention to settle the amounts on a
b. Postdated net basis or simultaneously

Entry for the check drawn:

A/P xx
E. W. Espino
 closed to a "receivable" or charged to
"loss"
CASH EQUIVALENTS - "short-term, highly liquid
Cash shortage or overage xx
investments that are readily convertible to known amounts
Cash on hand xx
of cash and which are subject to an insignificant risk of
changes in value" (PAS 7.6) Receivable from cashier / Loss
a. Treasury bills, notes, or bonds acquired 3 months on cash shortage xx
before maturity date. Cash shortage or
Overage xx
b. Money market instruments or commercial paper
acquired 3 months before maturity date.  Cash overage
o Cash count is more than the balance per
c. 3-month time deposit
record
d. Redeemable preference shares acquired 3 o Initially credited to "cash shortage or
months or less before specified redemption date. overage" and may be closed to a
"payable" or to gain"
Note: Date of acquisition should be 3 months or less before
maturity date Concealment of cash shortages
1. Lapping
Items not included as cash equivalents:  Collection of receivables from one customer
1. Checks and bank drafts is misappropriated and then concealed by
2. Equity securities applying subsequent collection from another
 It does not have a maturity date customer.
2. Kiting
INTERNAL CONTROLS OVER CASH  Cash shortage is concealed by overstating the
1. Segregation of incompatible duties balance of cash.
 The duties of (a) authorization - manager, (b)  Detected by preparing a bank transfer
execution - purchasing department, (c) schedule, obtaining a cut-off bank statement,
recording - accountant and (d) custody over or preparing a proof of cash.
cash - treasurer 3. Window dressing
2. Imprest system  Cooking the books
 All cash receipts should be deposited intact,  Books are not closed at year-end and
and all cash disbursements should be made transactions in the subsequent period are
through checks. deliberately recorded in the current period in
3. Bank reconciliation order to improve the entity's financial
 Reconcile on a timely basis the differences performance or financial ratios.
between the cash balance per book and the
cash balance per bank statement. Petty cash fund
4. Cash counts  Money set aside to defray relatively small
 Actual cash tallies with the balance per amounts of cash disbursements.
records
5. Minimum cash balance Accounting for petty cash fund
6. Lockbox accounts a. PCF is established:
Petty cash fund xx
7. Non-encashment of personal checks from petty Cash in bank xx
cash fund b. Disbursement out of PCF:
8. Voucher system -no journal entry-
 Voucher c. Replenishment of PC disbursements:
o Check disbursement voucher or CDV Various expense accounts xx
o Business document or written Cash in bank xx

authorization that supports every d. Adjustment for unreplenished fund at reporting

disbursement made by an entity. date:
Various expense accounts xx
Petty cash fund xx
Accounting for cash shortages and overages e. Subsequent changes in ledger balance of PCF:
 Cash shortage  To increase PCF
o cash count is less than the balance per Petty cash fund xx
records Cash in bank xx
o Initially debited to a suspense account  To decrease PCF
Cash in bank xx
"cash shortage or overage" and may be Petty cash fund xx

E. W. Espino
 a. Collections made by the bank on behalf
of the depositor.
b. Interest income earned by the deposit.
Petty cash fund c. Proceeds from loan directly credited or
Debited Credited added by the bank to the depositor's
When it is initially When the fund is not account.
established replenished but adjusted d. Unrolled-over matured time deposits
prior to the preparation of transferred by the bank to the entity's
When it is subsequently financial statements. account.
increased
When it is subsequently Debit memos
decreased  Deductions (bank debits) made by the bank to
the depositor's bank account not yet recorded by
Shortage Overage the depositor.
Various expense accounts xx Various expense accounts xx  Examples:
Cash shortage xx Cash overage xx a. Bank service charge (fees, interest,
Cash in bank xx Cash in bank xx penalties, and surcharges)
b. No sufficient funds checks (NSF) or
Computation: Drawn against insufficient funds checks
Coins and currencies xx (DAIF)
Check drawn to the order of the i. Checks deposited and already
petty cash custodian xx recorded by the bank but
PCF included as part of cash xx subsequently returned to the
depositor because the drawer's
Coins and currencies xx fund is insufficient to pay for the
Check drawn to the order of the check.
petty cash custodian xx c. Automatic debits - automatic payments
Petty cash vouchers xx of bills of the depositor
IOUs xx d. Payment of loans
Total cash count xx
Less: Total accountability (xx) Deposit in transit
PCF (shortage)/overage xx  Deposits made but not yet credited by the bank.

Ledger balance xx Outstanding checks

PCF included in cash (xx)  Checks drawn and released to payees but are not
Coins needed to bring the PCF back xx yet encashed with the bank.
to its fixed amount  OC exclude:
o Certified checks
BANK RECONCILATION o Stale checks
 Bringing the balances of cash (a) per records and
(b) per bank statement into agreement Reconciling items:
1. Opening of checking account
Bank reconciliation statement format: Entity (depositor) Bank
Cash in bank xx Cash on hand xx
Balance per books, end xx Bal. per bank statement, end xx Cash on hand xx Deposit liability – depositor xx

Add: Credit memos (CM) xx Add: Deposit in transit (DIT) xx

2. Deposit in transit
Entity (depositor) Bank
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx) Cash on hand xx
Accounts receivable xx
Add/Less: Book errors xx Add/Less: Bank errors xx
Cash in bank xx No entry yet. Deposit will be
Adjusted balance xx Adjusted balance xx
Cash on hand xx received in January 20x2.
3. Credit memo
Credit memos Entity (depositor) Bank
 Additions (bank credits) made by the bank to the No entry. The entity is not yet Cash on hand xx
aware of the collection. It will Deposit liability - depositor xx
depositor's bank account but not yet recorded by
record the collection when it
the depositor. receives the bank statement on
 Examples: the first week of the following
month.
E. W. Espino
 4. Book error – overstatement
Entity (depositor) Bank
Accounts payable xx Deposit liability - depositor xx
Cash in bank xx Cash on hand xx Deposits in transit
5. Outstanding checks
DIT, beg. bal xx
Entity (depositor) Bank
Accounts payable xx Deposit liability - depositor xx Deposits made during Deposits credited by bank
Cash in bank xx Cash on hand xx current month: during current month:

Total debits per books xx xx Total credits per bank

statement
Adjusting entries (only for book reconciling items)
1. Credit memo Less: CM last month (xx) (xx) Less: CM in current month
Cash xx
Accounts receivable xx Less: Effect of book Less: Effect on bank error
error last month (xx) (xx) last month
2. Debit memo
Bank service charge xx Add/less: Effect of book Add/less: Effect of bank
Cash xx error in current month xx xx xx xx error in current
month
Book errors
xx DIT, end. Bal.
Nature of error Effect on ending Correction
balance of cash
Understatement Understatement Debit / + on the Outstanding checks
in book debit pro forma xx OC, beg. bal.
reconciliation
Cash encashed by bank Checks drawn during
Understatement Overstatement Credit / - on the During current month: current month:
in book credit pro forma
reconciliation Total debits per bank
statement xx xx Total credits per book
Overstatement Overstatement Credit / - on the
in book debit pro forma Less: DM in current
reconciliation month (xx) (xx) Less: DM last month
Overstatement Understatement Debit / + on the Less: Effect of bank Less: Effect on book error
in bank debit pro forma error last month (xx) (xx) last month
reconciliation
Add/less: Effect of bank Add/less: Effect of book
error in current month xx xx xx xx error in current month
Bank errors
OC, end. bal.
Nature of error Effect on ending Correction xx
balance of cash
Understatement Understatement Credit / - on the
in bank credit pro forma
reconciliation
Understatement Overstatement Debit / + on the
in bank debit pro forma
reconciliation
Overstatement Overstatement Debit / + on the
in bank credit pro forma
reconciliation
Overstatement Understatement Credit / - on the
in book credit pro forma
reconciliation

Notes:
 To correct an overstated credit, you need to make
a debit.
 To correct an overstated debit, you need to make
a credit.
 To correct an understated credit, you need to
make a credit.
 To correct an understated debit, you need to
make a debit.
E. W. Espino
 Trade receivables
 receivables arising from the sale of goods or
services in the ordinary course of business.
RECEIVABLES  current asset if expected to be realized in cash
within the normal operating cycle or one year,
whichever is longer.
ACCOUNTS RECEIVABLE  include trade accounts receivables and notes
receivables
PRESENTATION:
 "Trade and other receivables" - Current assets Non-trade receivables
 receivables arising from other sources
MEASUREMENT:  current asset if expected be realized in cash
Initial: within one year
 Fair value plus transaction costs (FV + TC)
 Transaction price if it does not have significant Abnormal balances in accounts
financing component. 1. Credit balance in A/R or customers' accounts
Subsequent: o result from overpayments, advances, or
 Recoverable historical cost or net realizable errors
value (NRV) o presented as current liabilities (Advances
from customers)
Accounts receivable 2. Debit balance in A/P or suppliers' accounts
Beg. Bal. xx xx Collections on o result from overpayments, advances, or
accounts errors
(Excluding recovery) o presented as current assets (Advances to
xx Notes (to settle accts) suppliers)
Net credit sales xx xx Write-off
End. Bal. xx Term of sale contract
xx Allowances  Determine the timing of transfer and transfer of
(Freight charges / sales control over the goods sold.
return / sales discount / 1. FOB shipping point
doubtful accounts)
o ownership of goods sold is transferred to
Net realizable value
the buyer upon shipment
(NRV) xx o sales and A/R are recognized on
shipment date
RECOGNITION: 2. FOB destination (free on board)
 Recognized when the entity has the right to o ownership is transferred only when the
consideration that is unconditional i.e. when the buyer receives the goods
control over the promised goods or services is o sales and A/R are recognized when the
transferred to the customer.
buyer receives the goods.
 Recognized before control over a promised good
or service is transferred to the customer if Accounting for freight charges
unconditional right results from a contractual 1. Freight prepaid
provision. o freight is already paid in advance by the
seller before shipment
Receivables - assets that represent contractual rights to
2. Freight collect
receive cash or other assets from another entity. o freight is not yet paid upon shipment
o the carrier will collect the shipping costs
Examples of receivables: (ANLACAD)
from the buyer upon delivery
1. Accounts receivable
2. Notes receivable
Rule: The entity who owns the goods being shipped
3. Loans receivable
should pay for the shipping costs.
4. Advances - e.g. advances to officers and
employees, to suppliers and to affiliates
5. Accrued income - e.g. interest income and Special accounting arises when the terms of the sale
dividend income contract is either:
6. Deposits a. FOB shipping point, freight prepaid - the buyer
7. Claims receivables owns the goods being shipped but the seller paid
the shipping costs
E. W. Espino
 b. FOB destination, freight collect - the seller owns
the goods being shipped but the carrier will be Notes:
collecting the shipping costs from the buyer  Working capital = Current assets - Current
liabilities
Trade discount  Current ratio = Current assets / Current liabilities
 Given to encourage orders in large quantities  Under allowance method, the entry to record bad
 Deducted from the list price when determining debt expense decreases profit, total current
the invoice price assets, working capital and current ration but
 Not recorded or not accounted for separately write-offs and recoveries do not.
Cash discount  Under direct write-off method, both write-offs
 Given to encourage prompt payment and recoveries affect profit, working capital and
 Deducted from the invoice price current ratio.
 Accounted for separately (in accordance with
PFRS 15 Revenue from Contracts with Customers Estimating doubtful accounts
or traditional GAAP)  Bad debts expense is recognized when loss
becomes probable and can be measured reliably.
Credit terms: 20%, 10%, 2/10, n/30
o 20% and 10% - trade discounts deducted from the a. Percentage of net credit sales
list price to determine invoice price o Bad debts expense is computed by
o 2/10 - 2% cash discount off the invoice price if applying percentage on the net credit
pays within discount period of 10 days sales
o n/30 - credit period of up to 30 days to settle o Percentage applied is determined based
account on the entity's past experience
o Favors the income statement -
Allowance for doubtful accounts adherence to the matching principle
 Contra-asset (deduction) to A/R o Bad debts are based on and directly
matched to the sales recognized in a
Allowance for doubtful accounts period
xx beg.
Write-off xx xx Recovery Allowance for doubtful accounts
xx Bad debts expense xx beg.
xx end. Write-off xx xx Recovery
xx Bad debts expense
Accounting for bad debts (Net credit sales x %)
a. Allowance method xx end.
o An allowance is recognized for bad debt
expense when the collectability of b. Percentage of receivable
accounts becomes doubtful or o Required balance of allowance for
questionable doubtful accounts is computed by
b. Direct write-off method applying a percentage on the ending
o Bad debts expense is directly written-off balance of the receivables
from the balance of accounts receivable o Favors the statement of financial position
only when the accounts are deemed - provides reasonable estimate of the
worthless receivables' net realizable value

Allowance method Direct method Allowance for doubtful accounts

 Collectability become doubtful xx beg.
Bad debt expense xx No entry Write-off xx xx Recovery
Allowance for bad debts xx xx Bad debts expense
 Write-off (squeeze)
Allowance for bad debts xx Bad debt expense xx
xx end. (A/R end x %)
A/R xx A/R xx
 Recovery
A/R xx No entry
c. Aging of receivables (Provision matrix)
Allowance for bad debts xx o Required balance of allowance for
doubtful accounts is computed by
Cash xx Cash xx applying various estimated percentages
A/R xx Gain on recovery xx

E. W. Espino
 to the breakdown of the ending
receivable according to ages Concept of time value of money
o Favors statement of financial position - 1. Future Value of an Amount (FV of P1)
provides reasonable estimate of the  "If I deposit 1 peso today in the bank, how much
receivables' net realizable value will it be worth in the future?"
 What will be the amount of the future
Allowance for doubtful accounts withdrawal?
xx beg. n
FV of P 1=(1+i)
Write-off xx xx Recovery
xx Bad debts expense 2. Present Value of a future amount (PV of P1)
(squeeze)  "How much do I have to deposit today to receive
xx end. 1 peso in the future?"
 What is the amount of the present deposit?
−n
Debit balance in allowance for doubtful accounts
PV of P 1=(1+i)
 The debit balance is eliminated by increasing the
Press 1.%, now press the division sign ÷ twice, then press equal sign = nth
bade debts expense
times.

Allowance for doubtful accounts

Note:
beg. xx
 FV of P1 and PV of P1 are applicable only when
Write-off xx xx Recovery
the cash flow is on a lump sum basis or "one-time
xx Bad debts expense
basis".
(squeeze)
 Annuity factors shall be used if there are series of
end. xx
cash flow.

NOTES RECEIVABLE 3. Future value of an annuity P1

 A claim supported by a formal promise to pay a  "If I make a series of equal deposits over several
certain sum of money at a specific future date periods, how much will they accumulate to in the
usually in the form of promissory note. future?"
 Two types of annuities:
MEASUREMENT: o Ordinary annuity - deposits are made at
the end of each interest period
Initial Subsequent
Short-term FV of an ordinary annuity of P 1
(interest and non-interest) FA/PV/TP n
[ ( 1+i ) −1]
Long term: ¿
i
a. Reasonable
interest rate (SR = FA NRV o Annuity due - deposits are made at the
ER)
beginning of each interest period / the
first deposit is made immediately or in
b. Unreasonable /
advance
below-market PV Amortized cost
interest rate (SR < (using imputed (using effective
interest rate) interest method)
FV of an annuity due of P1
ER) n+1
[ ( 1+i ) −1]
¿ −1
c. Non-interest i
bearing PV Amortized cost
(using imputed (using effective
interest rate) interest method)
4. Present value of an annuity of P1
Fair value = Face amount (FA) / Present value (PV) / Transaction price (TP)
 "How much do I have to deposit to be able to
Stated interest rate = nominal rate / coupon rate / face rate make several equal withdrawals of P1 each over
Imputed interest rate = effective interest rate / market rate / yield rate equal periods in the future?"
NRV/Recoverable historical cost  Two types of annuities:
o Ordinary annuity - the first installment is
Face amount:
made one period after the deposit
 Cash price equivalent of the non-cash asset given
up

E. W. Espino
 PV of an ordinary annuity of P 1 1/1/x1 - -
−n
[1−( 1+i ) ] 12/31/x1 - - -
¿
i 12/31/x2 - FA

Press 1.%, now press the division sign ÷ twice, next press equal sign = nth Non-interest bearing note - Installment:
times, next press minus – 1, press equal sign. Lastly, divide ÷ the resulting
PV = Annual installment x PV of OA of P1
amount by the interest rate %. Press equal sign. Disregard the negative
sign.
o Annuity due - the first installment is Current portion of N/R xx
made immediately or in advance Noncurrent portion of N/R xx
Carrying amount of N/R xx
PV of an annuity due of P1
−(n−1 ) Outstanding face amount (FA-Install.) xx
[1−( 1+i ) ] Carrying amount of NR -xx
¿ +1
i Unearned interest income xx

Press 1.%, now press the division sign ÷ twice, next press equal sign = nth Amortization table
times, next press minus – 1, press equal sign. Divide ÷ the resulting Date Collections Interest Amortizations Present value
amount by the interest rate %. Press equal sign. Disregard the negative (Annual income (Collection - (Bal -
sign. Add + 1. installment) (PV x ER) Int. income) Amortization)
1/1/x1 -
To record the note
Note receivable xx 12/31/x1 - - - CA
Revenue (PV) xx 12/31/x2 - - Current Noncurrent
Unearned interest income xx portion portion
12/31/x3 - - - …0
To record installment collection
Cash xx
Note receivable xx Non-interest bearing note - Installment in advance:
PV = Annual installment x PV of AD of P1
-or-

To initially record note receivable Carry amount of N/R - beg xx

Cash xx Add back: 1st Collection xx
Notes receivable xx
Carrying amount of NR – end xx
Accumulated depreciation xx
Loss on sale of asset - squeeze xx
Asset (Ex: Equipment) xx Amortization table
Unearned interest income xx Date Collections Interest Amortizations Present value
(Annual income (Collection - (Bal -
To record the accrued interest income installment) (PV x ER) Int. income) Amortization)
Unearned interest income xx
1/1/x1 -
Interest income xx
1/1/x1 - No int inc. - -
To record collection / settlement of the note
1/1/x2 - - - CA
Cash xx
Note receivable xx 1/1/x3 - - - …0

Non-interest bearing note - Lump sum: Note with below-market interest - Principal due at
PV = FA x PV of P1 maturity, interest due periodically

Face amount xx Principal (FA x PV of P1) xx

Present value - xx Annual interest (FA x NR x PV of OA of P1) xx
Unearned interest income xx Total xx

Note receivable xx Amortization table

Unearned interest income - xx Date Interest Interest Amortization Present value
Carrying amount xx receivable income (Int. income – (Bal +
(FA x NR) (PV x ER) Int. collected) Amortization)
Amortization table 1/1/x1 -
Date Interest income Unearned Present value 1/1/x2 - - - -
(PV x ER) interest (Bal + Int.
(Bal - Int. income) income) 1/1/x3 - - - -

E. W. Espino
 1/1/x4 - - - FA Origination costs and fees
1. Direct origination costs
Face amount xx o Added to the carrying amount of the
Present value of note -xx loan and
Unearned interest income xx o subsequently amortized using the
Total collections on interest xx effective interest method
Total interest income on the note xx 2. Origination costs
o Deducted to the carrying amount of the
Receivable with cash price equivalent loan and
 Effective interest rate (x%) o subsequently amortized using the
 Trial and error approach effective interest method
PV = Future cash flows x PV factor @x% 3. Indirect origination costs
 Interpolation o Expensed immediately
x %−lower rate
Higher rate−lower rate Lender’s POV:

Deferred annuities Principal amount xx

 An annuity in which periodic cash flows begin only Direct origination cost xx
after two or more periods have passed. Origination fee (FA x %) (xx)
Initial carrying amount of loan receivable xx
 Future value of a Deferred Annuity
o Future value of the note Loan receivable xx
Cash xx
o = Deposits x FV of an OA of P1 Unearned interest income xx
To record release of loan, net of OF
 Present value of a Deferred Annuity
Unearned interest income xx
Cash xx
PV of OA of P1 – full term xx To record the DOC
PV of OA of P1 – deferred term - xx
PV factor for the payment period xx Administrative expenses xx
Cash xx
To record the IOC
Present value of the note receivable
= Annual cash flows x PF factor for the Note:
payment period Discount CA is less than FA
Premium CA is greater than FA
Pre-acquisition accrued interest
Discount ER is higher than NR
 Interest that has accrued prior to acquisition is
Premium ER is lower than NR
not recognized as interest in come but rather as a
gain.
Amortization table
 Only the post-acquisition accrued interest are
Date Interest Interest Amortizations Present value
recognized as interest income. receivable income (Collection - (Bal +
(FA x NR) (PV x ER) Int. income) Amortization)
LOAN RECEIVABLE 1/1/x1 -
1/1/x1 - - - -
Transaction costs 1/1/x2 - - - -
 Incremental costs that are directly attributable to
1/1/x3 - - - FA
the acquisition, issue or disposal of a financial
asset or financial liability.
 Fees and commissions paid to agents, Borrower’s POV:
advisers, brokers and dealers
 Levies by regulatory agencies and securities Principal amount of xx
exchanges Discount on loan payable (FA xx %) xx
 Transfer taxes and duties Initial carrying amount of loan payable xx

Cash xx
TC does not include debt premiums or discounts, financing Discount on loan payable xx
costs or internal administrative or holding costs. Loan payable xx

E. W. Espino
Day 1 difference
 If the transaction price for a financial instrument Pledge (hypothecation)
differs from the fair value on initial recognition,  Secured borrowing
difference is recognized as gain or loss in profit or  Receivables are used as collateral security or loans
loss.  Pledgor/borrower retains control over pledged
o Loan proceeds equal to present value receivables
Present value xx  Neither derecognized nor specifically identified
Transaction price (xx)
Difference -
from other receivables
o Loan proceeds equal to face amount  Only the loan transaction is recorded
Present value xx
Cash xx
Transaction price (FA) (xx)
Loan payable xx
Difference – Unrealized loss (xx)
IMPAIRMENT OF FINANCIAL ASSET
 Expected credit loss model  No entry for the pledged receivables, only a note
Stag Nature of Measurement of credit disclosure.
e instrument losses Assignment
1 & 2 FA that is not PV of the difference  Secured borrowing
credit-impaired between:  Receivables assigned or used as a collateral for
a. the contractual cash flows borrowing are specifically identified in the loan
under the contract and contract
b. the cash flows expected
 Does not qualify for derecognition but specifically
to be received
identified from other receivables (“Receivables –
3 FA that is credit- The difference between: assigned”)
impaired (but a. the asset’s gross CA
 Equity in the assigned receivables is disclosed in
not purchased b. the PV of estimated cash
the notes (A – L = E)
or originated flows discounted at the
 Assignment in non-notification basis is the most
credit-impaired) original effective interest
common assignments
rate
Forms of assignment
Credit-impaired financial asset
Notification basis Non-notification basis
Debtors whose receivables Debtors whose receivables
Loan receivable xx
have been assigned are have been assigned are
Interest receivable xx
notified of the assignment not notified of the
Total carrying amount of receivable
assignment
before impairment xx
The debtor will remit The debtors will continue
payments on the to remit payments on the
Estimated future cash flows (Ex: Installment) xx
receivables not to the receivables to the assignor
x PV of OA x
assignor (borrower) but to
Present value of estimated future cash flows xx
the assignee (lender)
The assignee will
PV of estimated future cash flows xx
periodically inform the
CA before impairment (xx)
assignor of collections
Impairment loss xx
made on the assigned
receivables
Direct Allowance
To record the assignment To record the assignment
Impairment loss xx Impairment loss xx
A/R – assigned xx A/R – assigned xx
Interest receivable xx Interest receivable xx
A/R xx A/R xx
Loan receivable xx Loss allowance xx
To record the receipt of loan To record the receipt of loan
RECEIVABLE FINANCING Cash
Discount on LP
xx
xx
Cash
Discount on LP
xx
xx
 The act of inducing cash inflows from receivables Loan payable xx Loan payable xx
other than their normal or scheduled payments.
To record the collections No entry is made on the book yet
Cash xx upon collection of receivables by
Forms Sales return and the bank.
1. Pledge collections xx
2. Assignment A/R – assigned xx When book is notified by the
3. Factoring bank of the collections
To record remittance of Loan payable xx
4. Discounting
E. W. Espino
collections to the bank Sales return and  Cost of factoring = Service fees / interest expense
Loan payable xx collections xx
+ Recourse obligation
Interest expense xx A/R – assigned xx
Cash xx
Payment of interest Accounts receivable factored xx
Interest expense xx
Service charge (A/R x %) (xx)
Cash xx
Factor’s holdback (A/R x %) (xx)
Interest charge (A/R x % x n/365) (xx)
Accounts receivable – assigned xx
Proceeds from factoring xx
Loan payable (xx)
Equity in assignment receivables xx
Without recourse
Journal entries
Factoring Casual basis Regular means of factoring
Cash xx Cash xx
 Selling the receivables to a financial institution Receivable from factor xx Receivable from factor xx
known as factor. Loss on sale of receivables xx Service charge xx
 Factoring without recourse is the most common A/R xx Interest expense xx
factoring transactions. A/R xx
Cost of factoring
Casual basis Regular means of factoring
Factoring w/out recourse Factoring w/ recourse Cost of factoring Cost of factoring
Factor assumes the risk of Transferor guarantees = Loss on sale of receivables = Service charge + Interest
uncollectability and payment to the factor in expense
absorbs credit losses the event the debtor fails Note: Cost of factoring is the same whether casual or
to pay regular means of financing.
Transferor is not held Transferor is held liable up
liable in case the debtor to the guaranteed amount With recourse
fails to pay Journal entries
Treated as outright sale or Transferor neither Casual basis Regular means of factoring
ordinary sale of transfers nor retains Cash xx Cash xx
Receivable from factor xx Receivable from factor xx
receivables both in substantially all the risks Loss on sale of receivables xx Service charge xx
substance and form (there and rewards of ownership A/R xx Interest expense xx
is a transfer of title and of the financial asset Liability for recourse Loss on recourse
control) obligation xx obligation xx
A/R xx
Derecognized in its Liability for recourse
entirety obligation xx
Ex: Credit card Cost of factoring
transactions All receivables are collected Default by debtor
Cost of factoring Cost of factoring
 Factor’s holdback
= Commission expense + Interest = Commission expense + Interest
o A certain percentage of the transferred expense expense + Recourse obligation
receivables to serve as cushion for sales
returns, discounts and allowances. Settlement of factor’s holdback
o This records a corresponding liability for Without recourse With recourse
the holdback. Cash (squeeze) xx Cash (squeeze) xx
o The factor returns the holdback to the Sales xx Sales returns xx
transferor when the receivables are fully Receivable from factor xx Receivable from factor xx
collected. Recourse obligation xx
Gain on recourse obligation xx
 Commissions and interest charges Reversed as gain because
o A certain percentage of the receivables all of the receivables are
factored as service fee or commissions collected.
o Interest is computed on a weighted
average time to maturity Discounting of notes receivable
o If made on casual basis  The holder endorses the note to a bank in
 charged as “loss on sales of exchange for the maturity value of the note less a
receivables” discount.
o If use as a regular means of financing  The bank collects maturity value of the note from
 recorded as regular expenses the maker at maturity.

E. W. Espino
Formulas: To record the discounting To record the discounting
 Net proceeds Cash xx Cash xx
Loss on discounting xx Interest expense xx
= Maturity value – Discount Note receivable discounted xx Liability on note
 Maturity value Interest income xx discounted xx
= Principal + Interest for the full term of the note Interest income xx
 Discount To derecognize the note
= Maturity value x Discount period x Discount rate receivable after collecting from To derecognize the note
the maker the full amount receivable and related liability
 Discount period (unexpired term) Note receivable discounted xx after collecting from the maker
= Full term – Expired term Note receivable xx the full amount of note
Note: If bank uses 365 days in computing discount. When Liability on note discounted xx
counting, exclude the first day but include the last day. Note receivable xx
 Discount rate is the rate at which the note is
discounted with a bank
 Interest income is the accrued interest as of date Notes:
of discounting  If conditional sale – liabilities are unaffected
because the related contingent liability is
Without With recourse disclosed only in the notes.
recourse  If secured borrowing – liabilities are increased
The holder of The holder is liable in case the because a separate liability is recognized on
note is held maker fails to pay. discounting.
liable in case
maker fails to Dishonored notes
pay.  Notes receivable not collected at maturity
The note The note is not derecognized. becomes an ordinary claim
discounted has  Transferred from “notes receivable” to “accounts
essentially been Discounting is accounted for as receivables”
sold outright, either:  Amount transferred to A/R is the maturity value
therefore, a. Conditional sale of N/R – a of the note plus any directs costs attributable to
derecognized. contingent liability equal to the dishonor
the face amount of the
note discounted is Maturity value [FA + (FA x SR x n/365)] xx
disclosed only in the notes Protest fees xx
to FS. Amount transferred to accounts receivable xx
b. Secured borrowing – a
liability equal to the face To derecognize the dishonored note
amount of the note Notes receivable discounted xx
Notes receivable xx
discounted is recognized on To record the cash payment to the bank and to recognize A/R for the
the discounting. dishonored note
Accounts receivable xx
Cash xx

Principal xx Discounting of “own” note

Interest (FA x NR x full term) xx  Discount on NP is a contra-liability account
Maturity value xx (deduction) to the NP.
 When an entity borrows money from a bank and
Maturity value xx discounts its own note, note a note from another
Discount (MV x ER x unexpired term) (xx) party, is a accounted for as a regular loan
Net proceeds xx transaction.
 Discounting means that the bank deducted in
Principal xx advance the interest on the loan.
Accrued interest receivable (FA x SR x expired term) xx  Loan proceeds is equal to the principal less
Carrying amount of NR xx interest deducted in advance.
Conditional sale Secured borrowing Cash xx
Net proceeds xx Net proceeds xx Discount on note payable xx
CA of NR xx CA of NR xx Note payable xx
Loss on discounting xx Interest expense xx

Conditional sale Secured borrowing

E. W. Espino
 d. Ex-ship – the seller assumes all expenses until the
goods are unloaded from the carrier, at which
time title passes to the buyer.
e. CIF (cost, insurance and freight) – the buyer pays
in lumpsum the costs of the goods, insurance and
freight costs.
f. CF ( cost and freight) – the buyer pays in lumpsum
the costs of the goods freight costs.
 CIF/CF – the seller must deliver the goods
to the carrier and pay the costs of
loading; title passes to the buyer upon
delivery of the goods to the carrier.
 Rule: The entity who owns the goods
being shipping should pay for the
INVENTORIES (PAS 2) shipping costs.

Inventories are as assets: 2. Consigned goods

a. Held for sale in the ordinary course of business  Consignor transferring goods to a consignee
(finished goods) who acts as an agent in selling the goods
b. In the process of production for such sale (work in  Included in the consignor’s inventory and
process) excluded from the consignee's inventory
c. In the form of materials or supplies to be  Repair and maintenance cost – expense
consumed in the production process or in the  Commissions – expense
rendering of services (raw materials and
manufacturing supplies) Cost of consigned goods
= Cost + Freight and other incidental costs
Recognition:
 When legal title / control is obtained by the buyer 3. Inventory financing agreements
from the seller a. Product financing agreement
 Legal title normally passes when possession over o Seller sells inventory to buyer but
of the goods is transferred assumes an obligation to repurchase it at
a later date
1. Goods in transit o Seller retains ownership over the
 goods already shipped by the seller but are inventory.
not yet received by the buyer. b. Pledge of inventory
 FOB shipping point o Borrower uses its inventory as collateral
o buyer’s inventories - ownership over security for a lon
goods is transferred upon shipment o Borrower retains ownership over the
o buyer records the purchases (and inventory.
accounts payable) upon shipment c. Loan of inventory
 FOB destination o An entity borrows inventory from
o seller’s inventories - ownership over the another entity to be replaced with the
goods is transferred only when the buyer same kind of inventory
receives the goods. o Borrower includes the loaned goods in
o buyer records the purchases (and its inventory.
accounts payable) only when received
4. Sale with unusual right of return
Terms for shipping costs  The buyer recognizes food purchased under a
a. Freight collect – the carrier collects shipping costs sale with right of return at the time of sale,
from the buyer. unless the goods purchased does not qualify
b. Freight prepaid – the seller pays the freight in for recognition of asset.
advance before shipment.  The buyer does not recognize inventory
c. FAS (free alongside) – the seller assumes expenses when:
in delivering goods to the dock alongside the o The buyer assess that no economic
carrier; the buyer assumes loading and shipping benefits will be derived from the
costs; title passes upon shipment. goods such as when they are
defective or unsalable.

E. W. Espino
 o The buyer intends to return the o The “Inventory” account is updated each time
goods to the seller within the time a purchase or sale is made.
limit allowed under the sale o The “Inventory” account shows a continuing
agreement. or running balance of the goods on hand.
o Quantities and balances of goods on hand
5. Sale on trial or sale on approval and goods sold can be determined at any
 The seller allows a prospective customer to given point of time from the ledger.
use a good for a given period of time.
 The legal title over the goods does not pass to
the prospective customer until he approves it
and purchases it.
 Seller retains the ownership of inventory
during the trial period.
Inventory COGS
6. Installment sale – regular sale Beg bal.
 Possession of the goods is transferred to the Purchases Purchase COGS
buyer but the seller retains legal title solely to return
protect the collectability if the amount due Freight-in COGS Sales
 Goods are excluded from the seller’s return
inventory and included in the buyer’s Sales End bal.
inventory at the point of sale. return
End bal.
7. Bill and hold arrangement
 A contract of sale under which a seller bills a Variation: Shortages/Overages
customer but retains physical possession of  Under perpetual inventory, difference between
the goods until it is transferred to the the perpetual inventory balance and the physical
customer at a future date. inventory is inventory shortage or overage.
 Goods are excluded from the seller’s
inventory and included in the buyer’s Balance per count xx
inventory upon billing. Balance per records xx
Difference (shortage)/overage xx
8. Lay away sale
 Goods are delivered only when the buyer Loss on inventory shortage xx
makes the final payment in a series of (or inventory shortage or overage)
Inventory xx
installments.
 Goods are included in the seller’s inventory
b) Periodic inventory system
until delivered to the buyer.
o The “Inventory” account is updated only
when a physical count is performed.
Notes:
o The amounts of inventory and cost of goods
Type of arrangement Included in the inventory
sold are determined only periodically.
of
1. FOB shipping point  Buyer
Beginning inventory xx
2. FOB destination  Seller
Add: Net purchases xx
3. Consigned goods  Consignor
Total Goods Available for Sale xx
4. Inventory financing  Borrower
Less: Ending inventory (physical count) (xx)
5. Sale with unusual right  Buyer (except
Cost of Goods Sold xx
of return when unsalable)
6. Sale on trial (or  Seller
Purchases xx
approval)
Add: Freight-in xx
7. Bill and hold  Buyer
Less: Purchase returns (xx)
8. Lay away  Seller
Less: Purchase discounts (xx)
Net purchases xx
PRESENTATION:
 “Inventories” – Current Assets Inventory errors under the periodic system
 Under the periodic system, COGS is a residual
Accounting for inventories amount. It is affected by errors in EI, BI and NP.
a) Perpetual inventory system
E. W. Espino
  EI : Profit – Direct relationship o Fixed production overheads (depreciation
(If EI is understated, profit is also understated) and maintenance, cost of factory
 BI and P : Profit – Inverse relationship management and administration)
 EI : COGS - Inverse relationship
 BI and P : COGS – Direct relationship Allocation of production overheads

Perpetual system Periodic system  FOH – allocated to the costs of conversion

1. To record purchase of goods based on the normal capacity of the
Inventory xx Purchases xx
A/P xx A/P xx
production facilities.
2. To record payment of shipping costs  VOH – recognized as expenses in the period in
Inventory xx Freight-in xx which they are incurred.
Cash xx Cash xx
3. To record return of damaged goods to the supplier Absorption (full) costing Variable costing
A/P xx A/P xx
Inventory xx Purchase returns xx
Both fixed and variable Only VOH is included in
4. To record sale of goods OH are included in the the cost of inventories.
A/R xx A/R xx costs of inventories FOH is expensed
Sales xx Sales xx immediately.
COGS xx No entry PAS 2 requires the use of absorption costing.
Inventory xx
5. To record returned goods by customer AGRICULTURE (PAS 41)
Sales return (at SP) xx Sales returns xx
A/R (at SP) xx A/R xx
Agricultural produce harvested from biological assets
Inventory (at cost) xx No entry Initial: FV – cost to sell at the point of harvest
COGS xx Subsequent: LCNRV

Cost formulas
MEASUREMENT:  First-In, First-Out (FIFO)
 Lower of cost and net realizable value (LCNRV) o Inventories that were purchased or produced
first are sold first. Unsold inventories at the
Cost of inventories end of period are those most recently
a. Purchase cost purchased or produced.
o Purchase price (net of trade discounts and o Cost of sales represents cost from earlier
other rebates purchases
o Import duties o Cost of ending inventory represents costs
o Non-refundable or non-recoverable purchase from the most recent purchases
taxes
o Transport and handling costs Note: FIFO Period and FIFO Perpetual yield the same
o Other costs directly attributable to the amounts of COGS and EI.
acquisition of the inventory
b. Conversion costs (DL & OH)  Weighted Average
c. Other costs in bring the inventories to their o Cost of sales and ending inventory are
present location and condition determined based on the weighted average
cost of beginning inventory and all
Exclusion from costs of inventories (Expensed) inventories purchased or produced during the
a. Abnormal amounts of wasted materials, labor and period.
production costs
b. Selling costs WAC = TGAS in pesos / TGAS in units
c. Administrative overheads
d. Storage costs
o Wine fermentation - capitalized
o Party finished goods – capitalized
o Completed goods – expensed

Conversion costs
o Variable production overheads (indirect
materials and indirect labor)
E. W. Espino