INTERMEDIATE
1. Objective the financial statements are
ACCOUNTING VOL I
THIS CONTEXT IS PURELY THEORIES ONLY. YOUVE BEEN
WARNED.
ACCOUNTING it is a service activity, its purpose it
to provide quantitative information, primarily financial
in nature, about economic entities, to provide economic
decisions.
1. Internal users (they are the managers of the
business or enterprise) special purpose
financial statements
2. External users (they need financial statements
for their decision making. E.g. inactive owners,
lenders, creditors, suppliers, potential investors,
taxing authorities, government, employees, etc.)
general purpose financial statements
BRANCHES OF ACCOUNTING
1. Financial accounting broadest branch of
accounting focusing on external users.
Concerned with the recognition, measurement,
and communication of economic resources.
2. Management accounting serves the
information needs of internal users. Does not
conform to GAAP.
3. Cost accounting concerned with the
measurement and recognition of cost of services
provided or products manufactured.
4. Tax accounting computation of taxes and
preparation of tax returns.
5. Government accounting encompasses the
process of analyzing, classifying, summarizing,
and communicating all transactions involving
the receipt and disposition of government funds
and property and interpreting the results thereof.
Bookkeeping refers only to one phase of accounting,
the recording phase.
Auditing refers to an independent examination of the
financial statements conducted by a certified public
accountant for the purpose of rendering an opinion as to
the fairness of the presentation of the financial
statements.
THE CONCEPTUAL FRAMEWORK FOR
FINANCIAL ACCOUNTING
Def. the conceptual framework defines the objective of
financial statements, enumerates and explains the
qualitative characteristics of accounting information,
identifies the elements of financial statements, and
provides the general criteria for their recognition and
discusses the concepts of capital maintenance.
prepared based on the assumption that users
have common information needs.
2. Use of accrual basis the accrual basis
recognizes the effects of the transactions when
the transactions occur, rather when the cash is
received or paid.
3. Underlying assumption (going concern)
entities are presumed to continue operations in
the future, unless there are indications of the
contrary.
4. Qualitative characteristics
a. Fundamental qualitative characteristics
A.1 Relevance relevant information
possesses three qualities: confirmatory
value, predictive value, and materiality.
A.2 Faithful Representation it has three
components: completeness, neutrality,
freedom from error.
b. Enhancing Qualitative characteristics
(verifiability, timeliness, understandability,
comparability)
ELEMENTS OF FINANCIAL STATEMENTS
*elements of position
1. Assets resources controlled by the entity as a
result of past events, and from which future
economic benefits are expected to flow to the
enterprise.
2. Liabilities present obligation of an enterprise
arising from past events, the settlement of which
is expected to result in an outflow from the
entity of economic resources embodying
economic benefits.
3. Equity residual interest in the assets of the
entity after deducting all of its liabilities.
*elements of performance
4. income increases in economic benefits
during an accounting period in the form of
inflows or enhancements of assets or decreases
of liabilities that results in increases in equity,
other than those relating to contributions from
equity participants.
5. Expenses decreases in economic benefits
during the reporting period in the form of
outflows or depletion of assets or incurrence of
liabilities that results in decreases in equity.
Expenses also include losses.
MEASUREMENT BASES:
1. Historical cost the cost of acquisition
2. Current cost (fair value) the amount of cash
or cash equivalents that would have to be paid if
the same asset or equivalent asset is acquired
currently.
3. Realizable value assets disposal value
reduced by disposal costs, or the liabilities
settlement amount including settling costs.
4. Present value discounted future cash flows.
 the conceptual framework does not require any
particular measurement for the recognition of
particular financial elements nor does it require
the use of a particular measurement basis for a
particular circumstance.
capital maintenance concept views profit as the
excess of the capital at the end of the period over the
capital at the beginning of the period after considering
the effects of contributions from and distributions to
owners during the reporting period. It is also known as
the net worth method of measuring profit.
Physical capital maintenance concept views that
there is profit only if the physical productive capacity of
the enterprise at the end of the period exceeds the
physical productive capacity at the beginning of the same
period, after excluding the effects of transactions with
owners.
CASH AND CASH
EQUIVALENTS
Def. cash is any item that is used as a medium of
exchange. An item is considered as cash id it is
acceptable by bank or other financial institution for
deposit at face value.
Cash Items
for use other
Unrestricted
than current
cash
operations
cash in the other non
current assets current
section financial assets
a. unrestricted cash items are unrestricted if
they are on hand or could be withdrawn
immediately.
Cash on the statement of financial position includes the
following
1. Cash on hand
a. Undeposited cash collections currencies
such as bills and coins, customers checks,
travelers checks, etc.
b. Working funds cash funds segregated for
current use in the ordinary conduct of
business. (E.g. petty cash fund, change fund,
payroll fund, dividend fund, tax fund,
interest fund)
2. Cash in Bank includes demand deposits.
There are unrestricted funds deposited in a bank
that can be withdrawn upon demand such as
amounts in checking and savings amount.
Cash Equivalents a financial instrument qualifies as
cash equivalent if it matures within a short period of
time, normally three months or less, from the date of
acquisition.
The following summarizes several noteworthy
considerations in reporting cash balance in the
statement of financial position:
1. Foreign Currency cash in foreign currency and
deposits in banks which are subject to immediate
and unrestricted withdrawal, should be
translated to Philippine currency using the
exchange rate at the end of the reporting period.
Cash in foreign banks should be reported
separately, preferably, as non-current assets.
2. Cash in closed banks or in banks having
financial difficulty or in bankruptcy should be
reclassified as receivables and should be written
down to its recoverable amount.
3. Customers post dated checks and NSF should
be reported as receivables rather than cash.
4. Postage stamps prepaid expenses
5. Bank overdraft reported as a liability. A bank
overdraft occurs when a depositor has written
checks for a sum greater than the amount in the
depositors bank account.
6. Undelivered or unreleased checks companys
checks drawn and recorded as disbursed but are
not actually issued or delivered to the payees as
of the reporting date. Should be reported as
current payables.
7. Companys post dated checks recorded as
issued and delivered to payee before or at the
end of the reporting period. Should be added to
the book balance.
8. Compensating balances minimum amounts
that a company agrees to maintain in a bank
checking account as support or collateral for a
loan by the depositor.
9. Cash set aside for long term specific purpose or
for acquisition of a long term asset reported as
non-current financial asset.
SOME CHARACTERISTICS OF A SYSTEM OF
CASH CONTROLS
1. Segregation of duties for handling cash and
recording cash transactions
2. Imprest system (idedeposit agad lahat ng cash
receipts for that day)
3. Voucher system
4. Internal audits at irregular intervals
5. Periodic reconciliation of bank statement
balances
Petty Cash Fund
- Fund used to pay for small items like taxi fares,
newspapers, delivery charges, postage, etc. (it is
under imprest system of cash control)
Cash short and over
- Cash short and over is a nominal account that is
debited for shortages and credited for overages
in the petty cash fund.
RECONCILLIATION OF BANK BALANCES
Def. a bank statement is a monthly report provided by
the bank to the depositor which shows the following
information:
1. Beginning of month cash balance
2. Total deposits made by the depositor and other
bank credits of the month
3. Total checks paid by the bank and other bank
charges during the month
4. End of the month cash balance
The bank treats the depositors account as a liability.
Ideally, any debit balance in the Cash in Bank account
maintained by the depositor should equal the credit
balance of the depositors account maintained by the
bank.
However, because of time-lapse differences and
possible errors existing in either the records of either
the bank or the depositor, these reciprocal accounts may
not be in agreement at month-end. A bank reconciliation
is, therefore, prepared to explain any differences
between a companys book balance of cash and the bank
statement balance for the depositor company.
Items that may cause the difference are any or the
combination of the following:
1. Deposit in transit (naka record na sa book pero
wala pa sa bank statement, therefore added to
sa bank balance)
2. Outstanding checks (deducted from the bank
balance)
3. Debit memos (naka deduct na sa bank, sa book
hindi pa)
4. Credit memos (added to the cash balance per
book)
5. Errors
TYPES OF BANK RECONCILIATION STATEMENT
1. Reconciliation of ending balances, where the
balance per bank and the balance per companys
records are reconciled as of a end of a period.
This is otherwise known as the single date bank
reconciliation.
2. Reconciliation of beginning cash balances, of
receipts and disbursements during the period and
of ending cash balances. This is more popularly
known as proof of cash, four column
reconciliation, or reconciliation of receipts
disbursements and bank balances.
Forms of bank reconciliation statement:
a. Both bank and book balances are reconciled to a
correct balance
b. Bank balance reconciled with book balance
c. Book balance reconciled with bank balance
Receivables
Def. represent claims that are expected to be settles by
receipt of cash.
CLASSIFICATION OF RECEIVABLES ACCORDING
TO SOURCE:
1. Trade receivables. Receivables arising from
sale of goods or services in the normal course of
business. These receivables should include only
charges for actual sales completed.
2. Non trade receivables.
a. Loans to officers and employees
b. Advances to affiliates
c. Accrued interest and dividends
d. Deposits to guarantee performance or
payment or to cover possible damages or
losses
e. Subscription for the entitys securities
f. Deposits with creditors, claims for losses
and damages
g. Claims for tax refunds or rebates
h. Claims against common carriers for
damaged or lost goods.