lOMoARcPSD|6989683
Intacc-1A ( Reviewer) - Conceptual Framework and
Accounting Standards
Financial Accounting And Reporting (Adamson University)
StuDocu is not sponsored or endorsed by any college or university
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
INTERMEDIATE ACCOUNTING – 1A (REVIEWER)
CASH AND CASH EQUIVALENTS
CASH INCLUDES:








Money
Any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
Checks
Bank drafts
Money orders
Cash on Hand – undeposited cash collections and other cash
items awaiting deposit such as:
o Customers’ checks
o Cashier’s or manager’s checks
o Traveler’s checks
o Bank drafts
o Money orders. (postal money order)
Cash in Bank – includes:
o Demand deposit
o Checking account
o Savings deposit
o All of the above must be unrestricted as to
withdrawal.
Cash fund – set aside for current purposes such as:
(depende talaga sa purpose pag cash fund)
o Petty cash fund
o Payroll fund
o Dividend fund
o Interest fund




o Travel fund
o Tax fund
o Bond Sinking Fund – basta one year after the reporting
period.
Deposits in foreign currency which are not subject for foreign
exchange restriction are included in cash.
Undelivered or Unreleased Check
Postdated Check Delivered
Stale Check Given.
NOT INCLUDED IN CASH











Postdated checks received. (unacceptable by the bank for
deposit and immediate credit or outright encashment.) (“cash in
bank includes customer check of 200,000 outstanding for 18
months)
Restricted Cash
IOU
NSF Check – if na redeposit within the year, di na ileless or
ignored nalang.
Sinking fund
Preference share redemption fund
Contingent fund
Insurance fund
Fund for acquisition and construction of PPE
Savings Deposit in Closed Bank
“the cash receipt journal was held open until Jan 15, 2021
during which time an amount of 450,000 was collected and
recorded on Dec 31, 2021.
A/R
450,000
Cash
450,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
UNRESTRICTED CASH




There is no specific dealings with “cash”.
An entity shall classify an asset as current when the asset as
cash or cash equivalents unless it is restricted to settle a liability
for more than 12 months after the end of the reporting period.
To be reported as “cash”, an item must be unrestricted in use.
Cash must be readily available and not subject to any
restriction, contractual or otherwise.
o BSP treasury bill that was purchased 1 year ago
cannot qualify as cash equivalent even if the
remaining maturity is three months or less.
INVESTMENT OF EXCESS CASH


CASH EQUIVALENTS




Short-term and highly liquid investments that are readily
convertible into cash and so near their maturity that they present
insignificant risk of changes in value because of changes in
interest rates.
Only highly liquid investments that are acquired 3 months
before maturity can qualify as cash equivalents
Examples of Cash Equivalents are:
o Three-month BSP Treasury Bill.
o Three-year BSP Treasury Bill purchased 3 months
before date of maturity.
o Three-month time deposit.
o Three-month money market instrument or commercial
paper.
o Preference shares with specified redemption date
acquired 3 months before date of maturity.
o Time Deposit and Commercial Paper if silent is included.
o Certificate of Deposit
Not examples of Cash Equivalents:
o Equity Securities (do not have maturity date)

Entity must maintain sufficient cash for use in current
operations.
Any cash accumulated in excess of that needed for current
operations should be invested even temporarily in some type of
revenue earning investment.
Excess cash may be invested in time deposit, money market
instrument and treasury bills for the purpose of earning interest
income.
CLASSIFICATIONS OF INVESTMENT OF EXCESS CASH

Investment in time deposit, money market instruments and
treasury bills should be classified as:
o If the term is three months or less, such instruments are
classified as cash equivalents.
o If the term is more than 3 months but within one year,
such investments are classified as short-term financial
asset or temporary investments and presented as
current assets.
o If the term is more than 1 year, such investments are
classified as non-current or long term investment.
o If such investments become due within one year from the
end of the reporting period, they are reclassified as
current or temporary investments.
MEASUREMENT OF CASH
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683



Measured at face value
Cash in foreign currency is measured at the current
exchange rate.
If a bank or financial institution holding the funds of an entity
is in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount of
recoverable is estimated to be lower than the face value.


FOREIGN CURRENCY





Should be translated to Philippine Pesos using current
exchange rate.
 Deposits in foreign currency which are not subject for foreign
exchange restriction are included in cash.
 Deposit in foreign bank subject to foreign restriction should be
classified as non-current assets.
IF material and restricted – Part of NCA
If Immaterial and restricted – part of C&CE
Without restriction – part of C&CE
If restricted and silent – part of NCA

BANK OVERDRAFT – mas madami kang inissue na check kesa sa
naka deposit



CASH FUND FOR CERTAIN PURPOSE


Part of cash and cash equivalents.
o Petty cash fund, payroll fund, travel fund, interest fund,
dividend fund and tax fund.
Not part of cash and cash equivalents.
o Sinking fund, P/S redemption fund, contingent fund,
insurance fund and fund for acquisition and construction
of PPE.
Should be parallel in the classification of the related liability.
o Example, sinking fund that is set aside to pay a bond
payable shall be classified as current asset when due
within one year after the end of the reporting period,
part of cash and cash equivalent
o Preference share Redemption fund – depende kung
current or not, pag current part of cash.
Cash fund set aside for the acquisition of a noncurrent asset,
future expansion for PPE. should be classified as noncurrent
regardless of the year of disbursement.
Cash Fund set aside for current purpose – part of cash


Credit Balance of CASH IN BANK.
o Results from the issuance of checks in excess of the
deposits.
Classified as current liability
NOT TO BE OFFSET against other bank accounts with debit
balances from the same bank. EXAMPLE:
a. Cash in Bank – First bank, which is overdrawn by
10,000
b. Cash in Bank – Second Bank, with a debit balance of
100,000.
o Net Cash Balance is 90,000.
It is not necessary to adjust and open a bank overdraft account
in the ledger.
o In other words, Cash in Bank – First Bank account is
maintained in the ledger with a credit balance.
Overdrafts are not permitted in the Philippines.
CLASSIFICATION OF CASH FUND
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683

EXCEPTION TO THE RULE ON OVERDRAFT.



When an entity maintains two or more accounts in one bank
and one account results in an overdraft, such overdraft can be
offset against the other bank account with a debit balance in
order to show cash, net of bank overdraft or bank overdraft,
net of other bank account.
An overdraft can also be offset against the other bank account if
the amount is not material.
Under IFRS, bank overdraft can be offset against other bank
account when payable on demand and often fluctuates from
positive to negative as an integral part of cash management.
Possible Questions:
COMPENSATING BALANCE






Pag legally restricted as to withdrawal yung amount ng
compensating balance, I miminus siya sa Cash in Bank
account.
o It will be classified as “cash held as compensating
balance” under current assets if the related loan is short
term.
o If Long term, compensating balance is classified as
noncurrent investment.
Pag not legally restricted as to withdrawal yung amount ng
compensating balance, hindi siya ileless sa cash in bank. (in
effect, part siya ng cash)
Generally takes the form of minimum checking or demand
deposit account balance that must be maintained in connection
with a borrowing arrangement with a bank.
Example:
o Entity borrows P 5,000,000 from a bank and agrees to
maintain a 10% or 500,000 minimum compensating
balance in a demand deposit account.
In effect, this arrangement results in the reduction of the amount
borrowed because the compensating balance provides a source
of fund to the bank as partial compensation for the loan
extended.
Naka charge to normally sa cash in bank account.
If silent, assume as not legally restricted.
1. What is the correct amount of Cash?
a. Cash only, not included si cash equivalents.
2. What is the correct amount of cash in the notes to financial
statements?
a. Cash only, not included si cash equivalents
3. What is the correct amount of cash in the SFP?
a. Cash and Cash Equivalents
4. What is the correct amount of cash and cash equivalents?
a. Cash and Cash Equivalents
CLASSIFICATION OF COMPENSATING BALANCE
Chapter 2 Bank Reconciliation
Bank Deposits
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683


3 kinds of bank deposit
o Demand Deposit
o Saving Deposit
o Time Deposit
Demand Deposit


Current account or checking account or commercial deposit
where deposits are covered by deposit slips and where funds
are withdrawable on demand by drawing checks against the
bank.
Noninterest bearing


Saving Deposit


Depositor is given a passbook upon the initial deposit.
Passbook is required when making deposits and withdrawals.
Interest bearing
RECONCILING ITEMS

Time Deposit



Similar to saving deposit in the sense that it is interest bearing.
Evidenced by a formal agreement embodied in an instrument
called certificate of deposit.
May be preterminated or withdrawn on demand or after a
certain period of time agreed upon.


Book Reconciling Items
o Credit Memo
o Debit Memo
o Erros
Bank Reconciling Items
o Deposit in Transit
o Outstanding Checks
o Errors
CREDIT MEMOS
BANK RECONCILIATION

A bank statement is a monthly report of the bank to the
depositor showing:
o Cash balance per bank at the beginning
o Deposits made by the depositor acknowledged by the
bank
o Checks drawn by the depositor and paid by the bank
o Daily cash balance per bank during the month
When bank statement is received, attached thereto are the
depositor’s canceled checks and any debit or credit memo that
have affected the depositor’s account.
Cancelled Check – checks issued by the depositor and paid by
the bank during the month
Statement which brings into agreement the cash balance per
book and cash balance per bank.
Prepared monthly because bank provides the depositor with the
bank statement at the end of every month.


Items that are not deposits credited by the bank to the account
of the depositor but not yet recorded by the depositor as
cash receipts.
Has the effect of increasing the bank balance.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683

Typical examples of credit memos are:
o Notes Receivables collected by bank in favor of the
depositor and credited to the account of the depositor.
o Proceeds of bank loan credited to the account of the
depositor.
o Matured time deposit transferred by the bank to the
current account of the depositor.
DEPOSIT IN TRANSIT


DEBIT MEMOS




Items that are not checks paid by bank which are charged or
debited by the bank to the account of the depositor but not yet
recorded by the depositor as cash disbursement.
Have the effect of decreasing the bank balance.
Mga auto debits ganon.
Typical examples of debit memos are:
o NSF or No Sufficient Fund Checks – checks deposited
but returned by the bank because of insufficiency of fund.
Other name is DAIF or “drawn against insufficient fund”
o Technically Defective Checks – checks deposited but
returned by the bank because of technical defects such
as absence of signature or countersignature,
erasures not countersigned, mutilated checks,
conflict between amount in words and amount in
figures.
o Bank Service Charges – bank charges for interest,
collection, checkbook and penalty.
o Reduction of loan – amount deducted from the current
account of the depositor in payment for loan which the
depositor owed to the bank and which has already
matured.
Collections already recorded by the depositor as cash
receipts but not yet reflected on the bank statement.
It includes:
o Collections already forwarded to the bank for deposit but
too late to appear in the bank statement.
o Undeposited collections or those still in the hands of the
depositor. In effect, these are cash on hand awaiting
delivery to bank for deposit.
OUTSTANDING CHECKS


Checks already recorded by the depositor as cash
disbursements but not yet reflected on the bank statement.
It includes:
o Checks drawn and already given to payees but not yet
presented for payment.
o Certified Check – one where the bank has stamped on
its face word “accepted” or “certified indicating sufficiency
of fund”
 When the bank certifies a check, the account of
the depositor is immediately debited or charged to
insure the eventual payment of the check.
 SHOULD BE DEDUCTED FROM THE TOTAL
OUTSTANDING CHECKS (if included therein)
because they are no longer outstanding for Bank
Recon.
FORMS OF BANK RECONCILIATION
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
1. Adjusted Balance Method – the book balance and the bank
balance and the bank balance are brought to a correct cash
balance that must appear on the balance sheet.
2. Book to Bank Method – the book balance is reconciled with
the bank balance or the book balance is adjusted to equal the
bank balance.
3. Bank to Book Method – bank balance is reconciled with the
book balance or the bank balance is adjusted to equal the book
balance.
Errors will have to be analyzed if it is a deduction or
addition.
2. BOOK TO BANK METHOD
Book Balance
xxx
Add: Credit Memo
Outstanding Checks
xxx
Total
xxx
Less: Debit Memo
Deposit in Transit
(xx)
Bank Balance
xxx
PROFORMA RECONCILIATION
1. ADJUSTED BALANCE METHOD
Book Balance
Add: Credit Memo
Total
Less: Debit Memo
Adjusted Book Balance
xxx
Bank Balance
Add: Deposit in Transit
Total
Less: Outstanding Checks
Adjusted Bank Balance
xxx
xxx
xxx
xxx
(xx)
xx
xx
xx
xx
3. BANK TO BOOK METHOD
Bank Balance
Add: Deposit in Transit
Debit Memo
Total
xxx
Less: Outstanding Checks
Credit Memo
Book Balance
xxx
xxx
xxx
xxx
(xx)
Illustration
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
xxx
xx
xx
xxx
xx
xx
(xx)
lOMoARcPSD|6989683
The cash records of Company X show the following for the
month
CASH RECEIPTS
Jan 5
60,000
Jan 13
20,000
Jan 25
30,000
Jan 31
40,000
150,000
Jan 11
Jan 12
Jan 14
Jan 17
Jan 26
Jan 26
Jan 30
Jan 30
CASH DISBURSEMENT
Jan 6
Check No.
5,000
721
Jan 7
Check No.
10,000
722
Jan 10
Check No.
18,000
723
Jan 14
Check No.
2,000
724
Jan 28
Check No.
37,000
725
Jan 31
Check No.
28,000
726
100,000
The general ledger shows the cash in bank account with a debit
balance of 150,000 and credit balance of 100,000. So the
balance of the cash in bank in depositor’s account is 50,000
Usually pag Jan 1 yung tas “balance” yung description, di siya
kasama kase beginning balance yon ng cash account
722
723
10,000
18,000
724
2,000
20,000
30,000
15,000 CM
5,000 RT
1,000 SC
The following data are gathered in connection with the CM and
DM appearing on the bank statement:
a. The CM of 15,000 on Jan 26 represents proceeds of note
collected by bank in favor of company.
b. The RT of 5,000 represents check of customer deposited
previously but returned by the bank because of NSF.
c. The last amount on the balance of the bank statement is the
unadjusted balance per bank amount.




Deposit in Transit
Outstanding Checks
Check No. 725
Check No. 726
40,000
37,000
28,000
6,000
15,000
Debit memo
Credit memo
BANK STATEMENT
Date
Jan 6
Jan 8
Check
No.
721
Withdrawals
5,000
Deposits
Balance
60,000
60,000
55,000
45,000
27,000
47,000
45,000
75,000
90,000
85,000
84,000
Adjusted Balance Method:
Balance per book
Add: Credit Memo
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
50,000
15,000
lOMoARcPSD|6989683
Total
Less: Debit Memo
Adjusted Balance per book
65,000
(6,000)
59,000
Balance per Bank
Add: Deposit in Transit
Total
Less: Outstanding Check
Adjusted Balance per Bank
84,000
40,000
124,000
65,000
59,000
Bank to Book Method
Balance per Bank
Add: Deposit in Transit
Debit Memo
Total
Less: Outstanding Check
Credit Memo
(80,000)
Balance per Book
84,000
40,000
6,000
46,000
130,000
65,000
15,000
Chapter 3 Proof of Cash
TWO-DATE BANK RECONCILIATION


Literally involves 2 dates
Same procedure as to 1 date bank recon.
Formula of Book Balance
Book to Bank Method
Balance per Book
Add: CreditMemo
Outstanding Check
80,000
Total
Less: Debit Memo
Deposit in Transit
(46,000)
Balance per Bank
Balance per book – beginning of the month
xxx
Add: Book Debits during the month
xxx
Total
Less: Book Credits during the month
(xx)
Balance per book – end of the month
xxx
50,000
15,000
65,000
130,000
6,000
40,000
84,000


xxx
Book Debits – refer to cash receipts or all items debited to the
cash in bank account.
Book Credits – cash disbursement or all items credited to the
cash account.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Formula of Bank Balance
Balance per bank – beginning of the month
Add: Bank Credits during the month
Total
Less: Bank Debits during the month
(xx)
Balance per bank – end of the month
xxx


xxx
xxx
xxx
Formula of Outstanding Checks
Bank Credits – all items credited to the account of the
depositor which includes deposits acknowledged by bank and
credit memos.
o In the absence of any statement to the contrary or if the
problem is silent, bank credits are assumed to be
deposits acknowledged by bank.
Bank Debits – all items debited to the account of the depositor
which include checks paid by bank and debit memos.
o In the absence of any statement to contrary or if the
problem is silent, bank debits are assumed to be checks
paid by bank.
Formula of Deposit in Transit
Deposit in Transit – beginning of the month
Add: Cash Receipts deposited during the month
xxx
Total deposits to be acknowledged by bank
Less: Deposits acknowledged by bank during the month
(xx)
Deposit in Transit – end of the month
xxx
xxx
xxx
Outstanding Checks – beginning of the month
Add: Checks drawn by depositor during the month
Total checks to be paid by the bank
Less: checks paid by the bank during the month
(xx)
Outstanding Checks – end of the month
xxx
xxx
xxx
xxx
Illustration
Cash in bank per ledger
Balance, January 31
50,000
Book debits for February including January CM
for note collected of P15,000
200,000
Book Credits for February, including NSF check
of 5,000 and service charge of 1,000 for January
180,000
Bank statement for Feburary
Balance, January 31
84,000
Bank Credits for February, including CM for
note collected of 20,000 and January
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
deposit in transit of 40,000
170,000
Bank Debits for February, including NSF check of
10,000 and January outstanding
check of 65,000
130,000
Bank Recon for the month of January
Balance per book – January 31
50,000
Note collected by bank in January
15,000
Total
NSF check for January
(5,000)
Service Charge for January
(1,000)
Adjusted book balance
59,000
Balance per bank, January 31
84,000
Deposit in Transit for January
40,000
Total
Outstanding check for January
(65,000)
Adjusted bank balance
59,000
Computation of Book Balance
Balance per book – January 31
50,000
Add: Book Debits during February
200,000
Total
Less: Book Credits during February
(180,000)
Balance per book – Feb 28
70,000
65,000
Computation of Bank Balance
Balance per bank – January 31
84,000
Add: Bank Credits during February
170,000
Total
Less: Bank Debits during February
(130,000)
Balance per bank – February 28
124,000
124,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
250,000
254,000
lOMoARcPSD|6989683
Computation of Deposit in Transit
Deposit in Transit – January 31
40,000
Add: Cash Receipts deposited during February:
Book Debits
200,000
Less: January Credit Memo
(15,000)
185,000
Total
225,000
Less: Cash Disbursement during February:
Bank Credits
170,000
Less: Feb. CM for note collected (20,000)
150,000
Deposit in Transit – Feb 28
75,000
Computation of Outstanding Checks
Outstanding Checks – January 31
65,000
Add: Check drawn by depositor during February:
Book Credits
180,000
Less: January DM
(6,000)
174,000
Less: Checks paid by bank during February
Bank Debits
130,000
Less: February NSF
(10,000)
120,000
Outstanding Checks – February 28
119,000
Bank Reconciliation in February
Balance per Book
Add: Note collected by Bank in Feb (CM)
20,000
Total
Less: NSF Check for February (DM)
(10,000)
Adjusted Book Balance
80,000
Balance per Bank
Deposits in Transit for Feb
Total
Outstanding Checks for February
Adjusted Bank Balance
80,000
Bal. per Book
Note Collected
Jan
Feb
NSF Check
Jan
Feb
Service
Charge:
Jan
Adjusted
Book Bal
Balance per
Jan 31
50,000
Receipts
200,000
15,000
(15,000)
20,000
(5,000)
Disbursement
180,000
70,000
90,000
124,000
75,000
199,000
(119,000)
Feb 28
70,000
20,000
(5,000)
10,000
(10,000)
(1,000)
59,000
205,000
184,000
80,000
84,000
170,000
130,000
124,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Bank
Deposit in
Transit
Jan
Feb
Outstanding
Checks
January
Adjusted
Bank bal
40,000
(40,000)
75,000
(65,000)
59,000
205,000
75,000
(65,000)
119,000
184,000
(119,000)
80,000

o Accounts Receivables – open account arising from the
sale of goods and services in the ordinary course of
business and not supported by promissory notes.
 If A/R is related to trade receivables, it is part of
current even if more than 12 months.
 AKA customers’ accounts, trade debtors, and
trade accounts receivable.
o Notes Receivables – those supported by formal
promise to pay in the form of notes.
Nontrade Receivables – represents claims arising from
sources other than the sale of merchandise or services in the
ordinary course of business.
Classification

Chapter 4 Accounts Receivables

Definition


Financial assets that represent a contractual right to receive
cash or another financial asset from another entity.
For retailers or manufacturers, receivables are classified into
trade receivables and nontrade receivables.

Trade and Nontrade Receivables

Trade Receivables – claims arising from sale of merchandise
or service in the ordinary course of business.
o Includes:
 Accounts Receivable
 Notes Receivable
Trade Receivables – if expected to be realized in cash within
the normal operating cycle or one year whichever is longer,
are classified as current assets.
Nontrade Receivables – if expected to be realized in cash
within one year, the length of operating cycle notwithstanding,
are classified as current asset.
o If collectible beyond one year, nontrade receivables
are classified as noncurrent assets.
An entity shall classify an asset as current when the entity
expects to realize the asset or intends to sell or consume it in
the entity’s normal operating cycle, or when the entity expects to
realize the asset within 12 months after the reporting period.
Presentation

One line item, trade and other Receivables.
Example of Nontrade receivables
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
a. Advances to or receivables from shareholders, directors,
officers or employees. If collectible in one year, such
advances or receivables should be classified as current assets,
otherwise noncurrent.
b. Advances to affiliates are usually treated as long-term
investments.
c. Advances to supplier for the acquisition of merchandise are
current assets.
d. Subscription Receivables current asset if collectible within one
year, otherwise noncurrent.
e. Creditor’s accounts may have debit balances as a result of
overpayment or returns and allowances. It is classified as
current asset.
a. Accounts Payable with debit balance.
i. If not material, offset against the creditors
accounts with credit balances and only net
accounts payable may be presented.
f. Special Deposits on contract bids normally are classified as
noncurrent assets.
a. if collectible currently, current assets.
g. Accrued income are usually current asset such as:
a. Dividend Receivable
b. Accrued Rent Receivable
c. Accrued Royalties Receivable
d. Accrued interest receivable on bond investment.
h. Claims Receivable are current asset such as
a. Claims against common carriers for losses or damages
b. Claim for rebates and tax refunds
c. Claim from insurance entity


Credit balances in accounts receivables resulting from:
o Overpayments
o Returns and allowances
o Advance payments from customers
Classified as current liabilities and are not offset against the
debit balances in other customers’ accounts, except when the
same is not material.
Initial measurement of Accounts Receivable




Recognized initially at fair value plus transaction costs that are
directly attributable to the acquisition.
o The fair value of the asset is usually the transaction
price, meaning the fair value of the consideration given.
For short-term receivables, the fair value is equal to the face
amount or original invoice amount.
Cash flows relating to short-term receivables are not
discounted.
Accounts receivable – shall be measured initially at face
amount or original invoice amount.
Subsequent Measurement


Amortized cost.
o It is the net realizable value of accounts receivable.
The net realizable value of accounts receivable is the amount of
cash expected to be collected or the estimated recoverable
amount.
Net Realizable Value
Customers’ Credit balances
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683


The initial amount recognized for accounts receivable shall be
reduced by adjustments which in the ordinary course of
business will reduce the amount recoverable from the customer.
In estimating the net realizable value of trade accounts
receivables, the following deductions are made:
o Allowance for freight charge
o Allowance for sales return
o Allowance for sales discount
o Allowance for doubtful accounts

Example.
An entity has a 100,000 account receivable at the end of
accounting period. The terms are 2/10, n/30, FOB destination
and freight collect. The customer paid freight charge of 5,000.
Terms related to freight charge




FOB destination
o Owner of the goods is the seller
o Seller should pay the freight
o Buyer will only own it upon receipt or when it reached the
company.
FOB shipping point
o Owner of goods while in transit is the buyer
o Buyer should pay the freight
o Buyer will be the owner upon shipment.
Freight Collect
o Freight charges is not yet paid
o Buyer actually paid
Freight prepaid
o Paid by the seller.
Accounting for Freight Charge

Sometimes, goods are sold FOB destination but shipped
freight collect with the understanding that the buyer will pay for
the freight charge and deduct the same when remittance is
made by him.
On the part of the seller, the freight charge is recorded by
debiting freight out and crediting allowance for freight charge.
To record the sale:
Accounts Receivable
100,000
Freight out
5,000
Sales
100,000
Allowance for freight charge
5,000
To record the collection within the discount period:
Cash
93,000
Sales Discount
2,000
Allowance for freight charge
5,000
Accounts Receivable
100,000
Allowance for Sales Returns

Measurement of accounts receivables shall also recognize the
probability that some customers will return goods that are
unsatisfactory or will make other claims requiring reduction in
the amount due as in the case of shipment shortages and
defects.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Accounts Receivable
100,000
Example
An amount of 50,000 of the total accounts receivable at yearend represents selling price of goods that will probably returned.
The journal entry to recognize the probable return is:
Sales Return
50,000
Allowance for Sales Return
50,000
Sales Discount



Illustration – Net Method


Cash discounts.
It is known as sales discount for the seller, and purchase
discount for the buyer.
Methods of recording credit sales
o Gross Method – recorded at gross amount.
o Net Method – recorded at net amount

Illustration – Gross Method



Sale of Merchandise for 100,000, terms 5/10, n/30.
Accounts Receivable
100,000
Sales
100,000
Assume collection is made within the discount period
Cash
95,000
Sales Discount
5,000
Accounts Receivable
100,000

Sale of merchandise for P100,000, terms 5/10, n/30.
Accounts Receivable
95,000
Sales
95,000
Assume collection is made within the discount period.
Cash
95,000
Accounts Receivable
95,000
Assume collection is made beyond the discount period
Cash
100,000
Accounts Receivable
95,000
Sales Discount forfeited
5,000
The sales discount forfeited is classified as other income.
Allowance for Sales Discount
Of the accounts receivable of 1,000,000 at the end of the
reporting period, it is estimated that the discounts to be taken
will amount to 50,000.
Sales Discount
50,000
Allowance for Sales Discount
50,000
Assume collection is made beyond the discount period.
Cash
100,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
The adjustment may be reversed at the beginning of the next
period in order that discounts can then be charged normally to
sales discount account.

Accounting for Bad Debts


Two methods:
o Allowance method
o Direct write-off method

Allowance Method



Requires recognition of a bad debt loss if the accounts are
doubtful of collection.
Doubtful Accounts Expense
xxx
ADA
xxx
The ADA is deduction from A/R
If the allowance was found worthless
ADA
xxx
A/R
xxx
Recoveries of Accounts written off


Illustration – Allowance Method
The same accounts that are previously written off are
unexpectedly recovered or collected.
A/R
30,000
ADA
30,000
Cash
30,000
A/R
30,000
Direct Write-Off Method




Requires recognition of a bad debt loss only when the accounts
proved to be worthless or uncollectible.
It is used by the BIR for tax purposes.
It violates the matching principle.
Not permitted under IFRS
Illustration – Direct Write-off Method

If a collection is made on account previously written off as
uncollectible, the procedure is first to recharge the customer’s
account.
Simple reverse the original entry.
Accounts of 30,000 are considered doubtful of collection
Doubtful Accounts
30,000
ADA
30,000
The accounts are subsequently discovered to be worthless or
uncollectible.
ADA
30,000
A/R
30,000


Accounts of 30,000 are considered doubtful of collection
No entry
The accounts proved to be worthless.
Bad debts expense
30,000
A/R
30,000
The same accounts that are previously written off as worthless
are recovered and collected.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
A/R
Bad Debts expense
Cash
A/R
30,000
30,000
30,000
30,000
1. Aging of Accounts Receivable or “statement of financial
position approach”
2. Percent of Accounts Receivable or also “statement of
financial position approach”
3. Percent of Sales or “income statement approach”
AGING OF ACCOUNTS RECEIVABLES
Chapter 5 Estimation of Doubtful Accounts

Involves analysis where accounts are classified into not due or
past due.
Methods of Estimating Doubtful Accounts
a.
b.
c.
d.





Not due
1 to 30 days past due
31 to 60 days past due
61 – 90 days past due
e.
f.
g.
h.
The allowance is determined by multiplying the total of each
classification by the rate or percent of loss experienced by
the entity for each category.
The major argument for the use of this method is the more
accurate and scientific computation of the allowance for doubtful
accounts.
It has the advantage of presenting fairly the accounts receivable
in the statement of financial position at net realizable value.
The objection of this method is it violates the matching process.
This method is time consuming if a large number of accounts
are involved.
Illustration
91-120 days past due
121 to 180 days past due
181 to 365 past due
More than 1 year past due
The following data are summarized in aging the accounts
receivable at the end of the period:
Balance
Not due
1-30 days
past due
31-60 days
past due
61-90 days
past due
91-180 days
past due
181-365
days past
due
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
500,000
300,000
Experience
rate
1%
2%
Required
Allowance
5,000
6,000
200,000
4%
8,000
100,000
7%
7,000
50,000
10%
5,000
30,000
30%
9,000
lOMoARcPSD|6989683
More than 1
year
20,000
50%
1,200,000
o Moreover, the loss experience rate may be difficult to
obtain and may not be reliable.
10,000
50,000
Illustration
The amount computed, which is 50,000 is the required balance
of ADA at the end of the period.
The balance of accounts receivable is 2,000,000 and the credit
balance in the allowance for doubtful accounts is 10,000.
Doubtful accounts are estimated at 3% of accounts receivable.
Thus, if the ADA has a credit balance of 10,000 before the
adjustment, the doubtful accounts expense is determined as
follows:
Required Allowance
50,000
Less: ADA before adjustment
10,000
Doubtful Accounts Expense
40,000
The Journal Entry to record the doubtful accounts expense is:
Doubtful Accounts Expense
40,000
ADA
40,000
Required Allowance (2,000,000)(3%)
60,000
Less: Credit Balance in Allowance
10,000
Doubtful Accounts Expense
50,000
Journal Entry:
Doubtful Accounts Expense
ADA
When is an Account Past Due


Credit terms will determine whether an account is past due.
o For example: 2/10, n/30, and the account is 45 years old,
it is considered to be 15 days past due.
The term “past due” refers to the period beyond the maximum
credit term.



PERCENT OF SALES




PERCENT OF ACCOUNTS RECEIVABLES
A certain rate is multiplied by the open accounts at the end of
the period in order to get the required allowance balance.
It has the advantage of presenting accounts receivable at
estimated NRV. The approach is also simple to apply.
This approach violates the principle of matching bad debt
loss against the sale revenue.
50,000
50,000


The amount of sales for the year is multiplied by a certain rate to
get the doubtful accounts expense.
The computed amount is the amount of doubtful accounts
expense and not the required ADA.
The rate may be applied on credit sales or total sales.
The rate to be used is computed by dividing bad debt losses
in prior years by the charge sales of prior years. (in case na
hindi given yung rate)
The rate obtain is multiplied by the current year’s charge sales
to arrive at the doubtful accounts expense.
There is no substantial difference if in the computation of the
rate, the basis is total sales of the prior periods.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683


o In such case, the rate obtained is multiplied by the
current year’s total sales to get the doubtful accounts
expense.
This procedure of determining the rate has the advantage of
eliminating the extra work of making a record of cash sales and
credit sales.
However, this approach may prove unsatisfactory when there is
a considerable fluctuation in the proportion of cash and credit
sales periodically.
Accounts Receivable
Sales
Sales Return
Allowance for doubtful accounts
If doubtful accounts are estimated at 1% of net sales, the
doubtful accounts expense is 50,000 or (1% of 5,000,000)
Argument for Percent of Sales Method



When the “percent of sales” method is used in computing
doubtful accounts, proper matching of cost against revenue
is achieved.
This is so because bad debt loss is directly related to sales and
reported in the year of sale.
This method is an income statement approach, because it
favors the income statement.
Argument against percent of sales method.



Doubtful Accounts Expense
50,000
ADA
50,000
The allowance of doubtful accounts now have a total balance of
70,000.
Correction in Allowance for Doubtful Accounts


The accounts receivable may not be shown at estimated
realizable value because the ADA may prove excessive or
inadequate.
Thus, it becomes necessary that from time to time the accounts
should be “aged” to ascertain the probable loss.
As a consequence, the rate applied on sales should be revised
accordingly.
Illustration
The following accounts are gathered from the ledger:
1,000,000
5,050,000
50,000
20,000

The correction is to be reported in the income statement either
as an addition to or subtraction from doubtful accounts expense.
Inadequate allowance is adjusted as follows:
Doubtful Accounts
xxx
ADA
xxx
An excessive allowance is recorded as follows:
ADA
xxx
Doubtful Accounts
xxx
When the allowance is excessive, there is a corollary problem
when the discrepancy is more than the debit balance in the
doubtful accounts expense account.
For example, if the amount of correction due to excessive
allowance is 30,000 and the DAE has a debit balance of 20,000,
following the above procedure will result to a credit balance in
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
the doubtful accounts expense account of 10,000. Such balance
is obviously abnormal.
The 10,000 difference should be treated in the determination of
income of the current period.
ADA
30,000
DAE
Miscellaneous Income
20,000
10,000
Debit balance in allowance account



DAE
60,000
ADA
Required allowance
Add: DR balance in allowance
20,000
DAE
60,000
40,000
60,000
In certain instances, it may have a debit balance because it may
be the policy of the entity to adjust the allowance at the end of
the period and record accounts written off during the year.
For Example, on Jan 1, the allowance account before
adjustment has a credit balance of 30,000 and during the year,
an account of 50,000 is written off and recorded as follows:
ADA
50,000
A/R
50,000
Thus, on Dec. 31, the allowance has a debit balance of 20,000
before adjustment

To continue the illustration, if on Dec. 31, the required
allowance is 40,000, the adjustment should be:
The debit balance does not indicate that the allowance is
inadequate because the accounts written off during the year and
charged to the allowance may have arisen from current year
sales.
Thus, the charge to the allowance account simply predates the
recording of doubtful accounts.
At the end of the period, when adjustments are made, the debit
balance should be considered.
Notes Receivable
Type of Receivable
Initial Measurement
Short
Term
Receivable
Long Term interest
bearing note
reasonable interest
rate (above market
rate)
Face Amount
Subsequent
Measurement
Face Amount
Face Amount
Face Amount
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Long Term interest
bearing note
unreasonable (below
market rate)
Order of Priority:
1. F.V. of
property given,
cash price
equivalent.
2. F.V. of
property
received or P.V.
Long
term Order of Priority:
noninterest bearing
1. F.V. of property
note
given, cash
price
equivalent.
2. F.V. of
property
received or P.V.
Amortized Cost
Effective Interest
Method
Amortized Cost
Effective Interest
Method
Future Value=PV (1+ i)t
Example what will be paid on maturity = 1,404,928. The total
interest received is 404,928.
Example – Noninterest Bearing Note
An entity manufactures and sells machinery. On Jan 1, 2020,
the entity sold machinery costing 280,000 for 400,000. The
buyer signed a non-interest bearing note for 400,000 payable in
four equal installments every December 31. The cash sale price
of the machinery is 350,000.
 Long-term noninterest bearing note. And may cash sales price na
given.
Face Value of Note
Present Value – Cash Sale Price
Unearned Interest Income
400,000
350,000
50,000
Example:
An entity owned a tract of land costing 800,000 and sold the land
for 1,000,000. The entity received a 3-year note for 1,000,000 plus
interest of 12% compounded annually.
 The note is a long term interest bearing note. So the 1,000,000
is its present value.
The Lumpsum formula can be used in this problem when
determining the FUTURE value of the note and interest per
year.
2020
2021
2022
2023
Note
Receivable
400,000
300,000
200,000
100,000
1,000,000
Fraction
4/10
3/10
2/10
1/10
Interest
Income
20,000
15,000
10,000
5,000
50,000
What is the current portion of the note on December 31, 2020?
NR – Current Portion
100,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Unearned Interest Income (15,000)
Carrying Amount
85,000
Jan 1, 20x2
Xx
Xx
xx
xx
Tables to be used:
For Lumpsum:
A
B
Interest Income
Unearned
(c x rate)
Interest Income
(bal – a)
xx
xx
xx
xx
0
Date
Jan 1, 20x1
Dec 31, 20x1
Sa dulo
C
Present value
(bal + a)
xx
xx
Amount of loan
For Ordinary Annuity
Date
Collectio
n
Jan 1, 20x1
Dec 31,
20x1
Sa dulo
Interest
Income
Amortizatio
n
xx
Xx
xx
Present
Value
xx
xx
xx
xx
xx
xx
For Annuity Due
Date
Jan 1, 20x1
Jan 1, 20x1
Loans Receivables
Initial Carrying Amount of Loan is:
Principal Amount
Direct Origination Cost
Origination Fees Received
Initial Carrying Amount
xx
xx
(xx)
xxx
Yung initial carrying amount din yung P.V. sa effective interest
method table.
Principal amount less Initial Carrying amount = unearned
interest income
If ang given lang is Principal tas may nominal at effective rate. Pag
tinanong ang what is the amount of cash paid to the borrower or initial
carrying amount ganto gagawin:
Ex. Dec. 31, 2019, London Bank granted a 5,000,000 loan to a
borrower with 10% stated rate payable annually and maturing in 5
years. The loan was discounted at the market interest rate of 12%.
Initial carrying amount of loan is?
Collectio
n
Xx
Interest
Income
Amortizatio
n
xx
Present
Value
xx
xx
PV of Principal = (5,000,000)(.57) = 2,850,000
PV of Interest = (500,000)(3.6) =
1,800,000
Initial Carrying Amount
4,650,000
Loan Impairment:
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683





Kalian gagamit ng PV of Principal plus PV of Interest?
o Kapag ma cocollect mo both interest and principal.
Kailan gagamit ng PV of Principal lang
o If principal nalang ma cocollect mo.
Be careful sa date kung kalian tinatanong yung carrying
amount. Minsan kase 2019 yung loan tas 2021 carrying amount
yung tinatanong.
Impairment loss is always =
Carrying Amount on
the year of impairment
xx
Less: Present Value
(xx)
Impairment Loss
(xx)
If inaccrue ni bank yung interest, kasama yun sa carrying
amount.
Receivable Financing – Pledge, Assignment, Factoring
PLEDGE
 In banking, if it is discounted, it means that interest from the loan is
deducted in advance.
o Example: On Nov. 1, 2020, entity borrowed 1,000,000. The
term is 1 year and discounted at 12%. The entity pledged A/R
for 2,000,000.
Cash
880,000
Discount on Note Payable
120,000
Note Payable Bank
1,000,000
Face Value of Loan
1,000,000
Interest in Advance (12%)(1m) (120,000)
Net Proceeds
880,000
o Subsequent Entries:
Nov 31, 2020
Interest Expense
10,000
Note Payable
10,000
Dec 31, 2020
Interest Expense
10,000
Note Payable
10,000
(120,000/12) = 10,000 per month.
Carrying Amount of Note Payable at Year end:
Note Payable – Bank
1,000,000
Discount on Note Payable(120k-20K)
(100,000)
Carrying Amount
900,000
ASSIGNMENT





A more formal type of pledging.
Assignor = Borrower, Assignee = Lender
Notification Basis = Customer is paying to Assignee or Lender of
Loan.
Non – Notification Bases = Customer is paying to Assignor and
assignor remits the payment to the assignee.
There is transfer of rights with regards to A/R but there is no
transfer of ownership.
Non-notification Basis:
Apr. 1. An entity assigned 700,000 of A/R to a bank under a
non-notification basis. The bank advances 80% less a service
charge of 5,000. The entity signed a promissory note that
provides for interest of 1% per month on the unpaid loan
balance.
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
To separate the assigned accounts.
A/R – Assigned
700,000
A/R
700,000
To record the Loan:
Cash (700,000)(80%) – 5,000
555,000
Service Charge
5,000
Note-Payable Bank
560,000
5. Issued credit memo for sales return to a customer whose
account was assigned, 20,000:
Sales Return
20,000
A/R – Assigned
20,000
10. Collected 300,000 of the assigned account less 2%
discount.
Cash
294,000
Sales Discount (2%)(300,000)
6,000
A/R – Assigned
300,000
30. Remitted Total Collections to the bank plus interest for 1
month:
Note Payable Bank
294,000
Interest Expense (1%)(560k)
5,600
Cash
299,600
May 7. Assigned Accounts of 15,000 proved worthless
ADA
15,000
A/R
15,000
20. Collected 300,000 of the assigned Accounts
Cash
300,000
A/R – Assigned
300,000
30. Remitted the total amount due the bank to pay off the loan
balance plus interest for one month.
Note Payable – Bank (560-294) 266,000
Interest Expense (1%)(266,000)
2,660
Cash
268,660
To transfer the remaining balance of assigned accounts to A/R
Accounts Receivable
65,000
A/R – Assigned
65,000
Notification Basis:
July 1. An entity assigned 1,000,000 of A/R to a bank under a
notification arrangement. The bank loans 80% less 4% service
charge on the gross amount assigned. The entity signed a
promissory note that provides for 1% interest per month on the
unpaid loan balance.
To separate accounts assigned:
A/R – Assigned
1,000,000
A/R
1,000,000
July 1 To record the loan:
Cash (1m)(80%) – 40,000
760,000
Service Charge
40,000
Note Payable – Bank
800,000
July 31 Received notice from bank that 600,000 of the assigned
accounts were collected less 2% discount. A check was sent to
the bank for the interest due.
Note Payable – Bank
588,000
Sales Discount (2% x 600,000)
12,000
A/R – Assigned
600,000
Aug 31 Received notice from bank that 300,000 of the assigned
accounts were collected. Final settlement was made by the
bank for the excess collections together with the uncollected
assigned accounts of 100,000.
Cash
85,880
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
Interest Expense
Note Payable – Bank
A/R – Assinged
300,000
A/R
2,120
212,000
100,000
A/R – assigned
100,000
Computation:
Loan from Bank
Less: July Collection by bank
Balance due the bank
August collection by bank
Less: Loan Balance
Excess Collection
Less: Interest (1% x 212,000)
Remittance from bank
800,000
588,000
212,000
300,000
(212,000)
88,000
2,120
85,880
Equity in assigned accounts
 A/R assigned less Note Payable Outstanding.
FACTORING
 Sale of accounts receivable on a without recourse notification
basis.
 There is transfer of ownership.
 The entity sells accounts receivable to a factor (bank or finance
entity)
 Casual Factoring or Continuing Agreement
 Factor’s Holdback – factor withhold a predetermined amount as
protection against customer returns and allowances and other
special adjustments.
 If hinahanap yung net realizable value, yung factored amounts ay
di kasama.
 “Weighted Average” sa interest – use 365 days.
Cash Received from Factoring
Gross Amount
Less: Sales discount
xx
Commission
Factor’s Holdback
Factoring Fee
xx
Interest
xx
Cash Received
xxx
xx
xx
(xx)
xxx
Initial loss from Factoring
Factoring Fee
xx
Interest
xx
Recourse Obligation
xx
Sales Discount
xx
Commission
xx
Loss Initially Recognized
xxx
 Wala yung Factor’s holdback sa initial loss.
If accounts are not collected by the factor
 The loss on factoring will include the recourse obligation. Hindi
siya ileless. As is na yung initial loss
If accounts are collected
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
The recourse obligation is not included in the loss on factoring i
miminus siya sa initial loss on factoring.
Step 5 = 604,800 – 610,000 = (5,200).
Receivable Financing – Discounting of Notes Receivable
 5 Steps:
o Maturity Value = Face Amount + Total Interest
o Discount = Maturity Value x Discount Rate x Unexpired Term
(exclude the 1st day and include the last day)
o Net Proceeds = M.V. less Discount
o Carrying Amount = Face + Accrued Interest
o Gain or Loss = Proceeds less Carrying Amount
 Example:
On June 30. Rain Company discounted at the bank a customer’s
600,000,
6-month, 10% note receivable dated April 30 2020. The bank
discounted the note at 12%
o What amount should be reported as proceeds from the
discounted note?
o Prepare Necessary entries
o Prepare entries assuming that the note is paid by the maker
on maturity
o Prepare entries assuming that the note is dishonored by the
maker.
With Recourse
Conditional Sale
Borrowing
Cash
604,800
Cash
604,800
604,800
Loss
5,200
Loss
5,200
5,200
NR
600,000
NR 600,000
600,000
Int.Inc 10,000
Int.Inc
Int Inc
10,000
No Entry
600k
NRD 600,000
NR
No Entry
Cash
Int Exp
Liab for NRD
10,000
Liab for NRD
600,000
A/R 634,000
Cash
Secured
NR
600K
A/R 634,000
634,000
Cash
634,000
NRD 600,000
Liab for NRD 600,000
NR
600,000
NR
Step 1. M.V. = 600,000 + (600,000)(10%)(6/12) = 630,000
Step 2. Discount = 630,000 x 12% x (4/12) = 25,200
Step 3. Net Proceeds = 630,000 – 25,200 = 604,800
Step 4. Carrying Amount = 600,000 + (30,000 interest)/6) x 2
months accrued = 610,000
600,000
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
 Shall not include foreign exchange differences.
 If tinanong, what amount of cash was received from the bank? Net
proceeds yon.X`
INVENTORIES




Held for sale in the ordinary course of business.
In process of production for such sale.
Materials or supplies to be consumed in the production process
Consumed in rendering services.
CLASSES OF INVENTORIES
 Trading Concern
o Merchandise Inventory
 Manufacturing concern
o Finished Goods
o Work in Process/ Goods in Process
o Raw Materials
o Factory or manufacturing supplies
Method
Date of
Purchase
Gross
Net
Allowanc
e
Gross
Net
Net
Payment
w/
discount
Net
Net
Net
Payment
w/out
discount
Gross
Net
Net
 Freight
o If the perspective is that we are the buyer, and the term is FOB
Shipping point, the freight charge is capitalized as cost of
inventory.
 Import Duties and Irrevocable Purchase Taxes
o Exclude the VAT
 Handling and Other Cost Directly Attributable to the Acquisition.
COST OF CONVERSION
 Direct Labor + Overhead
Other Cost
 Necessary to bring the inventories to their present location and
condition
 Purchase Discount Loss – part of other expense in Income
Statement.
INITIAL MEASUREMENT
 Cost of Purchase
o Purchase price
 subject to Trade discount & Cash discount.
 Methods of Recording Cash Discounts: Gross, Net,
Allowance
Cost of Item Excluded from Cost of Inventories
 Abnormal blabla
 Storage cost for Finished Goods (unless necessary for production
process before a further production stage)
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683









Administrative Overhead
Selling Expense
Interest Expense
Goods held on consignment
“Specifically segregated per sale contract”, if included in count,
deduct mo.
Items in receiving department refused because of damage
Freight is on account of seller “kay seller yung inventory”
Items included in count, damaged and unsaleable “if included,
deduct mo”
Unexpired insurance (asset kase to prepaid insurance)
Goods Includible in Inventory
 Goods owned & on hand
 Goods purchased and in transit FOB Shipping Point (tayo ang
buyer)
 Goods sold and in transit FOB Destination (tayo ang seller)
 Goods out on consignment
 Goods in the hands of salesman or agent
 Goods held by customer on approval or on trial
 Items in the shipping Department
Title or Control
 FOB Destination – Inventory of the Seller (except if received)
 FOB Shipping point – Inventory of the buyer (except if not yet
shipped)
CONSIGNED GOODS
 Goods out on Consignment
o Inventory of the entity
o Cost = Costs + Handling cost + Shipping Costs
 Goods held on Consignment
o Not part of the entity’s inventory
Special Orders
 If still in process – inventory of the seller
 If finished – Inventory of the buyer even if not yet delivered
 Stock items of seller – not considered as special orders. If
undelivered, inventory of the seller.
Installment Sales
 Inventory of the buyer.
Conditional Sale
 Goods sold with buyback agreement – Inventory of the seller.
 Goods sold with refund orders
o If the seller can estimate future returns – inventory of the
Buyer
o If items are unpredictable – inventory of the seller until the
expiration of refund period.
 Goods held on approval – Inventory of the Seller
 Goods held for storage/processing/shipment – inventory of the
Seller
(note)
Contract of Sale vs Contract to Sell
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
lOMoARcPSD|6989683
 Contract of sale – inventory of the buyer regardless of payment.
 Contract to sell – inventory of the seller until full payment, there is
transfer of title upon full payment.
Items Ordered – tayo ang buyer
Items Shipped – tayo ang seller
INVENTORY SHORTAGE & OVERAGE
 Overage: Physical Count > Ledger Balance
 Shortage: Physical Count < Ledger Balance
 All accounts for inventory is included except sales allowance and
sales discount.
 Sales returns – increases the number of inventory (add to)
 New weighted average unit cost must be computed after every
purchase and purchase returns.
 GOLDEN FORMULA
TGAS
xxx
Less: Ending Inventory (xx)
COGS
xxx
Normal Overage/Shortage
 Charged to inventory short or over then closed to COGS
Abnormal Overage/ Shortage
 Theft, ganon.
 Charged to Gain or Loss and becomes part of other expenses or
income.
FAS = Shipping Point
CIF = Shipping Point
Ex-Ship = Destination
FOB Buyer = Destination
FOB Seller = Shipping Point
40% above cost = GP based on Cost
Normally sell for or Marked to sell = multiply to cost ratio.
INVENTORY COST FLOW
 FIFO
 Weighted Average – Periodic
 Moving Average – Perpetual
 TGAS in PESO / TGAS in Units
Inventory beg.
Purchases 3/7
Purchases
7/15
Sale 5/20
Sale 6/30
Sale 9/17
Inventory End
Units
250
200
275
Unit Cost
10.5
11
11.75
(120)
(55)
(250)
300
FIFO Method
Ending Inventory = 300
TGAS = 725
Therefore, COGS = 425
Ending Inventory =
(275)(11.75) = 3,231.25
(25)(11)
= 275
Total
3,506.25
COGS
(250)(10.5) = 2,625
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)
Selling Price
14
15
16
lOMoARcPSD|6989683
(175)(11)
TOTAL
= 1,925
4,550
Purchase Returns
Abnormal chuchu
Departmental In
Departmental out
Markup
Markup Cancellation
Mark Down
Mark
Down
Cancellation
TGAS
Weighted Average Method
TGAS in Peso/ TGAS in Units
8,056.25/725 = 11.11
Ending Inventory = (300)(11.11) = 3,333
Cost of Goods Sold = (425)(11.11) = 4,721
LCNRV
 NRV = Selling price less Estimated cost to complete less
Estimated Cost to sell.
Inventory Estimation
 GP METHOD
 RETAIL METHOD
GP METHOD


(xx)
(xx)
xx
(xx)
xx
(xx)
(xx)
xx
xx
xx
Sales
Sales Returns
Employee Discount
Normal chuchu
End inventory @
Retail
xxx
(xx)
xx
xx
xx
XXX
Cost = TGAS @ Cost / TGAS @ RETAIL
Based on sales = GP = (40%)(Net Sales)
Based on COGS = GP = (40/140)(Net Sales)
Average Method = Included lahat
Conventional Method = From Beginning inventory to markup
cancellation.
FIFO = di kasama beginning inventory
RETAIL METHOD
Beginning Inventory
Purchases
Purchase Discount
Freight In
Purchase Allowance
(xx)
(xx)
xx
(xx)
Cost
xx
xx
(xx)
xx
(xx)
Retail
xx
xx
Downloaded by DAY6 & SEVENTEEN (altabanoerica@gmail.com)