CASH AND CASH EQUIVALENTS
CASH (Cash on hand, Cash in bank, and ▪ Three-year BSP treasury bill purchased three
Cash fund) months before maturity date
includes money (coins and paper money) and ▪ Three-month bank deposit
any other negotiable instrument (checks, bank ▪ Three-month money market instrument
drafts, and money order) that is payable in ▪ Preference shares with specified redemption
money and acceptable by the bank for deposit date and acquired three months before
and immediate credit. redemption date
▪ Certificates of deposit (having original
Included in cash: maturities of 90 days or less)
• Coins and bills in legal tender by BSP
• Checks (subject to certain conditions) • Bank
drafts
• Money orders (money market funds)
Example Analysis of a Check
The date of the check is on October 15, 2014
and has an amount of P15,000. The check is not
certified by the bank. Therefore:
▪ Before October 15, 2014, the check is post-
dated and the maker should have at least
P15,000 in his account.
▪ On October 15, 2014, if the maker has failed
to have at least P15,000 in his account, the Time Deposits:
check would bounce or marked as NSF check. ✔ Time deposits are locked savings that earn
Once the check is deposited to the bank, the interest.
drawer will receive a notice of DAIF (drawn ✔ If the maturity is 3 months or less → Cash
against insufficient funds) Equivalent
▪ After October 15, 2014, assuming the check ✔ If the maturity is between 3 months and 1
has sufficient funds, it will be an antedated year → Short-Term Investment
check. ✔ If the maturity is more than 1 year → Long-
▪ On April 15, 2015 (six months after the check Term Investment
date), assuming the check has not been
deposited nor encashed, it is deemed as Accounting for cash shortage
expired and it will become a stale check. Cash short or over xx
Cash xx
CASH EQUIVALENTS Accounting for cash overage
short-term and highly liquid investments that Cash xx
are readily convertible into cash and so near Cash short or over xx
their maturity that they present insignificant
risk of changes in value because of changes in
interest rates.
Included in cash equivalents:
▪ Three-month BSP treasury bill
BANK RECONCILIATION
Bank reconciliation is a statement which brings
into agreement the cash balance per book and
cash balance per bank.
RECONCILING ITEMS:
1. Book Reconciling Items:
a) Credit memos- refer to items not
representing deposits credited by the bank to
the account of the depositor but not yet
recorded by the depositor as cash receipts.
Examples:
▪ N/R collected by bank in favor of the
depositor and credited to the account of the
depositor
▪ Proceeds of bank loan credited to the account
of the depositor
▪ Matured time deposits transferred by the
bank to the current account of the depositor
b) Debit memos- refer to items w/c are charged
or debited by the bank to the account of the
depositor but not yet recorded by the
depositor as cash disbursements.
Examples:
▪ NSF checks
▪ Technically defective checks
▪ Bank service charges
▪ Reduction of loan- payment of loan
2. Bank Reconciling Items:
a) Deposits in transit – are collections already
recorded by the depositor as cash receipts but
not yet reflected on the bank statement.
b) Outstanding checks- already recorded by the
depositor as cash disbursements but not yet
reflected on the bank statement.
Note: certified check should be deducted from
outstanding check (if included therein) because
they are no longer outstanding for bank recon
purposes.
RECEIVABLE (TRADE RECEIVABLES)
Trade Receivables - claims arising from the sale of merchandise or services.
- always current
- 12 months or more is irrelevant if part of an operating system.
ACCOUNTS RECEIVABLE
Open accounts not supported by promissory notes
- ( always current)
Accounts receivable arise from credit sales. The amount to be recorded as accounts receivable from
sales on account shall be the “Invoice Price”
NOTES RECEIVABLE
Supported by formal promises to pay.
Example:
An item is sold to a credit customer under terms of 2/15 and net 30, FOB shipping point terms with
a list selling price of P2,000,000 with trade discounts of 20% and 10%. The Invoice price is:
1, 440, 000 pesos
RECEIVABLE (NONTRADE RECEIVABLES)
Nontrade Receivables - claims arising from the sale of merchandise or services.
- 12 months or less (CA)
- more than 12 months (NCA)
- identify the practical application
LOANS RECEIVABLES
For banks and other financial institutions, it is loaned to:
Accounts receivable xx
Customer’s Credit Balances xx
Accounts receivable made to heterogeneous customers and the repayment periods are frequently
longer or over several years.
ESTIMATION OF DOUBTFUL ACOUNTS
METHODS OF ESTIMATING BAD DEBTS
Simplified Explanation of Methods for Estimating Doubtful Accounts
When a company sells on credit, some customers might not pay. To account for this, businesses
estimate bad debts using three main methods:
1. Percentage of Net Credit Sales
This method estimates bad debt expense based on a percentage of total credit sales during
the period.
It ignores the existing balance in the Allowance for Doubtful Accounts and focuses only on
current sales.
Advantage: Matches bad debts directly with sales revenue, aligning with the income
statement approach.
Disadvantage: It might not accurately reflect the true net realizable value (NRV) of
accounts receivable.
Example:
If a company has ₱1,000,000 in credit sales and estimates 2% as uncollectible, it records:
Bad Debt Expense = ₱1,000,000 × 2% = ₱20,000
2. Percentage of Receivables
This method estimates the ending balance of the Allowance for Doubtful Accounts based on
a percentage of total accounts receivable.
The bad debt expense is the difference between the required balance and the current
allowance balance.
Advantage: Ensures that accounts receivable are reported at their most realistic value.
Disadvantage: Does not strictly match expenses with revenues since it is based on
receivables rather than sales.
Example:
If accounts receivable at year-end is ₱500,000 and 5% is expected to be uncollectible:
Required Allowance = ₱500,000 × 5% = ₱25,000
If the current allowance balance is ₱10,000, the bad debt expense is:
₱25,000 - ₱10,000 = ₱15,000
3. Aging of Receivables
This method classifies accounts based on how long they have been unpaid (e.g., current, 30
days past due, 60 days past due).
Different percentages are applied based on the likelihood of collection.
Advantage: More accurate as it considers the age of receivables.
Disadvantage: Time-consuming, especially for companies with many customers.
Example:
Age of Receivable Balance Estimated % Uncollectible Allowance Required
Current ₱200,000 1% ₱2,000
30 days past due ₱100,000 5% ₱5,000
60 days past due ₱50,000 10% ₱5,000
Total Allowance Needed ₱12,000
If the current allowance balance is ₱3,000, bad debt expense is:
₱12,000 - ₱3,000 = ₱9,000
Key Takeaways
✔ Percentage of Net Credit Sales: Estimates bad debt based on sales; good for matching expenses
with revenue.
✔ Percentage of Receivables: Estimates the final allowance balance based on accounts receivable;
ensures NRV is accurate.
✔ Aging of Receivables: More detailed version of the receivables method; considers how old the
debts are.
CONCEPT OF TIME VALUE OF MONEY
Present Value
• Sum of all of all future cash flows discounted using the prevailing market rate of interest for
similar notes
• The prevailing market rate of interest is the EFFECTIVE INTEREST RATE
Entities classify notes as either:
• Interest-bearing note have a stated interest rate, the contracted interest rate stated on
the promissory note. Other terms for stated interest rate include, nominal rate, coupon rate,
and face rate.
• Noninterest-bearing notes do not have stated interest rate because they include the
interest element as a part of the face amount. Its face amount represents an unspecified
principal and unspecified interest.
NOTES:
Dishonored Notes:
When a promissory note matures and is not paid.
Should removed from the notes receivable account and transferred to accounts receivable.
Short-term Notes Receivable
Shall be measured at FACE VALUE
Long-term Receivables
The fair value of a long-term receivable that bears a reasonable interest rate is equal to the
face amount
