

Chapter 1 – Equipment and devices used in the

system to expedite works, to provide
Accounting Process controls, and prevent fraud and
errors.
Accounting Information System- Involves  Records and reports necessary to
the collection, storage, and processing of gather, process, store and transmit
financial and accounting data used by internal and other information.
users to report information to interested
parties. The Accounting Cycle
Management Information System- It helps
 Represent the steps and procedures
the organization especially the managers to
used in recording transaction.
organize and evaluate information and data
provide information in a timely and efficient  Accounting cycle implements
manner. accounting process.
Major component of Management STEPS IN ACCOUNTING CYCLE:
Information System:
1. Identifying and analysing business
 Accounting information system documents or transaction – It’s the
steps where accountants gather
 Personnel information system
information from source documents
 Logistic information system and determines its effects.

Component of Accounting Information 2. Journalizing- The identified

System: accountable events are recorded in
the journals.
 Personnel directly involved in
accounting work. o Note that accountable
events are events only
 Accounting policies and standards. that has effects on asset,
liabilities and Owner’s
- Accounting principles are the
equity.
specific principles, bases,
conventions, rules, and practices 1. Posting- Information from the journal
applied by an entity in preparing are transferred to the ledger.
and presenting Financial
statement. o Ledger- A book
containing accounts in
- Not all PFRSs are applicable to which the classified and
an entity. An entity adopts and summarized information
applies only the PFRS that are from the journals is
relevant to its operations. posted as debit and
- The relevant PFRSs and the credits.
methods chosen are the entity’s 1. Preparing the Unadjusted Trial
accounting policies which are Balance- The equality of all debit and
disclosed in the notes to financial credit proved balance on the general
statement. ledger. It serves as the basis of
 Procedure or set of interrelated adjusting entries.
activities including the originating, 2. Preparing the Adjusting Entries-
processing, and reporting of financial The accounts are updated as of the
and related information, reporting date on an accrual basis by
 recording events often not signaled  Double-entry system- Transaction
by new source documents. are recorded in two parts; debit and
credit.
3. Preparing the Adjusted Trial
Balance- The equality of debit and  Duality- Views transaction as
credit are rechecked after adjustments having a two-fold effect on
are made. values.
4. Preparing the Financial  Equilibrium- Requires each
Statements- These are the means by transaction to be recorded in
which the information processed is terms of equal debit and
communicated to users. credit.
5. Closing the Books- To close Note: Double-entry system is in line with the
temporary accounts and transfer PFRSs because profit or loss is determined
profit to owner’s equity. through “Transaction Approach.”

6. Preparing the Post-Closing Trial Transaction Approach- Profit or Loss is

Balance- To check the equality of computed as the difference between income
debits and credits after the closing and expenses.
entries.
 Accounts recognize under
7. Recording of Reversing Entries- double-entry are assets,
To simplify the recording of liabilities, equity, income and
expenses.
certain regular transactions in the
next accounting period.  Books under double-entry are
journal, special journal.
Note: Steps 4, 6, 9, and 10 are optional. Ledger, subsidiary ledger and
Even though they are not required in the
another important books.
preparation of financial statement, for best
internal controls purposes. Trial balances  Single-entry system- Each
should be prepared. transaction is recorded through
simple narrative wherein transaction
ACCOUNTING RECORDS OF A
is not analyzed in terms of debit and
BUSINESS ENTITY
credit.
 Business or Source Documents-
Note: Single-entry system are not in line with
These are the original source
PFRSs because profit or loss is determined
materials evidencing a transaction. through capital maintenance approach or by
Example sales invoice, Official
comparing the beginning and ending
Receipts, vouchers, statement of balances.
accounts.
 Accounts recognized under
 Book of Journals single-entry are Cash,
 Journals- A detailed account Account’s receivables and
that chronologically record payables, and equity.
the transaction of the entity.  Books under single-entry are
 Ledger- Grouping of the cash books and subsidiary
entity’s accounts. ledger (personal accounts).

SYSTEMS OF RECORDING Journals

TRANSACTION
  By means of journal entries to record  Purchase of inventory for notes
transactions. payable, adjusting entries,
reversing entries, and other like
 A journal entry shows all the effects are recorded in the general ledger.
of a business transaction in terms of
debit and credit. TYPES OF JOURNAL ENTRIES:

 It is called as book of original entry.  Simple Journal Entry- Contains

single debit and credit.
 Compound Journal Entry- One
which contains two or more debit and
credit.
 Adjusting Entries- Used to make
adjustments if certain transaction to
TYPES OF JOURNALS: update certain accounts so that they
 General Journal- used to record reflect correct balances.
transaction other than those recorded  Closing Entries- Entries are made at
as special journal. the end of accounting period after all
adjustments have been made to zero-
out balance of temporary accounts
and update the retained earnings.
 Correcting Entries- Entries made to
correct accounting errors.
 Reclassification Entries- Used to
described moving an amount from
one general ledger to the other. It is a
 If special journal are not correction entry used to correct a
recognized, all transaction are misclassification or to change
recorded as general journal. classification of an entry.

Ledger
 Special Journal- These journals are
used to record transaction of high-  Posting- is the process of transferring
volume information. data from the journal to the
appropriate accounts in the ledger.
 Ledger- Also called “Book of
secondary entries or boof of financial
entries.” It is a systematize
compilation of a group of accounts.
KINDS OF LEDGER
 General Ledger- Contains all the
 Example of simple journal accounts appearing in the trial
includes cash receipts journals, balance. It is the “reference book” of
cash disbursement journals, the accounting system.
Payroll journals, and sales
journals.  It prepares data for basic
financial statements.
  Classified into two general
groups; Permanent and
Temporary accounts.

TYPES OF ACCOUNTS
 Real (Permanent) Account- Are not
closed in the end of accounting
 Subsidiary Ledger- provides a period. Found in the Statement of
breakdown of the balances of Financial Position.
controlling account.
 Nominal (Temporary) Account-
 Controlling account are Are closed at the end of accounting
most commonly used to period. Income and expenses account,
summarize receivables and drawings and dividends, income
payables. summary and suspense account (Cash
shortage or overage account).
 Mixed Account- Accounts that have
both nominal and real accounts.
Subject for adjustments.
 Includes unadjusted
prepayments and deferred
having both expired (nominal
account) and unexpired (real
account).
 Contra Account- Accounts that are
Accounts deducted from a related account.
Example of it is accumulated
 Is the basic storage of information in
depreciation.
accounting.
 Adjunct Account- Are accounts that
are added to a related account.
Example of this is premium on bonds
payable.

 T- Accounts – Are useful in making

Trial Balance
accounting analysis.  A list of accounts with their
respective debit and credit balances
 Chart of Accounts- Is a list of
and it verifies the equality of debit
accounts use by the entity. It is a list
and credit in the ledger at the end of
of all the accounts and their account
accounting period or anytime update.
numbers in the ledger.
 TYPES OF TRIAL BALANCE  Using wrong account with the same
normal balance as the correct
 Unadjusted Trial Balance- Prepared account. For example, a debit to
before adjusting entries. (Nominal, utilities expense is erroneously or
real and mixed account.) incorrectly debited to supplies
 Adjusted Trial Balance- Prepared expense.
after adjusting entries. (Nominal and  Wrong computation with the same
Real accounts.) erroneous amount posted to both the
 Post-Closing Trial Balance- debit and credit sides.
Prepared after closing entries. (Real Note: Wrong posting between two accounts
account only.) with the same normal balance are ignored in
ERRORS REVEALED BY TRIAL the computation since they don’t affect the
BALANCE totals in the trial balance.

 Journalizing or posting one-half of an

entry which means posting a debit Concepts:
without its corresponding credit or
vice versa.  The effect of an error on the trial
balance depends on the normal
 Recording one part of an entry at a balance of the account involved.
different amount than the other part
for example a debit with a correct  An erroneous debit to an account with
amount of P1200 and credit with a a normal debit balance will overstate
different amount of P200. that account while an erroneous credit
will understate that account.
 Transplacement error is committed
when the number of digits in an  An erroneous debit to an account with
amount is incorrectly increased or a normal credit balance will
decreased. For example, a P1,000 understate that account while an
amount is recorded as P100 or erroneous credit will overstate that
P10,000. account.

 Transposition error is committed  Overstatement is corrected by

when digits in an amount are Deduction while Understatement is
interchanged. For example, P15,625 corrected by Addition.
is recorded as P15,265 or P15, 526.
 Correction is made on a “Per
ERRORS NOT REVEALED IN TRIAL B. Account” basis, meaning if error
affects two accounts. Two separate
 These errors are not revealed in the corrections are made on those
trial balance and thus cannot affect accounts.
the equality of debit and credit but
still need to be rechecked for Adjusting Entries
accuracy.
 Are entries made prior tot the
 Omitting entirely the entry for a preparation of financial statements to
transaction. For example, a particular update certain accounts.
transaction wasn’t posted or
journalized.  It involves at least one statement of
financial position account and
 Journalizing or posting an entry statement of profit and loss and other
twice. comprehensive income for the period.
 PURPOSE OF ADJUSTING and preparation of financial
ENTRIES statements and closing entries.
 To take up unrecorded income and  It is not part of the ledger or the
expense of the period. (Accruals for journals, nor is it a financial
income and expenses.) statement.
 To split mixed account into their real
and nominal elements. (Adjustment
of payments and unearned income.) HEADING OF THE WORKSHEET

METHODS OF INITIAL RECORDING  Name of the entity

OF INCOME AND EXPENSE  Title of the report
INCOME:
 Date covered by the report
 Liability Method- Under this
Concepts:
method, advanced collection of
income is initially credited to a  In all trial balances, total debits
liability account. At the end of the equal total credits.
period, earned portion is recognize
as income while unearned portion  In the income statement columns,
remains as liability. if total credits exceed debits, there
is profit. If is the opposite, there is
 Income Method- Under this method,
advanced collection is initially loss.
credited to an income account. At  In the statement of financial
the end of period, the unearned
position columns (Balance Sheet),
portion is recognized as liability
while the earned portion remains
if the total debits exceed total
as income. credit, there is profit. If it is the
opposite, there is loss.
EXPENSES:
 Asset Method- Prepayments of
Financial Statements
expenses are initially debited to an  Are the means by which the
asset account. At the end of information accumulated and
reporting period, incurred portion processed in financial accounting is
or expired portion is recognize as periodically communicated to the
expense while unused portion users.
remains as asset.
 Financial statement are the end
 Expense Method- Prepayments of product of the accounting process.
expenses are initially debited to an
expense account. At the end of COMPLETE SET OF FINANCIAL
reporting period, the unused portion STATEMENTS:
or unexpired portion is recognized
 Statement of financial position
as asset while expired portion
remains as expense.  Statement of profit or loss and
other comprehensive income
Worksheet
 Statement of changes in equity
 An analytical device used to facilitate
the gathering of data for adjustments  Statement of cash flows
  Notes; enter into the determination of profit
or loss.
- Comparative information
 Accrued expense and accrued interest
 Additional statement of financial expense income are terms used in
position (required only when traditional accounting that refer to
certain instances occur). “Interest payable” and “Interest
HEADING OF FINANCIAL receivables,” respectively. These are
STATEMENT real accounts.
 The “unrealized gain-other
 Name of the reporting entity
comprehensive income” account is a
 Title of the financial statement real account that is accumulated in
equity.
 Reporting period
Type of Financial Date
Statement Post-closing Trial Balance
Statement of financial As of (or As at)
position December 31, 20X1  It verifies that all debits equal the
Statement of O/L and For the year ended credits in the trial balance.
OIC December 31, 20X1
 The trial balance contains only
Statement of Changes For the year ended
statement of financial position since
in equity December 31, 20X1
all income, expenses, as well as the
Statement of Cash For the year ended
withdrawal account have zero
flows December 31, 20X1
balance.
Notes December 31, 20X1
Closing Entries  Contains the balances that are
extended to the next accounting
 Closing the books is the process of period.
preparing closing entries for nominal
accounts and ruling and balancing Reversing Entries
real accounts.
 Is a journal entry which is the exact
 Closing entries are entries prepared at opposite of a related adjusting entry
the end of the accounting period to made at the end of the period.
“zero-out” all temporary or nominal
accounts in the ledger.  Usually made at the first day of the
accounting period to reverse certain
Notes: adjusting entries in the immediately
preceding period
 Only income statement accounts
(those that enter into the ADJUSTING ENTRIES THAT MAY
determination of profit or loss) are BE REVERSED
closed to the income summary
 Accruals for income or expense
account.
 Income accounts are closed by  Prepayments initially recorded
debiting them. Expense accounts are using the expense method.
closed by crediting them.  Advanced collections initially
 The dividends account is directly recorded using the income
closed to the retained earnings method.
because dividend declared do not
 that the seller didn’t know if
it has still funds on the bank
or none.
Chapter 2
Manager’s check- This
Cash and Cash Equivalents check refers to a check issued
by the manager of the bank.
CASH This means that the issuer of
 Includes money and any other the check has funds on bank.
negotiable instruments that is payable Cashier’s check- This check
in money and accepted by the bank refers to a check issued by
from deposit and immediate credit the cashier of the bank. Thus,
 It includes money or its equivalent It means the issuer if check
that is readily available for have funds on the bank.
unrestricted use. Traveller’s check only
means that the issuer or the
 Money is the standard medium of
owner of the check carries the
exchange and the basis of accounting
check on travel but it is
measurements.
issued on the bank. This also
 Cash is presented as current asset means that the issuer has
funds on bank.
 Measurement of Cash
 Bank drafts- document written by
a. In general – face value the bank to give guarantee that the
check has funds on the bank. This
b. Foreign currency – current
check is owned by the bank. This also
exchange rate
mean it has funds on bank.
c. Cash held by a bank or financial
 Postal Money order- Not really
institution under bankruptcy or
mean from banks but can request also
financial difficulty – estimated
from any financial institution. This
realizable value
looks like a check but not from bank.
Cash on Hand- Refers to undeposited For example, you give P20,000 to
collections awaiting deposit and other current Palawan Pawnshop. You ask for a
funds held as of reporting date. In other money order worth 20,000 also.
words, you still have the money on you and
Cash in Bank- It refers to deposit in banks
not yet deposited on bank.
that are available for immediate withdrawal
(Cus Un Tra Ca Po Ba?) and unrestricted use. In other words, money
you deposited in banks.
 Undeposited collection- Bills and
coins. This refers to cash not yet  Checking (demand) account-
deposited on bank. deposit money to use for transaction
especially in big transaction for
 Customers, manager, travellers, payment. Using check as negotiable
cashier check- this refers to different instrument.
check but with the same goal which is
use for payment or any transaction  Saving deposit- depositing money in
involving cash. bank for savings.

Customer’s checks are use Cash funds- Included in cash but with
by customer as payment. The restriction. Restriction doesn’t mean you
only disadvantage of this is
cannot really use the cash, but rather set aside date stipulated on the check. Not
for its intention. qualified as cash since they are not
presently available for use.
 Change Fund- This is included in
cash but this refers to coins or bills  Normally, entities record
use for change in store or other check collection as debiting
institution. to “cash” and crediting to
 Payroll Fund- Included as cash. This “accounts receivable”
fund is set aside for salary purposes. regardless if the check
received is post-dated or not.
 Petty Cash Fund- is a small amount
of cash kept on hand, in a locked  At reporting date, adjusting
drawer or box, to pay for minor entry is necessary to revert
expenses, such as office supplies or back post-dated checks to
reimbursements.  account receivables.
 Dividend Funds- Seeks to provide Accounts Receivables
xxx
investors with income from common Cash xxx
and preferred shares of stock which  In practice, all check
yield dividends in cash and stock (in collection are recorded as
some cases) on a regularly- occurring cash receipts and adjustment
basis.
for post-dated checks are
 Tax Fund- A funds set aside for made only when financial
paying taxes. statements are prepared.
 Travel Fund- A virtual wallet where Unused Credit Line- Not included as cash, It
you can transfer the cost of your is only disclosed in the notes.
ticket, which can then be used to pay
for your future bookings.   Unused Credit line is the difference
between amount line of credit minus
 Interest Fund- means a fund, escrow the amount borrowed.
or reserve established for the purpose
of providing a source of funds to pay  Line of Credit- Is a flexible loan
interest in respect of Indebtedness of from a financial institution that
the Parent consists of a define amount of money
that you can access if needed and
 Revolving Fund- A fund similar to repay either immediately or overtime.
petty cash fund but is use for a
limited or specific purpose set by  Unused credit line is the uncollected
management. amount part f the line of credit.

KINDS OF CHECK: Unreleased checks drawn and post-dated

checks drawn
 Undelivered Check- Checks are not
delivered to the respected person.  Entities normally record checks
Therefore, whenever you have drawn by debiting “Accounts
undelivered check, the entry is: payable” and crediting “Cash”. When
in scenario where no payment has
Cash in Bank XXX been actually made like (a)
Account XXX Unreleased or undelivered checks
Payable and (b) Post-dated, a reversing entry
 Post-dated Check- Check issued is needed to revert back the
can’t be used or encash unless on the unreleased and post-dated check.
 Preference share
redemption Fund- This
is a long-term
Stale Checks investment.

 Checks delivered to payee are not Contingency Fund- a

encash for within a relatively long reserve of money set
period of time. aside to cover possible
unforeseen future
 Checks that are expired already or in expenses.
other words cannot be used anymore.
If we compare it to food, it’s already Insurance Fund- A
been not eaten for a long time and it’s reserve of money set
not edible anymore. aside as first line of
defense against contract
 The period of time before check loss.
become stale is a matter of company
policy but usually 6 months or more.  Postage stamp- Prepaid expenses
under supplies.
 Stale checks are reverted back to
cash. Cash Equivalents
Cash includes money or its equivalent that is readily available
for unrestricted use.
 This is an investment not a medium
Post-dated checks Excluded from cash of exchange.
received from customer. (Liability)
Undelivered check drawn Include in cash  These are short-term and highly
Post-dated check drawn Include in cash liquid investments that are readily
Stale Checks Include in cash convertible into cash and so near their
maturity that they present
Other item not included as cash: insignificant risk of changes in value
because of changes in interest rates
 IOU’s or advances to
employees- Treated as  Only highly liquid investments that
receivables. are acquired three months before
maturity can qualify as cash
 Cash funds not available for use equivalents.
in current positions, such as
 If you will invest for 3 months or less
Sinking Fund- Use as
that can be considered as cash
payment for long-term
equivalents. If more than 3 months, it
debt.
isn’t considered anymore.
Plant Expansion Fund-
Examples of Cash equivalents:
Considered as noncash.
A long-term investment  Treasury bills, notes, or bonds
(non-current asset) acquired 3 months before maturity
date.
Depreciation Fund- An
amount of money that a  Treasury Bill is a short-term
company has available to obligation issued by the
buy new assets. It comes government at a discount.
from the investments of a Treasury bill normally have
sum equal to the 90 days to less than a year
depreciation allowance maturity. For example, Bank
for its existing assets. Sentral ng Pilipinas T-Bills.
  Treasury Notes and Deposit in foreign Banks
Treasury Bonds- are long-
term obligations issued also  Unrestricted Deposit in foreign
by the government. banks that are available for
immediate withdrawal are included in
Treasury notes have cash at face amount translated at the
a maturity of 1 year current exchange rate as of the
to less than 10 years. reporting date.
Treasury Bonds  Restricted Deposit in foreign banks
have a maturity of 10 that are not available for immediate
years or more. withdrawal are excluded from cash
and presented as receivables subject
 Money market instrument or to appropriate allowances for
commercial paper acquired 3 uncollectability and impairment.
months before maturity date,
Compensating Balance
 Money market instrument-
are investments in portfolios  It generally takes the form of
of short-term securities. minimum checking or demand
deposit account balance that must be
 Commercial paper- Consist
maintained in connection with a
of short-term, unsecured,
borrowing arrangement with a bank.
notes payable issued in large
denominations by large Types of Compensating Balance
companies. It should be
acquired months before  Informal Compensating Balance- It
maturity date. refers to one that is not legally
restricted and shall be included as
 Three-month time deposit- A time part of cash. If the problem is silent,
deposit is a deposit in bank that you
the compensating balance is treated
cannot use in a certain amount of
as unrestricted.
time. This is evidence by a certificate
of deposit.  Formal Compensating Balance- It
Checks and equity securities refers to one that is legally restricted
and shall be classified as current or
 Check and Bankdrafts cannot noncurrent asset depending on the
qualify as cash equivalents since terms of the related loan.
these are not short-term investments.
 Whether restricted or not,
 General rule: Equity securities compensating balance are disclosed
cannot qualify as cash equivalents in the notes.
because shares do not have a maturity
date.  Compensating Balance increase both
yield rate for the lender and the
 Exception: Preference shares
effective interest for the borrower.
with specified redemption
date and acquired three Bank Overdraft
months before redemption
date can qualify as cash  Illegal in the Philippines by law.
equivalents because
redeemable preference shares  It occurs when the cash in a bank
are debt instruments rather account has a credit balance resulting
than equity instruments.
 from the issuance of checks in excess Note: The custody over cash should only
of deposits. be given to the treasurer.

Classification of Bank Overdraft  Imprest System

 General rule: It shall be classified as a  Requires all cash receipts to
current liability and should not be be deposited intact and all
offset against other bank accounts cash disbursement should be
with debit balances. Exceptions: made through checks.
a. If there are other deposit accounts  Collection should be deposit
in the same bank as the account with intact within a reasonable
the credit balance, offsetting with period of time from the date
such other accounts is allowed. of collection and should not
be used for any type of
 b. If the amount is immaterial,
disbursement.
offsetting is allowed.
 Disbursement should be
Internal Controls Over Cash
made through check and not
 Is any process or action effected by from cash collection.
management that is designed to help
 Small amount is done
an entity achieved its objectives.
through petty cash fund.
 Controls the cash that the company
 Bank Reconciliation
pays out
 This one should be prepared
 Since cash is normally at higher risk
regularly, immediately upon
of theft and fraud, internal controls
the receipt of the monthly
should be practice and observed to
bank statement. This is to
ensure cash is protected.
know the different between
Examples of internal control over cash: cash balance per book and
the cash balance per bank
 Segregation of incompatible duties: statements, on a timely
 The duty of manager to basis.
authorize a purchase  Cash Count
(Authorization).
 Period cash count should be
 Purchase are made by the performed to provide
purchasing department reasonable assurance that
(Execution). actual cash tallies with the
 Check payment are released balance per records.
to payee by the treasurer  Cash count should be made
(Custody). also on surprise bases at
 Accountant records the irregular interval for internal
purchase transactions audit.
(Recording).
  Minimum Cash Balance to be disburse) which leads to
payment of cash.
 This means business doesn’t
allow its available cash to fall Documents needed for voucher
below its predetermined
 Purchase Requisition- Request a
thresholds.
certain product to be purchase.
 The use of minimum cash
balance means that a certain  Purchase Order- A sale document
amount of cash is maintained that you can give to the retailer.
in a bank account.  Receiving Report- a report on what
 Lockbox Account product they received on the
warehouse (Receiving department)
 Bank provides companies for
the receipts of payment from  Services don’t have receivers
customer. Under this system, report
payment of customer are  They make report about the
remitted directly to the product receive and if it is
lockbox account where bank correctly same with the
empties the box at least once product being purchase.
a day and process them and
deposit the payment directly  Supplies Invoice- Itemizes a
to the company’s bank transaction between the buyer and
account. seller. If the seller extended credit to
the buyer for the sale,
 Non-encashment of Personal Checks the invoice usually specifies payment
from Petty Cash Fund terms and provides options for
 Encashment of personal payment methods.
check from the petty cash  Company Check or EFT- Payment
fund should be prohibited to made through check. EFT stands for
discourage concealment of Electronic Funds Transfer if payment
cash shortages. is made through online.
Accounting for Cash shortages and overages
 Voucher System  Cash Shortage- cash count result to
 A method of authorizing the an amount less than the balance per
disbursement of cash. records

Vouch System  Cash shortage is initially recorded as:

 Voucher (Check Disbursement Cash Shortage or Over xxx

Voucher or CDV) is a business Cash on hand xxx
document or written authorization
that supports every disbursement  Cash shortage or overage is closed to
made by an entity. either nominal or real account.
 Used to provide evidence of a  Suspense account should not appear
payment requisite (request for cash in the financial statement.
  Depending on the result of  Kiting may be detected by preparing
investigation, the shortage may be a bank transfer schedule, obtaining a
cutoff bank statement, or preparing a
 Close to a “receivables” proof of cash.
account if the shortage was
due to the fault of an  A Bank transfer schedule
employee. shows the dates of all
transfer of cash among the
 Charged to “loss” if the various bank accounts.
investigation was without
merit.  A cut-off bank statement is a
bank statement prepared a
Receivables from cashier/ Loss on cash shortage xxx few days after month-end.
Cash shortage or overage xxx
 Cash overage- cash count result to  A Proof of cash
an amount more than the balance
 Fund transfer should not
per record.
affect the total balance of
Cash on hand xxx cash
Cash shortage or overage xxx  Receipt per book must be
 Depending on the result of recorded in the same period
investigation, the overage may be the disbursement of book is
 Close to a “Payable” account recorded.
if the overage was due to  Similarly, receipt per bank
cash belonging to an must also be recorded in the
employee that was same period the
commingled/mix with the disbursement per bank is
entity’s cash recorded.
Cash shortage or overage xxx  Remember:
Payable to employee/cashier xxx
Current period- Receipt
Overstatement
Next period- disbursement
 Charged to “Gain” if the
investigation was without
 (Plus, without minus overstates the
merit.
cash)
Cash shortage or overage xxx Current period- disbursement

Miscellaneous Income xxx Understatement

Next period- Receipt
Concealment of cash shortages
 Lapping- is a form of accounting  (Minus without plus understate cash)
fraud whereby stolen or this doesn’t mean kiting but rather
misappropriated cash is obscured by deposit in transit or outstanding
altering the accounts receivable. check.

 Kiting- is the fraudulent use of a  Window Dressing – (Cooking the

financial instrument to obtain books)
additional credit that is not
 are actions taken to
authorized or by overstating the
improve the appearance of
balance of cash.
 a company's financial Fluctuating Fund System
statements. Petty Cash Fund xxx
Cash in bank xxx
 Occurs when books are not
closed at year-end and
transactions in the
subsequent period are
deliberately recorded in the Expenses
current period in order to Imprest Fund System
improve the entity’s
No entry
financial performance
No entry
 Can also be used to conceal Fluctuating Fund System
cash shortages as of the Expenses xxx
reporting date by: Petty cash fund xxx
The reason why no entry is made on
Including collections imprest fund system because all
in the subsequent expenses are gathered or intact
period to the current before reported. The expenses are
period. initially written on the petty cash
By deferring the memorandum book supported by a
recording of current signed petty cash voucher.
year’s disbursement Under fluctuating fund system, an
to the subsequent entry is needed since we are
period. updating the every movement of the
Petty Cash Fund petty cash fund.

Is set aside to pay small expenses Replenishment- Replenishment is

which cannot be paid conveniently needed when the balance becomes
by means of check. What it means by low.
small amount or small expense
Imprest Fund System
depends on the company.
Various expense account xxx
For example, an amount 5,000 above Cash in bank xxx
should be disburse by check and Fluctuating Fund System
5,000 below should be disburse Petty Cash Fund xxx
through petty cash fund. Cash in bank xxx
As we can see, in this stage there is
Included in cash account.
already an entry in imprest fund
Two scenarios on petty cash fund, system because the petty cash
we have imprest fund system and custodian will supply a supporting
fluctuating fund system. document of all the intact expenses
to the accounting department for
Remember the following: replenishment. The initially recorded
Establishment: expenses in the petty cash
memorandum book will then be
Imprest Fund System written in the journals and a new
Petty Cash Fund xxx check will be given to the petty cash
Cash in bank xxx
 custodian that’s why we credit cash Cash in bank xxx
in bank. Fluctuating Fund System
Petty cash fund xxx
Cash overage xxx

Miscellaneous Activities: Chapter 3- Bank

For increase: Reconciliation
Imprest Fund System  It is a statement which brings into
Petty Cash Fund xxx agreement the cash balance per
Cash in bank xxx book and cash balance per bank.
Fluctuating Fund System
 if there’s a difference between the
Petty Cash Fund xxx
book and bank, one of them who has
Cash in bank xxx
the error should adjust and make a
For decrease:
reconciliation.
Imprest Fund System
 Reconciliation therefore is something
Cash in bank xxx that should be corrected.
Petty cash fund xxx
Fluctuating Fund System  Explain the difference between the
Petty Cash Fund xxx cash balance in the accounting
Cash in bank xxx record and the cash balance reported
End of reporting report on the bank statement.

Imprest Fund System  Arrived at the adjusted (correct) cash

Various expenses xxx balance to be shown in the financial
Petty cash fund xxx statement.
Fluctuating Fund System  Provide information for reconciling
No entry journal entries.
No entry
As you can see, there is no entry in Bank statement
the fluctuating fund system since  It is a monthly report of the bank to
they are always updated on the the depositor showing data about
movement of petty cash fund. the transactions of the reporting
Cash shortage: entity with the bank during the
period and the beginning and ending
Imprest Fund System balances of its bank account.
Cash shortage xxx
Cash in bank xxx Pro forma bank reconciliation system:
Fluctuating Fund System
Cash shortage xxx
Petty cash fund xxx
Cash overage

Imprest Fund System

Cash shortage xxx
 investment that can be use with the
right time has come that it Is allowed
to use the cash. When it is already
the right time, the bank will add it to
your account without you knowing
there is addition to your cash. A
credit memo will be sent you

Cash Xxx
Balance per books, end is the cash balance in
Long/Short term Xxx
the accounting record and the end of the
investment or
current month.
Time deposit
Balance per bank statement, end is the cash  Collection of notes receivable or any
balance on bank statement as of the current receivables- This mean when a
month certain company ask employees to
directly paid their obligations to the
Cancelled Checks
bank under the company’s account.
 These are the checks (attached to the The bank then will process the
bank statement upon receipt) issued payment and deposit it to the
by the depositor and paid by the company’s account. A credit
bank during the month. memorandum will be sent to the
company.
Book Reconciling Items
Cash xxx
Credit memos Notes Receivables xxx
 These refer to items not representing Debit Memorandum
deposits credited by the bank to the  These refer to items not representing
account of the depositor but not yet checks paid by bank which are
recorded by the depositor as cash charged or debited by the bank to
receipts. the account of the depositor but not
 Credit memorandum is a written yet recorded by the depositor as cash
document sent by the bank to inform disbursements.
the depositor/owner of the account Examples of debit memo:
that a cash was added.
 Bank Service Charges- Service by the
Examples of credit memo: bank has charges and not for free.
 Process of loan – This means when Service charge xxx
you apply for a loan in bank and in Cash/Cash in bank xxx
the future the loan was approved
 Auto debit (Payment of loan)- Auto
and there is an increase in cash. But
debit means auto payment of loan
you still don’t know that there’s an
like housing and other forms of loan
additional amount of cash added to
to the bank. For example, housing
your account.
loans and instead of paying manually,
Cash xxx you directly deduct it on your salaries
Loan’s payable Xxx or other means.
 Maturity of time deposit- We know Notes payable Xxx
already that time deposit is a form of Interest expense (if have) xxx
 Cash Xxx  Placed in an overnight
 Technically defective checks- Error depository
on technicality aspect of the check
 Made through check and the
and not about the funds. For
check has not yet cleared
example, you give a check to BDO
and the check was from BPI. During  Or, made after the bank’s
the clearing, BDO asked BPI if the cut-off.
check has no error or if it’s cleared
already. If found out cleared then its  Outstanding Checks- These are
good, but if something was caught checks already recorded by the
like the authorized person is not on depositor as cash disbursements but
the list of the bank’s authorized  not yet reflected on the bank
person to issue check or signed a statement.
check then BDO will not delete the
check but rather record on  Excluded in outstanding check:
withdrawal under defective check.
 Certified checks- When
Accounts Receivables Xxx certifying checks, the bank
Cash/Cash in bank xxx already deducted the
 No Sufficient Fund (NSF) or Drawn certified check on the
against insufficient fund (DAIF) – account, thus reduces
These are checks that are already already the depositor’s
deposited and recorded by the bank account and they are no
but is subsequently returned to the longer outstanding.
depositor because the drawer’s fund  Stale Check that remains
is insufficient or not enough to pay outstanding for a relatively
for the check. long period of time are
Accounts Receivables xxx reverted back to cash which
Cash/Cash in bank xxx means they are added back
Note: Remember that the above journal to cash balance per books
entries are not always the same title to be making them not part of the
used on recording such transaction. Always outstanding checks.
used the right title of the transaction to what  Certified Checks - It is a check for
really happened on such occasion to avoid which the issuing bank guarantees
errors. availability of cash in the holder's
 Book Errors- Errors committed by the account.
depositor.  Accounting treatment for certified
Bank Reconciliation Items: checks - Certified checks should be
deducted from the total outstanding
 Deposit in Transit- These are checks (if included therein) because
collections already recorded by the they are no longer outstanding for
depositor as cash receipts but not yet bank reconciliation purposes.
reflected on the bank statement. Like
for example:  Bank Errors- Errors made by the
bank.
 Deposits are mailed to the
bank  In books reconciling items, the
depositor will make a reconciling
 entry for each item while in banks debit
reconciling items not anymore.

Remember the following:

 To correct an overstated credit, you

need to make a debit.
 Book to
 To correct an overstated debit, you need Bank
to make a credit. Method-
It is a form
 To correct an understated credit, you
need to make a credit. of bank
Forms of Bank reconcilia
 To correct an understated debit, you Reconciliation tion
need to make a debit. 
Adjusted where the
Balance book
Method- balance is
It is a form reconciled
BOOK ERRORS of bank with the
reconcilia bank
Nature of error Effect on ending balance of
tion balance or
cash
where the the book
a. Understatement in book Understatement balance is
book
debit balance adjusted
b. Understatement in book Overstatement and the to equal
credit bank the bank
c. Overstatement in book Overstatement balance balance.
debit are
d. Overstatement in book Understatement brought to
credit a current
BANK ERRORS cash
balance
a. Understatement in bank Understatement that must
credit appear on
b. Understatement in bank Overstatement the
debit balance
c. Overstatement in bank Overstatement sheet.
credit
d. Overstatement in bank Understatement
 Bank to
Book
Method-
It is a form
of bank
reconcilia
tion
where the
bank
balance is
reconciled
with the
book
balance or
the bank
balance is
adjusted
to equal
the book
balance.