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BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

CHAPTER 12: Internal Control and Cash traveler’s checks, cashier’s checks,
cashier’s checks, bank drafts and money
INTERNAL CONTROL
orders;
Internal control ​is the plan of organization and
★ Peso or foreign currency deposits in banks
all the methods and measures used by a
that are unrestricted and immediately
business to:
available for use in the current operations
★ Safeguard assets;
★ Minimize errors and prevent fraud for Valuation and Classification
reliability of accounting records; ★ Cash is valued at ​face value;
★ Promote operational efficiency; and ★ Foreign currency is valued at the ​current
★ Ensure compliance with laws and exchange rate.
established managerial policies. ⚠ Cash received after the balance sheet date
➔ extends to functions beyond the accounting
and financial departments. ❌
should not form part of the cash account ⚠

❌ Post-dated checks
Accounting controls ​encompass safeguarding
assets and the accuracy of financial records.
❌ Advances to employees
Returned checks
⚠ ​Unreleased checks ​should not be treated
➔ give assurance that transactions are
as outstanding checks but should be restored to
properly authorized and are recorded for FS
the cash balance ⚠
in accordance with GAAP
➔ deals with: Internal Controls over Cash
★ accountability for assets ★ Control of Cash Receipts
★ proper authorization to access assets ★ Control of Cash Disbursement
★ periodic valuation between recorded
assets in the books and the physical PETTY CASH FUND
assets that exist. Petty cash ​is the amount of money established
and kept on hand by a business entity to meet
Administrative ​or ​managerial controls ​deals routine small expenditures,
with: ➔ Eliminates the need for writing numerous
★ operational efficiency, checks for insignificant amounts of money.
★ adherence to managerial policies, and ➔ includes:
★ management’s authorization of ○ postage
transactions ○ employee transportation costs
➔ Ex; quality controls and employee performance
○ minor purchases of supplies
reports
○ expenses related to delivery and
⚠ Accounting and administrative controls are ○ Miscellaneous expenses
not mutually exclusive ⚠ ➔ An employee should administer the fund as
its custodian.
Principles of Internal Control ➔ The replenishment of the fund should be
★ Competent and Reliable Personnel done using the normal cash disbursement
★ Assignment of Responsibilities procedures
★ Segregation of duties
★ Rotation of Personnel Two methods of handling petty cash
★ Documents and Records ★ Imprest fund system
★ Internal and External Audits ★ Fluctuating system
★ Physical and Electronic Controls
Steps in Petty Cash Fund Operation
CASH 1. Establishing the fund
Petty Cash xx
Nature Cash In Bank xx
Cash or Cash on Hand and In Banks in the 2. Making payments from the fund
balance sheet includes the following: ★ All petty cash payments will be
★ Currency or cash items on hand such as in recorded in a summary entry
working funds and cash items awaiting
deposit including ordinary checks,
Arrabis, Shannen B. BSA-1A
BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

3. Replenishing the fund Less: Cash deposited per books for April 2015 ​. xx .
Expenses xx Deposits in transit, 4/30/2015 P xxx
Cash In Bank xx ★ Outstanding checks
★ Petty Cash account is not affected by the
➔ Checks already issued by the entity but
replenishment
not yet cleared or paid by the bank
Control of Cash through a Bank Account ➔ listed in the cash payments journal or
➔ The entity should keep cash in a ​bank check register for the month but not
account included in the bank statement for that
➔ Deposit all cash to the bank account and month
make all cash payments through it by ➔ Subtracted​ from the balance per bank
issuing checks. Outstanding checks, 3/31/2015 P xx
Add: Checks issued per books for April 2015 ​. xx .
Procedures and documents Total amount that should have been deposited P xxx
Less: Checks debited per books for April 2015 ​. xx .
★ Signature card ​contains specimen Outstanding checks, 4/30/2015 P xxx
signatures of each person authorized to
★ Errors
sign checks in the accounts
Items recorded by the bank but not yet
★ Deposit slips are printed forms which
recorded by the entity:
when validated evidence actual deposits of
★ Credit memo
cash.
➔ Items ​not representing deposits ​credited
★ Check ​is a written order to the bank by a
by the bank to the account of the
depositor to pay a specified sum of money
depositor ​but not yet recorded by the
to a designated person.
depositor as cash receipts.
➔ Batas Pambansa Bilang 22: Bouncing
➔ Added ​to the book balance
Checks Law
➔ Bank collections
★ Checkbook ​summary form that keeps the
★ Debit memo
balance current by entering deposit and
➔ Items ​not representing checks paid by
check issued in running balance.
bank ​charged or debited by the bank to
★ Bank statement shows the account’s
the account of the depositor ​but not yet
beginning cash balance, all the additions
recorded by the depositor as cash
and deductions for the month, and the
disbursements.
ending cash balance.
➔ Subtracted ​to the book balance
Reconciliation of Bank and Book Cash ➔ Returned items
Balances DAUD - drawn against uncleared
★ Bank reconciliation is the process of deposits
reconciling the cash balance per books with DAIF - drawn against insufficient funds
the balance per bank statement to ensure ➔ Service Charge
that all cash transactions are accounted for ➔ Errors
and that both records
Procedures
➔ should yield the adjusted cash balance
1. Enter the ending balance per bank
to be reported in the balance sheet.
statement.
Reconciling Items 2. Compare the individual deposits credited in
Items recorded by the entity but not yet the bank statement with the receipts
recorded by the bank: deposited per books.
★ Deposits in Transit 3. Compare the paid or called checks
➔ cash receipts already recorded in the returned with the bank statement with
cash receipts journal that reached the checks outstanding and with the checks
bank too late to be credited in the recorded in the check register by the entity
current statement. during the current period.
➔ Added​ to the bank balance 4. Trace the bank statement items covered by
Deposit in transit, 3/31/2015 P xx credit and debit memoranda to the entity’s
Add: Cash deposited per books for April 2015 ​. xx . cash records
Total amount that should have been deposited P xxx
Arrabis, Shannen B. BSA-1A
BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

5. Note any errors discovered in the foregoing ➔ Include such items as loans or advances
steps and consider them in the appropriate to officers and employees, advances to
section of the bank reconciliation suppliers and accrued receivables.
statement.
6. Compute the adjusted bank balance and Two major types of trade receivables
the adjusted book balance. ★ Accounts receivable
★ Notes receivable
★ Each reconciling item per books should be
journalized and posted by the depositor. ACCOUNTS RECEIVABLE
Cash In Bank xx Accounts Receivable ​are amounts owed by
Miscellaneous Expense xx customers for goods sold and services
Notes Receivable xx rendered in the normal course of business.
To record note collected by bank less
charges. Valuation and Classification
★ Valued at their ​estimated realizable value
Accounts Receivable xx ➔ ESV is the amount of cash the entity
Cash In Bank xx actually expects to collect from the
To reclassify DAUD check
receivables.
Miscellaneous Expense xx
➔ ESV = Gross A/R - AUA
Cash In Bank xx ★ Trade receivables that may be reasonably
To record various bank charges expected to be collected within one year or
within the normal operating cycle,
ERRORS whichever is longer, are classified as
Cash in bank xx current assets.
Accounts receivable xx
Understatement of cash receipts Accounting for Uncollectible Accounts
★ Credit is extended receivables will not be
Accounts Payable xx collected.
Cash in bank xx
★ UA should be anticipated and the value of
Understatement of checks
A/R should be reduced by the EUA.

Two General Methods of Accounting for


Uncollectible Accounts
★ Direct write-off method
➔ Does not attempt to anticipate
uncollectible accounts
➔ Uncollectible accounts are written off as
an expense in the accounting period
when the account is determined to be
uncollectible
➔ BIR requires direct write-off method
★ Allowance method
➔ Requires that the accountant estimate
uncollectible accounts in the accounting
period when the credit sale are made..
CHAPTER 13: Accounts and Notes Receivable ➔ Based on the company’s own
Two general classes of receivables experience
★ Trade receivables ➔ Expense is recognized in the period of
➔ arise from sale of goods or services to sale
customers ➔ AUA is set up
★ Non-trade receivables ➔ Selling expenses
➔ arise from sources ​other than the sale of ➔ Allowance account is a contra asset
merchandise or services in the ordinary account
course of business. ➔ deducted from A/R in the balance sheet.

Arrabis, Shannen B. BSA-1A


BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

➔ determined to be uncollectible,
allowance account and the A/R are both
reduced by the amount of the
uncollectible account
⚠ write-off entry has no effect on net income
and on net A/R ⚠
➔ To record recovery, reverse the write-off ★ Aging of Receivables
entry and record collection ➔ Analysis that shows the length of time
➔ GAAP requires allowance method the customer’s accounts have remained
Journal entries: unpaid.
➔ Historical loss percentages ​are
applied to the total of each age category
of accounts to determine the required
ending balance of the allowance for
uncollectible accounts.

➔ It is possible for the allowance account


to have a ​debit balance before
adjustment may be caused by write-offs
exceeding the balance in the allowance
account
Estimating Uncollectible Accounts
NOTES RECEIVABLE
1. Credit Sales Method
Promissory note ​is an unconditional promise
➔ emphasizes the ​matching principle
in writing made by one person to another,
and the ​income statement
signed by the maker, engaging to pay on
➔ average percentage relationship
demand, or at a fixed or determinable future
between actual uncollectible accounts
time, a sum certain in money to order or to
and net credit sales is estimated on the
bearer (Negotiable Instrument Law).
basis of experience.
➔ Offers extended payment terms and more
➔ percentage is then applied to the net
security than a sales invoice does.
credit sales for the period to determine
the uncollectible accounts expense.
➔ the entry ignores the prior balance in the Interest bearing note
allowance account ➔ specifies the principal amount to be paid at
2. Accounts Receivable Method maturity date plus interest at a specified
➔ Estimates the ​required ending date
allowance account balance to state Non-interest bearing note
accounts receivable at estimated ➔ does not specify an interest rate but the
realizable value. face amount already includes the interest
➔ the current balance in the allowance charge.
account is updated through an adjusting
entry to equal the required balance Essential Elements of a Simple Interest Note
➔ Uncollectible accounts expense is ★ Maker
debited for the amount of adjustment ➔ signs and promises to pay the amount
★ Percentage of Total Accounts required in the instrument
Receivable ★ Payee

Arrabis, Shannen B. BSA-1A


BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

➔ the person to whom the promise is Maker dishonored or did not pay the receivable
made and to whom the instrument is at maturity.
payable ➔ Term of the note has expired
A note from a ​debtor is called a ​note ➔ Maker is still liable to pay the maturity
receivable by the ​holder ​and a ​note payable value including interest
by the debtor.
★ Principal
➔ Amount appearing on the face value of
the note
➔ represents the amount borrowed
➔ Also referred to as ​face value.
★ Interest Rate
➔ Annual rate of interest appearing on the
face of the note which will be the basis
of interest charges to the maker.
★ Term
➔ Period of time during which interest
should be computer
Discounting of Notes
➔ Extends from the issue date to the
★ Without recourse
maturity date of the note
➔ Sale of the note receivable receivable
★ Issue Date
is absolute and therefore there is no
➔ Date when the note was signed and
contingent liability.
issued
➔ Contingent liability ​is a potential
★ Maturity Date
liability that will become an actual
➔ Date when maturity value should be
liability only if a potential event does
paid
occur.
Formulas ➔ If the maker fails to pay the maturity
★ Interest = Principal x Rate x Time value to the new payee, the original
★ Maturity Value = Principal + Interest payee must pay the bank/
★ With recourse
➔ The entity discounting the note
Entries guarantee payment if the maker of the
note defaults or dishonors payment

Steps in determining the proceeds


1. Determine the maturity value of the original
note.
2. Count the number of months or days of the
discount period. The unexpired term of the
note is the ​discount period.
3. Solve for the bank discount. ​Discount ​is
the amount of interest deducted by the
bank in advance and is computed on the
maturity value of the note.
​Bank Discount = MV x DR x T
4. Compute for the proceeds.
Proceeds = MV - BD

Arrabis, Shannen B. BSA-1A


BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

CHAPTER 14: Inventory, Property and


Equipment
INVENTORY
PAS 2, paragraph 6
Inventories are assets:
(a) held for sale in the ordinary course of
business; (finished goods)
(b) in the process of production for such sale;
(work in process) or
(c) in the form of materials or supplies to be
consumed in the production process or in the
rendering of services. (raw materials)

Measurement, Cost and Classification


★ Stated at lower of cost and net realizable
value.
Loss on discounting is an other expense item
NRV = ESP - (ECC +ECS)
and is computed as:
★ Cost of inventories should comprise
➔ all costs of purchase
Face of value of notes P xx
Add: Accrued interest on notes ​ xx ​
.​ .
➔ net of trade discounts received
Book value of notes discounted P xx ➔ costs of conversion
Proceeds from discounting of notes ​ xx ​
.​ .
➔ others
Loss on discounting of notes ​P xx ​
★ Current assets
.

Internal Control of Receivables ★ Merchandising


1. Maintenance of subsidiary records and ➔ on hand,
ledgers for receivables. ➔ in transit,
2. Personnel who maintain the accounts ➔ in storage or
receivable subsidiary ledger must not have ➔ on consignment
access to cash receipts. They must not ★ Manufacturing
have authority to issue credit memorandum ➔ finished goods
or to write off uncollectible accounts. ➔ work in process
3. Proper approval of all credit sales by an ➔ raw materials and supplies
authorized officer. ➔ on hand
4. Proper authorization of all sales discounts, ➔ in transit
sales returns and allowances and Items included in Inventory
write-offs.
5. Effective collection procedures to ensure
Included Excluded
timely collection of receivables.
6. Monthly statements sent to all customers. GIT ​purchased FOB GIT ​purchased FOB
shipping point destination

GIT ​sold FOB GIT ​sold FOB


destination shipping point

Goods ​out on Goods ​accepted on


consignment consignment

Arrabis, Shannen B. BSA-1A


BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

★ Consignment ​is a way of selling certain 3. Physical control over inventory to prevent
types of goods. The ​consignor delivers ​the damage, decay and theft.
goods to the ​consignee who endeavors to 4. Segregation of custody of inventory and
sell the goods to customers for a maintenance of accounting records.
commission fee​. 5. Use of perpetual inventory system for
merchandise with high unit cost.
Cost Flow Assumptions 6. Purchase of inventory in economical
➔ Inventory items are homogeneous in quantities to avoid lost sales due to
nature inventory shortage of financial losses due
➔ Common where the company has a large to too much inventory position.
number of virtually identical inventory
items. PROPERTY AND EQUIPMENT
➔ The seller simply makes an assumption as Property, plant and equipment are ​tangible
to the sequence in which units are items ​that:
withdrawn from inventory. (a) are held for use in the production or supply
of goods or services, for rental to others, or
Inventory Costing Methods for administrative purposes; and
1. Specific Identification (b) are expected to be used during more than
➔ specific costs are attributed to identified one period.
items of inventory.
2. First-In, First Out Elements of Cost
➔ first items into the stockroms are first ★ purchase price
out. ★ directly attributable costs
➔ goods sold are assigned the cost of the ★ initial estimate of the costs of
oldest inventory available. dismantling
➔ ending inventory is to be valued at the
most recent costs. Valuation and Classification
➔ COGS = CGAS - EI ➔ @ cost less allowance for depreciation
3. Weighted-Average Cost ➔ Cost is measured as the cash price
➔ implies that the items in an inventory equivalent at the recognition date.
are sold at a random ➔ non -current assets
➔ Items in the ending inventory could
Classes of Property and Equipment
include some of the original items from
★ Land
the beginning balance and some from
★ Buildings
each purchase made during the period.
★ Machinery and Equipment
➔ Formula: WAUC = CGAS / UAS
★ Land Improvements
EI = WAUC x # of UE
COGS = CGAS - EI Acquisition Cost
★ Cash or Short-term Credit
Estimating InventoryーGross Profit Method
➔ direct cash purchase includes invoice cost
➔ relies on the relationship between sales and
and all other expenditures
cost of goods sold.
➔ short-term credit, cash discounts are are
➔ For most entities, COGS represents a
generally considered as reductions of cost
reasonably stable percentage of sales
even when the discount is not taken
➔ Gross profit can also be a predictable
★ Lump Sum Purchase
percentage of sales
➔ Total cost should be allocated to the
individual assets based on their relative
fair values.
Internal Control over Inventory APC = LSPC x fraction
1. Physical count of inventory at least once a ★ Others
year. ➔ Installment basis
2. Maintenance of an efficient purchasing, ➔ Issuance of bonds
receiving and shipping procedures. ➔ Exchange

Arrabis, Shannen B. BSA-1A


BASIC FINANCIAL ACCOUNTING AND REPORTING Reviewer

➔ Trade-in Depreciation for Partial Years


➔ donation - Compute the exact amount of
depreciation of each fractional period,
DEPRECIATION and others apply an accounting policy
Nature convention
★ The process of systematically ​allocating
the cost of the property and equipment to Internal Control over Property and
expense over the period the asset is used Equipment
is called ​depreciation​. 1. Authorization and approval of acquisitions of
★ Physical depreciation ​is due to wear and property and equipment.
tear, passage of time, action of the 2. Subsidiary ledgers should be maintained.
elements or diseases. 3. Periodic physical inventory of property and
★ Technical depreciation arises from equipment should be performed to verify the
obsolescence or inadequacy, accuracy of the accounting records.
4. Keeping a regular maintenance schedule.
Factors 5. All disposals should be properly authorized
★ Asset Cost. and approved.
★ Estimated Useful Life ​is the ​estimated
length of service expected from an asset.
Useful life may be expressed in ​years,
units of output or other measures.
★ Estimated Residual Value is the expected
cash value of the asset or the amount that
the asset can probably be ​sold ​for at the
end of its estimated useful life.

Depreciation Methods
★ Straight-Line Method
➔ equal amounts of periodic expense over the
estimated useful life of the asset.
➔ relates depreciation directly to the passage
of time.
➔ DC = OC - ESV
➔ ADE = EUL / DC
➔ Constant over the life of the asset

Journal entry to recognize depreciation


expense

Depreciation Expense xx
Accumulated Depreciation xx

★ Costs-of-Production Method
➔ The decrease in useful life of the asset is
directly related to the amount of time the
asset is in use.
➔ Life of the asset is expressed in ​productive
capacity
○ units produced
○ hours used
○ meters driven
➔ DC = OC - ESV
➔ DperU ​= ​EUL - DC
➔ DE = DperU x DC

Arrabis, Shannen B. BSA-1A

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