Chapter One : Accountancy profession

Accounting = the language of business and often use to provide information of the business
financial position and performance to the users of accounting
Identifying = It means analyzing the business transactions and events
Measuiring = the assigning of peso amounts to the accountable economic transactions
Communicating = the process of preparing and distributing accounting reports to potential users
of accounting information
Public Accounting = being an independent third party that examines the financial statements and
supporting systems of client companies to see if their financial statements fairly represent the
results, financial position , and cash flow of the clients.
Private Accounting = employed in business entities in various capacity as accounting staff, chief
accountant, internal auditor and controller.
Government Accounting = focus on the custody and administration of public funds

Continuing Professional Development (CPD)

Credit hours required for the renewal of CPA license and accreditation of a CPA to practice the
accountancy profession every 3 years.
Exemptions fromCPD includes:
1. CPA shall be permanently exempted from CPD requirements upon reaching age 65
2. CPA shall be temporarily exempted when staying abroad
Generally accepted accounting principles (GAAP)
Represents the rules , procedures , practice and standards followed in the preparation and
presentation of financial statements.
Generally accepted accounting principles are like laws that must be followed in financial
reporting.

Chapter Two : Conceptual Framework (Financial Reporting and

assumptions)
Conceptual Framework = is a summary of the terms and concepts that underlie the preparation
and presentation of financial statements for external users. Applied in the absence of a standar
Users of financial information:
Primary users = parties to whom general purpose financial reports are primarily directed.
Includes existing and potential investors , lenders and other creditors.

Other users = Users of financial information other than the existing and potential investors ,
lenders and other creditors. Includes employees, customers , government and public.
Accrued accounting = Recognize effects of transactions & other events when they occur and not
as cash is received.
Scope of Conceptual Framework
A. Objective of financial reporting
B. Qualitative characteristics of useful financial information
C. Definition, recognition and measurement of the elements from which financial statements
are constructed
D. Concepts of capital and capital maintenance
Objective of Financial Reporting
To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity.
Underlying Assumptions
Serve as the foundation or bedruck of accounting in order to avoid misunderstanding but rather
enhance the understanding and usefulness of the financial information
1. Going Concern = means that in the absence of evidence to the contrary, the accounting
entity is viewed as continuing in operation indefinitely.
2. Accounting entity = Under this assumption , the entity is separate from the owners,
managers, and employees who constiture the entity.
3. Time Period = requires that " the indefinite life of an entity is subdivided into accounting
periods which are usually of equal length for the purpose of preparing financial reports,
performance and cash flows.
4. Monetary unit = has 2 aspects namely quantifiability and stability of the peso
a.) quantifiability = means that the assets, liabilities, equity, income and expense should be
stated in terms of a unit of measure which is the peso in the Philippines.
b.) stability of the peso = means that the purchasing power of the peso is stable or constant
and that its instability is insignificant and therefore may be ignored.

Chapter Three: Conceptual Framework (Qualitative characteristics)

Qualitative characteristics = are the qualities or attributes that make financial accounting
information useful to the users. Classified into fundamental and enhancing qualitative
characteristics
Fundamental Qualitative characteristics
Relate to the content or substance of financial information. Fundamental qualitative
characteristics are relevance and faithful representation.
1. Relevance = capacity of the information to influence a decision. Financial information is
capable of making a difference in a decision if it has predictive value and confirmatory
value. Also includes materiality
a.) Predictive value = can be used as an input to processes employed by users to predict
future outcome.
b.) Confirmatory value = provides feedback about previous evaluations.
c.) Materiality = is a practical rule in accounting in which dictates that strict adherence to
GAAP is not required when the items are not significant enough to affect the evaluation,
decision and fairness of the financial statements.
2. Faithful representation = means that the actual effects of the transactions shall be
properly accounted for and reported in the financial statements. Have 3 characteristics
namely completeness, neutrality and free from error. Also includes substance over form.
a.) Completeness = requires that relevant information should be presented completely
b.) Neutrality = financial information should be stated "without bias"
c.) Free from error = means there are no errors or omissions in the presentation of financial
statements and transaction.
d.) Substance over form = an accounting concept which means that the economic substance
which means that the economic substance of transactions and events must be recorded in the
financial statements rather than just their legal form in order to present a true and fair view
of the affairs of the entity.
Conservatisim = "in case of doubt" record any loss and do not record any gain
Prudence = the desire to exercise care and caution when dealing with the uncertainties in the
measurement process such that assets or income are not overstated and liabilities or expenses are
not understated.
Enhancing Qualitative Characteristics
Relate to the presentation or form of the financial information. Intended to increase the
usefulness of the financial information that is relevant and faithfully represented. The enhancing
qualitative characteristics are comparability, understandability, verifiability and timeliness.
1. Comparability = enable users to identify and understand similarities and dissimilarities
among items.
 a. Consistency = using the same accounting method from period to period within an
entity.
2. Understandability = requires that financial information must be expressed in a
terminology that a user understands.
3. Verifiability = means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete argument, that a particular depiction
isa faithful representation.
4. Timeliness= means that financial informationmust be available or communicated early
enough when a decision is to be made.

Chapter 4: Conceptual Framework

Financial Statements = represents a formal record of entities. Show the elements of financial
position and the elements of financial performance.
Elements of Financial position include:
Assets = Something a business owns or control
Liabilities = Something a business owes to someone
Equity = Something a business owes to the owners
Elements of Financial performance include:
Income = what the business has earned over a period of time
Expense = The cost incurred by the business over a period of time.
Examples of Financial Statements
1. Statement of Financial position = also known as the balance sheet, presents the financial
position of an entity at a given date. It consists of the elements of financial position which
includes assets, liabilities, and equity.
2. Income Statement = also known as the profit and loss statement, it reports the company's
financial performance in terms of net profit or loss over a specified period. It consists of
the elements of financial performance which includes income and expense.
3. Cash Flow statement = presents the movement in cash and bank balances over a period
4. Statement of Changes in Equity = also known as statement of retained earnings , details
the movement of owner's equity in period of time.
Income recognition principle
Income is recognized when it is probable that a increase in future economic benefits and that the
increase economic benefits can be measured reliably.

Expense recognition principle

Expenses are recognized when it is probable that a decrease in future economic benefits related
to decrease in an asset or an increase in liability has occurred and economic benefits can be
measured reliably.
Measurement of elements
Measurement = is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the statement of financial position and
income statement.
Measurement bases of financial attributes include:
Historical cost = past purchase exchange price
Current cost = current purchase exchange price
Realizable value = current sale exchange price
Present value = future exchange price

Multiple Choice
1. Which is not an exemption of CPD requirements?
a. Working abroad c. Reaching 65 years old
b. Studying abroad d. Reaching 60 years old

2. It is the language of business and often use to provide information of the business
financial position and performance to the users of accounting system
a. Accounting c. Classifying
b. Identifying d. Summarizing

3. Which is not a type of accounting?

a. Government Accounting c. Mathematical Accounting
b. Public Accounting d. Private Accounting

4. It is like laws that must be followed in financial reporting

a. IASC c. FRSB
b. GAAP d. IASB
 5. It is the type of accounting that is being an independent third party that examines the
financial statements and supporting systems of companies to see if their financial
statements fairly represent the results
a. Public Accounting c. Government Accounting
b. Private Accounting d. Corporate Accounting

6. Which of the following does not belong to the scope of conceptual framework?
a. Qualitative characteristics of useful financial information
b. Objective of financial reporting
c. Concepts of capital and capital maintenance
d. Quantitative characteristics of the FRSC

7. Which does not belong to the primary users?

a. Investors c. Lenders
b. Government d. Creditors

8. Law company is expected to continue in operation indefinitely. What accounting

assumption is used?
a. Monetary unit c. Time Period
b. Going Concern d. Accounting Entity

9. What accounting assumption means that the entity is separate from the owner's personal
savings and expenses?
a. Monetary unit c. Time Period
b. Going Concern d. Accounting Entity

10. Which is a part of the Monetary unit assumption?

a. Time period c. Quantifiability
b. Going Concern d. Accounting Entity
11. Which qualitative characteristic means that financial information should not be bias?
a. Neutrality c. Comparability
b. Verifiability d. Understandability
 12. Joey's Company uses the same accounting method every accounting period. Which
qualitative characteristic is applied by Joey's Company?
a. Verifiability c. Understandability
b. Consistency d. Neutrality
13. Which means "in case of doubt" record any loss and do not record any gain
a. Consistency c. Conservatism
b. Comparability d. Going Concern
14. It is the desire to exercise care and caution when dealing with uncertainties in the
measurement process
a. Prudence c. Substance over form
b. Consistency d. Verifiability
15. Chester's Company always have financial information ready when a decision is about to be
made. Which qualitative characteristic is applied?
a. Prudence c. Materiality
b. Consistency d. Timeliness
16. Which is not an element of financial position?
a. Incomec. Asset
b. Liabilities d. Equity
17. It is the current purchase exchange price
a. Historical cost c. Realizable value
b. Current costd. Present value
18. It is the current sale exchange price
a. Historical cost c. Realizable value
b. Current costd. Present value

19. It is the future sale exchange price

a. Historical cost c. Realizable value
b. Current costd. Present value
20. DEF company just bought a laptop for P25,000 last year. What is the measurement bases of
P25,000 right now?
a. Historical cost c. Realizable value
b. Current Cost d. Present value

Chapter 7: Cash and Cash Equivalents

Money = is the standard medium of exchange in business transactions.
Cash items included in cash
a. Cash on hand = undeposited cash collections and other cash items awaiting deposit
b. Cash in bank = includes demand deposit, checking account and saving deposit which are
unrestricted
c. Cash fund = set aside for current purposes such as petty cash fund, payroll fund and dividend
fund
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.
Examples of cash equivalents are:
1. Three-month BSP Treasury bill
2. Three year BSP treasury bill purchased three months before date of maturity
3. Three- month time deposit
4. Three-month money market instrument or commercial paper
Measurement of cash
Cash is 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 of ginancial
difficulty, cash should be written down to estimated realizable
value if the amount recoverable is estimated to be lower than the face value
Compensating balance = 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.
Undelivered or unreleased check
An undelivered or unreleased check is one that is merely drawn and recorded but not given to the
payee before the end of reporting period.
Entry:
Cash xx
Accounts payable or appropriate account xx
Postdated check delivered
Is a check drawn, recorded and already given to the payee but it bears a date subsequent to the
end of reporting period
Entry :
Cash xx
Accounts payable or appropriate account xx
Stale check or check long understanding
A stale check is a check not encashed by the payee within a relatively long period of time
Entry if the amount of stale check is immaterial:
Cash xx
Miscellaneous income xx
Accounting for cash shortage
When cash count shows cash which is less than the balance per book, there is a cash shortage to
be recorded as follows:
Cash short or over xx
Cash xx
Unfortunately, cash shortage or over account is only a temporary or suspense accounts. When
financial statements are prepared the same should be adjusted.
Entry when cashier or cash custodian is held responsible for cash shortage:

Due from cashier xx

Cash short or over xx
Entry if efforts fail to disclose the cause of the shortage:
Loss from cash shortage xx
Cash short or over xx

Accounting for cash overage

When the cash count shows cash which is more than the balance per books
Entry to record cash overage:
Cash xx
Cash short or over xx
Entry if there is no claim on the same
Cash short or over xx
Miscellaneous income xx
Entry if cash overage is properly found to be the money of the cashier:
Cash short or over xx
Payable to cashier xx
Petty cash fund
Money set aside to pay small expenses which cannot be paid convebniently by means of check.
There are 2 methods in handling petty cash transactions namely Imprest and fluctuating fund
system.
Imprest fund system
the one usually followed in handling petty cash transactions
Ex.
a. A check is drawn to establish the fund
Petty cash fund xx
Cash in Bank xx
b. Payment of expenses out of the fund
No entries are made but requires a signed petty cash voucher for such payments
and simply prepares memorandum entries in the petty cash journal
c. Replenishment of petty cash payments
Expenses xx
Cash in Bank xx

d. Adjust the unreplenished expenses

Expenses xx
Petty Cash fund xx

Adjustment should be reversed at the beginning of the accounting period

e. An increase in the fund is recorded as follows :

Petty Cash fund xx
Cash in Bank xx
f. A decrease in the fund is recorded as follows
Cash in bank xx
Petty cash fund xx
Fluctuating fund system
checks drawn to replenish the fund do not necessarily equal the petty cash disbursements
Ex.
a. Establishment of the fund
Petty cash fund xx
Cash in bank xx
b. Payment of expenses out of the petty cash fund
Expenses xx
Petty cash fund xx

c. Replenishment or increase of the fund

Petty cash fund xx
Cash in bank xx

d. no adjustment at the end of reporting period

e. Decrease of the fund is recorded as follows

Cash in Bank xx
Petty Cash fund xx

Chapter 8: Bank Reconciliation

Bank Deposits = there are three kinds of bank deposits, namely demand deposit, saving deposit
and time deposit
Demand deposit = is the current account or checking account or commercial deposit where
deposits are covered by deposit slips and where funds are withdrawals on demand by drawing
checks against the bank.
Saving deposit = In a saving deposit, the depositor is given a passbook upon the initial deposit.
The passbook is required when making deposits and withdrawals
Time deposit = interest bearing, a time deposit is evidenced, however , by a formal agreement
embodied in an instrument called certificate of deposit
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
b.) Debit memos
c.) Errors
2. Bank reconciling items
a.) Deposits in transit
b.) Outstanding checks
c.) Errors
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.
Debit memos = refers to items not representing 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
disbursements
Deposits in Transit= collections already recorded by the depositor as cash receipts nut not yet
reflected on the bank statement
Outstanding checks = checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement
Forms of bank reconciliation
1. Adjusted balance method = under this method, the book balance and the bank balance
are brought to a correct cash balance that must appear on the balance sheet
Book balance xx
Add: Credit memos xx
Total xx
Less: Debit memos xx
Adjusted book balance xx
Bank balance xx
Add: Deposits in transit xx
Total xx
Less: Outstanding checks xx
Adjusted bank balance xx

2. Book to bank method

Book balance xx
Add: Credit memos xx
Outstanding checks xx xx
Total xx
Less: Debit memos xx
Deposits in transit xxxx
Bank balance xx
3. Bank to book method
Bank balance xx
Add: Deposits in transit xx
Debit memos xx xx
Total xx
Less: Outstanding checks xx
Credit memos xx xx
Book Balance xxx

Chapter 9 : Proof of cash

Two- date bank reconciliation = a bank reconciliation that literally involves 2 dates
Computation of book balance
Balance per book- beginning of month xx
Add: Bank credits during the month xx
Total xx
less: Bank Debits during the month xx
Balance per bank- end of month xx

Bank credits = refer to all items credited to the account of the depositor which inclucdes deposits
acknowledged by bank and credit memos. In the absence of any statement to the contrary, bank
credits are assumed to be checks paid by bank
Bank Debits = refer to all items debited to the account of the depositor which include checks
paid by bank and debit memos. In the absence of any statement to the contrary, bank debits are
assumed to the checks paid by bank
Computation of bank balance
Balance per bank - beginning of month xx
Add: Bank credits during the month xx
Total xx
less: Bank debits during the month xx
Balance pert bank - end of month xx

Computation of deposit in transit

Deposits in transit- beginning of month xx
Add: Cash receipts xx
Total deposits to be acknowledged by bank xx
less: Deposits acknowledged by bank during month xx
Deposits in transit- end of month xx
Computation of outstanding checks
Outstanding checks - beginning of month xx
Add: Checks drawn by depositor during the month xx
Total checks to be paid by bank xx
less: Checks paid by bank during the month xx
Outstanding checks - end of month xx

Cash in bank per ledger

Balance, January 3 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
P5,000 and service charge of P1000 for January 180,000

Proof of cash
is an expended reconciliation in that it includes proof of receipts and disbursements. There are 3
forms of proof or cash, namely: Adjusted balance method, book to bank method, bank to book
method
Adjusted Balance method
Ex.
Company X
Proof of cash
For the month of February
Jan 31 Receipts Disbursements Feb. 28
bal per book 50,000 200,000 180,000 70,000
Note collected:
January 15,000 (15,000)
February 20,000 20,000
NSF check:
January (5,000) (5,000)
February (10,000) (10,000)
Service charge:
Jan (1,000) ________ (1000) _______
Adjusted book balance 59,000 205,000 184,000 80,000

Bank to Book
Ex.
Company X
Proof of cash
For the month of February

Jan 31 Receipts Disbursements Feb. 28

bal per bank 3,402 25,200 23,900 4,702
Deposits in transit
Jan 31 1,610 (1,610)
Feb.28 1800 1800
Outstanding checks
Jan 31 (450) (450)
Feb.28 1200 (1200)
Service charges (5) (5)
Note collected by bank (150) (150)
Customer's NSF check (170) (170)
Deposits of Feb 12
recorded as P749 instead
of P794 (45) (45)
Bank error ______ _______ (50) (50)
Balance per books P4562 P25,195 24,425 5332

Book to bank
Company X
Proof of Cash
For the month of February
January 31 Receipts Disbursements February 28
Balance per book 50,000 200,000 180,000 70,000
Note collected:
January (5,000) (5,000)
February 10,000 (10,000)
Service charge:
January (1,000) (1,000)
Deposits in transit:
January (40,000) 40,000
February (75,000) (75,000)
Outstanding checks:
 January 65,000 65,000
February ______ _______ 119,000 119,000
Balance per bank 84,000 170,000 130,000 124,000

Theories Chapter 7-9

1.)In a bank reconciliation, NSF checks are
a.) Subtracted from the book balance
b.) Added to the book balance
c.) Added to the bank balance
d.)Subtracted from the book balance

2.) In a bank reconciliation , Deposits in transit are

a.) Subtracted from the book balance
b.) Added to the book balance
c.) Added to the bank balance
d.) Subtracted from the book balance

3.) The replenishment of a petty cash fund might include which of the following?
a.) A debit to cash
b.) A debit to interest income
c.) A debit to office supplies expense
d.) A credit to petty cash

4.) Which of the following might be classified as a cash equivalent?

a.) Cash in checking account
b.) 30-day treasury bill
 c.) Money orders waiting to be deposited
d.) 120-day treasury bill

5.) Post-dated checks and I.O.U.s should be reported as

a.) receivables
b.) cash
c.) expense
d.) equity

6.) What is a bank credit?

a.) checks written by the company that have yet to be presented at the bank for collection
b.) deposits recorded in the cash account in one period but not received by the bank until next
period
c.) collections or deposits in the company's account that the company is not aware of until
receipt of the bank statement
d.) minimum cash balance on deposit

7.) A bank statement is

a.) a monthly report of the bank to the depositor
b.) a yearly report of the bank to the depositor
c.) a weekly report of the bank to the depositor
d.) a daily report of the bank to the depositor

8.) Which is not a cash on hand?

a.) petty cash fund
b.) cashier's checks
 c.) bank drafts
d.) money orders

9.) Which is not a cash in bank

a. demand deposit
b. checking account
c.) bank drafts
d. saving deposit

10.) What are deposits in transit?

a.) collections already recorded by the depositor as cash receipts but not yet reflcted on the
bank statement
b.) checks already recorded by the depositor as cash disbursements but not yet reflected on
the bank statement
c.) collections or deposits in the company's account that the company is not aware of until
receipt of the bank statement
d.) minimum cash balance on deposit

11.) A petty cash system is designed to

a. cash checks to employees
b. handle cash sales
c. account for all small cash receipts and disbursements
d.) pay small miscellaneous expenses

12.) bank statements provide information about all of the following, except
a. checks cleared during the period
(b.) errors made by the company
 c. NSF checks
d. bank charges for the period

13.) A proof of cash is

a. a proof of company's liquid position
b. a reconciliation of cash receipts and payments, during the previous period, together with
the beginning and ending balances of cash
c. proof of the existence of a cash deposit in the bank
d.) reconciliation of cash receipts and payments during the current period, together with the
beginning and ending balances of cash

14.) In a bank reconciliation that attempts to reconcile the bank balance to the correct cash
balance, the following items would affect reconciliation in what way?
Outstanding checks Deposits in Transit
a. Added Added
b.) Deducted Added
c. Added Deducted
d. Deducted Deducted

15. Deposits held as compensating balances

a. usually do not earn interest
b. if legally restricted and held against short-term credit may be included as cash
c. if legally restricted and held against long-term credit may be included as cash
d.) if legally restricted and held against short- term credit should not be included in the cash
balance but it is reported among current assets

16. Seldom does the balance of the cash in bank account in the depositor's books agree with the
balance appearing in the bank statement at a particular date because of
 a. Bank secrecy requirements
b. Negligence by the bookkeeper
c. A tax avoidance scheme
d.) Time-lapse differences

17. If the cash balance shown in a company's accounting records is less than the correct cash
balance, and neither the company nor the bank has made any errors,
there must be
a.) deposits credited by the bank but not yet recorded by the company
b. outstanding checks
c. bank charges not yet recorded by the company
d. deposit in transit

18. What is included in recording a cash shortage?

a. debit to cash
b. credit to due from cashier
c. debit to loss from cash shortage
d. credit to miscellaneous income

19. What is included in recording a stale check?

a.) credit to cash
b.) debit to cash
c.) debit to miscellaneous income
d. debit to accounts payable

20. What is an undelivered check?

 a.) check that is merely drawn and recorded but not given to the payee before the end of
reporting period
b. check drawn, recorded and already given to the payee but it bears a date subsequent to the
end of reporting period
c. check not encashed by the payee within a relatively long period of time
d. must be maintained in connection with a borrowing arrangement with a bank

Problems
1. The statement of financial position of Russel's Company shows cash of 330,820. The
following items were found to comprise this total amount:
Checking account in Metrobank ( outstanding checks as of year end
Totaled 15,200) 100,000 +
Savings account in BDO 50,000 +
Petty cash fund 10,000 +
Cash on hand ( undeposited sales receipts) 5,000 +
Sinking fund cash 30,000
Cash in Foreign Bank ( in equivalent pesos) 60,000+
Traveler's check 10,000+
Manager's check 10,000 +
Short term treasury bills 52,000

What is the correct amount of cash?

a. 245,000 c. 225,000
b. 240,000 d. 215,000
Solution:
Checking Account Metrobank 100,000
Savings Account in BDO 50,000
Petty Cash Fund 10,000
Cash on Hand 5,000
Cash in Foreign Bank 60,000
Traveler's check 10,000
Manager's check 10,000
245,000

2. Chester Company’s checkbook balance at December 31, 2012 was 200,000. In addition,
Chester held the following items in its safe on that date: +
Check payable to Chester dated January 2, 2013 in payment of a sale made in December
2012, included in December 31 checkbook balance- 70,000. -
Check payable to Chester deposited December 15, but returned by the bank DAIF- 10,000.-
Check drawn on Chester’s account, payable to a vendor, dated and recorded on December 30
but not yet mailed to payee as of December 31, 2012- 20,000. +
What is the correct cash balance of the company?
a. 150,000 c. 160,000
b. 140,000 d. 130,000
Solution:
Reported checkbook balance 200,000
Adjustments:
Customer's post dated check included in balance (70,000)
Customer's check returned by bank marked by DAIF (10,000)
Company'c check recorded but not yet mailed 20,000
Cash reported on Dec. 31, 2009 balance sheet 140,000