INTERMIDIATE ACCOUNTING 1 Cash short or over

Internal Control on cash: Imprest system

An entity shall classify an asset as current when…

Bank Reconciliation Statement and Proof of Cash

Objectives:

1. Define what bank reconciliation is.

2. Define and explain different terminologies

Cash Items
related to bank reconciliation.

3. Prepare a bank reconciliation statement using

adjusted balance method, bank-to-book
method, and book-to-bank method.

4. Prepare a four-column bank reconciliation

statement (proof of cash).

Cash in bank
Cash Equivalents ❑ Cash receipts > deposited altogether

❑ Cash payments > made through checks

Bank statement >increase in entity’s cash >credit

>decrease in entity’s cash >debit

Ledger >increase in cash >debit

>decrease in cash >credit

Temporary investments of cash

Bank Reconciliation Statement

A bank reconciliation statement is prepared by

an entity to reconcile the cash-in-bank account
balance in the entity’s books versus the balance
as reported by the bank in the bank statement.

Bank Balance reconciling items

Compensating Balances
Deposits in transit (DIT)
>Cash that has been received by an entity and was
recorded in the cash-in-bank account balance as a
deposit. However, this deposit that has been sent to the
bank is not yet processed and posted by the bank, thus
not reflecting in the bank statement.
POSDATED CHECKS
Outstanding checks
• Shall be reverted back to cash as at the end of >Checks that the company has issued and was recorded
the reporting period as a credit entry in the entity’s cash-in-bank account.
However, these checks were not yet presented for
payment and has not yet cleared from the bank account
from which it is drawn.
Bank Errors Problem:
>Erroneous debits and credits by the bank in the entity’s
account.

Ledger Balance reconciling items

Credit Memos
>Items credited by the bank to the bank account of the
entity not yet recorded by the firm in their books. These
include notes receivable collected by the bank in behalf
of the entity and interest earned in putting their cash in
the bank.

Debit Memos
>Items charged against the company’s bank account not
yet recorded in the company’s ledger. These includes
NSF (not sufficient funds) check which are checks
deposited but were returned by the bank because the
source account has insufficient balance. It also includes
bank service charges.

Book Errors
>Erroneous debits and credits of cash in the entity’s
ledger

Adjusted balance method

Bank Balance
+ Deposit in Transit Bank to Book Method
-Outstanding Checks
+/- Bank Error
=ADJUSTED BALANCE

Ledger balance
+Notes collected by the bank
+Interest earned
-NSF Checks-Service charge
+/-Book error
=ADJUSTED BALANCE

BANK-TO-BOOK METHOD

Bank Balance
+Deposit in transit
-Outstanding checks
+/-Bank error
-Collections by the bank
-Interest earned
+Service charge
+NSF checks
+/-Book error

BOOK-TO-BANK METHOD

Ledger balance
+Collections by the bank
+Interest earned
-NSF Checks
-Service charge
+/- Book error
-Deposit in Transit
+Outstanding checks
+/- Bank error
=Bank balance
Cash in Bank - Bank of the Islands 100678988781
Dec-01 100,000.00 Dec-04 Chk 101 5,000.00
Dec-21 50,000.00 Dec-06 Chk 102 15,000.00
Dec-27 10,000.00 Dec-08 Chk 103 40,000.00
Dec-31 80,000.00 Dec-08 Chk 104 10,000.00
Apr-30 Receipts Disbursements May-31
Dec-10 Chk 105 30,000.00 Ledger Balance 2,352,000 4,065,000 3,232,000 3,185,000
Notes collected by the bank
Dec-14 Chk 106 25,000.00 April 30 382,000 - 382,000
May 31 356,000 356,000
Dec-28 Chk 107 50,000.00 Interest Earned
April 30 30,000 - 30,000
May 31 16,000 16,000
NSF Checks
April 30 - 40,000 - 40,000
May 31 25,000 - 25,000
Bank Service charges
April 30 - 8,000 - 8,000
May 31 18,000 - 18,000
Adjusted Balances 2,716,000 4,025,000 3,227,000 3,514,000

ACCOUNTING FRAMEWORK

Economic
Entity

Accrual Going
Basis Concern

Monetary
Periodicity
Unit

Economic Entity
-Transactions of the owners should not be mixed with
that of the business

Going Concern
-The business will continue to operate in the
foreseeable future.

Monetary Unit
-Money is the common denominator. Transactions
should be quantifiable or can be measured in terms of
money (Peso for PH)

Periodicity
-The life of a business can be divided in segments of
time.

Accrual Basis
-Transactions are recorded when they occur and not
when the related cash flows are received or paid.

Conceptual Framework for Financial Reporting

❖ Complete, comprehensive and single document

promulgated by the IASB.
❖ Summary of the terms and concepts as - to provide information about entity resources, claims,
foundations of FS Preparation & Presentation and changes in resources and claims.
for External users. Theoretical Foundation –
General Purpose FS
Qualitative Characteristics of Useful Financial
❖ Intended to guide the:
Information
❖ Standard Setters
Qualities or attributes that make financial accounting
❖ Preparers information useful to users.

❖ Users Fundamental QC (Content or Substance)

- Relevance and Faithful Representation
❖ Underlying theory for the development of
Accounting Standards and revision of previously Enhancing QC (Presentation of Financial Information)
issued Accounting Standards. - Comparability
- Understandability
❖ Provides foundation for the standards that:
- Verifiability
❖ Contribute to TRANSPARENCY by - Timeliness
enhancing comparability and quality
Fundamental QC (Content or Substance)
financial information
- Relevance
❖ Strengthen accountability by reducing
Ingredients of Relevance: Predictive Value and
information gap between the providers
Confirmatory Value
of capital and the people to whom they
have entrusted their money. Other related concepts:

❖ Contribute to Economic Efficiency by 1. Materiality (Doctrine of Convenience) – Professional

helping investors to identify Judgement; Relative Size rather than Absolute Size.
opportunities and risks across the 2. Magnitude of Financial Information
world. 3. Nature of Financial Information

Fundamental QC (Content or Substance)

- Faithful Representation

Ingredients of FR: Completeness, Neutrality, Free from

error

Other related concepts:

1. Substance over form

Concept of Materiality
-Information is material if omitting, misstating or
obscuring it could reasonably be expected to influence
the economic decisions that primary users of general
purpose FS make on the basis of those statements
Scope of Conceptual Framework which provide financial information about a specific
Objective of Financial Reporting
reporting entity.
Qualitative Characteristics of Useful Financial Information
Concept of Prudence (Support Neutrality)
FS and Reporting Entity
❑ Exercise of Care and caution when dealing with
Elements of FS uncertainties in the measurement process such
that assets or income are not overstated and
Recognition and Derecognition
liabilities and expenses are not understated.
Measurement
❑ Neutrality is supported by the exercise of
Presentation and Disclosure prudence.
Concepts of Capital & Capital Maintenance Concept of Conservatism (Synonymous to Prudence)

❑ “Do not count your chicks until the eggs hatch”

Objective of Financial Reporting
❑ In case of doubt record any loss and do not
1. Overall Objective – to provide information that is
record any gain
useful for decision making.
❑ It has to be emphasized that conservatism is not
2. Specific Objective - to provide information useful in
a license to deliberately understate net
making decisions about providing resources to the
income and net assets.
entity.
- to provide information useful in assessing the cash
flow prospects of the entity.