CONCEPTUAL FRAMEWORK MODULE

SCHOOL OF ACCOUNTANCY

MODULE 1
CONCEPTUAL FRAMEWORK

OVERVIEW:
This module will serve as an introduction to the accounting standards and the application of different
underlying assumptions, a review of the accountancy profession and financial statements.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting and basic accounting concepts.

LEARNING OBJECTIVES:
After studying this module, you should be able to:
1. Familiarize yourself with the Accountancy profession
2. Know the underlying assumptions to be applied in accounting
3. Review different ideas regarding the financial statements

INTRODUCTION:
As you continue to study Accountancy you need to know different opportunities for you in the future. Not
only that. You also need to be familiar with the “foundations” of accounting, including underlying
assumptions. You need to inculcate these ideas from today until the rest of your life (of course, when you
continue to work as an accountant in the future).

LESSON 1: ACCOUNTANCY PROFESSION:

Being an accountant means different jobs. Some thought that accountants are needed only in big
businesses generating profit, but that is not the exact truth. Accountants may also teach accounting to
different courses. In fact, most colleges and universities even require their teachers to be Certified Public
Accountant or CPA.

Moreover, accountants may also be employed by the government, may it be accounting or auditing
departments. Some accountants are employed by a not-for-profit organizations like schools and
foundations.

Today, accountants are very much in demand in the field of technology, like business process
outsourcing, or even those that create new accounting systems. Given this fact, we are rest assured that
accountants will be part of every organization worldwide.

To better understand our profession, here is an excerpt from the Republic Act No. 9298:

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 Republic of the Philippines
Congress of the Philippines
Metro Manila
Twelfth Congress
Third Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand three.
Republic Act No. 9298 May 13, 2004
AN ACT REGULATING THE PRACTICE OF ACCOUNTANCY IN THE PHILIPPINES, REPEALING FOR THE
PURPOSE PRESIDENTIAL DECREE NO. 692, OTHERWISE KNOWN AS THE REVISED ACCOUNTANCY LAW,
APPROPRIATING FUNDS THEREFOR AND FOR OTHER PURPOSES
Be it enacted by the Senate and House of Representatives of the Philippine Congress Assembled:
Section 1. Shorts Title. - This act shall be known as the "Philippine Accountancy Act of 2004"
Section 2. Declaration of Policy. - The State recognizes the importance of accountants in nation building and
development. Hence, it shall develop and nurture competent, virtuous, productive and well rounded professional
accountants whose standard of practice and service shall be excellent, qualitative, world class and globally competitive
though inviolable, honest, effective, and credible licensure examinations and though regulatory measures, programs
and activities that foster their professional growth and development.
Section 3. Objectives. - This Act shall provide and govern:
The standardization and regulation of accounting education;
The examination of registration of certified public accountants; and
The supervision, control, and regulation of the practice of accountancy in the Philippines.
Section 4. Scope of Practice. - The practice of accountancy shall include, but not limited to, the following:
(a) Practice of Public Accountancy - shall constitute a person, be it his/her individual capacity, or as a staff
member in an accounting or auditing firm, holding out himself/herself as one skilled in the knowledge, science
and practice of accounting, and as a qualified person to render professional services as a certified public
accountant; or offering or rendering, or both or more than one client on a fee basis or otherwise, services as
such as the audit or verification of financial transaction and accounting records; or the preparation, signing, or
certification for clients of reports of audit, balance sheet, and other financial, accounting and related schedules,
exhibits, statement of reports which are to be used for publication or for credit purposes, or to be filed with a
court or government agency, or to be used for any other purposes; or to design, installation, and revision of
accounting system; or the preparation of income tax returns when related to accounting procedures; or when
he/she represent clients before government agencies on tax and other matters relating to accounting or render
professional assistance in matters relating to accounting procedures and the recording and presentation of
financial facts or data.
(b) Practice in Commerce and Industry - shall constitute in a person involved in decision making requiring
professional knowledge in the science of accounting, or when such employment or position requires that the
holder thereof must be a certified public accountant.
(c) Practice in Education/Academe - shall constitute in a person in an educational institution which involve
teaching of accounting, auditing, management advisory services, fiancé, business law, taxation and other
technically related subject: Provided, That members of the Integrated Bar of the Philippines may be allowed to
teach business law and taxation subjects.
(d) Practice in Government - shall constitute in a person who holds, or is appointed to, a position in an
accounting professional group in government or in an government-owned and/or controlled corporation,
including those performing proprietary functions, where decision making requires professional knowledge in the
science of accounting, or where a civil service eligibility as a certified public accountant is a prerequisite.
LESSON 2: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING
The FRSC Framework for the Preparation and Presentation of Financial Statements describes the basic
concepts by which financial statements are prepared. The Framework serves as a guide to the Board in
developing accounting standards and as a guide to resolving accounting issues that are not addressed
directly in Philippine Accounting Standards or Philippine Financial Reporting Standards or
Interpretations. The purpose of the framework as outlined is to:

a. Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards
that represent generally accepted accounting principle;
b. Assist the FRSC in its review and adoption of existing International Accounting Standards;
c. Assist preparers of the financial statements in applying FRSC Statements of Financial
Accounting Standards and in dealing with topics that have yet to form the subject of an FRSC statement;
d. Assist auditors in forming an opinion as to whether financial statements conform with Philippine GAAP;
e. Assist users of financial statements in interpreting information contained in the financial statements
prepared in conformity with Philippine GAAP;
f. Provide those who are interested in the work of the FRSC with information about its approach to the
formulation of Statements of Financial Accounting Standards

Scope of the Framework:

• Defines the objective of financial statements;
• Identifies the qualitative characteristics that make information in financial statements useful; and
• Defines the basic elements of financial statements and the concepts for recognizing and measuring them
in financial statements.
• Concepts of capital and capital maintenance.

Framework is not a Standard. Meaning, when you encounter a transaction, you must not refer to the
framework only, but you must find the accounting standard related to the accounts in the transaction, in
order to follow strictly the financial reporting regulations. In case of contrary between framework and a
standard, the standard prevails.

2.1 The objective of general-purpose financial reporting:

The main objective of general-purpose financial reports is to provide the financial information
about the reporting entity that is useful to the following users:
a. existing and potential investors – interested in financial statements to help them make
decisions on what to do with their investments (shares of stock), i.e. hold, sell, or buy more.
b. lenders, and other creditors - interested in the company’s ability to pay liabilities upon maturity
c. Government - are interested in an entity's financial information for taxation and regulatory
purposes
d. Management – for business decisions, that require analysis of accounting information
e. Employees - interested in the company’s profitability and stability
f. Customers - interested in the company’s ability to continue its existence and maintain
stability of operations
g. General Public - anyone outside the company such as researchers, students, analysts and
others are interested in the financial statements of a company for some valid reason.

2.2 Qualitative characteristics of useful financial information

There are 2 types of characteristics for financial information to be useful:
2.2.1 Fundamental qualitative characteristics:
 a. Relevance: capable of making a difference in the users’ decisions. The
financial information is relevant when it has predictive value, confirmatory
value, or both.
b. Materiality is closely related to relevance. Materiality depends on size or
nature of information.
c. Faithful representation: The information is faithfully represented when it is
complete, neutral and free from error.
2.2.2 Enhancing qualitative characteristics:
a. Comparability: Information should be comparable between different entities
or time periods;
b. Verifiability: Independent and knowledgeable observers are able to verify the
information;
c. Timeliness: Information is available in time to influence the decisions of users;
d. Understandability: Information shall be classified, presented clearly and
concisely.

2.3 Financial Statements

Financial statements are one of the outputs made by accountants. Financial statements) are formal
records of the financial activities and position of a business, person, or other entity. The financial
statements should provide the useful information about the reporting entity.
2.3.1 Statement of financial
position - A statement of financial
position a.k.a balance sheet. It
displays the assets of a company
and their sources of financing,
debt and equity. The elements of
financial position are:
a. Assets - a present
economic resource
controlled by the
entity as a result of
past events;
b. Liabilities - a present
obligation of the entity
to transfer an
economic resource as
a result of past events
c. Equity - the residual
interest in the assets of
the entity after
deducting all its
liabilities
 2.3.2 Statement of financial performance -
A statement showing the revenues,
expenses, and income (the difference
between revenues and expenses) of a
company over some period of time. Some
call this income statement. The elements of
this statement are:
a. Income - increases in assets or
decreases in liabilities resulting
in increases in equity, other
than contributions from equity
holders
b. Expenses - decreases in assets or
increases in liabilities resulting
in decreases in equity, other
than distributions to equity
holders

2.3.3 Statement of changes in equity -

explains the changes in a company's Share Capital, accumulated reserves and retained
earnings over the reporting period. It breaks down changes in the owners' interest in the
organization, and in the application of retained profit or surplus from one accounting
period to the next. Line items typically include profits or losses from operations,
dividends paid, issue or redemption of shares, revaluation reserve and any other items
charged or credited to accumulated other comprehensive income.

2.3.4 Statement of cash flows - financial statement that summarizes the amount of cash
and cash equivalents entering and leaving a company. The cash flow statement measures
how well a company manages its cash position, meaning how well the company generates
cash to pay its debt obligations and fund its operating expenses.

2.3.4 Notes to financial statements - also referred to as footnotes. These provide additional
information pertaining to a company's operations and financial position and are
considered to be an integral part of the financial statements. The notes are required by the
full disclosure principle. These give detailed explanation of the different accounts seen in
the other financial statements.

2.4 Fundamental accounting concepts and assumptions:

Underlying Assumptions (Postulates)
• Accrual Basis. The effects of transactions and other events are recognized when they occur, rather
than when cash or its equivalent is received or paid, and they are reported in the financial
statements of the periods to which they relate.
• Going Concern. The financial statements presume that an enterprise will continue in operation
indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are
required.

The FRSC conceptual framework mentions two assumptions only. However, it is widely
believed that an inherent trait of the financial statements are the basic assumptions of:
 • Accounting Entity. The business is separate from the owners, managers, and employees who
constitute the business. Therefore transactions of the said individuals should not be included as
transactions of the business.
• Time Period. Financial reports are to be prepared for one year or a period of twelve months.
• Monetary unit. There are two aspects under this assumption. First is the quantifiability of the
peso, meaning that the elements of the financial statements should be stated under one unit of
measure which is the Philippine Peso. Second is the stability of the peso, means that there is still
an assumption that the purchasing power of the peso is stable or constant and that instability is
insignificant and therefore ignored.

Other concepts and principles:

• Matching principle - directs a company to report an expense on its income statement in the period
in which the related revenues are earned.
• Prudence / Conservatism - if there are two acceptable accounting procedures choose the one gives
the less optimistic view of profitability and asset values.
• Consistency - similar items should be accorded similar accounting treatments.
• Separate Valuation - each asset or liability must be valued separately.
• Materiality - only items material in amount or in their nature will affect the true and fair view
given by a set of accounts.
• Historical Cost -transactions are recorded at the cost when they occurred.
• Full disclosure principle - requires a company to provide the necessary information so that people
who are accustomed to reading financial information are able to make informed decisions
regarding the company.

2.5 Concepts of Capital Maintenance

Financial capital maintenance – Under this concept, a profit is earned only if the financial
(or money) amount of the net assets at the end of the of the period exceeds the financial
(or money) amount of the net assets at the beginning of the period, after excluding
any distributions to, and contributions from, owners during the period.

Physical capital maintenance – Under this concept, a profit is earned only if the physical
productive capacity (or operating capability) of the enterprise (or the resources need to
achieve that capacity) at the end of the period exceeds the physical productive capacity at
the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.

REFERENCES:
R.A. 9298
https://www.ifrsbox.com/
https://Investopedia.com
https://courses.lumenlearning.com/
Financial Accounting 1, Volume 1 Part 1, Christian Valix et al.

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapters 1-6.
NAME:
ID NUMBER: _

ACTIVITY SECTION

ACTIVITY 1: REFLECTION
Why do you want to become a CPA? As of today, in which sector of accountancy do you prefer to work?
State your reason.

Academe/Public Practice/Government/Commerce and Industry

ACTIVITY 2:
Identify which assumption or principle may be applied to each situation. Give brief explanation:

1. Princess Company does not report bankruptcy yet because they think they can still continue
operations amidst COVID19 pandemic.

2. Assume Apple Company is currently suing Ample company for copyright violation over its
software
package. Since this software package is the only operation the small tech company does, losing this
lawsuit would be detrimental. There is a 95 percent expectation that Apple will win the lawsuit.

3. Your business bought a new building for P10,000,000. You recorded the building account on the
same amount.

4. Thor Company has a receivable from a customer named Loki. Loki recently had problems with
his finances and told Thor that he may not be able to pay his debt. From that day, Thor Company
did not recognize the debt anymore. He recorded that as an expense/loss.

5. Bong No, together with his friends has created a business registered as NoNoNo Company last
2018. Bong No needed a large amount of money last June 2020 because he was hospitalized due
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

to COVID. He borrowed from his relatives, and when the due date came, they told Bong No to
just give them the company as payment. Bong No and other owners refused.

6. Instead of preparing daily financial statements, you prepared financial statements for the period
January 1 to December 31, 2019, your first year of operations. Aside from this annual report, you
also prepared quarterly and semi-annual reports.

7. The standard requires you to give detailed information of your cash balance such as its
composition
and restrictions, if there are any. You showed these details in the notes to financial statements.

EVALUATION
Which part of the discussion did Which part of the discussion did
you find most enjoyable to you find most difficult?
learn?

Do you have question(s) in mind? Write it here

missmaicustodio@dwcc.
edu.ph
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

MODULE 2
CASH

OVERVIEW:
This module will serve as an introduction to the accounting standards for cash and cash equivalents. This
module shall give you the basic knowledge in the accounting and proper classification of accounts related
to or within the description of cash.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting, including analyzing, journalizing and
preparation of adjusting entries.

LEARNING OBJECTIVES
After studying this module, you should be able to:
1. Identify whether an account may be considered as part of cash or not.
2. Prepare adjusting entries to correct wrong classification and use of different cash accounts.

INTRODUCTION
Cash includes money and other negotiable instrument that is payable in money and acceptable by bank for
deposit or immediate encashment. These negotiable instruments include checks, bank drafts and money
orders.

A bank draft and a money order are both

prepaid, with a specified and printed amount.
However, a bank draft is a check drawn on a
bank's funds after accepting the amount from
the issuer's account, whereas cash is used
when purchasing a money order. These
negotiable instruments are often used by
people who need money for transaction but do
not want to bring money with them for safety
purposes.

Persons receiving money order and bank drafts have less worries in terms of availability of funds because
these negotiable instruments represent an amount of money guaranteed by bank or other financial
institution.

LESSON 1: MEASUREMENT OF CASH

Cash should be recorded at face value, except cash in bank under bankruptcy, wherein cash is
measured at estimated realizable value, which is normally lower than the face amount.

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LESSON 2: CLASSIFICATIONS
Cash may be grouped into two:
2.1 Restricted – cash that the company already has set a purpose aside from using it in normal
operations
Example 1: Money in a bank that the company saved and has set aside for the purpose of
purchasing a building.
- It should be noted that restricted cash is different from normal cash in a way that it is
not free to be used for anything else.
Restricted cash is classified in other line item, within current or noncurrent, depending on purpose.
In our previous example, the restricted cash is under noncurrent asset because it will be used for
purchase of noncurrent asset.

Example 2: Cash set aside for payment of a liability.

In this case, the restricted cash is classified as current or noncurrent depending on the
classification of the liability. You should use parallelism for this. If our balance sheet date is
December 31, 2019, for example, and we have restricted cash that is due until December 31,
2020, that cash should be classified as current. And of course, when liability falls due beyond
December 31, 2020, it is included as part of noncurrent assets in 2019 balance sheet.

2.2 Unrestricted – cash with no other purpose, only for normal operations
- Under this group, cash may be classified as:
o Cash on Hand – in possession, or awaiting deposit
o Cash in Bank – well, obviously, cash that is in the possession of banks
o Cash Fund – cash set aside for current purposes (e.g. petty cash fund, payroll
fund, dividend fund)

LESSON 3: POSTDATED CHECK

We need to broaden our knowledge of cash. In layman’s term, cash is money. For accounting purposes,
we need to think that cash is not mere bills and coins, as defined above. It includes negotiable
instruments. For example, a check received from a customer may be considered as cash.

However, negotiable instruments,

like money, may not be classified
as part of company’s cash
account. A good example of this
is postdated check. A check,
when received by the company,
does not automatically mean that
cash has been received, because
sometimes, check is not yet
acceptable by bank for
encashment.

Scenario: Postdated check received from customer

It is December 29, 2019, when our company received a check of P10,000 from a customer as payment of
account. The check was dated January 15, 2020. As of December 31, 2019, our balance sheet date, the
money that the check represents cannot be given to us yet, even though we go to the bank for encashment.
 The bank will tell us that the check may only be turned into cash (encashed) starting January 15. So, for
reporting purposes, the postdated check is still a receivable.

If on December 29, 2019, due to confusion, you have journalized the receipt as follows,
Date Account Titles Debit Credit

Dec 29 Cash 1 0 0 0 0
Accounts Receivable 1 0 0 0 0
To record receipt of payment from customer

you have to create an adjusting entry to correct it:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 1 0 0 0 0
Cash 1 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

Scenario: Postdated check delivered to supplier

It is December 20, 2019, when our company paid a supplier for supplies worth P20,000 purchased through
issuing a check. The check was dated January 10, 2020. As of December 31, 2019, our balance sheet date,
the money that the check represents will not reduce our cash balance yet, because our supplier may only
encash the check starting January 10. We are still the rightful owner of the cash in bank as of the balance
sheet date.

If on December 20, 2019, you have entered the following entry upon issuing a check:
Date Account Titles Debit Credit
Dec 20 Accounts Payable 2 0 0 0 0
Cash 2 0 0 0 0
To record receipt of payment from customer

You must create an adjusting entry to reverse the previous one:

Date Account Titles Debit Credit
Dec 31 Cash 2 0 0 0 0
Accounts Payable 2 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

LESSON 4: STALE CHECK OR CHECKS LONG OUTSTANDING

As discussed previously, the date on a check connotes the starting day of encashment. This does not mean
that the payee (the person who receives the check) may encash the check anytime after that day. We have
what we call “expiration date” for check encashment. Checks not encashed within relatively long period of
time is called stale or long outstanding. In accounting, the “expiration” depends on company policy, but
legally, banks are only required to honor checks for six months.
 Scenario: Checks received
It was February 1, 2019 when we received a check dated that same day, from a customer as payment for
accounts due amounting P30,000. We have forgotten to encash the check. On reporting date, December
31, 2019, the check is considered stale, because it was not encashed for 11 months. So, if we have entered
in our journal an entry as follows:
Date Account Titles Debit Credit
Feb 1 Cash 3 0 0 0 0
Accounts Receivable 3 0 0 0 0
To record payment by customer

We need to prepare an adjusting entry, as follows:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 3 0 0 0 0
Cash 3 0 0 0 0
To adjust payment by customer, the check
received became stale

We have to contact the customer and inform them about the stale check, and request for a new check to
be issued.

If the check is only for an immaterial amount, and not related to receivables, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Miscellaneous Expense 3 0 0 0 0
Cash 3 0 0 0 0
To adjust for a check received that has become
stale

Scenario: Checks issued

It was March 1, 2019 when we issued a check to a supplier amounting to P40,000. That was for payment
of our accounts payable to them. On December 31, 2019, the check was still outstanding, meaning the
supplier failed to encash the check we gave. If we have entered the following entry on our journal on
March 1:
Date Account Titles Debit Credit
Mar 1 Accounts Payable 4 0 0 0 0
Cash 4 0 0 0 0
To record payment of accounts payable

We need to prepare adjusting entries as follows:

Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Accounts Payable 4 0 0 0 0
To adjust previous payment of accounts payable due to check becoming stale

If the check is only for an immaterial amount, and not related to liabilities, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Miscellaneous Income 4 0 0 0 0
To adjust previous payment of accounts payable
due to check becoming stale

LESSON 5: FOREIGN CURRENCY

Cash in foreign currency (e.g. Dollars, Yen, Won, etc.) needs to be translated to Philippine peso, for
reporting purposes. You need to use the current exchange rate in translation. For example, if your
company has a foreign currency account in ABC Bank, it is considered as a company asset, and
translated to Philippine Peso. Assuming you have $1,000 in the account, and on December 31, 2019,
reporting date, the exchange rate is P50 for $1. The amount to be included as part of cash amount to
P50,000.

LESSON 6: UNDELIVERED/UNRELEASED CHECKS

Sometimes, a company has already prepared and recorded a disbursement through check, but the check
itself is not yet delivered to the payee. It happens when the payee failed to claim the check from the
company premises. At this point, even though the check is not postdated, the amount will not be deducted
from the company’s cash balance, because the payee may not go to the bank for encashment without the
check.

Scenario: Checks drawn and recorded, but not delivered

It was November 2, 2019 when a company wrote a check amounting to P50,000 in favor of N. Lustre
Company, as payment for an accounts payable to them. On December 31, 2019, report date, the check is
still on hand. If you have recorded the following entry upon drawing the check
Date Account Titles Debit Credit
Nov 2 Accounts Payable 5 0 0 0 0
Cash 5 0 0 0 0
To record payment of accounts payable to N.
Lustre

You must prepare an adjusting entry, as follows, because the company cash has not been reduced by the
transaction and the liability is not yet settled because N. Lustre has not yet received the cash
Date Account Titles Debit Credit
Dec 31 Cash 5 0 0 0 0
Accounts Payable 5 0 0 0 0
To record payment of accounts payable to N.
Lustre
LESSON 7: COMPENSATING BALANCE
A compensating balance is a minimum balance that must be maintained in a bank account, normally used
to offset the cost incurred by a bank to set up a loan. The compensating balance may not be available for
company use, and may need to be disclosed in the borrower's notes to the financial statements. Our
treatment to compensating balance depends on the agreement made with the banks:

7.1 Informal Agreement – The balance is not restricted as to withdrawal, meaning the company
may withdraw the balance when they want to. In this case, the compensating balance is part of
company’s cash.
Note: Compensating balance is already included in the total cash balance in an account

7.2 Formal Agreement - The bank restricts the use of compensating balance because it serves like
a collateral for a loan to the company by the bank. Due to this restriction, the compensating
balance may not be included as part of cash. This restricted cash, like what we have discussed
earlier, will be classified as current or noncurrent, depending on the corresponding liability.

LESSON 8: BANK OVERDRAFT

Sometimes, cash in bank account has credit balance. This means that the company issued check
amounting to a total more than the actual amount of deposits. The excess is classifying as bank overdraft
and should be reported as a liability account. Please be reminded that bank overdrafts should not be
offset against other bank accounts with debit balances, except:
a. When an entity maintains two or more accounts in the same bank, and the other accounts
have debit balances
b. When the overdraft is immaterial

Scenario: Two accounts in one bank

Casa Maila Company has two bank accounts in Maharlika Bank. Account no. 1 has a debit balance
of P200,000. Account No. 2 has credit balance of P30,000. In this case, the P30,000 may be offset against
the P200,000, resulting to P170,000 net debit balance in Maharlika Bank.

Scenario: Two accounts in two banks

Casa Maila Company has one bank account in Maharlika Bank with a debit balance of P200,000. It also
has an account with the Malaya bank that has a credit balance of P30,000. In this case, the P30,000 may
not be offset against the P200,000, because the two accounts do not belong under the same bank. The
P200,000 should be reported as part of cash and cash equivalents, while P30,000 is in current liability
section.

REFERENCES:
Valix, Financial Accounting and Reporting Volume 1, 2017
investopedia.com

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapter 7
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

ACTIVITY SECTION

ACTIVITY 1:
PROVIDE ADJUSTING ENTRIES. (ASSUME FS DATE: DECEMBER 31, 2019)
1. On November 30, 2019, you have received a check from Baby Blue Company for a service that
you have already done on account. The check was dated February 13, 2020. Upon checking, you
have only journalized the recognition of receivable and income, but not the payment transaction.
What adjusting entry should you make?
Date Account Titles Debit Credit

2. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated
December 20, 2019, for an equipment purchased on the same date. You failed to record any
transaction.
Date Account Titles Debit Credit

3. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated February
20, 2019, for an equipment purchased on the same date. You failed to record any transaction.
Date Account Titles Debit Credit

4. On November 2, 2019, you have drawn and recorded a check amounting to P20,000 to pay J. Reid
Company for a Land purchased on that day. On December 31, 2019, the reporting date, the check
was still in the company’s premises, because J. Reid have forgotten to claim it.
Date Account Titles Debit Credit

ACTIVITY 2
Determine whether the following is included or excluded from cash:

1. Postdated checks received from customers

CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

2. Postdated checks drawn

3. Unreleased checks drawn
4. Compensating balances that are legally restricted as to withdrawal by the
borrower
5. A bank overdraft, in general
6. Money order
7. Cash fund set aside for payment of salaries
8. Traveler’s check
9. Restricted foreign currency deposit
10. Check received that became stale
11. Check issued that became stale

EVALUATION

Which part of the discussion did Which part of the discussion did
you find most enjoyable to you find most difficult?
learn?

Do you have question(s) in mind? Write it here

edu.ph
CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

MODULE 2
CASH

OVERVIEW:
This module will serve as an introduction to the accounting standards for cash and cash equivalents. This
module shall give you the basic knowledge in the accounting and proper classification of accounts related
to or within the description of cash.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting, including analyzing, journalizing and
preparation of adjusting entries.

LEARNING OBJECTIVES
After studying this module, you should be able to:
3. Identify whether an account may be considered as part of cash or not.
4. Prepare adjusting entries to correct wrong classification and use of different cash accounts.

INTRODUCTION
Cash includes money and other negotiable instrument that is payable in money and acceptable by bank for
deposit or immediate encashment. These negotiable instruments include checks, bank drafts and money
orders.

A bank draft and a money order are both

prepaid, with a specified and printed amount.
However, a bank draft is a check drawn on a
bank's funds after accepting the amount from
the issuer's account, whereas cash is used
when purchasing a money order. These
negotiable instruments are often used by
people who need money for transaction but do
not want to bring money with them for safety
purposes.

Persons receiving money order and bank drafts have less worries in terms of availability of funds because
these negotiable instruments represent an amount of money guaranteed by bank or other financial
institution.

LESSON 1: MEASUREMENT OF CASH

Cash should be recorded at face value, except cash in bank under bankruptcy, wherein cash is
measured at estimated realizable value, which is normally lower than the face amount.

missmaicustodio@dwcc.
edu.ph
LESSON 2: CLASSIFICATIONS
Cash may be grouped into two:
4.1 Restricted – cash that the company already has set a purpose aside from using it in normal
operations
Example 1: Money in a bank that the company saved and has set aside for the purpose of
purchasing a building.
- It should be noted that restricted cash is different from normal cash in a way that it is
not free to be used for anything else.
Restricted cash is classified in other line item, within current or noncurrent, depending on purpose.
In our previous example, the restricted cash is under noncurrent asset because it will be used for
purchase of noncurrent asset.

Example 2: Cash set aside for payment of a liability.

In this case, the restricted cash is classified as current or noncurrent depending on the
classification of the liability. You should use parallelism for this. If our balance sheet date is
December 31, 2019, for example, and we have restricted cash that is due until December 31,
2020, that cash should be classified as current. And of course, when liability falls due beyond
December 31, 2020, it is included as part of noncurrent assets in 2019 balance sheet.

4.2 Unrestricted – cash with no other purpose, only for normal operations
- Under this group, cash may be classified as:
o Cash on Hand – in possession, or awaiting deposit
o Cash in Bank – well, obviously, cash that is in the possession of banks
o Cash Fund – cash set aside for current purposes (e.g. petty cash fund, payroll
fund, dividend fund)

LESSON 3: POSTDATED CHECK

We need to broaden our knowledge of cash. In layman’s term, cash is money. For accounting purposes,
we need to think that cash is not mere bills and coins, as defined above. It includes negotiable
instruments. For example, a check received from a customer may be considered as cash.

However, negotiable instruments,

like money, may not be classified
as part of company’s cash
account. A good example of this
is postdated check. A check,
when received by the company,
does not automatically mean that
cash has been received, because
sometimes, check is not yet
acceptable by bank for
encashment.

Scenario: Postdated check received from customer

It is December 29, 2019, when our company received a check of P10,000 from a customer as payment of
account. The check was dated January 15, 2020. As of December 31, 2019, our balance sheet date, the
money that the check represents cannot be given to us yet, even though we go to the bank for encashment.
 The bank will tell us that the check may only be turned into cash (encashed) starting January 15. So, for
reporting purposes, the postdated check is still a receivable.

If on December 29, 2019, due to confusion, you have journalized the receipt as follows,
Date Account Titles Debit Credit

Dec 29 Cash 1 0 0 0 0
Accounts Receivable 1 0 0 0 0
To record receipt of payment from customer

you have to create an adjusting entry to correct it:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 1 0 0 0 0
Cash 1 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

Scenario: Postdated check delivered to supplier

It is December 20, 2019, when our company paid a supplier for supplies worth P20,000 purchased through
issuing a check. The check was dated January 10, 2020. As of December 31, 2019, our balance sheet date,
the money that the check represents will not reduce our cash balance yet, because our supplier may only
encash the check starting January 10. We are still the rightful owner of the cash in bank as of the balance
sheet date.

If on December 20, 2019, you have entered the following entry upon issuing a check:
Date Account Titles Debit Credit
Dec 20 Accounts Payable 2 0 0 0 0
Cash 2 0 0 0 0
To record receipt of payment from customer

You must create an adjusting entry to reverse the previous one:

Date Account Titles Debit Credit
Dec 31 Cash 2 0 0 0 0
Accounts Payable 2 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

LESSON 4: STALE CHECK OR CHECKS LONG OUTSTANDING

As discussed previously, the date on a check connotes the starting day of encashment. This does not mean
that the payee (the person who receives the check) may encash the check anytime after that day. We have
what we call “expiration date” for check encashment. Checks not encashed within relatively long period of
time is called stale or long outstanding. In accounting, the “expiration” depends on company policy, but
legally, banks are only required to honor checks for six months.
 Scenario: Checks received
It was February 1, 2019 when we received a check dated that same day, from a customer as payment for
accounts due amounting P30,000. We have forgotten to encash the check. On reporting date, December
31, 2019, the check is considered stale, because it was not encashed for 11 months. So, if we have entered
in our journal an entry as follows:
Date Account Titles Debit Credit
Feb 1 Cash 3 0 0 0 0
Accounts Receivable 3 0 0 0 0
To record payment by customer

We need to prepare an adjusting entry, as follows:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 3 0 0 0 0
Cash 3 0 0 0 0
To adjust payment by customer, the check
received became stale

We have to contact the customer and inform them about the stale check, and request for a new check to
be issued.

If the check is only for an immaterial amount, and not related to receivables, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Miscellaneous Expense 3 0 0 0 0
Cash 3 0 0 0 0
To adjust for a check received that has become
stale

Scenario: Checks issued

It was March 1, 2019 when we issued a check to a supplier amounting to P40,000. That was for payment
of our accounts payable to them. On December 31, 2019, the check was still outstanding, meaning the
supplier failed to encash the check we gave. If we have entered the following entry on our journal on
March 1:
Date Account Titles Debit Credit
Mar 1 Accounts Payable 4 0 0 0 0
Cash 4 0 0 0 0
To record payment of accounts payable

We need to prepare adjusting entries as follows:

Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Accounts Payable 4 0 0 0 0
To adjust previous payment of accounts payable due to check becoming stale

If the check is only for an immaterial amount, and not related to liabilities, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Miscellaneous Income 4 0 0 0 0
To adjust previous payment of accounts payable
due to check becoming stale

LESSON 5: FOREIGN CURRENCY

Cash in foreign currency (e.g. Dollars, Yen, Won, etc.) needs to be translated to Philippine peso, for
reporting purposes. You need to use the current exchange rate in translation. For example, if your
company has a foreign currency account in ABC Bank, it is considered as a company asset, and
translated to Philippine Peso. Assuming you have $1,000 in the account, and on December 31, 2019,
reporting date, the exchange rate is P50 for $1. The amount to be included as part of cash amount to
P50,000.

LESSON 6: UNDELIVERED/UNRELEASED CHECKS

Sometimes, a company has already prepared and recorded a disbursement through check, but the check
itself is not yet delivered to the payee. It happens when the payee failed to claim the check from the
company premises. At this point, even though the check is not postdated, the amount will not be deducted
from the company’s cash balance, because the payee may not go to the bank for encashment without the
check.

Scenario: Checks drawn and recorded, but not delivered

It was November 2, 2019 when a company wrote a check amounting to P50,000 in favor of N. Lustre
Company, as payment for an accounts payable to them. On December 31, 2019, report date, the check is
still on hand. If you have recorded the following entry upon drawing the check
Date Account Titles Debit Credit
Nov 2 Accounts Payable 5 0 0 0 0
Cash 5 0 0 0 0
To record payment of accounts payable to N.
Lustre

You must prepare an adjusting entry, as follows, because the company cash has not been reduced by the
transaction and the liability is not yet settled because N. Lustre has not yet received the cash
Date Account Titles Debit Credit
Dec 31 Cash 5 0 0 0 0
Accounts Payable 5 0 0 0 0
To record payment of accounts payable to N.
Lustre
LESSON 7: COMPENSATING BALANCE
A compensating balance is a minimum balance that must be maintained in a bank account, normally used
to offset the cost incurred by a bank to set up a loan. The compensating balance may not be available for
company use, and may need to be disclosed in the borrower's notes to the financial statements. Our
treatment to compensating balance depends on the agreement made with the banks:

7.3 Informal Agreement – The balance is not restricted as to withdrawal, meaning the company
may withdraw the balance when they want to. In this case, the compensating balance is part of
company’s cash.
Note: Compensating balance is already included in the total cash balance in an account

7.4 Formal Agreement - The bank restricts the use of compensating balance because it serves like
a collateral for a loan to the company by the bank. Due to this restriction, the compensating
balance may not be included as part of cash. This restricted cash, like what we have discussed
earlier, will be classified as current or noncurrent, depending on the corresponding liability.

LESSON 8: BANK OVERDRAFT

Sometimes, cash in bank account has credit balance. This means that the company issued check
amounting to a total more than the actual amount of deposits. The excess is classifying as bank overdraft
and should be reported as a liability account. Please be reminded that bank overdrafts should not be
offset against other bank accounts with debit balances, except:
c. When an entity maintains two or more accounts in the same bank, and the other accounts
have debit balances
d. When the overdraft is immaterial

Scenario: Two accounts in one bank

Casa Maila Company has two bank accounts in Maharlika Bank. Account no. 1 has a debit balance
of P200,000. Account No. 2 has credit balance of P30,000. In this case, the P30,000 may be offset against
the P200,000, resulting to P170,000 net debit balance in Maharlika Bank.

Scenario: Two accounts in two banks

Casa Maila Company has one bank account in Maharlika Bank with a debit balance of P200,000. It also
has an account with the Malaya bank that has a credit balance of P30,000. In this case, the P30,000 may
not be offset against the P200,000, because the two accounts do not belong under the same bank. The
P200,000 should be reported as part of cash and cash equivalents, while P30,000 is in current liability
section.

REFERENCES:
Valix, Financial Accounting and Reporting Volume 1, 2017
investopedia.com

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapter 7
 ACTIVITY SECTION

ACTIVITY 1:
PROVIDE ADJUSTING ENTRIES. (ASSUME FS DATE: DECEMBER 31, 2019)
5. On November 30, 2019, you have received a check from Baby Blue Company for a service that
you have already done on account. The check was dated February 13, 2020. Upon checking, you
have only journalized the recognition of receivable and income, but not the payment transaction.
What adjusting entry should you make?
Date Account Titles Debit Credit

6. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated
December 20, 2019, for an equipment purchased on the same date. You failed to record any
transaction.
Date Account Titles Debit Credit

7. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated February
20, 2019, for an equipment purchased on the same date. You failed to record any transaction.
Date Account Titles Debit Credit

8. On November 2, 2019, you have drawn and recorded a check amounting to P20,000 to pay J. Reid
Company for a Land purchased on that day. On December 31, 2019, the reporting date, the check
was still in the company’s premises, because J. Reid have forgotten to claim it.
Date Account Titles Debit Credit

ACTIVITY 2
Determine whether the following is included or excluded from cash:

1. Postdated checks received from customers

 2. Postdated checks drawn
3. Unreleased checks drawn
4. Compensating balances that are legally restricted as to
withdrawal by the borrower
5. A bank overdraft, in general
6. Money order
7. Cash fund set aside for payment of salaries
8. Traveler’s check
9. Restricted foreign currency deposit
10. Check received that became stale
11. Check issued that became stale

EVALUATION

Which part of the discussion did Which part of the discussion did
you find most enjoyable to you find most difficult?
learn?

Do you have question(s) in mind? Write it here

Coins and currencies P 2,550
Petty cash vouchers:
Gasoline for delivery equipment P3,000
Medical supplies for employees 2,040 5,040
IOU’s:
Advances to employees 2,220
A sheet of paper with names of several employees
together with contribution to bereaved employee,
attached is a currency of 2,400
Checks:
Check drawn to the order of the petty cash custodian 3,000
Personal check drawn by the petty cash custodian 2,400

ACCOUNTABILITY ACCOUNTED FOR

Petty Cash Fund 15,000 Coins & Currecies 2,550
Gasoline 3,000
Medical Supplies 2,040
Advances 2,220

Replenishment check 3,000

REPLENISHMENT:
Transportation expense 3,000
Medical Supplies 2040
Advances to employees 2220
Cash short or over 2,190
Cash in Bank 9,450
 On January 1, 2002, Princess Corporation established a petty cash fund of ₱400. On December 31, 2002,
the petty cash fund was examined and found to have receipts and documents for miscellaneous expenses
amounting to ₱364. In addition, there was cash amounting to ₱44. What entry would be required to record
replenishment of the petty cash fund on December 31, 2002?

ACCOUNTABILITY ACCOUNTED FOR

Petty Cash Fund 400 Coins & Currecies 44
Tota 400 Miscellaneous Exp
Total408 364
l short or over-8

REPLENISHMENT: Petty cash fund balance

Miscellaneous Expense 364 (44+356)
Cash in Bank 356
Cash short or over 8

Princess Company’s petty cash custodian has the following in its cash box:
Bills and Coins: P 520
Petty Cash Vouchers: P 1,700
Postdated Checks from Company Officers: P 1,000 IOUs from employees (vale): P 500
An envelope which has a “Happy Birthday” on it. It has a “P 350” writing at the back It was left unopened.

The Petty Cash is established at P3,500.

It is already reporting date and no replenishment has been done.

Provide the adjusting entry.

ACCOUNTABILITY ACCOUNTED FOR

Petty Cash Fund3,500 Coins & Currecies520
PCV1,700
Rec'l from officers1,000
IOUs500
Total3,500Total3,720
short or over-220
ADJUSTING ENTRY:
Expenses 1700 Petty cash fund balance is 520.
Receivable from officers Advances to 1000 no replenishment so kung ilan lang
Employees 500 u (3500-2980=520)
Cash short or over Petty cash Fund 220
2980

Information has the quality of relevance when

I. It influences the economic decisions of users by helping them evaluate past, present, or future events or
confirming, or correcting their past evaluations.
II. It is free from material error and bias and can be depended upon by users to represent faithfully that which it
purports to represent or could reasonably be expected to represent.
A. I only. C. I and II.
B. II only. D. Neither I nor II.
The FRSC Framework
A. Sets out the concepts that underlie the preparation and presentation of financial statements for external
users.
B. Provides information about the financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic decisions.
C. Represents the attributes that make the information provided in financial statements useful to users.
D. Is directly related to the measurement of financial position and performance of an enterprise
Cash equivalents are considered as part of cash.
False
The balance of cash account in the books of our company was P250,000. When it was counted at year end,
December 31, 2017, the cash count was only P190,000.
1. Provide entry for adjustment.
2. Assuming after investigation the cause for discrepancy of the record and count was still unknown and the cash
custodian was not responsible for such, provide closing entry
Cash s/o 60k
Cash 60k
Loss 60k
Cash s/o 60k

On April 1, 2002, Mighty Company established an imprest petty cash fund for P10,000
by writing a check drawn against its general checking account. On April 30, the fund contained the following:
Currency and coins P3,000
Receipts for office supplies 4,000
Receipts for postage (still unused) 2,000
Receipts for transportation 600
On April 25, the company wrote a check to replenish the fund.
What is the amount of replenishment under the imprest fund system?
7000

Petty Cash fund should be replenished every end of the year.

False

What is the proper accounting treatment for a stale check?

Revert back to cash and accounts payable.
Revert back to cash and a credit to gain.
Ignored
Either a or b

Financial accounting is concerned with

A. General-purpose reports on financial position and results of operations.
B. Specialized reports for inventory management and control.
C. Specialized reports for income tax computation and recognition.
D. General-purpose reports on changes in stock prices and future estimates of market position.

Using the imprest fund system, provide entry for replenishment of the petty cash fund when the following expenses
were incurred:
Transportation Expense P 500.00
Advertising expense P 5,000.00
Fuel Expense P 2,000.00

Transportation Expense 500

Advertising Expense 5000
Fuel Expense 2000
Cash in Bank 7500

Using the fluctuating fund system, provide entry for replenishment of the petty cash fund when the following
expenses were incurred:
Transportation Expense P 500.00
 Advertising expense P 5,000.00
Fuel Expense P 2,000.00
Petty cash fund 7,500
Cash in Bank 7,500

Question 11
99000

Which of the following statements about materiality is not correct?

A. An item must make a difference or it need not be disclosed.
B. Materiality is a matter of relative size or importance.
C. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.
D. All of these are correct statements about materiality

Princess Company’s petty cash custodian has the following in its cash box:
Bills and Coins: P 520
Petty Cash Vouchers: P 1,700
Postdated Checks from Company Officers: P 1,000
IOUs from employees (vale): P 500
An empty envelope which has a “Happy Birthday” on it. It has a “P 350” writing at the back.
The Petty Cash is established at P3,500.
It is already reporting date and no replenishment has been done.
Provide the adjusting entry and closing entry assuming the custodian is responsible for the short/over.
Expenses 1,700
Advances to officers 1,000
Advances to employees 500
Cash short or over 130
Petty cash fund 3,330
Receivable from custodian 130
Cash short or over 130

The amount reported as "Cash" on a company's statement of financial position normally should exclude
postdated checks that are payable to the company.
cash in a payroll account.
undelivered checks written and signed by the company.
petty cash.

8700000

The providers of risk capital and their advisers

A. Are concerned with the risk inherent in and return provided by their investments and need information to help
determine whether they should buy or sell.
B. Are interested in information about the stability and profitability of the employers.
C. Are interested in information that enables them to determine whether their moans and the interest attaching to
them will be aid when due.
D. Have an interest in information about the continuance of an enterprise, especially when they have a long-term
involvement with or are dependent on the enterprise.

This represents the concepts that underlie the preparation and presentation of financial statements.
A. Statement of Financial Accounting Standards
B. Statement of Auditing Standards
C. Note to financial statement.
D. Conceptual framework

Question text
Answer:
7000000

On December 31, 2009, Princess Company had the following cash balances:
Cash in banks P1,800,000
Petty cash funds (all funds were reimbursed on 12/31/09) 50,000
Cash in banks includes P600,000 of compensating balances against short-term borrowing arrangements at
December 31, 2009. The compensating balances are not legally restricted as to withdrawal by West. In the current
assets section of West's December 31, 2009, balance sheet (statement of financial position), what total amount
should be reported as cash?
1850000
"Petty Cash fund" account can be seen on the face of financial statements.
False
Decision makers vary widely in the types of decisions they make, the methods of decision making they employ, the
information they already possess or can obtain from other sources, and their ability to process information.
Consequently, for information to be useful there must be a linkage between these users and the decisions they
make. This link is
A. Relevance C. Understandability
B. Reliability D. Materiality
Which statement is correct concerning the ASC framework?
I. The framework applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public and private sector
II. Special purpose financial reports, for example, prospectuses and computations prepared for taxation purposes,
are beyond the scope of the framework
A. Both I and II C. I only
B. Neither I nor II D. II only

Question 23
32000000
The principal purpose of a voucher system is to provide assurance that
all cash receipts are deposited intact in the bank.
all cash disbursements are approved before a check is issued.
all cash receipts are recorded in the accounting records.
all purchase invoices are supported by debit memoranda.

Financial statements (choose the statement that is not valid)

A. Provide information about the financial position, financial performance and cash flows of an enterprise that is
useful to a wide range of users in making economic decisions.
B. Are the primary responsibility of the management of the enterprise.
C. Also show the results of the stewardship of management for the resources entrusted to it.
D. Are prepared and presented at least annually and are directed toward the specific information needs of a
wide range of users.
The valuation of a promise to receive cash in the future at present value on the financial statement of a business
entity is valid because of the accounting concept of
A. Entity C. Going concern
B. Time period D. Monetary unit

The cash account in the current asset section of the balance sheet for Princess Company showed the balance of
P555,000. It was found to include the following items:
Petty cash fund (P1,000 is in the form of paid vouchers) P5,000
Undeposited receipts (including post-dated check for P5,000), P120,000
Currencies and coins awaiting deposit, P55,000
Bond sinking fund – cash (expected to be disbursed next year), P100,000
Check drawn by manager-returned by bank marked NSF, P20,000
What is the correct cash balance for Princess Company’s balance sheet?
529000

In analyzing a company’s financial statements which financial statement would a potential investor primarily use to
assess the company’s liquidity and financial flexibility?
A. Balance sheet C. Statement of retained earnings
B. Income statement D. Cash flow statement