Intermediate Accounting

Second Semester | LQ-Midterms

I. Cash Discount Net Method

● Also known as sales discount and given by
sellers to buyers who pay earlier than the
due date to avail discount. - The accounts receivables and sales are
● Usually presented to include discount, recorded at amount less Trade Discount
and Cash Discount.
discount period, and term of credit.
- Assumes that the customer will avail the
cash discount.
- Unique Acc: Sales Discount not taken or
Gross Method
Sales Discount Forfeited

- The accounts receivables and sales are

recorded at an amount less Trade Discount.
- Cash discount is only recorded when the Illustration:
customer pays within the given discount 1. To record sale:
period. Accounts Receivable xx
- Most used as it is the simplest Sales xx
- Unique Acc: Allowance for sales discount Specific Notes: Record accounts receivables and
Illustration: sales at list price less trade discount and cash
1. To record sale: discount.
Accounts Receivable xx 2. Collection is made within the discount
period.
Sales xx
Cash xx
Specific Notes: Record accounts receivables and Accounts Receivable xx
sales at gross amount. Specific Notes: Cancel accounts receivables upon
collection within the discount period.
2. To record collection:
3. Collection is made beyond the discount
Cash xx period.
Sales Discount xx Cash xx
Accounts Receivable xx Sales Discount not taken xx
Accounts Receivable xx
Specific Notes: Recognize the sales discount Specific Notes: Cancel accounts receivables upon
upon collection. collection within the discount period.
3. 4. Adjustments: Accounts Receivable are no
longer qualified for discount and remained
Sales Discount xx
uncollected as of the reporting period
Allowance for Sales Discount xx closed.
Specific Notes: Recognize the allowance for sales Accounts Receivable xx
discount potentially to be availed of based on the Sales Discount not taken xx
actual sales during the period.

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Specific Notes: Recognize the forfeited sales 4. Adjustment: uncollected accounts
discount. Reinstate the portion of accounts receivable at the end of reporting period
receivable that must be collected
Allowance for Sales Discount xx
Sales Discount not taken xx
Allowance Method (Hybrid)
Specific Notes: Cancel the unused allowance.
Recognize the forfeited sales discount.
- Record accounts receivables at amount less
Trade Discount. Recorded sales at amount II. Bank Reconciliation
less Trade Discount and less Cash Discount
- Recording the sales as net of trade ● The process of noting the differences between
discounts and cash discounts while using the bank statement and the book of accounts.
an allowance for sales discounts to record This includes adjusting and updating the
the cash discount balances of the two records in order to reflect
- Unique Acc: Allowance for Sales Discount equal balances.
Illustration:
1. To record sale:
Accounts Receivable xx Reconciling Items and Treatment
Allowance for Sales Discount xx
Sales xx Deposit in Transit

Specific Notes: Recognize accounts receivable at

Definition
gross. Set up allowance for sales discount equal to - Also called Undeposited Collection
the amount of estimated related sales discounts - Cash that are physically in company’s
upon sales recognition. care, but we now aim to put in the
2. Collection is made within the discount company’s bank account
period. - Considered as cash receipt as these are
Accounts Receivable xx collections from other people
- Deposits on the way
Allowance for Sales Discount xx - Already added in the book but has not yet
Accounts Receivable xx been added to the bank

Specific Notes: Cancel the used of allowance for Why is it excluded from the Bank Statement?
sales discount upon collection of accounts - Because of the cut-off period
receivable within the discount period.
3. Collection is made beyond the discount Effect
period. - Understated bank balance
Cash xx How to Correct it?
Allowance for Sales Discount xx - Add the amount of the DIP to the bank
statement
Sales Discount not taken xx
Accounts Receivable xx Outstanding Checks
Specific Notes: Cancel the forfeited allowance for
Definition
sales discount upon collection of accounts - Considered as cash disbursements as
receivable within the discount period. these represents cash in the company’s
bank that will be used to pay debts on the

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 account
- Already deducted from book but not yet in Why is it not deducted from the Bank Statement?
the bank - Cash on account is deducted
Why is it not deducted from the Bank Statement? automatically by the bank to cover for the
- When we write the check, we record it expenses and debts of the company
immediately in the books as a reduction of - These deductions from the bank are not
cash. However, the checks we made are usually made known to the company so
not yet delivered or presented to the bank the books are not adjusted.
for encashment.
Effect Specifics
- Overstated bank balance - No Sufficient Fund Checks/Drawn Against
Insufficient Fund/Drawn Against
How to Correct it? Uncollected Deposit
- Deduct the OS in the bank statement - Bank Service Charge
- Payment of Bank Loans
Credit Memos
Effect
Definition - Overstated book balance
- Represent the cash on account that is
added to the bank but not yet added to How to Correct it?
the books - Deduct from the book balance

Errors
Why is it not added to the Bank Statement?
- The bank usually collects cash on
account for the company and when cash Definition
on the account is added, the company is - Errors are not immediately detected and
usually not immediately notified is usually noticed upon the issuance of
- Without notification, credit memos, the bank reconciliation
company is not able to add this cash on - If it is the bank who made error, the bank
account automatically collected by the account should be adjusted and vice
bank, to the books. versa
-
Specifics
- Notes receivables Examples
- Proceeds of the bank loan - Transposition error
- Matured time deposits - Addition error
- Interest - Truncation error
*all are credited/added to - Substitution error
company’s bank account - Specific Bank error

Effect Effect
- Understated book balance - It may understate or overstate both book
and bank balance depending on the error
How to Correct it?
- Add to the book balance How to Correct it?
- Both book and bank errors should be
Debit Memos analyzed carefully as there is no definite
rule on when to add or deduct an error
Definition - The party that committed the mistake is
- Represent the cash on account that is the one responsible for correcting it
deducted from the bank but not yet Rules as guide:
deducted from the book - Understated disbursements results in an

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 overstated cash balance Add: Credit Memos xx
- Overstated disbursements results in an
understated cash balance Outstanding Checks xx xx
- Understated receipts results in an
understated cash balance Total xx
- Overstated receipts results in an
overstated cash balance Less: Debit Memos xx
- If the result is an overstated cash
Deposit In Transit xx (xx)
balance, the deduct to correct
- If the result is an understated cash Bank Balance (unadjusted)
balance, the add to correct

In sum:
Bank R Items Book R Items
c. Adjusted Balance Method
Add: Deposit in transit Add: Credit Memos
Less: Outstanding Checks Less: Debit Memos Book Balance (unadjusted)
Add/Less: Bank Errors Add/Less: Book Errors
Add: Credit Memos xx

Total xx
Forms of Bank Reconciliation Less: Debit Memos (xx)
a. Bank to Book Method
- Bank R items are treated as usual but the
book R Items are reversed because the aim Adjusted Book Balance xx
of this form is to get to the unadjusted book
balance
Bank Balance (unadjusted) xx Bank Balance (unadjusted)
Add: Deposit in Transit xx Add: Deposit in Transit xx
Debit Memos xx xx Total xx
Total xx Less: Outstanding Checks xx
Less: Outstanding Checks xx

Credit Memos xx (xx) Adjusted Bank Balance xx

Book Balance (unadjusted)

b. Book to Bank Method

- Book R items are treated as usual but the
bank R Items are reversed because the aim
of this form is to get to the unadjusted bank
balance
Book Balance (unadjusted) xx

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