CASH AND CASH EQUIVALENTS

I. CASH
 Cash comprises cash on hand and demand deposits.
 To be reported as cash, an item must be readily available and not restricted for use in the payment of current
obligations.
 Cash on hand includes undeposited coin and currency, petty cash funds, change funds, and negotiable
instruments such as personal checks.
 Demand deposits are unrestricted funds that can be withdrawn upon demand from a bank where they have been
deposited.
 Time deposits are deposits that are not immediately available for withdrawal or that have other restrictions.
Examples of time deposits include certificates of sdeposit and money market savings certificates.
 Foreign deposits that are subject to immediate and unrestricted withdrawal are reported in their Philippine peso
equivalents as of end of the period.
 Restricted foreign deposits are designated as receivables of a current or noncurrent nature and reported
subject to any appropriate allowances.
 Some items do not meet the “acceptance at face value on deposit” test and should not be reported as cash [i.e.,
postage stamps (an office supply), postdated checks, IOUs, and NSF checks (the latter three essentially being
receivables)].
 Cash specifically designated for special purposes should be reported separately in the current or noncurrent
asset section (classification should parallel the classification applied to the liability).
 Cash/bank overdraft is a credit balance in the cash account resulting from the issuance of checks in excess of
the amount on deposit. It should not be offset against OTHER BANK ACCOUNTS with debit balances, except
when an entity maintains two or more accounts in ONE BANK and one account results in an overdraft. Another
exception is IF THE AMOUNT IS NOT MATERIAL.

II. CASH EQUIVALENTS

 Cash equivalents are short-term, highly liquid investments that are readily convertible to known amount of cash
and which are subject to an insignificant risk of changes in value.
 Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or
other purposes.
 For an investment to qualify as a cash equivalent it must be readily convertible to a known amount of cash and be
subject to an insignificant risk of changes in value.
 An investment normally qualifies as a cash equivalent only when it has a short-term maturity of, say, three months
or less from the date of acquisition.
 Equity investments are excluded in cash equivalents unless they are, in substance, cash equivalents. For
example, in the case of preferred shares acquired within a short period of their maturity and with a specified
redemption date.

III. COMPENSATING BALANCES

 A minimum are average balance on deposit with a bank
 Constitutes support for existing borrowing arrangements.
 Provide a source of funds to the lender as partial compensation for the credit extended.
 Without adequate disclosure, financial statement users may mistakenly assume the entire cash is available to
meet current obligations when, in fact, part of the balance is restricted.
 Therefore, any “legally restricted” deposits held as compensating balances should be segregated and reported
separately.
 If the balances are the result of short-term arrangements, they should be shown separately among the “cash
items” in the current assets section; if the result of long-term arrangements, they should be classified as non-
current (either as investments or “other noncurrent assets”).
  Deposits held as compensating balances that are not “legally restricted” are not shown separately. However,
footnote disclosure is necessary.

IV. PETTY CASH

 In an imprest petty cash system, a petty cash custodian is given a small amount of currency from which to make
small payments (minor office supplies, taxi, postage, etc.)
 Each time a disbursement is made, the petty cashier obtains a signed receipt for the payment.
 When cash in the fund runs low, the petty cashier submits the signed receipts to the general cashier and a check
is prepared to replenish the petty cash fund.
 This process is designed to promote control over small cash disbursements which would be awkward to pay by
check.

V. BANK RECONCILIATION
 The bank reconciliation, when properly prepared, proves that the cash balance per bank and the cash balance
per book are in agreement.
 Periodic bank reconciliations can help identify any cash errors or irregularities that have occurred in accounting
for cash, either by the entity or the bank.
 Prepared by an individual who neither handles nor records cash.
 Most differences in bank and book balances for cash are “normal” and are the result of temporary timing lags.
 Deposit in transit – deposits recorded in the cash account in one period but not received by the bank until the
next period.
 Outstanding checks – checks written by the company that have yet to be presented at the bank for collection.
 Bank charges – Charges by the bank for services that are deducted from the account by the bank and which the
company learns of when it receives the bank statement.
 Bank credits – collections or deposits in the company’s account that the company is not aware of until receipt of
the bank statement.
 Bank or Depositor’s errors – errors made by the company or the bank that must be corrected for the
reconciliation to balance.