CASH AND CASH EQUIVALENTS Cash equivalents- short-term and highly liquid investments that are
Cash includes money and any other negotiable instrument that is
payable in money and acceptable by the bank for deposit and
immediate credit. To be reported as cash, an item must be
unrestricted in use. This means that the cash must be readily
available in the payment of current obligations and not be subject to
any restrictions.
Included in cash:
 Coins and bills in legal tender by BSP
 Checks (subject to certain conditions)
 Bank drafts
 Money orders (money market funds)
Types of checks:
1. Post-dated checks - not part of cash and cash equivalents
2. Not sufficient fund (NSF) checks – not part of cash and cash
equivalents
3. Certified checks – part of cash and cash equivalents because it
is certified and insured by the bank to have sufficiency of fund
backed in the check. Examples of certified checks include:
a. Manager’s check – certified by the manager of the bank
b. Cashier’s check – certified by the teller or cashier of the bank
c. Traveller’s check – certified for travel purposes of the
depositor
4. Antedated checks (checks dated on past date) – part of cash
and cash equivalents provided that they are to be encashed or
deposited to the bank six months following the date of the
check.
5. Stale checks (checks long outstanding) – not part of cash and
cash equivalents because it is deemed to be expired. Checks
must be deposited or encashed six months following the date
of the check.
Example Analysis of a Check
The date of the check is on October 15, 2014 and has an amount of
P15,000. The check is not certified by the bank. Therefore:
 Before October 15, 2014, the check is post-dated and the
maker should have at least P15,000 in his account.
 On October 15, 2014, if the maker has failed to have at least
P15,000 in his account, the check would bounce or marked as
NSF check. Once the check is deposited to the bank, the
drawer will receive a notice of DAIF (drawn against insufficient
funds)
 After October 15, 2014, assuming the check has sufficient
funds, it will be an antedated check.
 On April 15, 2015 (six months after the check date), assuming
the check has not been deposited nor encashed, it is deemed
as expired and it will become a stale check.
The following cash items are included in “cash.”
 Cash on hand – cash collections and cash items (checks, bank
drafts and money orders) awaiting bank deposit
 Cash in bank – demand or savings deposit, or checking
account which are unrestricted as to withdrawal
 Cash fund – cash set aside for current purposes (petty cash
fund, payroll fund, dividend fund.
readily convertible into cash and so near their maturity that they
present insignificant risk of changes in value because of changes in
interest rates. [PAS 7 (Statement of Cash Flows) definition]
Included in cash equivalents:
 Three-month BSP treasury bill
 Three-year BSP treasury bill purchased three months
before maturity date
 Three-month bank deposit
 Three-month money market instrument
 Preference shares with specified redemption date and
acquired three months before redemption date
 Certificates of deposit (having original maturities of 90
days or less)
Measurement
 Cash is measured at face value.
 Cash in foreign currency is measured at current
exchange date (balance sheet date)
 Cash is measured at estimated realizable value if
bank is in financial difficulty or bankruptcy and if
recoverable amount is lower than face value
(currently, cash account is insured up to P500,000)
Classification for investments
 If term is three months or less, classified as cash equivalents
 If term is more than three months but within one year,
classified as marketable securities, or short-term
investments, and are separate current assets in the financial
statements
 If term is more than one year, classified as long-term
investments which are non-current assets.
Cash in a foreign bank
 If not subject to foreign exchange restriction, they are
included as cash.
 If subject to foreign exchange restriction and material, they
are reclassified as cash restricted in foreign bank which are
non-current assets.
Cash fund set for a purpose
 For use in current operations – classified as current asset.
Examples include: petty cash fund, payroll fund, travel fund,
interest fund, dividend fund, and tax fund.
 For use in non-current operations – classified as long-term
investment. Examples include sinking fund, contingent fund,
fund for acquisition of PPE, etc. If the fund is set aside for use
within one year after the reporting period, it will be
reclassified as current asset.
Items Not Cash or Cash Equivalents
1. Time certificates of deposit (if original maturity over 90 days)
2. IOU’s from officers
3. Sinking Fund Cash
4. NSF checks and post-dated checks- it should be reverted
back to A/R
5. Postage stamps
6. Cash in closed bank –classify realizable value as other
receivables
Bank Overdraft
 When cash in bank account has a credit balance.
 It is classified as a current liability and should not be offset
against other bank accounts with debit balances
 Exception to the rule: If an entity maintains two or more
bank accounts in one bank and one account results in an
overdraft, such overdraft can be offset against the other
bank account with debit balance.
Compensating Balance- Generally takes the form minimum checking
or demand deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.
Classification of Compensating Balance:
a) If the deposit is not legally restricted as to withdrawal by the
borrower because of an informal compensating balance
agreement = part of cash
b) If the deposit is legally restricted because of a formal
compensating balance agreement = classified separately as
“cash held as compensating balance” under current assets if
the related loan is short-term
c) If the related loan is long term = classify as noncurrent
investment
Undelivered checks – checks that is drawn and recorded but is not
given to payees; it is still cash of the company.
Pro-forma Entry
Cash xxx
Accounts payable xxx
Post-dated checks delivered – checks that is sent to payees but has
a date subsequent in the reporting period; it is still cash of the
company.
Stale checks – checks released by the company that has been
expired
Pro-forma Entry
Cash xxx
Miscellaneous income xxx (if immaterial)
Cash xxx
Accounts payable xxx (if material)
ILLUSTRATION – KIESO, ET AL
ISSUES IN CASH
Window Dressing - Opening the accounts even after the reporting
period. In a broad sense, WD is any deliberate misstatement of
assets, liabilities, equity, income and expenses.
Lapping - Used for concealing cash shortage. Practice used for
concealing cash shortage, where it consists of misappropriating
collections in customers. It consists of misappropriating a collection
from one customer and concealing the defalcation by applying a
subsequent collection made from another customer. Involves series
of postponements of the entries for the collection of receivables,
possible because of poor internal control.
Kitting - Occurs when a check is drawn against a first bank and
depositing the same check in a second bank to cover the shortage in
the latter bank. No entry is made for both transactions.
IMPREST SYSTEM
IMPREST SYSTEM - A system of control of cash which requires that
all cash receipts should be deposited intact and all cash
disbursements should be made by means of check.
Petty Cash Fund- is money set aside to pay small expense which
cannot be conveniently paid by means of check. There are two
methods of handling the petty cash, namely
I. IMPREST FUND SYSTEM
Journal entries:
1. To establish the fund:
Petty Cash fund xx
Cash in bank xx
2. Payment of expenses out of the fund
NO JOURNAL ENTRY (memo entries only)
3. Replenishment of petty cash payments:
Expenses xx
Cash in bank xx
4. Year-end adjustment to adjust the unreplenished expenses in
order to estate the correct petty cash balance:
Expenses xx
Petty Cash fund xx
Note: The adjustment is to be reversed at the BEG of the next
accounting period so that normal replenishment procedures may
be followed.
5. An increase in the fund is recorded as follows:
Petty Cash fund xx
Cash in bank xx
6. A decrease in the fund is recorded as follows:
Cash in Bank xx
Petty Cash fund xx
II. FLUCTUATING FUND SYSTEM
 Petty cash disbursements are immediately recorded. Accounting for cash overage
 The checks drawn to replenish the fund do not necessarily The entry to record cash overage is:
equal the petty cash disbursements. Cash xx
Cash short or over xx
1. To establish the fund:
Note: Whether it is a cash shortage or cash overage, the offsetting
Petty Cash fund xx
account is cash short or over account. Such account should be
Cash in bank xx
adjusted when statements are prepared.
2. Payment of expenses out of the fund :
Expenses xx The cash overage is treated as Where the cash overage is
Petty Cash fund xx miscellaneous income if there is properly found to be the
no claim on the same , the money of the cashier, the
entry is: entry is:
3. An increase in the fund is recorded as follows:
Cash short or over Cash short or over
Petty Cash fund xx
Miscellaneous income Payable to cashier
Cash in bank xx

4. Year-end adjustment: BANK RECONCILIATIONS

NO adjustment necessary because the petty cash expenses are
recorded outright. Bank reconciliation is a statement which brings into agreement the
cash balance per book and cash balance per bank.
5. A decrease in the fund is recorded as follows:
The reconciliation compares the amount of cash shown on the
Cash in Bank xx
monthly bank statement with the amount of cash reported in the
Petty Cash fund xx
general ledger.

RECONCILING ITEMS:

ACCOUNTING FOR CASH SHORTAGE/OVERAGE 1. Book Reconciling Items:

Occasional errors may cause the petty cash fund to be out of
balance. The sum of the cash and receipts will differ from the correct
Petty Cash balance. This might be the result of simple mistakes, such
as math errors in making change, or perhaps someone failed to
provide a receipt for an appropriate expenditure. Whatever the
cause, the available cash must be brought back to the appropriate
level.
Accounting for cash shortage/overage
Cash count < balance per book = cash shortage
Cash count > balance per book = cash overage
Accounting for cash shortage
The entry to record cash shortage is:
Cash short or over xx
Cash xx
a) 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.
Examples:
 N/R collected by bank in favor of the depositor and
credited to the account of the depositor
 Proceeds of bank loan credited to the account of the
depositor
 Matured time deposits transferred by the bank to the
current account of the depositor
b) Debit memos- refer to items w/c are charged or debited by
the bank to the account of the depositor but not yet
recorded by the depositor as cash disbursements.
Examples:
 NSF checks
 Technically defective checks
 Bank service charges
 Reduction of loan- payment of loan

c) Errors
Note: The cash short or over account is only a temporary or
suspense account. When financial statements are prepared, the
same should be adjusted. Hence, 2. Bank Reconciling Items:
a) Deposits in transit – are collections already recorded by the
If the cashier is responsible If reasonable efforts fail to depositor as cash receipts but not yet reflected on the bank
for cash shortage, the disclose the cause of the statement.
adjustment is: shortage, the adjustment is:
Due from cashier Loss from cash shortage b) Outstanding checks- already recorded by the depositor as
Cash short or over Cash short or over. cash disbursements but not yet reflected on the bank
statement.
 Note: certified check should be deducted from outstanding
check (if included therein) because they are no longer
outstanding for bank recon purposes.

c) Errors

SEVERAL FACTORS BRING ABOUT THIS DIFFERENTIAL

a. Deposits in transit = Funds sent by the depositor to the bank

that have not been recorded by the bank and deposits made
after the bank's cutoff date will not be included in the bank
statement. In both cases, the balance per the depositor's
records will be higher than those of the bank.

b. Outstanding checks = Checks written for payment by the

depositor that have not been presented to the bank will result
in a higher balance per bank records than per depositor
records.

c. Service charges = Service charges are deducted by the bank.

The depositor will not deduct this amount from its records until
it is made aware of the charge, usually in the following month.
Balance per books is overstated until this amount is subtracted.

d. Bank collections = the bank may make collections on the

depositor's behalf, increasing the depositor’s bank balance. If
the depositor is not aware the collection was credited to its
balance, the balance per depositor's records will be
understated.

Proforma Reconciliation: Adjusted Balance Method

ABM means that the book balance and the book balance are
adjusted to equal correct cash balance.

Book Balance XX
Add: Credit Memos XX
Total XX
Less: Debit Memos XX
Adjusted Bank Balance XX

Bank Balance XX
Add: Deposits in transit XX
Total XX
Less: Outstanding Checks XX
Adjusted Bank Balance XX

Note: Errors will have to be analysed for proper treatment. But

errors are reconciling items of the party which committed them.