ACC3 – INTERMEDIATE ACCOUNTING 1A

CASH AND CASH EQUIVALENTS

Money
It is the standard medium of exchange in business transactions. it refers to the currency
and coins which are in circulation and legal tender.

Cash
In the context of accounting, it includes money and any other negotiable instrument that
is payable in money and acceptable by the bank for deposit and immediate credit.

Check
It is a document that orders a bank to pay a specific amount of money from the person's
account to the person in whose name the same has been issued. In general, it is included in the
books as cash provided that the same is payable to the reporting entity.

Bank Draft
It is a check drawn by a bank on its own funds in another bank. If it is payable to the
reporting entity, it is included in the books as cash.

Money Order
It is a paper document, similar to a check, used for making payments. it is prepaid, so it
is only issued after a buyer pays for the same with cash or another form of guaranteed funds. If
it is payable to the reporting entity, it is included in the books as cash.

Postdated Check
It is a check written by the drawer (payor) for a date in the future. it may only be cashed
or deposited on or after the date written on it. If it is payable to the reporting entity, it is not
included in the books as cash. If it is payable to a different party, it should not be excluded in
the total cash balance.

Cash Items Included in the Accounting Books

Cash on Hand
It includes undeposited cash collections and other cash items awaiting deposit.

Cash in Bank
It includes demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.

Cash Fund Set Aside for Current Purposes

Examples of this include:

a. Petty cash fund

b. Dividend fund
c. Payroll fund
d. Revolving fund
e. Tax fund
f. Interest fund

Bond Sinking Fund

It is a restricted asset of a corporation that was required to set aside money for
redeeming or buying back some of its bonds payable.
General rule: It is presented as a noncurrent asset.
Exception: It is presented as a current asset when the bonds associated to it become
due within 12 months after the end of the reporting period.

Fund Held for Future Plant Expansion

It is a noncash item always presented as a noncurrent asset.

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Preference Share Redemption Fund

It is a noncash item always presented as a noncurrent asset.

Cash Equivalents
These are short-term and highly liquid investments that are readily convertible into cash
and so near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.

Criterion for an Item to Qualify as Cash Equivalent

Only highly liquid investments that are acquired three months before maturity can qualify
as cash equivalents.

Equity Securities as Cash Equivalents General rule: Equity securities cannot qualify as cash
equivalents because shares do not have a maturity date.
Exception: Preference shares with specified redemption date and acquired three months
before redemption date can qualify as cash equivalents.

Classification of Investments of Excess Cash

a. Cash Equivalent
These are short-term and highly liquid investments that are readily convertible into cash
and so near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.

b. Short-Term Financial Asset

It is an investment that matures in more than three months but within one year from the
end of the reporting period and is presented separately as current asset.

c. Long-Term Investments
It is an investment that matures in more than one year from the end of the reporting
period and is classified as noncurrent asset.

Reclassification of Long-Term Investments

If a long-term investment becomes due within one year from the end of the reporting
period, the same shall be reclassified as current or temporary investment.

Measurement of Cash

a. In general – face value

b. Foreign currency – current exchange rate
c. Cash held by a bank or financial institution under bankruptcy or financial difficulty –
estimated realizable value

Foreign Exchange Restriction

Deposits in foreign banks which are subject to foreign exchange restriction, if material,
should be classified separately among noncurrent assets and the restriction clearly indicated.

Classification of Cash Fund Related to a Liability

The classification should be parallel with such related liability (i.e., if the noncurrent
liability is reclassified as current, the related noncurrent cash fund shall also be reclassified as
current asset).

Classification of Cash Fund Set Aside for the Acquisition of a Noncurrent Asset
Such fund should be classified as noncurrent asset regardless of the year of
disbursement.

Bank Overdraft
It occurs when the cash in a bank account has a credit balance resulting from the
issuance of checks in excess of deposits.

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Classification of Bank Overdraft

General rule: It shall be classified as a current liability and should not be offset against
other bank accounts with debit balances.
Exceptions:

a. If there are other deposit accounts in the same bank as the account with the credit
balance, offsetting with such other accounts is allowed.
b. If the amount is immaterial, offsetting is allowed.

Compensating Balance
It generally takes the form of minimum checking or demand deposit account balance that
must be maintained in connection with a borrowing arrangement with a bank.

Types of Compensating Balance

Informal Compensating Balance

It refers to one that is not legally restricted and shall be included as part of cash. If the
problem is silent, the compensating balance is treated as unrestricted.

Formal Compensating Balance

It refers to one that is legally restricted and shall be classified as current or noncurrent
asset depending on the terms of the related loan.

Unreleased or Undelivered Checks

It is a check that is merely drawn and recorded but not given to the payee before the
end of reporting period.

Adjustment Required for Undelivered or Unreleased Checks

Dr. Cash in bank; Cr. Expense or liability

The entry made upon issuance of said check should be reversed because in essence, no
payment has really been made.

Postdated Check Delivered

It is a check drawn, recorded and already given to the payee but it bears a date
subsequent to the end of reporting period.

Adjustment Required for Postdated Checks Delivered

Dr. Cash in bank; Cr. Expense or liability

The entry made upon issuance of said check should be reversed because in essence, no
payment has really been made.

Stale Check or Check Long Outstanding

It is a check not encashed / withdrawn by the payee within a relatively long period of
time.

Prescriptive Period for Checks

In banking practice, a check becomes stale if not encashed / withdrawn within 6 months
from the time of issuance.

Adjustment Required for Issued Checks That Became Stale

a. If the amount is material - Dr. Cash in bank; Cr. Accounts payable or appropriate
account
b. If the amount is immaterial - Dr. Cash in bank; Cr. Miscellaneous income

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Journal Entries for Cash Shortage

Initial entry Dr. Cash short or over; Cr. Cash
If the cashier or cash custodian is held Dr. Due from cashier; Cr. Cash short or over
responsible for the cash shortage
If reasonable efforts fail to disclose the Dr. Loss from cash shortage; Cr. Cash short
cause of the shortage or over

Journal Entries for Cash Overage

Initial entry
If there is no claim on the overage
If the cash overage is properly found to
be the money of the cashier
Dr. Cash; Cr. Cash short or over
Dr. Cash short or over; Cr. Miscellaneous
income
Dr. Cash short or over; Cr. Payable to
cashier

Imprest System
It is 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.

Methods of Handling the Petty Cash Fund

Imprest Fund System

a. A memorandum entry is simply prepared in the petty cash journal for each
disbursement.
b. Replenishment of the fund is usually equal to the petty cash disbursements.

c. Replenishment should only be by means of drawing checks and not from

undeposited collections.

d. It is necessary to adjust the unreplenished expenses at the end of the reporting

period in order to state the correct balance of the fund.

Fluctuating Fund System

a. Disbursements are immediately recorded in the general journal or cash

disbursements journal.
b. Replenishment of the fund may or may not be the same amount as the petty
cash disbursement.
c. No adjustment for unreplenished expenses is needed at the end of the reporting
period because of the outright recording of expenses.

Journal Entries for the Handling of Petty Cash

Fund
Imprest Fund System Fluctuating Fund System
Establishment of the fund Dr. Petty cash fund; Cr. Cash Dr. Petty cash fund; Cr. Cash
in bank in bank
Payment of expenses out of memorandum entry in the Dr. Expenses; Cr. Petty cash
the fund petty cash journal fund
Replenishment of petty Dr. Expenses; Cr. Cash in Dr. Petty cash fund; Cr. Cash
cash payments bank in bank
Adjusting entry if no Dr. Expenses; cr. Cash in no entry required
replenishment is made at bank
year-end
Increase in fund Dr. Petty cash fund; Cr. Cash Dr. Petty cash fund; Cr. Cash
in bank in bank
Decrease in fund Dr. Cash in bank; Cr. Petty Dr. Cash in bank; Cr. Petty
cash fund cash fund

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Demand Deposit
It is the current account or checking account or commercial deposit where deposits are
covered by deposit slips and where funds are withdrawable on demand by drawing checks
against the bank.

Savings Deposit
It is a bank account where the depositor is given a passbook upon initial deposit. the
passbook is required when making deposits and withdrawals. this type of bank deposit is
interest bearing.

Time Deposit
It is a bank deposit evidenced by a formal agreement called certificate of deposit. it is
interest bearing and may be pre-terminated or withdrawn on demand or after a certain period of
time agreed upon.

Journal Entry Used to Record Collection of Cash in the Books of the Reporting Entity

Dr. Cash or Cash in bank; Cr. Accounts receivable or any other appropriate account

Journal Entry Used by the Bank to Record Collection of Cash by the Reporting Entity
and Subsequent Deposit to the Bank
Dr. Cash; Cr. Bank account of reporting entity

Journal Entry Used to Record Disbursements of Cash in the Books of the Reporting
Entity
Dr. Expenses or any other appropriate account; Cr. Cash or Cash in bank

Journal Entry Used by the Bank to Record Withdrawals or Disbursements of Cash by the
Reporting Entity
Dr. Bank account of reporting entity; Cr. Cash

Bank Reconciliation
It is a statement which brings into agreement the cash balance per book and cash balance per
bank.

Bank Statement
It is a monthly report of the bank to the depositor showing data about the transactions of
the reporting entity with the bank during the period and the beginning and ending balances of its
bank account.

Cancelled Checks
These are the checks (attached to the bank statement upon receipt) issued by the
depositor and paid by the bank during the month.

Book Reconciling Items

a. Credit Memos
These 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:

a. Notes receivable collected by bank in favor of the depositor

b. Proceeds of bank loan
c. Matured time deposits transferred by the bank to the current account of the depositor

b. Debit Memos

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These refer to items not representing checks paid by bank which are charged or debited
by the bank to the account of the depositor but not yet recorded by the depositor as cash
disbursements. Examples:

a. NSF checks or DAIF (drawn against insufficient fund) checks

b. Technically defective checks
c. Bank service charges
d. Reduction of loan

c. Book Errors
These refer to incorrect recording of cash receipts or disbursements resulting to either
overstatement or understatement of cash balance in the books of the entity.

d. NSF or DAIF Checks

These are checks deposited but not returned by the bank because of insufficiency of
fund.

Bank Reconciling Items

a. Deposits in Transit
These are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.

b. Outstanding Checks
These are checks already recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.

c. Bank Errors
These refer to incorrect posting of cash deposits or withdrawals resulting to either
overstatement or understatement of cash balance in the bank account of the depositor.

***

Certified Check
It is a check for which the issuing bank guarantees availability of cash in the holder's
account.

Accounting Treatment for Certified Checks

Certified checks should be deducted from the total outstanding checks (if included
therein) because they are no longer outstanding for bank reconciliation purposes.

Forms of Bank Reconciliation

a. Adjusted Balance Method

It is a form of bank reconciliation where the book balance and the bank balance are
brought to a current cash balance that must appear on the balance sheet.

b. Book to Bank Method

It is a form of bank reconciliation where the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.

c. Bank to Book Method

It is a form of bank reconciliation where the bank balance is reconciled with the book balance or
the bank balance is adjusted to equal the book balance.

Formula to Compute for the Adjusted Book Balance under the Adjusted Balance Method
of Bank Reconciliation
Book balance + Credit memos - Debit Memos ± Effect of errors = Adjusted book balance

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Formula to Compute for the Adjusted Bank Balance under the Adjusted Balance Method
of Bank Reconciliation
Bank balance + Deposits in transit - Outstanding checks (after excluding certified checks) ±
Effect of errors = Adjusted bank balance

Formula Used Under the Book to Bank Method of Bank Reconciliation

Book balance + Credit memos + Outstanding checks (after excluding certified checks) - Debit
memos - Deposits in transit ± Effect of errors = Bank balance

Formula Used Under the Bank to Book Method of Bank Reconciliation

Bank balance + Deposits in transit + Debit memos - Outstanding checks (after excluding
certified checks) - Credit memos ± effect of errors = book balance

Proof of Cash
It is a reconciliation of the general ledger cash balance at both the beginning and end of
a period, combined with a reconciliation of cash deposited for the period with the cash receipts
journal, and a reconciliation of checks for the period with the cash disbursements journal.

Computation of End of Month Balance per Book

Beginning of month balance per book + Book debits during the month - Book credits during the
month = End of month balance per book

Book Debits
These refer to cash receipts or all items debited to the cash in bank account.

Book Credits
These refer to cash disbursements or all items credited to the cash in bank account.

Computation of End of Month Balance per Bank

Beginning of month balance per bank + Bank credits during the month - Bank debits during the
month = End of month balance per bank

Bank Credits
These refer to all items credited to the account of the depositor which include deposits
acknowledged by bank and credit memos.

Bank Debits
These refer to all items debited to the account of the depositor which includes checks
paid by bank and debit memos.

Computation of End of Month Deposits in Transit

Beginning of month deposits in transit + Book debits - CM from previous month - Bank credits +
CM from current month = End of month deposits in transit

Computation of End of Month Outstanding Checks

Beginning of month outstanding checks + Book credits – DM from previous month + Bank
debits + DM from current month = End of month outstanding checks

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