Financial

Accounting
1
Cash and Cash
equivalents

Definition of Cash
In

a viewpoint of a layman, cash is simply

means money.
In accounting parlance, the term cash has
special and broader meaning. It connotes
more than money.
Cash includes checks, bank drafts and money
orders because these are acceptable by the
bank for immediate encashment or deposit.
Postdated
checks received cannot be
determined as cash. Because simply its not
yet acceptable by the bank.

The following are included in

Cash
a)

b)

c)

Cash on Hand, these are the cash on your

possession. Obviously these are the cash that are
not yet deposited on the bank. Includes: travelers
checks, customers checks, managers or cashiers
checks, bank drafts and money orders.
Cash in bank, this is the total amount of your cash
in the bank. Simply the balance of your bank
account. Includes: Checking and savings account
which are unrestricted as to withdrawal.
Cash fund, this are funds that were set aside for
current purposes like petty cash fund, payroll fund
and dividend fund.

Cash Equivalents
Cash equivalents are short-term and
highly liquid investments that are readily
convertible into cash and so near their
maturity.
The Standard (PAS 7) states that only
high liquid investments that are acquired
three months before its maturity can
qualify as Cash and Cash equivalent.

Examples of Cash Equivalents

1.
2.
3.
4.

Three-Month BSP Treasury bill.

Three-year BSP Treasury bill purchased
Three months before its maturity.
Three-Month Time Deposit.
Redeemable
Preference
share,
maturing in three months.

Ordinary shares will never be considered as Cash Equivalent.

Because it has NO MATURITY. The Purchase date and the
maturity date is very important.

Cash fund for a certain purpose

If the cash fund is set aside for use in current operations or for
payment of current obligations, it is a current asset and is
included in Cash and Cash equivalents.
On the other hand, if the fund is set aside for use in non-current
operations or set aside for future expansion, employees
insurance etc.. It is a long term investment.
Current:
Current: If
If the
the Asset
Asset or
or liability
liability
within
within one
one year.
year.
Non-Current:
Non-Current: If
If the
the Asset
Asset
used/maturing
used/maturing more
more than
than one
one year
year

is
is used/maturing
used/maturing
or
or

Liability
Liability

is
is

Bank overdraft
This happens when you have a credit balance on your bank
account. The credit balance in the bank is a result of excessive
issuance of check.. For example the balance of the bank is
100,000 and you issued 120,000 check. The new balance of
your bank now is -20,000 this is the overdraft. Gets?
NOTE: A bank overdraft is classified as current liability and
should not be offset against other bank accounts in
different bank. You are allowed to offset the overdraft only
when you maintain two accounts in the same bank. If your
account X has a overdraft of 20,000 while your account Y has
a debit balance of 200,000 you can offset your account X to
account Y.
Cash on Bank X
20,000
Cash on Bank Y
20,000

Compensating balance
Compensating balance generally takes the form of
minimum checking or demand deposit account
balance that must be maintained in connection with
the borrowing arrangement with a bank.
If it is not legally restricted, includes in cash.
If it is legally restricted, it is classified as Current
or Non-current asset depends on the nature of the
loan.

 Undelivered

checks issued by the entity

are part of CASH.
Postdated checks issued by the entity
are part of CASH.
Stale Checks issued by the entity are
either miscellaneous income or
accounts payable appropriated. (to be
considered stale, it must be at least
6months from the date of issuance.

Petty cash fund

Petty cash funds is set aside for small expenses which cannot be
paid conveniently by means of checks.
Transaction
Imprest Fund
Establishment
petty cash fund

of Petty cash fund

Cash in bank

Payment of expenses

NO ENTRY

Fluctuating Fund
Petty cash fund
Cash in bank
Expense
Petty cash
fund

Replenishment of PCF Expense

Cash in Bank

Petty cash fund

Cash in bank

Increase the fund

Petty cash fund

Cash in bank

Petty cash fund

Cash in bank

Decrease the fund

Cash in bank
Petty cash
fund

Cash in bank
Petty cash
fund

Adjustment

Expense

NO ENTRY

You can observe that the two methods has the

same entry when they establish the fund.
Imprest fund dont require any entry when PCF is
used because the only time you record the
transaction is when you replenish the fund. At this
time instead of debiting PCF, you debit expense
account.
Fluctuating fund always records its PCF account.
Every transaction using Petty cash, you should
increase or decrease your PCF.

Special notes
Cash and Cash equivalents: acquired 3 months
before its maturity.
Cash: should be unrestricted
Bank overdraft: Cannot offset against other bank
account from different banks.
Postdated checks received: Not included in CASH
Postdated checks issued: return to CASH account
Undelivered checks: return to cash account