CONCEPTUAL FRAMEWORK MODULE

SCHOOL OF ACCOUNTANCY

MODULE 3
PETTY CASH AND CASH EQUIVALENTS

OVERVIEW:
In this module, we will discuss the concepts of petty cash fund and cash equivalents.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting and basic accounting concepts.

LEARNING OBJECTIVES:
After studying this module, you should be able to:
1. Have knowledge about imprest and fluctuating fund system of accounting for petty cash
2. Prepare journal entries for petty cash transactions
3. Obtain knowledge about the cash equivalents
4. Identify whether an account is cash equivalent or not

INTRODUCTION:
Part of the sound internal control system for cash is to minimize the cash on hand. This is to prevent theft
and to properly monitor cash transactions. This is what we call imprest system. Under imprest sytem, all
cash receipts should be deposited intact and all disbursements should be by means of check. The use of
check for is highly recommended because disbursements through check will have a trail that you can use
in tracking the flow of cash.

However, use of checks for small cash transactions is impractical. Imagine paying a jeepney or tricycle driver
a check for transportation. The driver would either be angry or he would think you are funny. For a P20
fare, the driver needs to go to bank to get the money itself. How inconvenient!

LESSON 1: PETTY CASH FUND:

A petty cash fund is a small amount of cash kept on hand to pay for minor expenses, such as office supplies,
transportation, or reimbursements. Petty cash transactions provide convenience for small transactions for
which issuing a check is unreasonable or unacceptable.

1.1 PETTY CASH AND PETTY CASH FLOAT

Petty cash imprest is a popular system of managing petty cash in which a fixed amount called
petty cash float is maintained in the hands of petty cash custodian. For example, if the float is
decided to be P10,000 then initially P10,000 will be disbursed to the custodian. Afterwards, if
custodian spends P6,000 during a week, P6,000 will be disbursed to him to maintain his petty
cash float at P10,000.

1.2 PETTY CASH MANAGEMENT

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1.3 PETTY CASH ACCOUNTING

There two ways to account petty cash transactions:

1.3.1 Imprest Fund System

a. Establishment of fund amounting to P20,000 on December 1, 2019
Date Account Titles Debit Credit
Dec 1 Petty Cash Fund 2 0 0 0 0
Cash in Bank 2 0 0 0 0
To establish petty cash fund

b. Payment of expenses for P10,000 on December 15. (you need to use specific expense
account if given)
In this case, the custodian will use petty cash voucher and no journal entry will be made,
only memorandum entry.
*Petty cash voucher is for illustration purposes only, not included in the transactions

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c. Every end of a certain period, or depending on company policy, a replenishment is made

to bring back the cash balance to the petty cash float. Sometimes, not all vouchers are
replenished due to lack of supporting documents, e.g. official receipts, that proves that actual
expense are incurred. However, some expenses need no supporting documents like
transportation through tricycle or jeepneys because they don’t issue such receipts. The
custodian shall prepare this (amounts for illustration purposes only)

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In some companies, liquidation report is used. A journal entry is prepared upon

replenishment on December 30, 2019:
Date Account Titles Debit Credit
Dec 30 Expenses 1 0 0 0 0
Cash in Bank 1 0 0 0 0
To replenish the fund

d. Assuming the replenishment did not occur and it is the end of reporting period. Meaning,
the petty cash custodian only has P10,000 on hand, and petty cash vouchers. In order to report
the actual cash on hand and to recognize expense incurred during the period, you need to
adjust the petty cash fund.
Date Account Titles Debit Credit
Dec 31 Expenses 1 0 0 0 0
Petty Cash Fund 1 0 0 0 0
To adjust petty cash fund for unreplenished
vouchers

e. The company may want to increase the petty cash float to P30,000 on January 1, 2020.
Thus, we need to prepare the following entry:
Date Account Titles Debit Credit
Jan 1 Petty Cash Fund 1 0 0 0 0
Cash in Bank 1 0 0 0 0
To increase the petty cash fund

1.3.2 Fluctuating Fund System

In this system, as the name implies, the petty cash transactions are recorded every time
the petty cash moves. We will use the same information as the imprest fund example.

a. Establishment of fund – same entry with imprest fund system

b. Payment of expenses for P10,000

Date Account Titles Debit Credit
Dec 15 Expenses 1 0 0 0 0
Petty Cash Fund 1 0 0 0 0
To record payment of expenses

c. Replenishment
Date Account Titles Debit Credit
Dec 30 Petty Cash Fund 1 0 0 0 0
Cash in Bank 1 0 0 0 0
To record replenishment of fund

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d. In case no replenishment is made in c, no more adjusting entry is needed, because the

petty cash fund is already at P10,000 and expenses are already recorded.

e. Same entry on increase of petty cash fund.

Reminder: We will be using the imprest fund system, unless stated in the problem that fluctuating will be
used.

1.4 SHORT OR OVER

This discussion may also apply to cash in general, not just petty cash fund. In order to compute
for short or over, you need to ask:
What is the custodian’s accountability?
How much does the custodian accounted?

Scenario: Petty cash short or over:

The cash fund established was P10,000. At end of the period, the cash count shows that custodian has
P5,000 cash on hand. There are also petty cash vouchers amounting to P2,000, P1,000 for transportation,
and another P1,000 for cash advance to other employees. At this point, we can say that there are
unreplenished accounts.

At this point, you need to know the accountability and accounted for. Accountability means the actual cash
that the custodian has received. Accounted for answers the question, where did all the money go?
Accountability Accounted For
Petty cash fund P10,000 Transportation expense P1,000
Cash advance to employee P1,000
Cash on Hand P5,000
Total P10,000 Total P7,000

Since the accountability did not equal to accounted for, there is a shortage in petty cash of P3,000. The
adjusting entry should be:

Date Account Titles Debit Credit

Dec 31 Transportation Expense 1 0 0 0
Advances to employees 1 0 0 0
Cash short or over 3 0 0 0
Petty Cash Fund 5 0 0 0
To adjust petty cash fund for unreplenished
vouchers and shortage

After this entry, the petty cash balance is only P5,000, which is actually the “real” cash that is on hand.

Reminder: “Cash short or over” account is a temporary account and should not be presented in the financial
statements. This should be closed in an account depending on the investigation of shortage. Assuming after
investigating the shortage, it is known that the custodian has used the P3,000 for personal use, there will
be an entry as follows

Date Account Titles Debit Credit

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Dec 31 Receivable from custodian 1 0 0 0 0

Cash short or over 1 0 0 0 0
To close short or over account

If the reason for P3,000 shortage is still unknown, cash short or over will be closed to a loss account.

LESSON 2: CASH EQUIVALENTS

Philippine Accounting Standards 7 defines cash equivalents are short-term, 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. The standard states that “only highly liquid investments that
are acquired three months before maturity can qualify as cash equivalents”. Thus we have a “three-month
rule”

Reminder: 3 months should be between the purchase date and maturity date.

Examples of investments that may be classified as cash equivalents when purchased three months before
maturity are:
a. Treasury bills
b. Time deposit
c. Commercial Papers
d. Marketable securities
e. Money market fund

To sum up, we will classify investments into three:

1. 3 months or less – Cash equivalents
2. More than 3 months but within 1 year – Current assets
3. More than 1 year – Noncurrent assets

REFERENCES:
http://accountingclarified.com
https://www.investopedia.com/
Financial Accounting 1, Volume 1 Part 1, Christian Valix et al.

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapter 7.

ACTIVITY SECTION

ACTIVITY 1:
Cash equivalents or Investment?
_________________1. Treasury bills dated November 1, 2019, maturing January 15, 2019
_________________2. One-year commercial papers dated January 1, 2019, purchased October 15, 2019

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_________________3. Three-year money market placement purchased June 1, 2019, maturing December
31, 2019
_________________4. Three-month treasury bills
_________________5. Four-year commercial papers purchased 4 months before maturity.

ACTIVITY 2: PROBLEM SOLVING

Problem1:
Missy Company’s petty cash custodian has the following in its cash box:
Bills and Coins: P 520
Petty Cash Vouchers: P 1,700
Postdated Checks from Company Officers: P 1,000
IOUs from employees (vale): P 500
An empty envelope which has a “Happy Birthday” on it. It has a “P 350” writing at the back
The Petty Cash is established at P3,500. The custodian will replenish the Petty Cash. Give the appropriate
entries:
Date Account Titles Debit Credit

Problem 2

Date Account Titles Debit Credit

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EVALUATION

Which part of the discussion did you Which part of the discussion did you
find most enjoyable to learn? find most difficult?

Do you have question(s) in mind? Write it here

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