Cash & Cash Equivalents: Topic 1

Cash & Cash
Equivalents
Topic 1
Learning Objectives
• To understand the concept of cash
• To understand the concept of cash equivalents
• To identify items considered cash
• To identify items considered cash equivalents
• To understand the imprest system of internal control
• To know the accounting for petty cash fund
Definition of cash – layman’s view
• Cash means money
• Money is the standard medium of exchange in business transactions
(i.e., currency & coins which are in circulation and legal tender)
Definition of cash – accounting view
• Money and any other negotiable instrument that is payable in money
& acceptable by the bank for deposit and immediate credit (e.g.,
checks, bank drafts and money orders)
Note: Postdated checks received cannot be considered as cash yet

because these checks are unacceptable by the bank for deposit &
immediate credit or outright encashment
Unrestricted cash
• Cash must be unrestricted in use to be reported as “cash”
• Cash restricted to settle a liability for more than 12 months after the
end of the reporting period cannot be considered “cash”
Cash items included in cash
Cash on hand
• Includes undeposited cash collections and other cash items awaiting
deposit such as customer’s checks, cashier’s checks or manager’s
checks, traveler’s checks, bank drafts & money orders
Cash in bank
• Includes demand deposit or checking account and savings deposit
which are unrestricted as to withdrawal
Cash fund
• Set aside for current purposes such as petty cash fund, payroll fund
and dividend fund
Cash equivalents
• 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
Items that can be included as cash
equivalents
• Only highly liquid investments that are acquired 3 months before
maturity can qualify as cash equivalents
Examples:
a) 3-month BSP treasury bill
b) 3-year treasury bill purchased 3 months before maturity date
c) 3-month time deposit
d) 3-month money market instrument or commercial paper
Important notes on cash equivalents
• Equity securities cannot qualify as cash equivalents because shares
do not have maturity date
• Preference share with specified redemption date & acquired 3
months before redemption date can qualify as cash equivalents
• Treasury bill purchased 1 year ago cannot qualify as cash equivalent
even if the remaining maturity is 3 months or less
Investment of excess cash
• Entity must maintain sufficient cash for use in current operations
• Any excess cash may be invested in time deposits, money market
instruments and treasury bills for the purpose of earning interest
income
Investment of excess cash
classifications
• If term is 3 months or less, such instruments are classified as “cash
equivalents”
• If the term is more than 3 months but within 1 year, such investments
are classified as short-term financial assets which are part of current
assets
• If more than 1 year, investments are classified as noncurrent or long-
term investments
Measurement of cash
• Face value
• If foreign currency, it should be measured at current exchange rate
• If bank holding the funds is padlocked by PDIC/BSP, cash should be
written down to estimated realizable value
Financial statement presentation
• “Cash & cash equivalents” should be shown as first item among the
current assets
• This caption includes unrestricted cash on hand, cash in bank, petty
cash fund and cash equivalents
Cash fund for a certain purpose
1) Cash for current operations – should be part of “cash & cash
equivalents (e.g., petty cash fund, payroll fund, travel fund, interest
fund, dividend fund and tax fund)
2) Cash for payment of noncurrent purpose (long term) – shown as
long-term investment (e.g., sinking fund, preference share
redemption fund, contingent fund, insurance fund & fund for
acquisition/construction of property & equipment)
Classification of cash fund
• Classification of cash fund as current or noncurrent should parallel the
classification of the related liability
• Sinking fund set aside to pay bond payable shall be classified as
current assets when bond payable is already due within 1 year after
end of reporting period
• Fund set aside for acquisition of noncurrent asset should be classified
as non-current regardless of the year of disbursement
Bank overdraft
• Happens when “cash in bank” account has a credit balance
• Results from issuance of checks in excess of deposits
• Not permitted in the Philippines
• If it happens, it should be classified as current liability
• Should not be offset against other bank accounts w/debit balances
Example
• ABC Company maintains these 2 accounts:
a) Cash in bank – First Bank, which is overdrawn by P10,000
b) Cash in bank – Second Bank, debit balance of P100,000
Net cash balance is P90,000 but presentation should be:

Current asset:
Cash in bank – Second Bank P100,000
Current liability:
Bank overdraft – First Bank 10,000
Bank overdraft should not be offset against other bank accounts with debit balances, except
when accounts are maintained in the same bank & even if accounts are with different bank
provided the amounts are not material
Compensating balance
• 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
Compensating balance example
• An entity borrows P5,000,000 from a bank and agrees to maintain a
10% or P500,000 minimum compensating balance in a demand
deposit account
• This arrangement results in reduction of amount borrowed because
compensating balance provides a source of fund to the bank as partial
compensation for the loan extended
Classification of compensating
balance
• If not legally restricted for withdrawal, it is part of “cash”
• If legally restricted & related loan is short-term, it is separately
classified as “cash held as compensating balance” under “current
assets” section
• If legally restricted & related loan is long-term, it is classified as “non-
current investment”
Undelivered or unreleased check
• One that is merely drawn & recorded but not given to the payee as of
the end of the accounting period
• Adjusting entry:
Cash P—
Account payable or appropriate account P—
• In practice, the foregoing adjustment is sometimes ignored because
the amount is not very substantial & there is no evidence of actual
cancellation of the check
Postdated check delivered
• It is a check drawn, recorded & already given to the payee but it bears
a date subsequent to the end of the reporting period
• Just like undelivered/unreleased check, this adjustment is necessary:
Cash P—
Stale check or check long
outstanding
• Check not encashed by the payee within 6 months after the date
indicated in the check
• Adjusting entry necessary:
If material: Cash P—
If immaterial: Cash P—
Miscellaneous income P—
Accounting for cash shortage
• Happens when actual cash is lower than what is reflected in the records of the
company
• Temporary entry required: Cash short or over P—
Cash P—
• If cashier is the one held responsible, this entry is required:
Due from cashier P—
Cash short or over P—
• If reasonable efforts fail to disclose the cause of shortage, entry is:
Loss from cash shortage P—
Accounting for cash overage
• Happens when actual cash is more than what is reflected in the records of the
company
• Temporary entry required: Cash P—
• If overage is caused by the money of cashier, this entry is required:
Payable to cashier P—
• If there is no claim for the overage, entry is:
Miscellaneous incomeP—
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
• Money set aside to pay small expenses which cannot be paid
conveniently by means of check
2 methods of handling petty cash
a) Imprest fund system
b) Fluctuating fund system
Imprest fund system
• One usually flowed in handling petty cash transactions
Accounting procedures:
a) A check is drawn to establish the fund:
Petty cash fund P—
Cash in bankP—
b) Payment of expenses out of the fund:
No formal journal entries are made. Petty cashier requires a
signed petty cash voucher.
c) Replenishment of petty cash payments:
Expenses P—
Cash in bankP—
Accounting procedures: cont…
d. Adjustment for unreplenished expenses at the end of the accounting
period:
Expenses P—
e. Reversal at the beginning of the next accounting period:
Expenses P—
f. An increase in the fund is recorded as follows:
Cash in bank P—
g. A decrease in the fund is recorded as follows:
Cash in bank P—
Illustration:
2016:
Nov 10 – The entity established an imprest fund of P10,000.
Petty cash fund P10,000
Cash in bank P10,000
29 – Replenished the fund. The petty cash items include the following: Currency & coin
P2,000
Supplies 5,000
Telephone 1,800
Postage 1,200
Entry:
Supplies P5,000
Telephone 1,800
Postage 1,200
Cash in bank P8,000
Illustration: cont..
Dec. 31 – The fund was not replenished. The fund is composed of the
following: currency & coin – P7,000; Supplies - P1,500; Postage – P500;
Miscellaneous expense – P1,000.
Supplies P1,500
Postage 500
Miscellaneous expense 1,000
2017
January 1 – The adjustment made on December 31, 2016 is reversed:
Supplies P1,500
Postage 500
2017
February 1 – The fund is replenished & increased to P15,000. The
composition of the fund: currency & coin – P1,000; Supplies – P4,500;
Postage – P3,000 & Miscellaneous expense – P1,500
Supplies 4,500
Postage 3,000
Fluctuating Fund System
• The system is called as such because the checks drawn to replenish
the fund do not necessarily equal to the petty cash disbursements.
a) Establishment of the fund:
Cash in bank P—
b) Payment of expenses out of the fund:
Expenses P—
c) Replenishment or increase of fund (may or may not be the same as disbursements):
Cash in bank P–
Accounting procedures: cont..
d. At the end of the reporting period, no adjustment is necessary
because the petty cash expenses are recorded outright.
e. Decrease of the fund is recorded as follows:
Cash in bank P—
Illustration:
Nov. 10 – The entity established a petty cash fund of P10,000
November 11-28 Petty cash disbursements of P8,000

Expenses P8,000
Nov 29 – Issued a check for P10,000 to replenish the fund.
Dec 1-30 Petty cash expenses of P9,000.

Expenses P9,000
Dec 31 – Issued a check for P15,000 to replenish the fund.
End

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Cash & Cash

Note: Postdated checks received cannot be considered as cash yet

Net cash balance is P90,000 but presentation should be:

November 11-28 Petty cash disbursements of P8,000

Dec 1-30 Petty cash expenses of P9,000.

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