CASH AND CASH EQUIVALENTS

CASH
includes checks, bank draft and money orders as these are acceptable for deposit or immediate
encashment.

Check – an instrument that directs the bank to pay a sum of money to the bearer
o Postdated Checks – are not considered as cash, as this is only acceptable for
encashment by the bank at a certain future date and provided, the account from
which it is drawn have sufficient funds.
o Customer’s/ Cashier’s, Manager’s, Traveler’s Checks are considered as cash (on
hand), as these are issued by the bank.

Bank Draft – similar to a (cashier’s) check. A negotiable instrument where payment is
guaranteed by the issuing bank. Banks verify and withdraw funds from the requester's
account and deposit them into an internal account to cover the amount of the draft.


Money orders – a certificate that allows the stated payee to receive cash on demand. One can
purchase money orders (may have to pay a small fee) at banks and credit unions. An alternative
to cash/ checks.

Must be UNRESTRICTED / readily available as to its use. If cash is restricted to settle liability for
more than 12 months after the end of the reporting period [PAS 1, 66], it is classified as
NONCURRENT otherwise, it is a CURRENT ASSET. This applies to deposits in foreign countries as
well.

Cash items
o Cash on hand – includes undeposited cash or checks considered as cash.
o Cash in bank – includes demand deposit or checking account and savings deposit, which
are unrestricted as to withdrawal.
o Cash fund set aside for current purposes (Petty Cash Fund, Payroll Fund and Dividend
Fund). If the funds are set aside for noncurrent purposes, then it has to be reclassified as
Noncurrent. In other words, classification of cash fund should parallel the classification
of the related liability (or purpose).

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.
[PAS 7, 6]. It includes the following:

Three month BSP treasury bill (short term obligation)

Three year BSP treasury bill purchased three months before maturity date.
Three-month time deposit
Three-month money market instrument1 or commercial paper2

1. Includes commercial paper, certificates of deposit among others

2. Is for buying and selling unsecured loans for corporations in need of a short-term cash infusion. Only
highly creditworthy companies participate, so the risks are low)
* Preference shares with specified redemption date may qualify as cash equivalent.

CASH INVESTMENT CLASSIFICATION

TERM Financial Statements Classification
3 months or less Cash and cash equivalents
> 3 months up to 1 year Short term financial assets/ investments under
Current Assets
3
> 1 year Noncurrent/ Long-term Investments
3
If due within one year from end of reporting period, reclassified as current.

MEASUREMENT OF CASH
1. At face value or current exchange rate if foreign currency
2. Estimated Realizable Value if amount recoverable is lower than face value in case of a bank or
financial institution in bankruptcy or financial difficulty.

PRESENTATION
An entity makes the judgement about whether to present additional items separately on the basis of an
assessment of:
a) the nature and liquidity of assets;
b) the function of assets within the entity; and
c) the amounts, nature and timing of liabilities.

Other Terms:
1. BANK OVERDRAFT
Means credit balance in cash in bank account (Not applicable in the Philippines) and
classified as Current Liability
May only be offset with accounts in the same bank with appropriate disclosures.

2. COMPENSATING BALANCE
Amount that must be maintained in connection with a borrowing arrangement with a
bank. Partial compensation to the bank for the loan.
Generally takes the form of minimum checking or demand deposit account balance
o If not legally restricted as to withdrawal, it shall form part of CASH
o If legally restricted, classified as Cash held as Compensating Balance under
current or noncurrent assets depending on the term of the loan.
3. Undelivered or Unreleased Check
Must be adjusted and recognize a liability, as the check cannot be presented to the bank
for encashment.
4. Postdated Check Delivered – check drawn, recorded and given to payee but bears date
subsequent to the end of reporting period.
5. Stale Check or check long outstanding – a check not encashed by the payee within a relatively
long period of time. in banking practice, a check becomes stale if not encashed within 6
months from time of issuance. May be credited to miscellaneous income if the amount is
immaterial.
 Adjusting entry for number 3 to 5:
Cash xxx
Accounts Payable xxx

IMPREST SYSTEM
A system of control of cash which requires all cash receipts should be deposited intact and all
cash disbursements should be made by means of check. Ex. A day’s cash collections deposited within
the same day with the bank. Disbursements larger than amount set aside as petty cash are made by
means of check to avoid unauthorized disbursement.

PETTY CASH FUND (PCF)

Take note that the imprest system is a kind of internal control measure over cash to safeguard it
from theft, misappropriation and other financing schemes. However, risk in cash is inherent and no
control measure can guarantee elimination of risks.
Presented below are the two fund system in accounting for petty cash. Imprest fund system is
more common while fluctuating fund system is more time consuming in maintaining, recording and, in
effect, costlier.
IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM
Setting up petty cash fund Setting up petty cash fund
PCF 10,000 PCF 10,000
Cash in Bank 10,000 Cash in Bank 10,000

Use of Petty Cash Fund Use of Petty Cash Fund

*Memo Entry only Various Expenses 8,000
PCF 8,000

Replenishment Replenishment
Various Expenses 8,000 PCF 8,000
Cash in Bank 8,000 Cash in Bank 8,000

After the foregoing entry, PCF is still at 10,000. Cash in Bank forwarded to Petty cash custodian

Increase of PCF Increase of PCF

PCF xx PCF xx
Cash in Bank xx Cash in Bank xx

Decrease of PCF Decrease of PCF

Cash in Bank xx Cash in Bank xx
PCF xx PCF xx
Accounting for Cash Shortage/ Overage
When cash count is less (short) or more (over) than balance per book. Cash short or over
account is used as a temporary account and adjusted to reflect proper classification/ treatment for the
reason resulting cash shortage/ overage.

CASH SHORTAGE CASH OVERAGE

Initial entry upon discovery of discrepancy Initial entry upon discovery of discrepancy
Cash short or over 1,000 Cash 1,000
Cash 1,000 Cash short or over 1,000

Adjusting entry if custodian is at fault for the Adjusting entry if excess pertains to the
shortage custodian
Due from Cashier 1,000 Cash short or over 1,000
Cash short or over 1,000 Due to Cashier 1,000

Adjusting entry if cause of shortage is Adjusting entry if cause of overage is

unknown unknown
Loss from cash shortage 1,000 Cash short or over 1,000
Cash short or over 1,000 Miscellaneous income 1,000

BANK RECONCILIATION
A very important control measure of cash in practice. Several entities are having difficulty in
maintaining an effective bank reconciliation due to the data that must be processed and monitored. This
control measure is used to ensure that receipts and disbursements per the entity’s and bank’s records
are the same and accounted for.

Normally done on a monthly basis that coincides the bank’s issuance of a bank statement of the
entity, which comprises the cash beginning, deposits acknowledged, checks paid, other charges, and
credits and daily cash balance per bank during the month.
Cancelled checks, any debit or credit memoranda that have affected the depositor’s account are
attached to the bank statement

*Note: Daily accounting procedures or workflow of every organization must be clear so as to properly
conduct the monthly bank reconciliation.

Types of Deposits:
1. Demand deposit – normally charge by the bank with fees for using and maintaining this account.
This includes checking or current account or commercial deposit where deposits are covered with
deposit slips and funds are withdrawable on demand. This account is non-interest bearing
2. Savings deposit – where a passbook is essential in depositing and withdrawing funds. This are
interest-bearing account.
 3. Time deposit – with formal agreement with the bank evidenced by a certificate of deposit and
bears a higher interest than the savings. However, funds in this account are not withdrawable
within a short period of time (say, 6 months or 1 year) otherwise, the depositor shall be charged
with a fee for breach of terms.

In bank recon, banks require specimen signature and list of authorized officers to approve
transactions or sign checks.

Book Reconciling Items

1. Credit Memos – recorded by bank that does not yet appear on the books. Ex. Collection of
receivable of the entity, loan proceeds, etc.
2. Debit Memos – includes charges by the bank such as bank service charge or checks presented
but without sufficient funds (NSF)
3. Errors – error in recording by the book which may include transposition errors

Bank Reconciling Items

1. Deposit in transit (DIT) – undeposited cash on hand of the entity or those that have not yet
cleared by the bank
2. Outstanding Checks (OC)– checks drawn by the entity but not presented (encashed or
deposited) by the recipient
3. Errors- same as above.

FORMS OF BANK RECONCILIATION

1. Adjusted Balance Method – book and bank balance are brought to a correct cash balance that
must appear on the balance sheet. Preferred method.
2. Book to bank method – Book balance is reconciled with the bank balance or adjusted to equal
bank balance
3. Bank to Book Method – Bank balance is reconciled with the book balance or adjusted to equal
book balance.

ADJUSTED BALANCE METHOD BOOK TO BANK BANK TO BOOK

Book Balance XX Book balance xx Bank balance xx
Add: Credit Memos XX add: Credit Memos xx Add: DIT xx
Total XX OC XX Debit Memos xx
Less: Debit Memos (XX) Total XX Total XX
Adjusted Book Balance XX Less: Debit Memos (XX) Less: OC (XX)
DIT (XX) Credit Memos (XX)
Bank Balance XX Bank Balance XX Book Balance XX
Add: DIT XX
Total XX
Less: OC (XX)
Adjusted Bank Balance XX
 TWO-DATE BANK RECONCILIATION
Bank recon that literally involves two dates. Procedures followed are the same with a one date
reconciliation. It becomes complicated when certain facts or data are omitted. To help with the missing
data, the following formulas may help.

Computation of Book Balance Computation of DIT

Balance per Book, Beg of Month xx DIT, Beg of Month xx
Add: Book debits during the month xx Add: Cash receipts deposited during the month xx
Total xx Total deposits to be acknowledged by the bank xx
Less: Book credits during the
month (xx) Less: Deposits acknowledge by the bank (xx)
Balance per book, End of month xx DIT, End of Month xx

Computation of Bank Balance Computation of OC

Balance per Bank, Beg of Month xx OC, Beg of Month xx
Add: Checks drawn by deposited during the
Add: Bank credits during the month xx month xx
Total xx Total checks to be paid by the bank xx
Less: Bank debits during the month (xx) Less: Checks paid by bank during the month (xx)
Balance per Bank, End of month xx OC, End of Month xx

PROOF OF CASH
Is an expanded reconciliation that includes receipts and disbursements columns. It is useful in
discovering possible discrepancies in handling cash particularly when cash receipts have been recorded
but not deposited.

January 31 Receipts Disbursements February 28

A B C D = A+B-C
Balance per book 50 200 180 70
Note collected:
January 15 -15
February 20 20
NSF Check/ Service
Charge:
January -5 -5
February 10 -10
Adjusted Book balance 59 205 184 80
Balance per bank 84 170 130 124
Deposit in transit:
January 40 -40
February 75 75
Outstanding checks:
January -65 -65
February 119 -119
Adjusted Bank Balance 59 205 184 80

Receipts and Disbursement indicated in the proof of cash pertains to the current month or the
month of February in this case
Do take note that any discrepancies in the previous month shall be discovered and adjusted on
the following month by the receipt of the bank statement. Therefore,
o On Credit Memos or Note collected in January, it must be added to the January
column while deducted for the Receipts of the current month because it is overstated
by the adjusting entry made.
o Credit Memos or Note collected in February must be added to the Receipts of the
current month as it truly pertains to the current month and such amount extended
under the February 28 column.
o The same logic applies for the Debit Memos/ NSF Checks, Bank service Charge,
Deposit in transit, and Outstanding Checks