CASH AND CASH EQUIVALENTS

Cash & Cash Equivalents Composition & Other Topics

Cash

Definition

Cash includes money and any other negotiable instrument that is payable in
money and acceptable by the bank for deposit and immediate credit.

Recognition
Since there is no specific standard governing cash and cash equivalents, the
related standard is “The only guidance is found in PAS 1, paragraph 66, which provides
that “an entity shall classify an asset as current when it is cash or a cash equivalent
unless it is restricted from being exchanged or used to settle a liability for at least twelve
months after the end of mated realizable value

reporting period.” In conclusion, to report an item as part of cash, it should be

UNRESTRICTED IN USE.

Measurement
Item Measurement
Cash in local currency -at face value
Cash in foreign currency -at face value but translated to
Philippine Peso using
closing rate at year-end
Cash in closed bank or banks in bankruptcy -estimated realizable value

Composition
To properly understand the composition of cash, we will group its parts into
three (3): cash on hand, cash in bank and cash fund.
Category Items part of cash? Classification
Coins and 
currencies

Normal 
customer’s
checks
Cashiers’ 
Managers’ &
Travelers’ check

Undelivered & Drawn by the  Revert to

Cash on Post-dated entity payable
Hand checks
Checks Drawn by  receivable
another person
or entity

Drawn by the  Revert to

entity payable/ other
Stale checks income
Drawn by  receivable
another person
or entity
Other Money order 
instruments Bank drafts 
Demand (non- interest 
deposit bearing)
Savings (interest bearing) 
deposit

Escrow (interest bearing)  Long-term

deposit investment
Time deposit (interest bearing)  Cash equivalent

Unrestricted/ 
Compensati informal *if
ng balance silent
Restricted/ Restriction is
formal more than 12
months- long
term
investments
restriction is 12
months or less-
short term
investment
Cash in General rule & if  0 Current liability
bank Bank silent
overdraft Exceptions: (a) 2 Offset from
 or more accounts other bank
with the same accounts
banks
(b) immaterial
 Offset from
other bank
accounts

For asset current asset 

acquisition

Non-current asset  Long term

investment

For use in Examples:

operations change fund, 
payroll fund,
revolving fund,
Cash fund
petty cash:
travel fund
For Current liability Examples: 
settlement of interest fund;
liabilities dividend fund;
tax fund

Non- current Examples:  Long term

liability pension fund; investment
contingent fund;
insurance fund;
bond sinking
fund

Accounting for Petty Cash Fund

Petty Cash Fund is money set aside to defray relatively small amount of cash
disbursements. Petty cash fund may be accounted for using the following methods:

(A) Imprest fund system

(B) Fluctuating fund system

Summary of journal entries

Imprest Fund System Fluctuating fund system

A. Establishment Petty cash xx Petty cash fund xx

Cash in bank xx cash in bank xx
 B. Payment of expense Memo entry only Expenses xx
Petty cash fund xx

C. Replenishment Expense xx Petty cash fund xx

Cash in bank xx Cash in bank xx

D. A.E for unreplenished fund Expense xx No entry

Petty cash fund xx

E. Increase in the fund Petty cash fund xx Petty cash fund xx

Cash in bank xx Cash in bank xx

F. Decrease in the fund Cash in bank xx Cash in bank xx

Petty cash fund xx Petty cash fund xx

Other Topics

Fraudelent activities in cash

(a) Lapping – consist of misapptoptiating a collection from one customer and

concealing this defalcation when collection is made from another customer.
(b) Window dressing – is a practice of opening the books of accounts beyond the
close of the accounting period for the purpose of showing a better financial
position and performance. Window dressing is usually perpetrated as follows:
(1) by recording as of the last day of the accounting period collections made
subsequent to the close the close of the period.
(2) by recording as of the last day of the accounting period payments of accounts
made subsequent to the close of the period.

(c) Kitting – is a transfer of cash from one bank to another bank. Kitting usually
employed at the end of the month. Kitting occurs when a check is drawn against
a first bank and depositing the same check in a second bank to cover the
shortage in the latter bank.
Accounting for cash shortage and overage

Summary of journal entries

Cash shortage Cash overage

a. Upon discovery Cash short/over xx Cash on hand xx

Cash on hand xx Cash short/over xx

b. Upon investigation Due from cashier xx Cash short/over xx

(cashier is accountable) Cash short/over xx Due to cashier xx

c. Upon investigation Loss from shortage xx Cash short/over xx

(cannot trace anymore) Cash short/over xx other income xx

Cash Equivalents

Definition

PAS 7, paragraph 6, defines cash equivalents 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.

Recognition

Only debt instruments acquired within 3 months or less before their maturity
date can qualify as cash equivalents.

Composition

Examples of cash equivalents are:

(a) Time deposit

(b) Money market instrument or commercial paper
(c) Treasury bills

NOTE:

(1) If an item cannot be included as cash equivalent because it did not qualify the
cut0off time period, it will be classified as investments, short-term or long-term,
depending on the period up to maturity.
 (2) If the problem is silent with regards to the above items (a-c), they are classified
as cash equivalents

Bank Reconciliation

Definition

A bank reconciliation is a statements which brings into agreement the cash

balance per book and cash balance per bank. It usually prepared monthly because the
bank provides the depositor with the bank statement at the end of every month.

The source document for bank reconciliation is the bank statement coming from the
bank.

A bank statement is a monthly report of the bank to the depositor showing the cash
balance per bank at the beginning, the deposits acknowledged, the checks paid, other
charges and credits and the daily cash balance per bank during the month. Actually, the
bank statement is an exact copy of the depositor’s ledger in the records of the bank.

Forms of bank reconciliation

1. Adjusted balance method - under this method, the book balance and the bank
balance are brought to correct cash balance that must appear on the balance
sheet.
2. Book to bank method – under this method, the book balance is reconciled with
the bank balance or the book balance is adjusted to equal the bank balance.
3. Bank to book method – under this method, the bank balance is reconciled with
the book or the bank balance is adjusted to equal the book balance.

NOTE: The above methods are not independent methods, they are inter-related. For a
simpler computation, the suggested solution format below is based on the adjusted
balance method.

Solution guide for bank reconciliation

Unadjusted balance per book/leger xx Unadjusted balance per bank xx

Add: Credit memos xx Add: Deposit in transit xx

Less: Debit meos (xx) Less: Outstanding checks (xx)

+/- Errors xx +/- Errors xx

 (xx) (xx)

Adjusted balance xx Adjusted balance xx

NOTE: Errors are to be added or deducted by the party who committed the error based
on its nature. The following is a guide on the treatment of the errors.

TREATMENT

Nature of the error Understatement Overstatement

Error on receipt (collection) Added Deducted

Error on disbursement (payment) Deducted Added

Based on the guide above, we can say the receipts or collections directly affect cash
while disbursement or payments inversely affect cash.

Proof of Cash

A proof of cash is an expanded reconciliation in that it includes proof of receipts

and disbursements. This approach may be useful in discovering possible
discrepancies in handling cash particularly when cash receipts have been
recorded but have not been deposited.
In answering a proof of cash, always bear in mind that it is just expanded bank
reconciliation. You need the concept you absorbed from the previous topic in answering
this topics questions. Follow these basis steps in answering proof of cash questions.

Step 1: analyze the beginning and ending of the format as if it is bank reconciliation.

Step 2: analyze the middle columns based on the nature of the item.

Solution guide for proof of cash

Per Book: Current Month

Prior Month (PM) Receipts Disbursements (CM)
Unadjusted balances XXX XXX XXX XXX
Credit Memos:
PM XXX (XXX)
CM XXX XXX
Debit Memos:
PM (XXX) (XXX)
CM XXX (XXX)
Errors:
Under Receipt:
PM XXX (XXX)
CM XXX XXX
Over Receipt:
PM (XXX) (XXX)
CM (XXX) (XXX)
Under Disbursement:
PM (XXX) (XXX)
CM XXX (XXX)
Over Disbursement:
PM XXX (XXX)
CM (XXX) XXX
Adjusted Balances XXX XXX XXX XXX

Per Bank: Current Month

Prior Month (PM) Receipts Disbursements (CM)

Unadjusted balances XXX XXX XXX XXX
Deposit in Transit:
PM XXX (XXX)
CM XXX XXX
Outstanding Checks:
PM (XXX) (XXX)
CM XXX (XXX)
Errors:
Under Receipts:
PM XXX (XXX)
CM XXX XXX
Over Receipts:
PM (XXX) (XXX)
CM (XXX) (XXX)
Under Disbursement:
PM (XXX) (XXX)
CM XXX (XXX)
Over Disbursement:
PM XXX (XXX)
CM (XXX) XXX
Adjusted Balances XXX XXX XXX XXX
Solution guide to Special Cases on Proof of Cash:
(1) Errors of the PM not yet corrected in the current month (adjusted to either bank side or
book side depending on who committed the error.
Current Month

Prior Month (PM) Receipts Disbursements (CM)

Unadjusted balances XXX XXX XXX XXX
Over Receipt (XXX) (XXX)
Under Receipt XXX XXX
Over Disbursement XXX XXX
Under Disbursement (XXX) (XXX)
(2) NSF checks returned in the current month and redeposited in the current. This is an
adjustment on the bank side only.
NSF Checks (XXX) (XXX)

What if the current month’s deposit in transit and outstanding checks were not given by the
problem, how can we determine them to answer a bank reconcilition question or a proof of cash
question? Please follow the solution guide below in computing them.

Solution guide in computing deposits in transit:

Deposit in transit, beginning xx

Add: Deposit made by the company this month xx

Total deposit to be acknowledged by the bank xx

Less: Deposit acknowledged by the bank xx

Deposit in transit, end xx

Computation of the deposits made by the company and the deposits acknowledge by the bank:
Book receipts (debit) xx Bank receipts (credit) xx

Less:

Credit memos last month (XX) Credit memos last month (XX)

Book errors last month (XX) Bank errors last month (xx)

Corrected this month: Corrected this month:

Understatement of CR (xx) Understatement of CR (xx)

Overstatement of CD (xx) Overstatement of CD (xx)

Book errors this month: Book errors this month:

Overstatement of CR (xx) Overstatement of CR (xx)

Add: Understatement of CR xx Add: Understatement of CR (xx)

Deposits made by the company xx Deposits acknowledged by the bank

xx

Solution guide in computing outstanding checks:

Outstanding checks, beginning xx

Add: Checks issued by the company this month xx

Total checks to be paid by the bank xx

Less: Checks paid by the bank xx

Outstanding checks, end xx

Computation of the checks issued by the company and the checks paid by the bank:

Book disbursements (credits) xx Bank disbursements (debits) xx

Less: Less:

Debit memos last month (XX) Debit memos this month (XX)

Book errors last month (XX) Bank errors last month (xx)

Corrected this month: Corrected this month:

Overstatement of CR (xx) Overstatement of CR (xx)

Understatement of CD (xx) Understatement of CD (xx)

Book errors this month: Bank errors this month:

Overstatement of CD (xx) Overstatement of CD (xx)

Add: Understatement of CD xx Add: Understatement of CD (xx)

Checks issued by the company xx Checks paid by the bank xx

 DISCUSSION EXERCISES

STRAIGHT PROBLEMS

1. At December 31, 2021, SACRED WARRIOR CORP. reported the following as composition
of its Cash and Cash Equivalents line item in its Statement of Financial Position:

Cash on hand P 300, 000

Cash in bank – URSA BANK P400,000

Cash in bank – MOGUL BANK (30,000)

Manager’s check P50,000

Times deposit – URSA BANK P2,000,000

Postage stamps P10,000

Escrow deposit P100,000

Demand deposit – VOID BANK P300,000

Payroll account – VOID BANK P500,000

Treasury note P50,000

Treasury share P90,000

Treasury bills purchased 12/25/2021 maturing 4/1/2022 P120,000

Cash in bank – DOTA BANK P300,000

Cash in bank – MOBA BANK P150,000

Money market placement due 6/2/2022 P100,000

Money market placement due 2/5/2022 P80,000

Revolving fund P40,000

Contingency fund P30,000

Payroll fund P100,000

Dividend fund P40,000

Fund for acquisition of PPE P200,000

Unused credit line P100,000

Post-dated check, customer P60,000

IOUs from employees P90,000

Foreign bank account – unrestricted (in equivalent pesos) P200,000

Petty cash fund P50,000

Traveler’s check P200,000

Additional information:

a) Accounts payable of P16,400 was paid in January 2022. The payments on which a
P1,400 cash discount has been taken were recorded on cash on hand in the December
31, 2021.

b) Drawn against cash in URSA bank were check amounting to P40,000 dated December
26, 2021 still on one of the drawer of the accountant in the treasury department

c) Demand deposit to VOID bank is restricted for the company's plant expansion next year.

d) Cash in bank in DOTA BANK includes an informal compensating balance of P40,000 for
long-term borrowing arrangement.

e) Cash in bank in MOBA BANK includes restricted compensating balance of P50,000 for
short-term borrowing arrangement

f) The petty cash fund included unreplenished December 2021 petty cash expense
vouchers for P15,000. REQUIREMENT(S): (1) Determine the amount of cash for the
year ended 2021. (2) How much is to be reported as Cash and Cash equivalents in the
Statement of Financial Position as of December 31, 2021?
2. The following information was provided by RAIGOR INC. in preparing its current month's
bank reconciliation:

Balance per bank statement 9/30/2021 P2,000,000

Outstanding checks (with certified check of P100,000) P400,000

Deposit placed in the bank's night depository on September 30 P600,000

Bank service charge P10,000

Proceeds of bank loan not recorded by RAIGOR P100,000

Customer's check charged by the bank due to lack of counter signature P20,000

Amount erroneously credited by bank to RAIGOR's account P50,000

A supplier check for P10,000 was incorrectly recorded by RAIGOR as P100,000

Notes collected by the bank for RAIGOR. P150,000

A customer check for P150,000 was incorrectly recorder by RAIGOR as P15,000

NSF checks not recorded on books nor redeposited P25,000

Check of RIGID CORP. charged by the bank to RAIGOR INC P60,000

Deposit of RAIGOR INC. credited by the bank to RAIGEE INC. P100,000

Check issued by RAIGOR INC. charged by the bank to RAINOR CORP P40,000

REQUIREMENT(S) (1) How much is the adjusted cash in bank balance for the month of
September? (2) What is the unadjusted balance per book at the end of September?

3. MOGUL CORP. provided the following bank reconciliation on August 31

Balance per bank statement P1,500,000

Deposits outstanding P300,000

Checks outstanding (P180,000)

Errors P70,000

Adjusted cash balance P1,690,000

Balance per ledger P1,575,000

Credit Memos P250,000

NSF Checks not recorded nor redeposited (P90,000)

Bank service charge (P5,000)

Errors (P40,000)

Adjusted cash balance P1,690,000

Other information pertaining to August

 Book errors comprised an over-recording of customer check of P100,000 and over-

recording of disbursement of P60,000.

 Bank error was actually an erroneous debit in the account of the company

The following are data pertaining to September

Receipts per ledger P1,600,000

Disbursements per ledger P700,000

Credit Memos P150,000

NSF Checks redeposited immediately P50,000

NSF Checks not recorded nor redeposited P40,000

Outstanding Checks P100,000

Deposit in Transit P280,000

Bank Service Charges P10,000

Error in recording customer check amounting to P100,000 as P10,000

Deposit of MOGAL CORP credited to the company's account P110,000

Check issued by MOGUL charged by the bank to MIGUL P60,000

Customer check amounting to 15,000 recorded by MOGUL as P150,000

Erroneous charge by the bank to MOGUL's account amounting to P40,000

REQUIREMENT(S): Compute for the following:

(a) Adjusted cash in bank balance at the end of August

(b) Adjusted cash receipts of September
(c) Adjusted cash disbursements of September
(d) Adjusted cash in bank balance at the end of September
(e) Unadjusted balance per bank statement for September
(f) Unadjusted bank receipts of September
(g) Unadjusted bank disbursements of September

4. The following information was available for the current month’s cash in bank balance of
BALANAR CORP.

Book debits in March 550,000

Bank credits in March 600,000

Book credits in March 250,000

Bank debits in March 300,000

Interest income on deposits in February recorded on March 10,000

Collection of note receivable by the bank of February recorded on March 150,000

Note receivable collected on March 12,000

Bank service charge - February 100,000

Bank service charge - March 20,000

Deposit in transit - February 25,000

Outstanding checks - February 300,000

Summary of Errors

Overstatement on book receipts – February 15,000

Overstatement on book receipts – March 20,000

Customer check for P50,000 recorded by BALANAR on February as 5,000

Customer check for P100,000 recorded by BALANAR on March as 10,000

Overstatement on book disbursements – February 30,000

Overstatement on book disbursements – March 25,000

Supplier check for P150,000 recorded by BALANAR on February 15,000

Supplier check for P90,000 recorded by BALANAR on March 20,000

Overstatement on bank receipts – February 30,000

Overstatement on bank receipts – March 40,000

REQUIREMENT(S): (1) Compute the deposit in transit for the month of March. (2) Compute the
outstanding checks for the month of March.

MULTIPLE CHOICE (THEORIES)

1. S1: The basic requirement for cash and cash equivalent is for it to be restricted for use.
S2: Money, which is not legal tender can be part of cash.
A. True, false C. False, false
B. False, true D. True, true

2. At the end of the current year, an entity had various checks and papers in the safe.
Which of the following should not be included in “cash” in the current year- end
statement of financial position?
A. US $20,000 cash.
B. Past due promissory note issued in favor of the entity by the President.
C. The entity’s undelivered check payable to a supplier dated December 31 of the
current year.
D. Another entity’s P150,000 check payable to the entity dated December 15 of the
current year.
3. Which of the following is not a cash item?
I. Demand deposit
II. Customer post – dated checks
III. Time deposit
A. I and II
B. II and III
C. I and III

4. In relation to cash equivalents, determine wheter the following statements are true or
false:
S1: Redeemable preference shares can never be part of cash equivalents since they are
equity instruments.
S2: If a debt instrument cannot be included as cash equivalent because it is acquired 4
months before its maturity date, it is still part of the current assets of the company.
S3: Cash equivalents should be measured at maturity value, meaning face value plus
interest.
A. True, false, false
B. Falses, true, false
 C. True, true, false

5. In replenishing a petty cash fund, which one of the following entries required?
A. Debit Petty Cash, credit Cash in bank
B. Debit individual expense accounts, credit Cash in bank
C. Debit Petty Cash, credit individual expense accounts
D. Debit Cash in bank, credit Petty Cash

6. In relation to cash and cash equivalent, which of the following statements are true or
false?
I. Checks are always presented as part of cash.
II. Checks drawn which are post-dated should be reverted back to cash even if the
checks are already delivered to the payees.
III. An entity acquires an investment in debt securities on November30, 20x1: The debt
securities mature on January 31, 20x2. The debt securities qualify to be presented
as part of cash equivalents on the entity’s 20x1 financial statements.
IV. A comprehensive balance that is legally restricted as to withdrawal cannot be
included as part of cash and cash equivalents but can be presented as current asset.

A B C D
Statement I False True False False

Statement II False True True True

Statement III True True True True

Statement IV True False True False

7. Which of the following may be used to compute for the adjusted balance of cash?
A. Balance per bank statement + Deposits in transit – Outstanding checks – Erroneous
credit to the account made by the bank
B. Balance per bank statement + Deposits in transit – Outstanding checks + Erroneous
credit to the account made by the bank
C. Balance per bank statement + Deposits in transit – Outstanding checks – Erroneous
debit to the account made by the bank
D. Balance per bank statement + Deposits in transit – Outstanding checks, net of
certified checks Erroneous credit to the account made by the bank

8. Which of the following statements in relation to bank reconciliation is true?

A. The cash amount reported in the statement of financial position must be the balace
reported in the bank statement.
B. Credit memos will be cause the cash balance per ledger to be higher than that
reported by the bank, all other things being equal.
C. Bank service charge will cause the cash balance per ledger to be higher than that
reported by the bank, all other things being equal.
 D. Outstanding checks will cause the cash balance per ledger to be greater than the
balance reported by the bank, all other things being equal.

9. The adjusting entries for the bank reconciliation

A. Are taken from the “balance per bank” section only
B. May include a debit to office expense for bank service change
C. May include a debit to accounts payable for an NSF customer check
D. May include a credit to accounts receivables for an NSF customer check

10. When preparing a proof of cash, a credit memo from the previous month is
A. Extended to the book receipts column as an addition
B. Extended to the bank receipts column as an addition
C. Extended to the book receipts column as an deduction
D. Not extended in any of the book columns

- END OF HANDOUTS -