CASH AND CASH EQUIVALENTS Bank Deposits

Cash includes money and any other negotiable instrument that is • Savings
payable in money and acceptable by the bank for deposit and - Demand deposit (cash) •
immediate credit. To be reported as cash, an item must be
Current/Checking
unrestricted in use. This means that the cash must be readily available
in the payment of current obligations and not be subject to any - Demand deposit (cash)
restrictions. • Time
- Not a demand deposit (not cash)
- May be considered as cash equivalent

Types of checks:
1. Post-dated checks - not part of cash and cash equivalents
2. Not sufficient fund (NSF) checks – not part of cash and cash
equivalents
3. Certified checks – part of cash and cash equivalents because it is
certified and insured by the bank to have sufficiency of fund
backed in the check. Examples of certified checks include:
a. Manager’s check – certified by the manager of the bank
b. Cashier’s check – certified by the teller or cashier of the bank

Relevant Standards c. Traveller’s check – certified for travel purposes of the

depositor
Financial Instruments Standards
4. Antedated checks (checks dated on past date) – part of cash and
• PAS 32 – Presentation cash equivalents provided that they are to be encashed or
• PAS 39 – Recognition and Measurement deposited to the bank six months following the date of the check.

• PFRS 7 – Disclosures
5. Stale checks (checks long outstanding) – not part of cash and
• PFRS 9 – Financial Instruments (01.01.18) cash equivalents because it is deemed to be expired. Checks
must be deposited or encashed six months following the date of
Other Standards the check.
• PAS 1 – Presentation of FS
Example Analysis of a Check
• PAS 7 – Statement of Cash Flows The date of the check is on October 15, 2014 and has an amount of
P15,000. The check is not certified by the bank. Therefore:
What is Cash? ▪ Before October 15, 2014, the check is post-dated and the
maker should have at least P15,000 in his account.
- Includes cash on hand and other negotiable instrument payable
▪ On October 15, 2014, if the maker has failed to have at least
in money and acceptable by the bank for deposit and
P15,000 in his account, the check would bounce or marked as
immediate credit NSF check. Once the check is deposited to the bank, the
- Cash include currency and coins, petty cash fund, change fund drawer will receive a notice of DAIF (drawn against insufficient
and negotiable instruments like checks and bank drafts funds)
- To be reported as cash, items must be readily available and not ▪ After October 15, 2014, assuming the check has sufficient funds,
restricted for use in the payment of current obligations. it will be an antedated check.
▪ On April 15, 2015 (six months after the check date), assuming
the check has not been deposited nor encashed, it is deemed
Included in cash:
as expired and it will become a stale check.
• Coins and bills in legal tender by BSP
• Checks (subject to certain conditions) The following cash items are included in “cash.”
• Bank drafts
• Cash on hand – cash collections and cash items (checks, bank
• Money orders (money market funds)
drafts and money orders) awaiting bank deposit
• Cash in bank – demand or savings deposit, or checking account
Cash comprises cash on hand and demand deposits. (PAS 7)
which are unrestricted as to withdrawal
• Cash fund – cash set aside for current purposes (petty cash
Cash on hand includes undeposited coin and currency, petty cash
fund, payroll fund, dividend fund.
funds, change funds, and negotiable instruments such as personal
checks.

Demand deposits are unrestricted funds that can be withdrawn upon

demand from a bank where they have been deposited.
Cash equivalents- short-term and highly liquid investments that are Items Not Cash or Cash Equivalents
readily convertible into cash and so near their maturity that they 1. Time certificates of deposit (if original maturity over 90 days)
present insignificant risk of changes in value because of changes in 2. IOU’s from officers
interest rates. [PAS 7 (Statement of Cash Flows) definition] 3. Sinking Fund Cash
Included in cash equivalents: 4. NSF checks and post-dated checks- it should be reverted back
▪ Three-month BSP treasury bill to A/R
▪ Three-year BSP treasury bill purchased three months before 5. Postage stamps
maturity date 6. Cash in closed bank –classify realizable value as other
▪ Three-month bank deposit receivables
▪ Three-month money market instrument
▪ Preference shares with specified redemption date and Bank Overdraft
acquired three months before redemption date ▪ When cash in bank account has a credit balance.
▪ Certificates of deposit (having original maturities of 90 days or
▪ It is classified as a current liability and should not be offset
less)
against other bank accounts with debit balances
▪ Exception to the rule: If an entity maintains two or more
Measurement
bank accounts in one bank and one account results in an
▪ Cash is measured at face value. overdraft, such overdraft can be offset against the other
▪ Cash in foreign currency is measured at current bank account with debit balance.
exchange date (balance sheet date)
▪ Cash is measured at estimated realizable value if bank – Credit balance in the cash account resulting from the
is in financial difficulty or bankruptcy and if
issuance of checks in excess of the amount on deposit
recoverable amount is lower than face value
(currently, cash account is insured up to P500,000) – Normally reported as a current liability (short term
borrowing)
Classification for investments – May be offset against other bank accounts if maintained
▪ If term is three months or less, classified as cash equivalents within the same bank
▪ If term is more than three months but within one year,
classified as marketable securities, or short-term investments, – If repayable on demand and integral part of cash
and are separate current assets in the financial statements management, included in cash and cash equivalents.
▪ If term is more than one year, classified as long-term (PAS 7.7-8)
investments which are non-current assets.
Compensating Balance- Generally takes the form minimum checking
Cash in a foreign bank or demand deposit account balance that must be maintained in
▪ If not subject to foreign exchange restriction, they are connection with a borrowing arrangement with a bank.
included as cash.
▪ If subject to foreign exchange restriction and material, they Classification of Compensating Balance:
are reclassified as cash restricted in foreign bank which are a) If the deposit is not legally restricted as to withdrawal by the
non-current assets. borrower because of an informal compensating balance
_____________________________________________
agreement = part of cash
Unrestricted
b) If the deposit is legally restricted because of a formal
- Reported as part of cash in their Philippine peso equivalents
compensating balance agreement = classified separately as
as of the end of the reporting period.
“cash held as compensating balance” under current assets if
Restricted the related loan is short-term
• Current – Other current assets
c) If the related loan is long term = classify as noncurrent
• Noncurrent – Other noncurrent assets investment

Cash fund set for a purpose Presentation •

▪ For use in current operations – classified as current asset. Unrestricted -
Examples include: petty cash fund, payroll fund, travel fund, Cash
interest fund, dividend fund, and tax fund. • Restricted:
▪ For use in non-current operations – classified as long-term
investment. Examples include sinking fund, contingent fund,
- Short term borrowing – OCA
fund for acquisition of PPE, etc. If the fund is set aside for use - Long term borrowing – ONCA
within one year after the reporting period, it will be
reclassified as current asset.
Undelivered checks – checks that is drawn and recorded but is not of postponements of the entries for the collection of receivables,
given to payees; it is still cash of the company. possible because of poor internal control.
Pro-forma Entry
Cash xxx Kitting - Occurs when a check is drawn against a first bank and
Accounts payable xxx depositing the same check in a second bank to cover the shortage in
the latter bank. No entry is made for both transactions.
Post-dated checks delivered – checks that is sent to payees but has
a date subsequent in the reporting period; it is still cash of the Theft of cash
company.
- Unauthorized removal of cash, malversation or
Stale checks – checks released by the company that has been expired misappropriation and etc.

Pro forma Entry Control of Cash

Cash xxx
Miscellaneous income xxx (if immaterial)
• Imprest system

• All cash receipts are deposited intact

Cash xxx and all disbursements made by check.
Accounts payable xxx (if material)
• Utilization of Petty Cash Fund
Time Deposits • Segregation of duties
- Deposits that are not immediately available for withdrawal or
that have other restrictions. • Bank reconciliation
Examples
• Certificates of deposit IMPREST SYSTEM
• Money market savings certificates IMPREST SYSTEM - A system of control of cash which requires that all
Presentation cash receipts should be deposited intact and all cash disbursements
should be made by means of check.
• Not more than 3 mos. – Cash equivalents
• 3 mos. but not > 1 yr. – Short Term Investment Petty Cash Fund- is money set aside to pay small expense which
• More than 1 year – Long Term Investment cannot be conveniently paid by means of check. There are two
methods of handling the petty cash, namely
ILLUSTRATION – KIESO, ET AL
I. IMPREST FUND SYSTEM
Journal entries:
1. To establish the fund:
Petty Cash fund xx
Cash in bank xx

2. Payment of expenses out of the fund

NO JOURNAL ENTRY (memo entries only)

3. Replenishment of petty cash payments:

Expenses xx
Cash in bank xx

4. Year-end adjustment to adjust the unreplenished expenses in

order to estate the correct petty cash balance:
Expenses xx
ISSUES IN CASH
Petty Cash fund xx
Window Dressing - Opening the accounts even after the reporting
period. In a broad sense, WD is any deliberate misstatement of assets,
Note: The adjustment is to be reversed at the BEG of the next
liabilities, equity, income and expenses.
accounting period so that normal replenishment procedures may
be followed.
Lapping - Used for concealing cash shortage. Practice used for
concealing cash shortage, where it consists of misappropriating
collections in customers. It consists of misappropriating a collection 5. An increase in the fund is recorded as follows:
from one customer and concealing the defalcation by applying a Petty Cash fund xx
subsequent collection made from another customer. Involves series
 Cash in bank xx ACCOUNTING FOR CASH SHORTAGE/OVERAGE

6. A decrease in the fund is recorded as follows: Occasional errors may cause the petty cash fund to be out of balance.
Cash in Bank xx The sum of the cash and receipts will differ from the correct Petty
Petty Cash fund xx Cash balance. This might be the result of simple mistakes, such as
math errors in making change, or perhaps someone failed to provide
II. FLUCTUATING FUND SYSTEM a receipt for an appropriate expenditure. Whatever the cause, the
▪ Petty cash disbursements are immediately recorded. available cash must be brought back to the appropriate level.
▪ The checks drawn to replenish the fund do not necessarily
equal the petty cash disbursements. Accounting for cash shortage/overage
Cash count < balance per book = cash shortage
1. To establish the fund: Cash count > balance per book = cash overage
Petty Cash fund xx
Cash in bank xx
Accounting for cash shortage
2. Payment of expenses out of the fund : The entry to record cash shortage is:
Expenses xx Cash short or over xx
Petty Cash fund xx Cash xx

3. An increase in the fund is recorded as follows: Note: The cash short or over account is only a temporary or
Petty Cash fund xx suspense account. When financial statements are prepared, the
Cash in bank xx same should be adjusted. Hence,

4. Year-end adjustment: If the cashier is responsible If reasonable efforts fail to

NO adjustment necessary because the petty cash expenses are for cash shortage, the disclose the cause of the
recorded outright. adjustment is: shortage, the adjustment is:
Due from cashier Loss from cash shortage
5. A decrease in the fund is recorded as follows: Cash short or over Cash short or over.
Cash in Bank xx
Petty Cash fund xx Accounting for cash overage
The entry to record cash overage is:
Cash xx
Cash short or over xx

Note: Whether it is a cash shortage or cash overage, the offsetting

account is cash short or over account. Such account should be
adjusted when statements are prepared.

The cash overage is treated as Where the cash overage is

miscellaneous income if there is properly found to be the
no claim on the same , the entry money of the cashier, the
is: entry is:
Cash short or over Cash short or over
Miscellaneous income Payable to cashier

BANK RECONCILIATIONS

Bank reconciliation is a statement which brings into agreement the

cash balance per book and cash balance per bank.

The reconciliation compares the amount of cash shown on the

monthly bank statement with the amount of cash reported in the
general ledger.
RECONCILING ITEMS: d. Bank collections = the bank may make collections on the
depositor's behalf, increasing the depositor’s bank balance. If
the depositor is not aware the collection was credited to its
1. Book Reconciling Items: balance, the balance per depositor's records will be understated.
a) Credit memos- refer to items not representing deposits
credited by the bank to the account of the depositor but not Proforma Reconciliation: Adjusted Balance Method ABM
yet recorded by the depositor as cash receipts. means that the book balance and the book balance are
Examples: adjusted to equal correct cash balance.
▪ N/R collected by bank in favor of the depositor and
credited to the account of the depositor
▪ Proceeds of bank loan credited to the account of the Book Balance XX
depositor
Add: Credit Memos XX
▪ Matured time deposits transferred by the bank to the
current account of the depositor Total XX
Less: Debit Memos XX
b) Debit memos- refer to items w/c are charged or debited by
the bank to the account of the depositor but not yet Adjusted Bank Balance XX
recorded by the depositor as cash disbursements.
Examples:
▪ NSF checks
▪ Technically defective checks
▪ Bank service charges Bank Balance XX
▪ Reduction of loan- payment of loan
Add: Deposits in transit XX
c) Errors Total XX
Less: Outstanding Checks XX
Adjusted Bank Balance XX
2. Bank Reconciling Items:
a) Deposits in transit – are collections already recorded by the
depositor as cash receipts but not yet reflected on the bank
Note: Errors will have to be analysed for proper treatment. But errors
statement.
are reconciling items of the party which committed them.
b) Outstanding checks- already recorded by the depositor as
cash disbursements but not yet reflected on the bank
statement.

Note: certified check should be deducted from outstanding

check (if included therein) because they are no longer
outstanding for bank recon purposes.

c) Errors

SEVERAL FACTORS BRING ABOUT THIS DIFFERENTIAL

a. Deposits in transit = Funds sent by the depositor to the bank that

have not been recorded by the bank and deposits made after the
bank's cutoff date will not be included in the bank statement. In
both cases, the balance per the depositor's records will be higher
than those of the bank.

b. Outstanding checks = Checks written for payment by the

depositor that have not been presented to the bank will result in
a higher balance per bank records than per depositor records.

c. Service charges = Service charges are deducted by the bank. The

depositor will not deduct this amount from its records until it is
made aware of the charge, usually in the following month.
Balance per books is overstated until this amount is subtracted.
 Problem No. 4
Practice Set The petty cash fund of Guiguinto Company on
December 31, 2016 is composed of the following:
Coins and Currencies 14,000
Problem No. 1
Petty Cash Vouchers:
On January 1, 2016, Tinoc Company borrows 2,000,000 from
National Bank at 12% annual interest. In addition, Tinoc is required to Gasoline Payments 3,000
keep a compensatory balance of 200,000 on deposit at National Bank Supplies 1,000
which will earn interest at 4%. The effective interest that Tinoc pays
Cash advances to employees 2,000
on its 2,000,000 loan is:
a. 10.0% b. 11.6% c. 12.0% d. 12.8% Employee’s check returned by bank
marked NSF 5,000
Check drawn by the company payable to the
Problem No. 2 order of the petty cash custodian,
Cash in bank balance of William Co. on January 1, 2016 was 70,000 representing her salary 20,000
representing 35% paid-up Capital of its authorized share capital of A sheet of paper with the names of employees
200,000. During the year you ascertained the following postings to together with contribution for a birthday gift of a
some accounts, as follows: co-employee
Debit Credit in the amount of 8,000
Petty Cash Fund 2,000 53,000
Accounts Receivable Trade 450,000 290,000
Subscription Receivable 60,000 50,000 The petty cash ledger account has an imprest balance of 50,000.
What is the correct amount of petty cash on December 31, 2016?
Delivery Equipment 50,000
a. 34,000 b. 14,000 c. 39,000 d. 42,000
Accounts Payable Trade 280,000 430,000
Bank Loan 35,000 80,000 Theory Questions
Accrued Expenses 1,500
Subscribed Share Capital 60,000 1. As defined in PAS 7, cash comprises
Authorized Share Capital 130,000 a. Cash on hand
Unissued Share Capital 200,000 b. Demand deposits
Sales 450,000 c. Cash equivalents
Purchases 430,000 d. Both a and b
Expenses (including depreciation of
5,000 and
accrued expense of 1,500) 90,000
2. Cash equivalents are
a. Short term highly liquid investments
Cash in bank balance at December 31, 2016 was:
a. 41,500 b. 33,000 c. 34,500 d. 39,500 b. Readily convertible to known amounts of cash
c. Subject to an insignificant risk of changes in value
Problem No. 3 d. All of the above
An office supplies enterprise, operating on a calendar year basis, has
the following data in its accounting records:
01/01 12/31 3. Which statement is true?
Cash 47,000 a. Certificates of deposit are usually classified as cash on the
statement of financial position.
Inventory 101,000 93,000
b. Companies include postdated checks and petty cash funds
Accounts Receivable 82,000 116,000
as cash.
Accounts Payable 68,000 63,000 c. Cash equivalents are investments with original maturities of
Sales 1,150,000 six months or less.
Cost of Goods Sold 900,000 d. Savings accounts are usually classified as cash on the
Operating Expenses 200,000 statement of financial position.

What is the expected cash balance for December 31? 4. The following statements relate to cash. Which statement is
incorrect?
a. 50,000 b. 66,000 c. 76,000 d. 134,000
 a. The purpose of establishing a petty cash fund is to pay small 11. Which of the following is true regarding the imprest petty cash
expenses which cannot be paid conveniently by means of system?
check.
a. The imprest petty cash system in effect adheres to the rule
b. Classification of a restricted cash balance as current or of disbursement by check.
noncurrent should parallel the classification of the related b. Entries are made to the Petty Cash account only to increase
obligation for which the cash was restricted.
or decrease the size of the fund.
c. Compensating balances required by a bank may be included c. The Petty Cash account is debited when the fund is
in “cash and cash equivalent”.
replenished.
d. The term “cash equivalent” refers to demand credit d. All of these are not true.
instruments such as money order and bank drafts.

5. Which of the following is not considered cash for financial 12. In most situations the petty cash fund is reimbursed just prior to
the year end and an adjusting entry is made to avoid
reporting purposes?
a. Petty cash funds and change funds a. The overstatement of cash and the understatement of
expenses
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds b. The understatement of cash and the overstatement of
expenses
d. Postdated checks and I.O.U.'s
c. The misstatement of revenues
6. Which of the following is considered cash?
d. The understatement of cash with the appropriate statement
a. Certificates of deposit (CDs)
of expenses
b. Money market savings certificates
c. Postdated checks 13. The payments of accounts payable made subsequent to the close
d. Money orders of the accounting period are recorded as if they were made at
the end of the current period. a. Window dressing
7. In which account are post-dated checks received classified?
b. Lapping
a. Receivables c. Kiting
b. Prepaid expenses d. Imprest system
c. Cash
14. It consists of misappropriating a collection from one customer
d. Payables and concealing this defalcation by applying a subsequent
collection made from another customer. a. Window dressing
8. What is a compensating balance? b. Lapping
a. Savings account balances. c. Kiting
b. Margin accounts held with brokers. d. Imprest system
c. Temporary investments serving as collateral for outstanding 15. The cash receipts function should be separated from the related
loans. record keeping in an organization to a. Physically safeguard the
d. Minimum deposits required to be maintained in connection cash receipts.
with a borrowing arrangement. b. Establish accountability when the cash is first received.
9. Under which section of the statement of financial position is
c. Prevent paying cash disbursements from
"cash restricted for plant expansion" reported?
cash receipts.
a. Current assets d. Minimize undetected misappropriations of cash receipts.
b. Non-current assets
c. Current liabilities
d. Equity
10. Bank overdrafts generally should be
a. Reported as a deduction from the current asset section.
b. Reported as a deduction from cash.
c. Netted against cash and a net cash amount reported.
d. Reported as a current liability.