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Learning Objectives
1. Define cash and identify the items that are included in the “Cash and Cash Equivalents”
line item.
2. Determined how and what amount cash and cash equivalent are presented in the
statement of financial position.
3. Internal Control to safeguard cash.
4. Account for petty cash funds and cash shortages/overages.
5. Bank Reconciliation
Definition of Cash
Cash is money or its equivalent that is readily available for unrestricted use. Items to be
considered as cash are showed by the illustration.
Cash Item
Unrestricted and immediately available for For use other than current operation
use in current operations (Other non-current financial assets)
(Cash in the current asset section)
Cash is generally measured at face value, which is also its fair value. The following summarizes
several noteworthy considerations in the reporting of cash balance in the statement of financial
position
1. Foreign Currency
Cash in foreign currency and deposits in foreign banks which are subject to immediate
and unrestricted withdrawal, should be translated to Philippines currency using the
exchange rate at the end of the reporting period.
3. NSF Checks (No Sufficient Fund Checks) and IOUs (“I ow you” notes)
NSF checks also described as DAIF (“drawn against insufficient funds”) checks or
DAUD (“drawn against unclear deposit”) and IOUs are excluded from cash and should
be reported as receivable.
6. Bank overdraft
A bank overdraft is presented as a current liability unless it qualifies to be offset against
cash.
Compensating balances that are not legally restricted as to withdrawal are included in
cash.
Illustrative Problem
Jimenez Company had the following account balances on December 31, 2020:
the cash on hand included a P200,000 check payable to Jimenez, dated January 15, 2021. What
total amount should be reported as “cash and cash equivalents” on December 31, 2020?
The cash in bank set aside for payroll is included in cash because it is for the payment of current
liability.
The cash on hand is reduced by the postdated check payable to Jimenez. The postdated check
should be reverted to accounts receivable.
The time deposit is classified as cash equivalent because the term is three months. Under PAS 7,
treasury bills, money market placement and time deposit normally qualify as cash equivalents
only when they have a short maturity of three months or less from the date of acquisition.
The cash in bank restricted for building construction is classified as a noncurrent investment
because it is set aside for the acquisition of a noncurrent asset and not for the payment of a
current liability.
Surigao Company shows the following account balances in their financial records as of
December 31, 2020:
What is the correct cash balance to be reported in the statement of financial position of Surigao
Company on December 31, 2020 assuming the bank overdraft is repayable on demand and it’s
integral to the entity’s cash management?
3. Voucher System
Under this system, all disbursement must be supported by properly approved vouchers
and properly recorded.
4. At year-end, Prior to the preparation of the financial statement, I'm adjusting entries made
to recognize the payment from the fund that are not there replenish. This adjustment
likewise updates and bring the petty cash fund general Ledger account to an amount
equal to actual cash balance. This would avoid understatement of expense is an
overstatement of cash. This adjustment is usually reverse at the beginning of the
subsequent period. The year-end adjustment is recorded as follow.
5. In the instances the amount in the petty cash fund may be dim in a decade to satisfy the
company's needs, define balances increase and the following journal entry is made:
Various Expense Accounts XXX
Cash in Bank XXX
Illustrative Problem
The cash account in the current asset section of the balance sheet for Kudarat Company showed
a balance of P555,000. It was found to include the following items:
What is the correct cash balance for Kudarat Company’s statement of financial position?
Petty cash fund 4,000
Checking account, per bank, (net of outstanding check) 230,000
Undeposited Receipts 115,000
Currencies and Coins 55,000
Correct Cash Balance 404,000
Cash short and over is a nominal account that is debited for cash shortage and credited over
overage in the petty cash fund. A debit balance in cash short and over account at the end of the
period should be reported as miscellaneous expense, while a credit balance is reported as
miscellaneous revenue. However, material cash shortage resulting from cause such as theft
should be charged to receivable account if it's probable that the shortage is to be recovered.
Bank Reconciliation
A bank reconciliation statement is a report that is prepared for purpose of bringing balances of
cash (a) per records and (b) per bank statement into agreement.
Balance per book, end. - the cash balance in the hunting records as of the end of the current
month
Balance per bank statement, end. - the ending cash balance in the bank statement of the current
month
Credit Memos - these are addition (bank credit) made by the bank to the depositor's bank
accounts but not yet recorded by the depositor.
Ex.
i. Collection made by the bank on behalf of the depositor.
ii. interest income earned by the depositor.
iii. Proceeds from loan directly credited or added by the bank to the depositor's account.
iv. Unrolled-over matured time deposit transferred by the bank to the entity’ account
Debit Memos - These are deductions (bank debit) made by the bank to the depositor's bank
account but not yet recorded by the depositor.
Ex.
i. Bank service charges
ii. No Sufficient Fund Checks (NSF)
iii. Automatic Debits
iv. Payment of loans
Illustrative Problem
Velasco Company’s bank statement for the month of April included the following information:
In comparing the bank statement to its own records, the entity found the following:
All deposits in transit and outstanding checks have been properly recorded in the entity’s books.
A customer’s check for P35,000 payable to Velasco Company had not yet been deposited and
had not been recorded by the entity. The cash in bank account balance per ledger is P920,000.
Outstanding Checks - these are checks drawn and released to the payees but not yet any cash
with the bank.
If there were no errors existing in the records of both the depositor and the bank, the
computations for the deposits in transit and outstanding checks, respectively, may be
summarized as follows:
To compute deposits in transit:
Deposit in transit, beginning of the month Pxx
Add cash receipts reflected in the company’s
records during the month* xx
Total Pxx
Less deposits during the month as reflected
in the bank statement** xx
Deposits in transit, end of the month Pxx
* the amount does not necessarily represent debits (charges) in the company’s
records. If total of charges to the cash account is given, any credit memo in previous month
should be excluded.
** the amount does not necessarily represent credits in the bank statement. If the
total of credit memo for the current month should be excluded.
* the amount does not necessarily represent credits in the company’s records. Of the
total of credits to the cash account is given, any debit memo in previous month should
be excluded.
** the amount does not necessarily represent debits (charges) in the bank statement.
If the total of charges in the bank statement. If the total of charges in the bank statement
is given, any debit memo for the current month should be excluded.
2. The previous month ending and current month ending columns follow the regular bank
reconciliation format.
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx xx xx
ADD: CM
November xx xx
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx xx xx xx
3. The “Receipts” and “Disbursements” columns pertain to the current month only - in
this illustration, like the month of December below.
Nov. 30 Receipts Disbursements Dec. 31
Per books 60 xx xx 70
ADD: CM
November 25 xx
December xx 35
LESS: DM
November (65) xx
December xx (95)
Book errors:
November
December
Adjusted bal. 20 xx xx 10