Cash

 Is the most liquid asset, the medium of exchange and the basis for
measurement and accounting for all other items.
 Includes “money” and any other negotiable instrument that is payable in
money and acceptable by the bank for deposit and immediate credit”
 Readily available for payment of current obligations and not be subject to any
restriction

Cash Items Included In Cash

 Cash on hand - Includes Undeposited cash collections and other cash items
awaiting deposit such as customers checks, cashier's or manager's checks,
traveler's checks, bank drafts and money orders.
 Cash in bank- Includes demand deposit or checking account and saving
deposit which are unrestricted as to withdrawal.
 Cash fund set aside for current purposes- Petty cash fund, payroll fund,
dividend fund.

According to PAS 7, paragraph 6, cash equivalent is a 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.
The standard further states that only highly liquid investments that are acquired
three months before maturity can qualify as cash equivalents.

Ex.
Three-month BSP Treasury bill;
three-year BSP Treasury bill purchased three months before date of maturity;
three-month time deposit,
three-month money market instrument or commercial paper.
Preference shares with specified redemption date and acquired three months
before redemption date can qualify as cash equivalents

Equity securities cannot qualify as cash equivalents because shares do not have a
maturity date.

Note that what is important is the date of purchase which should be three
months or less before maturity.

Classification
Investments in Time Deposit, Money market instrument and Treasury Bills
Term : Classified as:
3 months or less - Cash equivalents
more than three months but within one year - Short-term financial assets
more than one year - Long-term investment

Measurement of Cash
Cash is measured at face value.

Cash in foreign currency is measured at the current exchange rate.

If a bank or financial institution is in bankruptcy -cash should be written down to

estimated realizable value if the amount recoverable is estimated to be lower
than the face value.

Foreign Currency
 Cash in foreign currency should be translated to Philippine pesos using the
current exchange rate.
 Deposits in foreign bank which are subject to foreign exchange restriction
should be classified separately among non-current assets and those funds are
reported as restricted.

Additional; Bank Overdraft

When the cash in bank account has a credit balance, it is said to be an overdraft.
The credit balance in the cash in bank account results from the issuance of checks
in excess of the deposits.
- generally Current liability
- can be offset against other bank account with debit balance if with the
same bank.
- Can also be offset against other account if immaterial

Exception to Overdraft:
When an entity maintains two or more accounts in one bank and one account
results in an overdraft, such overdraft can be offset against the other bank
account with a debit balance.
An overdraft can also be offset against the other bank account if the amount is
not material.

Compensating Balance
Minimum account balance that must be maintained in connection with a
borrowing agreement with a bank.

Classifications:
If not legally restricted/informal --- Cash
If legally restricted/formal --- short-term Investment (loan is short-term)
If legally restricted/formal --- long-term investment (if loan is long-term)

Undelivered or Unreleased Check

– a check that is merely drawn and recorded but not given to the payee before
the end of reporting period.
– Accordingly, an adjusting entry is required to restore the cash balance and set
up the liability.
Cash xxx
Accounts payable or appropriate account xxx

Postdated Check Delivered

– a check drawn, recorded and already given to the payee but it bears a date
subsequent to the end of reporting period.
– The original entry recording a delivered postdated check shall also be reversed
and therefore restored to the cash balance.
Cash xxx
Accounts payable or appropriate account xxx

– there is no payment until the check can presented to the bank for encashment
or deposit.

Stale Check or Check Long Outstanding

– a check not encashed by the payee within a relatively long period of time.
– If the amount of stale check is immaterial,
Cash xxx
Miscellaneous income xxx
– if the amount is material and liability is expected to continue, the cash is
restored and the liability is again set up.
Cash xxx
Accounts payable or appropriate account xxx

Practice of concealing cash: window dressing, lapping, kiting.

Accounting for Cash Shortage
- cash count shows cash which is less than the balance per book,
 Cash short or over xxx
Cash xxx

Hence, if the cashier or cash custodian is held responsible for the cash shortage,
the adjustment should be:
Due from cashier xxx
Cash short or over xxx

However, if reasonable efforts fail to disclose the cause of the shortage,

Loss from cash shortage xxx
Cash short or over xxx

Accounting for Cash Overage

- cash count shows cash which is more than the balance per book,
Cash xxx
Cash short or over xxx

-The cash overage is treated as miscellaneous income if there is no claim on the

same.
Cash short or over xxx
Miscellaneous income xxx

But where the cash overage is properly found to be the money of the cashier, the
journal entry is:
Cash short or over xxx
Payable to cashier xxx

Imprest System – 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.

Two Methods of Handling Petty - the imprest fund system is the one
Cash usually followed in handling petty
1. Imprest Fund System cash transaction.
 - The system is called "fluctuating
a. Establishment of the fund fund system" because the checks
Petty cash fund xxx drawn to replenish the fund do not
Cash in bank xxx necessarily equal the petty cash
b. Payment of expenses out of the disbursements.
fund - The replenishment checks are simply
No journal entry drawn upon the request of the petty
cashier.
c. Replenishment of petty cash
payments. a. Establishment of the fund
Expenses xxx Petty cash fund xxx
Cash in bank xxx Cash in bank xxx
d. At the end of the accounting b. Payment of expenses out of the
period, it is necessary to adjust the petty cash fund
unreplenished expenses in order to Expenses xxx
state the correct petty cash balance. Petty cash fund xxx
Expenses xxx c. Replenishment or increase of the
Petty cash fund xxx fund
e. An increase in the fund Petty cash fund xxx
Petty cash fund xxx Cash in bank xxx
Cash in bank xxx d. At the end of the reporting period,
f. A decrease in the fund no adjustment is necessary because
Cash in bank xxx the petty cash expenses are
Petty cash fund xxx recorded outright.
e. Decrease of the fund is reverted to
the general cash.
Cash in bank xxx
2. Fluctuating Fund System Petty cash fund xxx

Bank Reconciliation

Kinds of Bank Deposits

 Demand deposit – the current account or checking account or commercial
deposit where deposits are covered by deposit slips and where funds are
withdrawable on demand by drawing checks against the bank. A demand
deposit is non-interest bearing.
 Saving deposit - In a saving deposit, the depositor is given a passbook upon
the initial deposit. The passbook is required when making deposits and
withdrawals. Withdrawals are made anytime but the bank sometimes may
require notice of withdrawal. A saving deposit is interest bearing.
 Time deposit - The time deposit is similar to saving deposit in the sense that it
is interest bearing. A time deposit is evidenced, however, by a formal
agreement embodied in an instrument called certificate of deposit. Time
deposit may be pre-terminated or withdrawn on demand or after a certain
period of time agreed upon.

Bank reconciliation –
 is a statement which brings into agreement that cash balance per book and
cash balance per bank.
 a report that is prepared for the purpose of bringing the balances of cash (a.)
per records and (b.) per bank statement into agreement.

It is prepared to:
1. Explain the difference between the cash balances;
2. Arrive at the adjusted (correct cash balance to be shown in the FS;
3. Provide information for reconciling journal entries.

Reconciling Items
 Book reconciling items:
1. Credit memos
2. Debit memos
3. Errors

 Bank reconciling items

1. Deposits in transit
2. Outstanding checks
3. Errors

Credit memos – items not representing deposits credited by the bank to the
account of the depositor but not yet recorded by the depositor as cash receipts.
- The credit memos have the effect of increasing the bank balance.
Ex.
a. Notes receivable collected by bank in favor of the depositor and credited to the
account of the depositor.
b. Proceeds of bank loan credited to the account of the depositor
c. Matured time deposits transferred by the bank to the current account of the
depositor.
d. Interest income earned

Debit memos – items not representing checks paid by bank which are charged or
debited by the bank to the account of the depositor but not yet recorded by the
depositor as cash disbursements.
- The debit memos have the effect of decreasing the bank balance.
Ex.
a. No Sufficient Fund Checks (NSF) – checks deposited but returned by the bank
because of insufficiency of fund.
b. Bank Service charge
c. Reduction/ Payment of loan
d. Technically defective checks
e. Automatic debits

Errors committed by the depositor/ book error

Examples:
 Under/(over)statement of book cash receipts
 Under/(over) statement of checks drawn by depositor

Deposits in Transit – collections already recorded by the depositor as cash

receipts but not yet reflected on the bank statement.
Inclusion
a. Collections already forwarded to the bank for deposit but too late to appear in the
bank statement.
b. Undeposited collections or those still in the hands of the depositor. In effect, these
are cash on hand awaiting delivery to the bank for deposit.

Outstanding checks – checks already recorded by the depositor as cash

disbursements but not yet reflected on the bank statement.

Inclusion
a. Checks drawn and already given to payees but not yet presented for payment.
b.Certified checks – a check where the bank has stamped on its face the word
"accepted" or "certified" indicating sufficiency of fund
When the bank certifies a check, the account of the depositor is immediately debited or
charged to insure the eventual payment of the check.
Certified checks should be deducted from the total outstanding checks (if included
therein) because they are no longer outstanding for bank reconciliation purposes.

Errors committed by the bank/bank error

Examples:
 Deposit of another company credited to the depositor
 Check of another entity charged to the account of the depositor

Forms of Bank Reconciliation

 Adjusted Balance Method – under this method, the book balance and the
bank balance are brought to a correct cash balance that must appear on the
balance sheet.

Book balance xxx Bank balance xxx

Add: Credit memos xxx Add: Deposits in transit xxx
Total xxx Total xxx
Less: Debit memos xxx Less: Outstanding checks xxx
Adjusted book balance xxx Adjusted bank balance xxx

 Book to bank method:

Book balance xxx

Add: Credit memos xxx
Outstanding checks xxx xxx
Total xxx
Less: Debit memos xxx
Deposits in transit xxx xxx
Bank balance xxx

 Bank to book method:

Bank balance xxx
Add: Deposits in transit xxx
Debit memos xxx xxx
Total xxx
Less: Outstanding checks xxx
Credit memos xxx xxx
Book balance xxx
Adjusting Entries

to record note collected by bank:

Cash xx
Collection fee expense xx
Note receivable xx
Interest Revenue xx

to record NSF customer check:

Accounts receivable xx
Cash in bank xx

to record the service charge:

Bank service charge xx
Cash in bank xx

Overstatement of cash receipts:

Accounts receivable xx
Cash in bank xx

Overstatement of checks drawn:

Cash in bank xx
Accounts payable xx

Proof of Cash
Two-date Bank Reconciliation
 The bank reconciliation is so-called “two-date” because it literally involves
two dates
 The procedures followed for a one-date reconciliation are the same for a two-
date reconciliation
 Among others, the omitted information may be any one or a combination of
the following:
a. Book balance – beginning or ending
 b. Bank balance – beginning or ending
c. Deposits in transit – beginning or ending
d. Outstanding checks – beginning or ending

Computation of Book Balance

Balance per book – beginning of month xxx
Add: Book debits during the month xxx
Total xxx
Less: book credits during the month xxx
Balance per book – end of the month xxx

Book debits – refer to cash receipts or all items debited to the cash in bank
account
Book credits – refer to cash disbursement or all items credited to the cash in bank
account

Computation of Bank Balance

Balance per bank – beginning of month xxx
Add: Bank credits during the month xxx
Total xxx
Less: Bank debits during the month xxx
Balance per bank – end of month xxx

Bank credits – refer to all items credited to the account of the depositor which
include deposits acknowledged by bank and credit memos. In the absence of any
statement to the contrary, bank credits are assumed to be deposits acknowledge
by bank
Bank debits – refer to all items debited to the account of the depositor which
include checks paid by bank and debit memos

Computation of Deposits in Transit

Deposits in transit – beginning of month xxx
Add: Cash receipts deposited during the month xxx
Total deposits to be acknowledge by bank xxx
Less: Deposits acknowledge by bank during month xxx
Deposits in transit – end of month xxx

Computation of Outstanding Checks

Outstanding checks – beginning of month xxx
Add: Checks drawn by depositor during the month xxx
Total checks to be paid by bank xxx
Less: Checks paid by bank during the month xxx
Outstanding checks – end of month xxx

Proof of Cash
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.

Three Forms of Proof of Cash

1. Adjusted balance method
2. Book to bank method
3. Bank to book method

In all the three forms, a four-column worksheet is necessary although under the
adjusted balance method, an 8-column worksheet may be required.