CASH AND CASH EQUIVALENTS C.

CASH EQUIVALENTS – short-term and highly liquid investments that are

readily convertible into cash and so near their maturity (3 months or less
A. GAAP FOR CASH
before maturity)
Cash Items Examples:
1. 3-month BSP treasury bill, treasury notes, and treasury bonds (if purchased
Unrestricted and For use other than for 1 year ago cannot be considered as cash equivalent) (notes and bonds are
immediately available current operations silent, noncurrent investment)
for use in the current 2. 3-year BSP treasury bill purchased 3 months before date of maturity
3. 3-month time deposit (if silent, considered as noncurrent asset)
operations
4. 3-month money market instrument or commercial paper
5. Redeemable preference shares with mandatory redemption period
For payment of OPEX Take note! DATE OF PURCHASE IS IMPORTANT
For payment of current liabilities  If originally invested/acquired for more than 3 months before maturity date:
For acquisition of current assets a. Remaining term is 3 months or less from reporting period – STI
“Cash” in the current Other noncurrent b. Remaining term is more than 3 months but within 1 year – STI
c. Remaining term is more than 1 year – LTI
asset section financial assets
 Equity Securities NOT INCLUDED because shares does not have maturity
D. MEASUREMENT OF CASH
B. CASH ITEMS INCLUDED IN CASH
1. CASH ON HAND – undeposited cash collections and other cash items  Cash is measured at FACE VALUE
Cash awaiting deposit  Cash in foreign currency is measured as the CURRENT EXCHANGE RATE
a. Coins and currency, bills (Converted to Philippine peso)
b. Checks (undeposited)  Bankruptcy or financial difficulty – ESTIMATED REALIZABLE VALUE
c. Money orders (a demand credit instrument issued and payable E. BANK OVERDRAFT – bank account has a credit balance, “overdrawn”
by a postal office or a bank) - Issued amount in checks > balance in bank account
d. Bank drafts (a written order addressed to the bank to pay an - Current liability
amount of money to the order of the maker)  SAME BANK – Offsetting is allowed (if amount is not material)
e. Traveler’s check, customer’s check, cashier’s or manager’s DIFFERENT BANK – Offsetting is not allowed
check F. COMPENSATING BALANCE – takes the forms of minimum checking or
2. CASH IN BANK – deposited cash collections demand deposit account balance that must be maintained in connection with
a. Current account/checking account/demand deposit/commercial a borrowing arrangement with a bank.
deposit (Generally non-interest-bearing and withdrawable by - DEDUCTION TO THE AMOUNT BORROWED
checks against bank)  If deposit is not legally restricted – cash
b. Savings deposit (Savings Account – SA) If legally restricted – STI or LTI
(Generally non-interest bearing, depositor is issued an ATM G. UNDELIVERED OR UNRELEASED CHECK – merely drawn and recorded
card or passbook, withdrawable in ATM or within the bank) but not given to the payee (receiver of money) before the end of the
3. CASH FUND – set aside for current purposes reporting period and no payment when the check is pending delivery
a. Current: change fund, payroll fund, purchasing fund, revolving Cash xxx
fund, interest fund, dividend fund, travel fund, tax fund, and Accounts Payable xxx
petty cash fund H. POSTDATED CHECK DELIVERED – recorded and given but it bears a date
b. Noncurrent: pension fund, preferred redemption fund, subsequent to the end of reporting period.
acquisition of PPE, contingent fund, insurance fund, sinking Cash xxx
fund - LTI Accounts Payable xxx
I. STALE CHECK OR CHECK LONG OUTSTANDING M. PETTY CASH FUND – money set aside for small disbursements or
STALE CHECK – not encashed by the payee within a relatively long period expenses
of time (in banking practice, checks become stale if not encashed within 6 2 METHODS:
months) 1. IMPREST FUND SYSTEM – usually followed
 If amount of stale check is immaterial, accounted for as miscellaneous a. Check drawn to establish a fund
income Petty cash fund xxx
Cash xxx Cash in bank xxx
Miscellaneous Income xxx b. Payment of expenses out of fund
If amount is material, accounted as liability No Entry
Cash xxx c. Replenishment of petty cash payments (petty cash disbursements
Accounts Payable xxx are now recorded)
J. ACCOUNTING FOR CASH SHORTAGE – cash is less than the balance per Expenses xxx
book Cash in bank xxx
Cash short or over xxx d. Adjustment for unreplenished expenses
Cash xxx Expenses xxx
 If it is temporary or suspense account and cashier/custodian is responsible Petty cash fund xxx
Due from cashier xxx e. Increase in the fund
Cash short or over xxx Petty cash fund xxx
If failed to disclose the cause of shortage, Cash in bank xxx
Loss from cash shortage xxx f. Decrease in the fund
Cash short or over xxx Cash in bank xxx
K. ACCOUNTING FOR CASH OVERAGE – cash is more than the balance per Petty cash fund xxx
book 2. FLUCTUATING FUND SYSTEM – cash disbursements are immediately
Cash xxx recorded, replenished fund not necessarily equal petty cash expenses
Cash short or over xxx a. Establishment of the fund
 If treated as miscellaneous income Petty cash fund xxx
Cash short or over xxx Cash in bank xxx
Miscellaneous Income xxx b. Payment of expenses out of the petty cash fund
If money of the cashier Expenses xxx
Cash short or over xxx Petty cash fund xxx
Payable to cashier xxx c. Replenishment or increase of the fund
Petty cash fund xxx
L. IMPREST SYSTEM – is a system of control of cash which requires that all Cash in bank xxx
cash receipts should be deposited intact and all cash disbursements should d. End of reporting period
be made by means of check. (impossible and impractical for small No Entry
payments) e. Decrease of the fund is recorded as follows:
Cash in bank xxx
Petty cash fund xxx
BANK RECONCILIATION PROOF OR CASH
 Only necessary for a demand deposit or checking account Beg. Balance Receipts Disbursement End Balance
Balance per book xxx xxx xxx xxx
 Deposits creates the debtor-creditor relationship (bank being the debtor and (unadjusted)
depositor being the creditor) Note collected:
 Statement which brings into agreement the cash balance per book and cash Previous xxx (xxx)
balance per bank. Current xxx xxx
NSF Check:
 Prepared monthly Previous (xxx) (xxx)
FORMS OF BANK RECONCILIATION: Current xxx (xxx)
1. Adjusted balance method Service Charge:
2. Book to Bank Method Previous (xxx) (xxx)
Current xxx (xxx)
3. Bank to Book Method Adjusted Book --------- ----------- ------------ -------------
BOOK RECONCILING ITEMS: Balance
1. Credit Memos (add) – collections or deposits made by bank
 Collections made by bank on behalf of the entity (notes receivable) Unadjusted
Balance per Bank xxx xxx xxx xxx
 Proceeds of bank loan (compensating balance) Deposit in Transit:
 Matured time deposits (unencashed checks) Previous xxx (xxx)
 Interest Income Current xxx xxx
2. Debit Memos (less) – deductions by the bank Outstanding Check:
Previous (xxx) (xxx)
 Bank service charges (interest collection, checkbook, and penalty) Current xxx (xxx)
 Insufficient Fund, drawn against uncleared deposits, and drawn against Adjusted Bank --------- ----------- ------------ --------------
insufficient funds) Balance
 Payment of Loan
 Final withholding tax on interest income
 Technically defective check
BANK RECONCILING ITEMS:
1. Deposit in Transit (add) - collections already recorded by the depositor as
cash receipts but not yet reflected on the bank statement
 Collections already forwarded to the bank
 Undeposited collections, cash on hand
2. Outstanding Checks (less) – already recorded by the depositor as cash
disbursements but not yet reflected on the bank statement
 Checks drawn and already given to payees but not yet presented for
payment
 Certified checks – deducted from the outstanding checks, indicating
sufficiency of fund

Book Debits – Receipts; Book Credit – Disbursement

Bank Debit – Disbursement; Bank Credit - Receipts
RECEIVABLES: ACCOUNTS, NOTES, AND LOANS 2. NET METHOD – discount is outright deducted from invoice price; if beyond
the discount period records “sales discount forfeited” – other income
RECEIVABLES – are financial assets that represent a contractual right to receive
2 METHODS FOR ACCOUNTING FOR BAD DEBTS:
cash or another financial asset from another.
1. ALLOWANCE METHOD – GAAP require the use of this method
TRADE AND NONTRADE RECEIVABLES:
2. DIRECT WRITE-OFF METHOD – required recognition of bad debts loss
TRADE – claims arising from sale of merchandise or services in the ordinary course
only when the accounts proved to be worthless
of business. Includes: accounts receivable (open accounts) and notes receivable
- no entry for doubtful collections
(with promissory note)
-proved to be worthless: (dr: Bad debts exp. Cr. Accounts Rec)
- expected to be realized in cash within normal operating cycle or one year
- Recovered: (1. Dr. A/R cr: Bad debts exp ; 2. Dr: cash Cr: A/R)
NONTRADE – represent claims arising from sources other than sale of merchandise
3 METHODS FOR THE ESTIMATION OF DOUBTFUL ACCOUNTS ***
EXAMPLES OF NONTRADE:
1. Aging the Accounts Receivable or Statement of Financial Position Approach
1. Advances to or receivables from shareholders, directors, officers or
- has the advantage of presenting fairlythe accounts receivable in balance sheet at
employees (IOU of them)
NRV (Required allowance – credit balance in allowance = DAE)
2. Advances to affiliates (usually LTI)
2. Percent of A/R or Statement of Financial Position Approach
3. Advances to suppliers (prepaid – CA)
3. Percent of Sales or Income Statement Approach
4. Subscriptions receivable (dr: subscription rec. cr: subscription share capital)
B. NOTES RECEIVABLE
(current if collectible within 1 year if not, deduction to SHE)
-claims supported by formal promises to pay usually in the form of notes
5. Creditor’s accounts debit balance – overpayment or returns and allowances
DISHONORED NOTES – promissory note matures and is not paid (included in
6. Specials deposits on contract bids
Accounts Receivable plus interest and other charges)
7. Accrued income such as dividend receivable, accrued rent receivable,
INITIAL MEASUREMENT OF NOTES RECEIVABLE:
accrued royalties receivable, and accrued interest receivable on bond
investment  AT PRESENT VALUE
8. Claims receivable – against common carriers for losses or damages, claim 1. INTEREST-BEARING NOTE: AT FACE VALUE (PRESENT VALUE UPON
for rebates and tax refunds and from insurance entity ISSUANCE)
** Customer’s credit balance - LIABILITY 2. NONINTEREST-BEARING NOTE: AT PRESENT VALUE (discounted value
LOANS RECEIVABLE – for banks and other financial institutions (frequently longer or of the future cash flows using the effective interest rate)
over several years) - intesest being included in the face amount
SUBSEQUENT MEASUREMENT OF NOTES RECEIVABLE:
A. ACCOUNTS RECEIVABLE – also known as customer’s accounts, trade
debtors, and trade accounts receivable  AT AMORTIZED COST
INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLE a. Minus principal repayment
Initial measurement of financial asset: b. Plus or minus cumulative amortization of any difference
At fair value plus transaction costs directly attributable to the acquisition between the carrying amount and the principal maturity amount
- Fair value is usually the transaction price c. Minus reduction of impairment or uncollectabilityf
 Initial measurement of accounts receivable:
- Short term: FV = Face amount or original invoice amount
(Not discounted because it is immaterial)
 Subsequent measurement of accounts receivable:
- At amortized cost (NRV – amount of cash expected to be collected or the estimated
recoverable amount)
- deductions to attain NRV – allowances for freight charge, sales return, sales
discounts (reduction to invoice price), and for doubtful accounts
2 METHODS OF RECORDING CREDIT SALES:
1. GROSS METHOD – shows the discount