FUNDAMENTALS OF

FINANCIAL ACCOUNTING
CHAPTER2
 WHAT IS CASH?

- From the point of view of a layman, “cash” simply

means money.

Money is the standard medium of exchange in business

transactions.

It refers to the currency and coins which are in circulation and

legal tender.
 WHAT IS UNRESTRICTED CASH?

- Cash must be readily available in the payment of

current obligations and not be subject to any restrictions,
contractual or otherwise.
WHAT ARE ITEMS INCLUDED IN CASH?

➢
Cash on Hand
➢
Cash in Bank
➢
Cash Fund
 WHAT IS CASH EQUIVALENTS?

- Cash equivalents 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.
 WHAT ARE EXAMPLES OF CASH
EQUIVALENTS?

➢
3 month BSP Treasury Bill
➢
3 year BSP Treasury Bill purchased 3 months before the
date of maturity

➢
3 month time deposit
➢
3 month money market instrument or commercial paper
 MEASUREMENT OF CASH

1. Cash is measured at face value

2. Cash in foreign currency is measured at the current

exchange rate.
CASH FUND FOR A CERTAIN PURPOSE

➢
If a cash fund is set aside for use in current operations or
for the payment of current obligation, it is current asset
➢
If a cash fund is set aside for use in noncurrent purpose or
for the payment of noncurrent obligation, it is shown as long
term investment
 BANK OVERDRAFT

When a cash in bank account has a credit balance, it is said to

be an overdraft.

A bank overdraft is classified as a current liability and should

not be offset against other bank accounts with debit balances.
 COMPENSATING BALANCE

A compensating balance generally takes the form of minimum

checking or demand deposit account balance that must be
maintained in connection with a borrowing with a bank.

If not legally restricted as to withdrawal-cash

If legally restricted because of formal agreement-current asset

If legally restricted because of long term loan -noncurrent asset

(Investment)
 UNDELIVERED OR UNRELEASED CHECK

-is one that is merely drawn and recorded but not given to the
payee before the end of reporting period.

Adjusting entry:

Cash XX

A/P or appropriate account XX

 POSTDATED CHECK

-is check delivered is a check drawn, recorded and already

given to the payee but it bears a date subsequent to the end of
reporting period.

Adjusting entry:

Cash XX

A/P or appropriate account XX

 STALE CHECK

- Is a check not encashed by the payee within a relatively long period of

time (within 6 months)
If immaterial:
Cash XX
Miscellaneous Income XX

If material:
Cash XX
A/P or appropriate account XX
 ACCOUNTING FOR CASH SHORTAGE

Adjusting entry:

Cash short or over XX

Cash XX

Due from Cashier XX

Cash short or over XX

Loss from cash shortage XX

Cash short or over XX

 ACCOUNTING FOR CASH SHORTAGE

Adjusting entry:

Cash XX

Cash short or over XX

Cash short or over XX

Miscellaneous Income XX

Cash short or over XX

Payable to CashierXX
 PETTY CASH FUND

The petty cash fund is money set aside to pay small expenses
which cannot be paid conveniently by means of check.
 IMPREST FUND SYSTEM

1. A check is drawn to establish the fund:

Petty Cash Fund XX

Cash in Bank XX

2. Payment of expenses out of Fund

No entry
 IMPREST FUND SYSTEM

3. Replenishment of Petty Cash Fund:

Expenses XX

Cash in Bank XX

4. Year end Adjustment of Unreplenished Fund

Expenses XX

Petty Cash Fund XX

 IMPREST FUND SYSTEM

5. Increase in Fund:

Petty Cash Fund XX

Cash in Bank XX

6. Decrease in Fund:

Cash in Bank XX

Petty Cash Fund XX

 FLUCTUATING FUND SYSTEM

1. A check is drawn to establish the fund:

Petty Cash Fund XX

Cash in Bank XX

2. Expenses XX

Petty Cash Fund XX

 FLUCTUATING FUND SYSTEM

3. Replenishment of Petty Cash Fund:

Petty Cash Fund XX

Cash in Bank XX

4. Year end Adjustment of Unreplenished Fund

No entry
 FLUCTUATING FUND SYSTEM

5. Increase in Fund:

Petty Cash Fund XX

Cash in Bank XX

6. Decrease in Fund:

Cash in Bank XX

Petty Cash Fund XX

 BANK RECONCILIATION

BANK DEPOSIT
➢ DEMAND DEPOSIT-IS THE CURRENT ACCOUNT OR
CHECKING ACCOUNT OR COMMERCIAL DEPOSIT WHERE
DEPOSIT ARE COVERED BY DEPOSIT SLIPS AND WHERE
FUNDS ARE WITHDRAWABLE ON DEMAND BY DRAWING
CHECK AGAINST THE BANK
•

.
 BANK RECONCILIATION

BANK DEPOSIT
➢ SAVINGS DEPOSIT- THE DEPOSITOR IS GIVEN A
PASSBOOK UPON THE INITIAL DEPOSIT
➢ TIME DEPOSIT-IS EVIDENCED, BY A FORMAL AGREEMENT
EMBODIED IN AN INSTRUMENT CALLED CERTIFICATE OF
DEPOSIT
•

.
 BANK RECONCILIATION

BANK RECONCILIATION IS A STATEMENT WHICH BRINGS

INTO AGREEMENT THE CASH BALANCE PER BOOK AND
CASH BALANCE PER BANK. IT IS USUALLY PREPARED
MONTHLY BECAUSE THE BANK PROVIDES THE DEPOSITOR
WITH THE BANK STATEMENT AT THE END OF EVERY
MONTH.
 BANK STATEMENT

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 CHARGE AND THE DAILY CASH
BALANCE PER BANK DURING THE MONTH.
 BANK STATEMENT

ACTUALLY, THE BANK STATEMENT IS AN EXACT COPY OF

THE DEPOSITOR’S LEDGER IN THE RECORDS OF THE BANK.
WHEN THE BANK STATEMENT IS RECEIVED, ATTACHED
THERETO ARE THE DEPOSITOR’S CANCELED CHECKS AND
ANY DEBIT OR CREDIT MEMORANDA THAT HAVE AFFECTED
THE DEPOSITOR’S ACCOUNT.
The canceled checks are the checks issued by the depositor and
paid by the bank during the month. These are called canceled
checks because they are literally canceled by stamping or
punching to show that they have been paid.
 RECONCILING ITEMS

1. Book reconciling items:

a. Credit memos
b. Debit memos
c. Errors
2. Bank reconciling items:
a. Deposit in transit
b. Outstanding checks
c. Errors.
 CREDIT MEMOS

-are items not representing deposit credited by the bank

of the depositor but not yet recorded by the depositor as
cash receipt
❑
Notes receivable collected by bank in favor of the depositor
and credited to the account of the depositor.
❑
Proceeds of bank loan credited to the account pf the
depositor
❑
Matured time deposit transferred by the bank to the
current amount of the depositor
 DEBIT MEMOS

-are items not representing checks paid by the bank of

the depositor but not yet recorded by the depositor as
cash disbursement
❑
NSF –Checks deposited but not returned by the bank
because of insufficiency of fund.
❑
Technically defective check-return by the bank because of
absence of signature, counter signature, erasures not
countersigned
❑
Bank service charge-bank charges for interest, collection,
checkbook and penalty
❑
Reduction of loan-amount deducted from the current
account in payment for loan which has already matured
 DEPOSIT IN TRANSIT

Deposit in transit are collections already recorded by the

depositor as cash receipts but not yet reflected on the bank
statement.
❑
Collections already forwarded to the bank for deposit but
too late to appear in the bank statement
❑
Undeposited collections or those still in the hands of the
depositor
 OUTSTANDING CHECKS

Outstanding checks are checks 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- a certified check is one where the bank
has stamped on its face the word “accepted” or
“certified” indicating sufficiency of fund.
 FORMS OF BANK RECONCILIATION

❑ ADJUSTED BALANCE METHOD-Book and bank

balance are brought to a correct cash balance that must appear
on the balance sheet.
❑
BOOK TO BANK METHOD-Book balance is
reconciled with the bank balance or the book balance is
adjusted equal to bank balance.
❑
BANK TO BOOK METHOD-Bank balance is
reconciled with the book balance or the bank balance is
adjusted equal to book balance.
 ADJUSTED BALANCE

Book Balance XX
Add: Credit Memo XX
Total XX
X
Less: Debit Memo XX
Adjusted Book Balance XX
X
Bank Balance XX
Add: Deposit in Transit XX
Total XX
X
Less: Outstanding Check XX
Adjusted Bank Balance XX
X
 BOOK TO BANK

Book Balance XX
Add: Credit Memo XX
Outstanding Check XX
Total XX
X
Less: Debit Memo
Deposit in Transit XX
Adjusted Book Balance XX
X
Bank Balance XX
 BANK TO BOOK

Bank Balance XX
Add: Deposit in Transit XX
Debit Memo XX
Total XX
X
Less: Credit Memo
Outstanding Check XX
Adjusted Book Balance XX
X
Book Balance XX