Cash and Cash Equivalents

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According to International Accounting Standard 7 (IAS 7), Cash “comprises cash on hand and
demand deposits”. And cash equivalents “are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of changes in
value”.
Cash
Cash is the money in the form of currency. Currency includes currency notes and coins. Any
currency notes and coins held by an enterprise are part of the term “cash”.
Demand deposit is a type of an account from which funds can be withdrawn at any time without
having to inform the bank or depository institution. Most of the checking and saving accounts are
demand deposits.
Cash Equivalent
Cash equivalents are investments that can be readily converted to cash. Common examples of cash
equivalents include commercial paper, treasury bills, short term government bonds, marketable
securities, and money market holdings. An item should satisfy the following criteria to qualify for
cash equivalent.
 The investment should be short term. They should mature in less than three months. If they
mature in more than three months they will be classified as other investments.
 They should be highly liquid. This means that they should be easily sold in the market. The
buyers of these investments should be easily available.
 They should be convertible to known amounts of cash. This means that their market price
should be available and this market price should not be subject to significant fluctuations.
 They should not be too risky. There should be very little risk of changes in their value. This
means that equity shares cannot be classified as cash equivalents. But preferred
shares purchased shortly before the redemption date can be classified as cash equivalents.
In short, cash and cash equivalents mean the cash and those assets which are immediately
convertible to cash. Cash and cash equivalents are the most liquid assets of any business. Cash
and cash equivalents are very important for the liquidity of a business. A company should have
sufficient cash and cash equivalents to meet its urgent liabilities when they fall due.  
 Cash and Cash Equivalents

Typ Perio
Item Balance Description
e d

Cash and Cash text

Equivalents

Cash and Cash text The entire disclosure for cash and cash equivalent
Equivalents footnotes, which may include the types of deposits and
Disclosure money market instruments, applicable carrying amounts,
restricted amounts and compensating balance
arrangements. Cash and equivalents include: (1) currency
on hand (2) demand deposits with banks or financial
institutions (3) other kinds of accounts that have the general
characteristics of demand deposits (4) short-term, highly
liquid investments that are both readily convertible to known
amounts of cash and so near their maturity that they
present insignificant risk of changes in value because of
changes in interest rates. Generally, only investments
maturing within three months from the date of acquisition
qualify.

Schedule of $ instant debit Tabular disclosure of the components of cash and cash
Cash and equivalents.
Cash
Equivalents

Additional text An element designated to encapsulate any additional

Cash and information related to cash and cash equivalents not
Cash otherwise addressed by the existing taxonomy. Cash
Equivalent includes currency on hand as well as demand deposits with
Related Text banks or financial institutions. It also includes other kinds of
accounts that have the general characteristics of demand
deposits in that the Entity may deposit additional funds at
any time and also effectively may withdraw funds at any
time without prior notice or penalty. Cash equivalents,
excluding items classified as marketable securities, include
short-term, highly liquid investments that are both readily
convertible to known amounts of cash, and so near their
maturity that they present minimal risk of changes in value
because of changes in interest rates. Generally, only
investments with original maturities of three months or less
qualify under that definition. Original maturity means original
maturity to the entity holding the investment. For example,
both a three-month US Treasury bill and a three-year
Treasury note purchased three months from maturity qualify
as cash equivalents. However, a Treasury note purchased
three years ago does not become a cash equivalent when
 its remaining maturity is three months.

Schedule of text Tabular disclosure of the cash and cash items which are
Restricted restricted as to withdrawal or usage. The provisions of any
Cash and restrictions are described in a note to the financial
Cash statements. Restrictions may include legally restricted
Equivalents deposits held as compensating balances against short-term
borrowing arrangements, contracts entered into with others,
or entity statements of intention with regard to particular
deposits; however, time deposits and short-term certificates
of deposit are not generally included in legally restricted
deposits.

Schedule of text Tabular disclosure of compensating balance arrangements

Compensatin that are not agreements which legally restrict the use of
g Balances cash amounts shown on the balance sheet. Includes
disclosure of these arrangements and the amount involved,
if determinable, for the most recent audited balance sheet
required and for any subsequent unaudited balance sheet
required in the notes to the financial statements.
Compensating balances that are maintained under an
agreement to assure future credit availability are generally
disclosed in the notes to the financial statements along with
the amount and terms of such agreement.

Cash, Insured $ instant debit

and
Uninsured

Disclosure Text text

Block
Supplement

Cash, Cash text The entire disclosure of cash, cash equivalents, and debt
Equivalents, and equity securities, including any unrealized or realized
and gain (loss).
Marketable
Securities

Cash, Cash text The entire disclosure of the components of cash, cash
Equivalents, equivalents, and short-term investments. Short-term
and Short- investments may include current marketable securities.
term
Investments

Investments in text The entire disclosure for cash, cash equivalents,

Debt and investments in debt and equity instruments (including cost
Equity and equity investees and related income statement
Instruments, amounts), equity and cost method investments, investments
 Cash and in joint ventures and any other investment.
Cash
Equivalents,
Unrealized
and Realized
Gains
(Losses)

Table Text text

Block
Supplement

Schedule of text Tabular disclosure of the components of cash, cash

Cash, Cash equivalents, and short-term investments. Short-term
Equivalents investments may include current marketable securities.
and Short-
term
Investments

Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank
We will demonstrate the bank reconciliation process in several steps. The first step is to adjust
the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for
this step are listed in the following schedule:

Deposits in transit are amounts already received and recorded by the company, but are not yet
recorded by thebank. For example, a retail store deposits its cash receipts of August 31 into the
bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit on the
morning of September 1. As of August 31 (the bank statement date) this is a deposit in transit.
Because deposits in transit are already included in the company's Cash account, there is no need to
adjust the company's records. However, deposits in transit are not yet on the bank statement.
Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in
order to report the true amount of cash.
 A helpful rule of thumb is "put it where it isn't." A deposit in transit is on the company's books, but it
isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement.
Outstanding checks are checks that have been written and recorded in the company's Cash account,
but havenot yet cleared the bank account. Checks written during the last few days of the month plus
a few older checks are likely to be among the outstanding checks.
Because all checks that have been written are immediately recorded in the company's Cash
account, there is no need to adjust the company's records for the outstanding checks. However, the
outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding
checks are listed on the bank reconciliation as a decrease in the balance per bank.
 Recall the helpful tip "put it where it isn't." An outstanding check is on the company's books, but it
isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement.
Bank errors are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank statement, or
omitting an amount from a company's bank statement. The company should notify the bank of its
errors. Depending on the error, the correction could increase or decrease the balance shown on the bank
statement. (Since the company did not make the error, the company's records are not changed.)

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the company's Cash account
so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in the
following schedule:

Bank service charges are fees deducted from the bank statement for the bank's processing of the
checking account activity (accepting deposits, posting checks, mailing the bank statement, etc.)
Other types of bank service charges include the fee charged when a company overdraws its checking
account and the bank fee for processing a stop payment order on a company's check. The bank might
deduct these charges or fees on the bank statement without notifying the company. When that
occurs the company usually learns of the amounts only after receiving its bank statement.
Because the bank service charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the service charges will have to be entered as an
adjustment to the company's books. The company's Cash account will need to be decreased by the
amount of the service charges.

 Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the bank
statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash
account on the company's books.
An NSF check is a check that was not honored by the bank of the person or company writing the
check because that account did not have a sufficient balance. As a result, the check is returned
without being honored or paid. (NSF is the acronym for not sufficient funds. Often the bank
describes the returned check as a return item. Others refer to the NSF check as a "rubber check"
because the check "bounced" back from the bank on which it was written.) When the NSF check
comes back to the bank in which it was deposited, the bank will decrease the checking account of
the company that had deposited the check. The amount charged will be the amount of the check
plus a bank fee.
Because the NSF check and the related bank fee have already been deducted on the bank
statement, there is no need to adjust the balance per the bank. However, if the company has not yet
decreased its Cash account balance for the returned check and the bank fee, the company must
decrease the balance per books in order to reconcile.
Check printing charges occur when a company arranges for its bank to handle the reordering of its
checks. The cost of the printed checks will automatically be deducted from the company's checking
account.
Because the check printing charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the check printing charges need to be an adjustment
on the company's books. They will be a deduction to the company's Cash account.

 Recall the general rule, "put it where it isn't." A check printing charge is on the bank statement, but it
isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the
company's books.
Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances. The amount is added to the checking account balance and is automatically on the
bank statement. Hence there is no need to adjust the balance per the bank statement. However, the
amount of interest earned will increase the balance in the company's Cash account on its books.
 Recall "put it where it isn't." Interest received from the bank is on the bank statement, but it isn't on
the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's
books.
Notes Receivable are assets of a company. When notes come due, the company might ask its bank to
collect the notes receivable. For this service the bank will charge a fee. The bank will increase the
company's checking account for the amount it collected (principal and interest) and will decrease the
account by the collection fee it charges.Since these amounts are already on the bank statement, the
company must be certain that the amounts appear on the company's books in its Cash account.
  Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's fees are on the
bank statement, but they are not on the company's books. Put them where they aren't: as adjustments
to the Cash account on the company's books.
Errors in the company's Cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that should be in
the account. Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash account on the company's books.

Step 3. Comparing the Adjusted Balances

After adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two
adjusted amounts should be equal. If they are not equal, you must repeat the process until the
balances are identical. The balances should be the true, correct amount of cash as of the date of the
bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2). Adjustments to
increase the cash balance will require a journal entry that debits Cash and credits another account.
Adjustments to decrease the cash balance will require a credit to Cash and a debit to another
account.

A company's cash balance at bank and its cash balance according to its accounting records usually do
not match. This is due to the fact that, at any particular date, checks may be outstanding, deposits
may be in transit to the bank, errors may have occurred etc. Therefore companies have to carry out
bank reconciliation process which prepares a statement accounting for the difference between the
cash balance in company's cash account and the cash balance according to its bank statement.

Following are the transactions which usually appear in company's records but not in the bank
statement:

 Deposits in Transit: Deposits which have been sent by the company to the bank but have
not been received by the bank at proper time before the issuance of bank statement.
 Checks Outstanding: Checks which have been issued by the company but were not
presented or cleared before the issuance of bank statement.

Following are the transactions which usually appear in bank statement but not in company's cash
account:

 Service Charges: Service charges may have been deducted by the bank. Such charges are
usually not known to the company before the issuance of bank statement.
 Interest Income: If any interest income has been earned by the company on its bank
account, it is not usually entered in company's cash account before the issuance of bank statement.
 NSF Checks: NSF stands for "not sufficient funds". These are the checks deposited by the
company in bank account but the bank is unable to receive payment on those checks due to
insufficient funds in the payer's account.

Example

Company A's bank statement dated Dec 31, 2011 shows a balance of $24,594.72. The company's
cash records on the same date show a balance of $23,196.79. Following additional information is
available:

1. Following checks issued by the company to its customers are still outstanding:
No. 846 issued on Nov
$320.00
29

No. 875 issued on Dec 26 49.21

No. 878 issued on Dec 29 275.00

No. 881 issued on Dec 31 186.50

2. A deposit of $400.00 made on Dec 31 does not appear on bank statement.

3. An NSF check of $850 was returned by the bank with the bank statement.
4. The bank charged $50 as service fee.
5. Interest income earned on the company's average cash balance at bank was $1,237.22.
6. The bank collected a note receivable on behalf of the company. Amount received by the bank
on the note was $550. This includes $50 interest income. The bank charged a collection fee of $10.
7. A deposit of $430 was incorrectly entered as $340 in the company's cash records.

Prepare a bank reconciliation statement using the above information.

Solution:
Company A

Bank Reconciliation

December 31, 2011

Balance as per Bank, Dec 31 $24,594.72

Add: Deposit in Transit 400.00

$24,994.72

Less: Outstanding Checks:

No. 846 issued on Nov 29 $320.00

 No. 875 issued on Dec 26 49.21

No. 878 issued on Dec 29 275.00

No. 881 issued on Dec 31 186.50

830.71

Adjusted Bank Balance $24,164.01

Balance as per Books, Dec 31 $23,196.79

Add:

Interest Income from Bank $1,237.22

Note Receivable Collected by Bank 500.00

Interest Income from Note

50.00
Receivable

Deposit Understated 90.00

1,877.22

$25,074.01

Less:

NSF Check 850.00

Bank Service Fee 50.00

Bank Collection Fee 10.00

910.00

Adjusted Book Balance $24,164.01

Bank Reconciliation
Bank reconciliation statement is a report which compares the bank balance as per company's accounting
records with the balance stated in the bank statement.
It is normal for a company's bank balance as per accounting records to differ from the balance as per
bank statement due to timing differences. Certain transactions are recorded by the entity that are updated
in the bank's system after a certain time lag. Likewise, some transactions are accounted for in the bank's
financial system before the company incorporates them into its own accounting system. Such timing
differences appear as reconciling items in the Bank Reconciliation Statement.
The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the
accounting records of the entity and the bank besides those due to normal timing differences. Such
discrepancies might exist due to an error on the part of the company or the bank.

Importance of Bank Reconciliation

 Preparation of bank reconciliation helps in the identification of errors in the accounting records of
the company or the bank.
 Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary control
mechanism to help protect the valuable resource through uncovering irregularities such as
unauthorized bank withdrawals. However, in order for the control process to work effectively, it is
necessary to segregate the duties of persons responsible for accounting and authorizing of bank
transactions and those responsible for preparing and monitoring bank reconciliation statements.
 If the bank balance appearing in the accounting records can be confirmed to be correct by
comparing it with the bank statement balance, it provides added comfort that the bank
transactions have been recorded correctly in the company records.
 Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a
business.

Preparing a Bank Reconciliation

Statement
Following is a sample Bank Reconciliation Statement:
ABC LTD
Bank Reconciliation Statement as at 31 December 2011

Balance as per corrected Cash Book 1 xxx

Add:

Unpresented Cheques 2 xxx

Less:

Deposits in Transit 3 (xxx)

Errors in Bank Statement 4 (xxx)

Balance as per Bank Statement xxx

1. Balance as per corrected Cash Book:

This is the starting point of a bank reconciliation. Corrected bank balance is calculated by adjusting the
cash book ledger balance for transactions that are recorded by the bank but not by the entity as shown
below:
Balance as per Cash Book xxx

Add:
 Direct Credits 5 xxx

Interest on Deposit 6 xxx

Less:

Bank Charges 7 (xxx)

Direct Debits 8 (xxx)

Standing Order 9 (xxx)

Errors in Cash Book 10 (xxx)

Balance as per corrected Cash Book xxx

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What is included in cash and cash

equivalents?
The term cash and cash equivalents includes: currency, coins, checks received but not yet
deposited, checking accounts, petty cash, savings accounts, money market accounts, and short-term,
highly liquid investments with a maturity of three months or less at the time of purchase such as U.S.
treasury bills and commercial paper. The items included as cash and cash equivalents must also be
unrestricted.

The amount of cash and cash equivalents will be reported on the balance sheet as the first item in the
listing of current assets. The change in the amount of cash and cash equivalents during an accounting
period is explained by the statement of cash flows.