Chapter #1: Cash and Cash Equivalent
Cash
◊ Cash is measured at face value.
◊ It must be unrestricted in use. The
cash must be readily available in the
payment of current obligations and
not be subject to any restrictions,
contractual or otherwise.
◊ Cash includes money and any other
negotiable instrument that is payable
in money and acceptable by the bank
for deposit and immediate credit.
(checks, bank drafts and money
orders)
Unrestricted Cash
◊ An entity shall classify an asset as
current when the asset is cash or a
cash equivalent unless it is restricted
to settle a liability for more than
twelve months after the end of the
reporting period. (PAS 1,
paragraph 66)
Cash items included in cash
◊ Cash on Hand
◦ cash currently on hand, undeposited
collections, costumers and manager's
checks, bank drafts and money orders)
◊ Cash in Bank
◦ this includes demand deposit or
checking account and saving deposit
which are unrestricted as to withdrawal.
◊ Working Funds
◦ Cash fund set aside for current purposes
such as petty cash fund, payroll fund
and dividend fund
 
Cash Equivalents
◊ 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.
(PAS 7, paragraph 6)
◊ The duration from
the date of purchase up to date of
maturity is three months or less.
◊ Equity securities
cannot qualify as cash equivalents
because shares do not have a
maturity date.
Investment of excess cash
◊ If excess cash is invested to earn
interest income, the actual cash
invested shall be classified as:
◦ With a term of three months or less =
Cash Equivalent
◦ More than
three months but less than one year =
Current Asset (short-term investment)
◦ More than
one year = Noncurrent Asset (long-term
investment)
 
Foreign Currency
◊ Cash in foreign currency should be
translated to Philippine peso using
the current exchange rate
Cash fund for a certain purpose
◊ If the cash fund is set
aside for use in current operations or
for the payment of current obligation,
it is a current asset.
◊ If the cash fund is set
aside for noncurrent purpose or
payment of noncurrent obligation, it
is shown as long term investment.
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.
◊ A bank overdraft is classified as a
current liability and should not be
offset against other bank accounts
with debit balances.
Exception to the rule
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.
Compensating balance
◊ generally takes the form of minimum
checking or demand deposit account
balance that must be maintained in
connection with a borrowing
arrangement with a bank.
◦ No legal restrictions = Cash
◦ With legal restrictions on withdrawal =
Cash held as compensating balance or
Long-term Investment (depending if the
related loan made is short-term or long-
term)
Undelivered or unreleased check
◊ is one 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 xx
Accounts payable or xx
appropriate account
 
Postdated check
◊ Is a check drawn,
recorded and already given to the
payee but it bears a date subsequent
to the end of reporting period.
◊ Shall be reverted
back to cash at the end of the
on reporting period because there is no
payment until the check can be
presented to the bank for encashment
or deposit.
Cash xx
Accounts payable or xx
appropriate account
 
Stale check or check long
outstanding
◊ In banking practice, a check becomes
stale if not encashed within six
months from the time of issuance.
◊ If the amount of stale check is
immaterial, it is simply accounted as
miscellaneous income.
Cash xx
Miscellaneous Income xx
◊ If the amount is material and liability Cash short or over xx
is expected to continue, the cash is Payable to Cashier xx
restored and the liability is again set
up.
◊ If unable to look for the reason, cash
Cash xx
Accounts payable or xx overage will become miscellaneous
appropriate account revenue.
 
Imprest System
Cash Shortage or Overage
◊ is a system of control of cash which
◊ Cash Count < Recorded Cash = Cash requires that all cash should be
Shortage deposited intact and all cash
disbursements should be made by
◊ Cash Count > Recorded Cash = Cash means of check.
Overage
 

Cash Shortage ◊ While internal control ideally

requires that all payments should be
made by means of check, this is
◊ It is debited to Cash short/over and sometimes impossible.
credited to cash
Cash short or over xx ◦ Cash Receipts = Deposit altogether
Cash xx ◦ Cash Payment = Made through checks
 

Petty cash fund

◊ If the cashier or cash custodian is
held responsible for the cash
◊ The petty cash fund is money set
shortage, the adjustment should be
aside to pay small expenses which
debited to the reason for the shortage
cannot be paid conveniently by
and credited to cash short/over
means of check.
Due from cashier xx
Cash short or over xx
◊ There are two methods of handling
the petty cash, namely:
◊ If unable to look for the reason, cash
shortage will become miscellaneous ◦ Imprest fund system
expense.
 

Cash Overage ◦ Fluctuating fund system

 

Imprest fund system

◊ It is debited to cash and credited to
cash short/over. ◊ The imprest fund
Cash xx system is the one usually followed in
Cash short or over xx handling petty cash transactions.
 

Accounting Procedure
◊ When the reason is found we will
debit cash short/over then credit the a) A check is drawn to establish the
reason for the overage. fund.
 Petty cash fund xx e) An increase in the fund is recorded
Cash in bank xx as:
Petty cash fund xx
Cash in bank xx
b)Payment of expenses out of the fund.

◦ No formal journal entries are made. f) A decrease in the fund is recorded as:
Cash in bank xx
◦ The petty cashier generally requires a Petty cash fund xx
signed petty cash voucher for such  

payments and simply prepares Fluctuating fund system

memorandum entries in the petty cash
journal.
◊ The checks drawn to replenish the
fund do not necessarily equal the
c) Replenishment of petty cash
petty cash disbursements.
payments.

◦ Whenever the petty cash fund runs low,
a check is drawn to replenish the fund.
The replenishment check is usually
equal to the petty cash disbursements.
◦ It is at this time that the petty cash
disbursements are recorded
Expenses xx
Cash in bank xx
◊ The replenishment checks are simply
drawn upon the request of the petty
cashier.
◊ Moreover, petty cash disbursement
are immediately recorded thus
resulting in a fluctuating petty cash
balance per book from time to time.
Accounting Procedure

◦ It is to be pointed out a) Establishment of fund:

that the petty cash disbursements should
be replenished only by means of check Petty cash fund xx
and not from undeposited collections. Cash in bank xx

d)At the end of the accounting period, b)Payment of expenses out of the petty
it is necessary to adjust the cash fund:
unreplenished expenses in order to
Expenses xx
state the correct petty cash balance. Petty cash fund xx
Expenses xx
Petty cash fund xx
◦ Under the system, the disbursement
from the petty cash fund are
◦ The reversal is made in order that the immediately recorded in contradiction
normal replenishment procedures may with the imprest fund system where the
be followed by simply debiting disbursements are recorded upon the
expenses and crediting cash in bank replenishment of the fund.
without distinguishing whether the
expenses pertain to the current period or a) Replenishment or
prior period. increase of the fund:
Petty cash fund xx
 Cash in bank xx

◦ The replenishment check may or may

not be the same as the petty cash
disbursements.

a) At the end of the

reporting period, no adjustment is
necessary because the petty cash
expenses are recorded outright.

b) Decreases of the fund

is reverted to the general cash.
Cash in bank xx
Petty cash fund xx