Intermediate

Accounting 1 - Cash and Cash Equivalents

Definition:
1. Cash – includes money and negotiable instruments (such as checks, money orders, etc.) that are
acceptable by the bank for deposit and immediate encashment. To be classified as cash
(current assets), an item must be unrestricted and immediately available for current
operations.
2. Cash equivalents – are short term, highly liquid investments that are readily convertible into
cash and so near their maturity that they represent insignificant risks of changes in interest
rates.
Composition:
1. Cash – currency coins and bills (cash awaiting deposit, cash deposited with bank checking,
savings, demand deposit), cash funds, checks, drafts, money order, etc.
2. Cash equivalents – time deposit, treasury bills and notes, money market accounts etc.

Valuation:
1. Benchmark – at face value.
2. Alternative – at estimated realizable value (if the financial institution holding the cash and cash
equivalents is suffering from major financial difficulties)

Classifications:
1. As current asset
a. Cash and cash equivalents – for presentation purposes only (details are shown in the notes
to financial statements.)
b. Separately shown

2. As non-current asset
a. Long term investment
b. Other Non-current asset

Special Treatments:
1. Investments in time Deposit, Treasury Bills & Notes, Money Market Instruments
a. If 3 months or less - Cash and cash equivalents
b. In more than 3 months but within 1 year - Short term Investments
c. If more than 1 year - Long term investments

2. Compensating balance
a. If not legally restricted as to withdrawal - Cash and cash equivalents
b. If legally restricted to as withdrawal
Related to a short term borrowing - Current asset (separately shown)
Related to as long term borrowing - Non-current asset (long term
investment)
3. Bank Overdraft
a. If amount is material
Of the same bank - apply the rule of offset
Of different banks - Current Liability
b. If amount is not material - Apply the rule of offset

4. Checks
a. Undelivered – means not yet given to payees.
b. Postdated – means given or not yet given to payees but withdrawal at a certain future date.
c. Stale – means cannot be withdrawn because they have been long outstanding.

 6. Cash in closed banks - Presented as non-current asset.

7. Proper Treatment of Non-Cash Items
a. Employees values and advances (IOUs) & Advances to salesmen - Non Trade receivables.
b. Postdated customers checks - Trade Receivables
c. NSF customer check – Trade Receivable
d. Cash due memoranda for money advances –Non-Trade Receivable
e. Note or draft left with bank for collection – Trade Receivable, before collection; Cash, after
collection.
f. Postage Stamps – Supplies inventory
g. Documentary Stamps – Prepaid taxes
h. Stocks, Bonds, government securities – Long term or short term investments
i. Time deposits (not subject to pre-termination) – Long term or short term investments


Petty Cash Fund
- It represents bills and coins that are set aside to accommodate small disbursements of cash.
- It may be accounted for using:

Imprest System: Fluctuating System:
Establishment of the Fund: Establishment of the fund:
Petty Cash fund xx Petty Cash Fund xx
Cash in bank xx Cash in Bank xx
Petty Cash Expenses: Petty Cash Expenses:
No Journal Entry Expenses xx
Replenishment of petty cash vouchers: Petty Cash Fund xx
Expenses xx Replenishment of Petty cash vouchers:
Cash in Bank xx Petty Cash Fund xx
Cash in bank xx
Adjustment for no replenishment: Adjustment for no Replenishment:
Expenses xx No Journal Entry
Petty Cash Fund xx


Bank reconciliation:
It is prepared to reconcile the cash in bank balances per client and per bank. Adjustments are made
only in the books of the client after compromising the balances reflected in the client’s books of accounts and
the bank statement.
The (3) methods in bank reconciliation are:
(a) Adjustment balance method
(b) Book to bank balance method
(c) Bank to book method


Adjusted Balance Method
Balance per book xx Balance per bank xx
Add: Credit memos xx Add Deposit in transit xx
Book errors xx Bank errors xx
Total: xx Total: xx
Less: Debit memos xx less: Outstanding checks xx
Book errors xx Bank errors xx
Adj. Balance per book xx Adj. balance per book xx


Book to Bank Balance Method Bank to Book Balance Method


Balance per book xx Balance per bank xx
Add: Credit Memos xx Add: Debit memos xx
Outstanding Checks xx Deposit in transit xx
Book errors xx Book errors xx
Bank errors xx Bank errors xx
Total: xx Total xx
Less: Debit memos xx Less: Credit Memos xx
Deposit in transit xx Outstanding checks xx
Book errors xx Book errors xx
Bank errors xx Bank errors xx
Balance per Bank xx Balance per book xx