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CASH AND CASH EQUIVALENTS

VALUATION OF FINANCIAL ASSET
Initial measurement of financial instruments
As stated in IFRS 9 at initial recognition, an entity shall measure a financial asset or liability at:
» Fair value - If the financial instruments are at fair value through profit or loss; or
» Fair value plus transaction - If the instruments are amortized cost or fair value through other
comprehensive income.
Subsequent measurement
IFRS 9 applies one (1) classification approach for all types of financial assets, including those that contain
embedded derivative features. Financial assets are therefore classified in their entirety rather than being subject
to complex requirements.
The illustration below shows the three (3) classification of financial assets (International Financial Reporting
Standards, 2018):

Figure 1. Process for determining the classification and measurement of financial assets
Source: https://www.ey.com/Publication/vwLUAssets/Financial_instruments:_A_summary_of_IFRS9_and_its_effects/$FILE/ey-ifrs-9-
financial-instruments.pdf

1. At amortized cost - These are financial assets that met the following conditions:
» Business model test - The financial asset is hold only to collect contractual cash flow (not to
sell them).
» Contractual cash flows’ characteristics test - The cash flows from the asset are only for
payments of principal and interest.
Examples: debt securities, receivables, and loans

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2. At fair value through profit or loss (FVTPL) - These are financial assets that met the following
conditions:
» If the financial instrument is a derivative financial asset; or
» If the company designates the financial asset at fair value through profit or loss.
3. At fair value through other comprehensive income (FVOCI) - These are financial assets that met
the following conditions:
» The financial asset meets contractual cash flow characteristics test and the business model is
to collect contractual cash flow and sell financial assets, unless FVTPL option is chosen.
» The company voluntarily choose to measure some equity instruments at FVOCI. This is an
irrevocable election at initial recognition.

DEFINITION OF CASH AND CASH EQUIVALENTS

Cash
In layman’s term, cash simply means money. Money plays an important role in the day-to-day operations of the
business. It is the standard medium of exchange in business which comprises money in circulation or the legal
tender of a particular country.
But in accounting, cash connotes more than money. It comprises “money and any other negotiable instrument
that is payable in money and acceptable by the bank for deposit and immediate credit.”
Therefore, cash includes:
a) cash on hand (coins, bank notes, and available currencies); and
b) demand deposits (deposit in bank accounts that are available on demand).
As stated in IAS 1 Presentation of Financial Statement, the asset is cash or a cash equivalent (as defined in
IAS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least 12 months after
the reporting period (e.g., currencies, checks received but not yet deposited, savings account, and petty cash
fund). The major characteristic to be considered as cash equivalent is that the instrument must be three (3)
months or less from its original maturity.
Cash Equivalents
PAS 7, paragraph 6 defines “cash equivalents” as short-term 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.
Cash equivalents include:
a) treasury bills;
b) taxable municipal bonds;
c) money market funds that have an original maturity of three (3) months or less; and
d) amount receivable from credit card companies as they are typically converted cash within three (3) days
of sales transaction.
REPORTING CASH IN THE FINANCIAL STATEMENT
Measurement
Cash is measured at face value in the statement of financial position. Cash (demand deposits) denominated in
foreign currency is measured at the current exchange rate.
Financial Statement Presentation
Cash is the first line item in the financial statements together with cash equivalents. It is usually named as “cash
and cash equivalents” in the current asset portion of the balance sheet. This portion contains cash items like
currencies, checks received but not yet deposited, savings account, petty cash fund, money market accounts,
and other highly liquid investments with a maturity of three (3) months or less at the time of purchase and also
unrestricted in use for current operations.

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Listed below are the important notes in reporting cash balance in the financial statement (Robles & Empleo,
2016):
1. Foreign currency - Deposits and cash in foreign denomination which are unrestricted in use for current
operations should be converted to Philippine currency. The current exchange rate must be used at the
end of the reporting period. With regard to the cash in foreign currency which is restricted as to use or
withdrawal, it should be reported as part of the non-current assets.
2. Cash fund set aside for a specific purpose - Cash under this type shall follow the classification of
account for which it is designated. If it is used in current operations or as payment of current liabilities,
then it is a current asset to be reported as part of cash and cash equivalents (e.g., petty cash fund,
travel fund, interest fund, dividend fund, and tax fund). Conversely, those cash set aside for non-current
purpose are to be shown as part of long-term investment (Valix, 2017).
3. Cash in closed banks or in banks having financial misfortune - To be reclassified as receivable
and written down to its recoverable amount.
4. Customers’ post-dated checks, NSF (no sufficient fund) checks (those that cannot be recovered
by funds in the debtor’s bank account), and IOUs (“I owe you” notes) - These are commercial
documents that should be reported as receivables rather than cash. In the Philippines, NSF checks are
often described as DAIF (drawn against insufficient funds) checks or DAUD (drawn against unclear
deposits) checks.
5. Postage stamps and expense advances - These are commercial documents that should be reported
as prepaid expenses rather than cash.
6. Bank overdraft - It is a checking account in which the amounts of checks drawn or presented exceeded
the amount of deposit. The balance is reported as liability or may be offset against a positive balance
in another account with the same bank. Right of offset can be exercised an established agreement
exists between the depositor and the bank.
7. Undelivered or unreleased checks - These are the checks that are drawn and recorded but not
delivered to payees before the end of the reporting period. It should be reverted to cash, and the
corresponding liability shall continue.
8. Compensating Balance - It is the minimum account balance that the company agrees to maintain as
a support or collateral for a loan of a depositor.
Classifications of compensating balances: (Valix, 2017)
a) Not legally restricted/ informal compensating balance agreement - part of cash
b) Legally restricted/ formal compensating balance agreement - cash held as compensating balance under
current asset if the related loan is short-term
c) Legally restricted/ formal compensating balance agreement and the corresponding loan is long-term -
reported as non-current investments
CASH MANAGEMENT
This refers to planning, controlling, and accounting for cash transactions and cash balances. Because cash
moves so readily between bank accounts and other financial assets, cash management really means the
management of all financial resources (Williams, 2011).
Basic objectives of cash management:
• Provide accurate accounting for cash receipts, cash disbursements, and cash balances.
• Prevent or minimize losses from theft or fraud.
• Anticipated the need for borrowing and assure the availability of adequate amounts of cash conducting
business operations.
• Prevent unnecessary large amounts of cash from sitting idle in bank accounts that produce no revenue.

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INTERNAL CONTROL OVER CASH

Because cash is highly susceptible to theft, management should practice a standardized system of cash control.
The following are some control systems used by companies to secure its cash (Robles & Empleo, 2016):
1. Segregation of duties for handling cash and recording cash transactions - This is a cash control
system which suggests that no person should be in complete control of a transaction. For example, a
person handling cash receipts should not have access to the accounting records for cash.
2. Imprest system - This is a cash control system which is characterized by daily deposit of all cash receipt
to the bank and making disbursements through issuance of check. This system prevents the presence
of a significant amount of cash balance within the business vicinity.
3. Voucher system - Under this cash control system, all disbursements must be supported by properly
approved vouchers which must be recorded in the voucher register.
4. Internal audit at irregular intervals - Under this cash control system, cash counts are conducted by
the internal control department which are made without advance notice to the cash custodian, such that
the cash custodian is always conscious of his accountability, keeping the cash on hand intact.
5. Periodic reconciliation - Under this cash control system, the company conducts regular reconciliation
of bank balance and book balance for cash to immediately uncover any error or irregularities in recording
cash transactions.
PETTY CASH FUND
Under the imprest system, cash receipts and cash disbursements are to be made using checks. Due to the
impracticality of issuing checks for small transactions, the concept of petty cash fund was introduced.
An imprest system of petty cash means that the general ledger account Petty Cash will remain dormant at a set
amount. For example, if the petty cash custodian is entrusted with a locking bag containing P10,000 of currency
and coins, then the Petty Cash account will always report a debit balance of P10,000. This P10,000 is the
imprest balance. As long as P10,000 is adequate for the organization's small disbursements, then the general
ledger account Petty Cash will never have an entry again. When the coins and currency in the locking bag get
low, the petty cash custodian will request a check to replenish the coins and currency that were disbursed. Since
the requested check is drawn on the organization's checking account, the Cash account (not the Petty Cash
account) will be credited. The debits will go to the expense accounts indicated by the petty cash receipts (e.g.,
postage expense, and supplies expense). In other words, the general ledger account Petty Cash is not involved
in the replenishment (Averkamp, 2018).
Accounting for petty cash fund
Establishment and increasing the fund
Petty Cash xxx
Cash in Bank xxx
Replenishment
Expenses xxx
Cash in Bank xxx
Adjusting entry to recognized payments that are not replenished
Expenses xxx
Petty Cash Fund xxx

Cash Short and Over

Cash short and over is a nominal account that is debited for shortages and credited for overages in the petty
cash fund. A debit to this account at the end of the reporting period should be reported as miscellaneous
expense, while a credit is reported as miscellaneous revenue. If the shortage is proved that a theft causes it, it
should be charged to a receivable account if the shortage is collectible. Also, cash overage should be taken out
from the petty cash fund and be deposited to the general fund of the company to maintain the imprest balance
(Robles & Empleo, 2016).

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This is how imprest system of petty cash works:

1. The company designates a petty cash custodian and gives the custodian a small amount of currency
from which to make payments. It records transfer of funds to petty cash as:
Petty Cash 500
Cash 500
2. The petty cash custodian obtains signed receipts from each individual to whom s/he pays cash,
attaching evidence of the disbursement to the petty cash receipt. Petty cash transactions are not
recorded until the fund is reimbursed. Someone other than the petty cash custodian records those
entries.

3. When the supply of cash runs low, the custodian presents to the controller or accounts payable cashier
a request for reimbursement supported by the petty cash receipts and other disbursement evidence.
The custodian receives a company check to replenish the fund. At this point, the company records
transactions based on petty cash receipts.
Supplies Expense 85
Postage Expense 102
Miscellaneous Expense 156
Cash Over and Short 12
Cash 355
4. If the company decides that the amount of cash in the petty cash fund is excessive, it lowers the fund
balance.
Cash 100
Petty Cash 100
BANK RECONCILIATION
Bank Deposits
Below are three (3) types of bank deposit (Valix, 2017):
• Demand Deposit – This type of bank deposit includes current account, checking account, or commercial
deposits. These bank deposits are covered by deposit slips, and funds are withdrawable on demand by
drawing checks against the bank. This is noninterest bearing.
• Saving Deposit - In this type of bank deposit, the depositor is given a passbook upon the initial deposit.
The passbook is required in making deposits and withdrawals. This is interest bearing.
• Time Deposit – This type of bank deposit is evidenced by a formal agreement embodied in an instrument
called certificate of deposit. It may be preterminated or withdrawn on demand or after a certain period
of time agreed upon. This is also interest bearing.

Bank Reconciliation
A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance
per bank (Valix, 2017). It is usually prepared on a monthly basis as banks provide their clients bank statement
at the end of every month.
A bank statement is a monthly report of the bank to the depositor showing (Valix, 2017):
a) the cash balance per bank at the beginning;
b) the deposits made by the depositor and acknowledged by the bank;
c) the checks drawn by the depositor and paid by the bank; and
d) the daily cash balance per bank during the month
Reconciling Items
At the end of the month, there are differences in the balance per book with the balance per bank. This is due to
timing differences caused by items collectively called as reconciling items.

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Book reconciling items:

a) Credit memos – These are book reconciling items not representing deposits credited by the bank to
the account of the depositor but not yet recorded by the depositor as cash receipts. The following are
examples of credit memos (Averkamp, 2018):
» Interest earned – This is a type of credit memo that 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.
» Notes receivable – This is a type of reconciliation where 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.
b) Debit memos - These are book reconciling items not representing checks paid by the bank which are
charged or debited by the bank to the account of the depositor but not yet recorded by the depositor
as cash disbursements. The following are examples of debit memos (Averkamp, 2018):
» Bank service charges – This type of debit memo comprises 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.
» NSF check - This type of debit memo represents 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.
» Check printing charges – This type of debit memo occurs 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.
c) Errors - These are book reconciling items which represent the errors made by the accountant or
another person in charge during the bookkeeping process.
Bank reconciling items:
a) Deposits in Transit – These are collections already recorded by the depositor as cash receipts but not
yet reflected on the bank statements (e.g., undeposited collections).

To compute for deposit in transit:

Deposits in transit, beginning balance xxx
Add: Cash receipts for the month xxx
Total xxx
Less: Cash receipts reflected in the bank statement xxx
Deposit in transit, ending balance xxx
b) Outstanding Checks – These checks are already recorded by the depositor as cash disbursements
but not yet reflected on the bank statement (e.g., check drawn but not yet presented by payee for
payment and certified checks).

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To compute for outstanding checks:

Outstanding checks, beginning balance xxx
Add: Checks drawn by the company for the month xxx
Total xxx
Less: Checks paid reflected in the bank statement xxx
Outstanding checks, ending balance xxx
c) Errors - These are bank reconciling items which represent the errors made by the bank such as
erroneously debiting the company’s account for the transaction that does not exist.
Forms of Bank Reconciliation
The following forms may be used in reconciling the book balance and bank balance (Valix, 2017):
a. Adjusted balance method - Under this method, the book balance and the bank balance are brought
to a correct cash balance that must appear on the balance sheet.

Proforma Bank Reconciliation (Adjusted Balance method)

Book Balance xxx
Add: Credit Memos xxx
Total xxx
Less: Debit Memos xxx
Adjusted book balance xxx

Bank Balance xxx

Add: Deposits in Transit xxx
Total xxx
Less: Outstanding Checks xxx
Adjusted bank balance xxx

b. Book to bank method - Under this method, the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.

Proforma Bank Reconciliation (Book to Bank Method)

Book Balance xxx
Add: Credit Memos xxx
Outstanding Checks xxx
Total xxx
Less: Debit Memos xxx
Deposits in Transit xxx
Bank balance xxx

c. Bank to book method - Under this method, the bank balance is reconciled with the book balance or
the bank balance is adjusted equally with the bank balance.

Proforma Bank Reconciliation (Bank to Book Method)

Bank Balance xxx
Add: Debit Memos xxx
Deposit in Transit xxx
Total xxx
Less: Credit Memos xxx
Outstanding Checks xxx
Book balance xxx

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ILLUSTRATIVE PROBLEM – ADAPTED (Robles & Empleo, 2016)

The following unadjusted cash balances are available for JK Company for the month ended November 30,
201A.
Cash balance per bank statement, November 30, 201A P 62, 305.75
Cash balance per company records, November 30, 201A 62,189.70
The bank statement disclosed the following information:
1. Charges by bank included a returned customer’s check for P 690.70 because of insufficient funds (NSF)
and service charge of P75 for November.
2. Credits by the bank included a customer’s note for P6,000 plus interest of P60 that was collected on
November 29, 201A.
A review of the company records disclosed the following information:
1. A deposit for P5,714.35 made on November 29, 201A did not appear on the bank statement.
2. Customers’ checks totaling P1,637 were still on hand at November 30, 201A awaiting deposit.
3. The following company checks were still outstanding as of November 30, 201A:

Check #145243 P 480.95

Check #145247 735.90
Check #145250 1,316.25
4. Check #145257 for P456 in payment of a creditor account and included with the canceled checks in the
bank statement has been erroneously recorded in the company records as P 96.
Required:
Prepare a bank reconciliation statement for JK Company as of November 30, 201A. Use the three (3) forms of
bank reconciliation.
Adjusted Balance Method
JK Company
Bank Reconciliation Statement
November 30, 201A

Balance per bank statement P 62,305.75

Add: Deposit in transit P 5,714.35
Receipts not yet deposited 1,637.00 7,351.35
Total P 69,657.10
Deduct: Outstanding checks:
Check #145243 P 480.95
Check #145247 735.90
Check #145250 1,316.25 2,533.10
Adjusted cash balance P 67,124.00

Balance per books P62,189.70

Add: Notes collected by the bank P 6,000.00
Interest on notes collected 60.00 6,060.00
Total P68,249.70
Deduct:
Bank service charge P 75.00
Customer’s NSF check returned 690.70
Check #145257 for P456 was erroneously recorded as P96 360.00 1,125.70
Adjusted cash balance P 67,124.00

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Bank to Book
JK Company
Bank Reconciliation Statement
November 30, 201A

Balance per bank statement P 62,305.75

Add: Deposit in transit P 5,714.35
Receipts not yet deposited 1,637.00
Bank service charge 75.00
Customer’s NSF check returned 690.70
Check #145257 for P456 was erroneously recorded as P96 360.00 P 8,477.05
Total P70,782.80

Deduct: Outstanding checks:

Check #145243 P480.95
Check #145247 735.90
Check #145250 1,316.25
Notes collected by bank 6,000.00
Interest on notes collected 60.00 P8,593.1
Balance per book P62,189.70

Book to Bank
JK Company
Bank Reconciliation Statement
November 30, 201A

Balance per bank statement P 62,189.70

Add: Outstanding checks:
Check #145243 P 480.95
Check #145247 735.90
Check #145250 1,316.25
Notes collected by bank 6,000.00
Interest on notes collected 60.00 8,593.10
Total P 70,782.80
Deduct: Deposit in transit P 5,714.35
Receipts not yet deposited 1,637.00
Bank service charge 75.00
Customer’s NSF check returned 690.70
Check #145257 for P456 was erroneously recorded as P96 360.00 P8,477.05
Balance per book 62,305.75

PROOF OF CASH
A proof of cash is essentially a roll forward of each line item in a bank reconciliation from one accounting
period to the next, incorporating separate columns for cash receipts and cash disbursements. Below is the
formula used to compute for the ending cash balance using proof of cash (Bragg, 2018):

𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑏𝑏𝑏𝑏𝑏𝑏𝑎𝑎𝑛𝑛𝑛𝑛𝑛𝑛 + 𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 − 𝐶𝐶𝐶𝐶𝐶𝐶ℎ 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑖𝑖𝑖𝑖 𝑡𝑡ℎ𝑒𝑒 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏

When used for each line item in a bank reconciliation, the proof of cash highlights areas in which there are
discrepancies, and which may therefore require further investigation, and probably some adjusting entries.
A proof of cash can indicate an array of other reconciliation issues that will require adjustments to a
company's accounting records, including the following: (Bragg, 2018)
• Bank fees not recorded
• NSF checks not deleted from the deposit records
• Interest income or expense not recorded

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• Checks or deposits recorded by the bank in different amounts than what they were recorded by the
company
• Checks cashed by suppliers that the company voided
• Cash disbursements and/or receipts recorded in the wrong account

A proof of cash can also uncover instances of fraud. If there is a difference between the totals, it can indicate
the presence of unauthorized borrowings and repayments within the time period covered by a single bank
statement. Thus, if a controller were to illegally withdraw P10,000 from the company accounts near the
beginning of the month for his personal use, and replaced the funds before the end of the month, the issue
would not appear in a normal bank reconciliation as a reconciling item. However, a proof of cash would be more
likely to flag the extra cash withdrawal and cash return within the period (Bragg, 2018).

A proof of cash is more complicated to complete than a bank reconciliation. However, it provides a greater
degree of detail, and so makes it easier to locate errors than a bank reconciliation. Thus, it may be cost-effective
to use a proof of cash when you expect to find a large number of different cash-related errors within an
accounting period (Bragg, 2018).

ILLUSTRATIVE PROBLEM – ADAPTED (Robles & Empleo, 2016)

To illustrate the preparation of proof of cash, assume the following information for JK Corporation for September
and October 201A.

Balance per company’s ledger

September 30 P 780,000
October 31 1,050,000
Total debits to cash per company’s books (recorded receipts) during October 3,750,000
Total credits to cash per company’s books(recorded disbursements) during October 3,480,000
Balance per bank statement
September 30 806,100
October 31 1,017,300
October receipts recorded by bank during October 3,711,600
October disbursements recorded by bank during October 3,500,400
Deposits in transit
September 30 240,000
October 31 337,500
Outstanding checks
September 30 214,500
October 31 177,000
Bank service charges (recorded by the depositor in the month following the month
of charge)
September 30 1,800
October 31 1,200
Bank credit memo for customer’s note collected by bank in September (face value
P90,000 plus interest of P900), recorded by the company only on October 31. 90,900
Bank credit memo for proceeds of bank loan granted by the bank on October 31 150,000
Customer’s DAIF check returned by the bank (recorded by the company in the
following month)
October 37,500
September 21,000

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The proof of cash for the period of September 30 to October 31 is prepared as follows:

JK Corporation
Proof of Cash
September 30- October 31, 201A
October
September 30 Receipts Disbursements October 31
Unadjusted bank balances P 806,100 P3,711,600 P3,500,400 1,017,300
Deposits in transit
September 30 240,000 (240,000)
October 31 337,500 337,500
Outstanding checks
September 30 (214,500) (214,500)
October 31 177,000 (177,000)
Adjusted balances, per bank P 831,600 P3,809,100 3,462,900 1,177,800
October
September 30 Receipts Disbursements October 31
Unadjusted book balances P780,000 P3,750,000 P3,480,000 1,050,000
Bank service charges
September (1,800) (1,800)
October 1,200 (1,200)
Bank Credit memo in December for
proceeds of bank loan granted on Oct. 31 90,900 (90,900)
Customers’ DAIF checks returned by bank: 150,000 150,000
September (37,500)
October (37,500) 21,000 (21,000)
Adjusted balances per books P 831,600 P3,809,100 3,462,900 1,177,800

Note the following observations in the proof of cash:

a. Deposit in transit at September 30 understated the September bank balance. The bank recorded these
as receipts in October, so the October receipts were overstated. As such, September 30 deposits in
transit are added to September 30 bank balance and deducted from October bank receipts.

b. The bank has not yet taken up deposits in transit at October 31, so the October recorded receipts and
October 31 bank balances were both understated. To reconcile, these October 31 deposits in transit
must be added to October receipts and to October 31 bank balance.

c. The bank recorded outstanding checks at September 30 only in October, overstating the September
30 balance and the October disbursements. The September 30 outstanding checks should, therefore,
be deducted from both September 30 bank balance and October disbursements per bank.

d. The bank has not yet recorded outstanding checks on October 31, so the October disbursements were
understated, and the October 31 balance was overstated. Therefore, in the proof of cash, October 31
outstanding checks must be added to October bank disbursements and deducted from October 31
bank balance.

e. The company recorded bank service charge in September, and the customers’ DAIF checks returned
by the bank in September as disbursements in October, overstating both the September 30 balance
and the October disbursements per books. Both are, therefore, deducted from both September 30
book balance and October book disbursements.

f. The service charge in October and the customers’ DAIF checks returned in October have yet to be
taken up by the company as of October 31, understating the book disbursements in October and
overstating the October 31 book balance. Both should be added to the October book disbursements
and deducted from October 31 balance.

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g. Bank credit memo in September was recorded by the company as debit to cash account only in
October, so it was a recorded October receipt, although the collection was actually made by the bank
in September. This makes the September 30 balance per books understated and the October receipts
overstated. Thus, the September 30 bank credit memo should be deducted from the October receipts
per books.

h. The bank credit memo on October 31 has yet to be taken up in the company’s books, as the bank may
not have notified the depositor yet. The recorded receipts per company’s books and the October 31
book balance are both understated. To reflect the correct transaction and October 31 balance, this
October bank credit memo should be added both to the October receipts per books and to the October
31 book balance.

References
Averkamp, H. (2018, October 15). Bank reconciliation. Retrieved from Accounting Coach:
https://www.accountingcoach.com/bank-reconciliation/explanation
Bragg, S. (2018, March 23). The proof of cash. Retrieved from Accounting Tools:
https://www.accountingtools.com/articles/what-is-a-proof-of-cash.html
Kieso, D. E., Meygandt, J. J., & Warfield, T. D. (2016). Intermediate accounting (16th ed.). New York: John Wiley
& Sons.
Robles, N. S., & Empleo, P. M. (2016). Intermediate accounting (Vol. 1). Mandaluyong: Millenium Books, Inc.
Stolowy, H., & Ding, Y. (2017). Financial Accounting and Reporting: A Global Perspective, 5th Edition.
Singapore: Andre Ashwin.
Valix, C. T., Peralta, J. F., & Valix, C. A. (2016). Financial accounting (Vol. 1). Manila: GIC Enterprises & Co.,
Inc.
Williams, J. R. (2011). Financial Accounting including International Financial Reporting Standards (IFRS). New
York: McGraw-Hill.

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