AUDITING & ASSURANCE: CONCEPTS AND APPLICATIONS 1

MODULE 3: CASH AND CASH EQUIVALENTS

Glen De Vera De Leon, CPA, MBA, AFBE, FRIAcc, Ph. D

TOPIC OVERVIEW:
This chapter discusses the concept of cash and cash equivalents, its characteristics and
components, and bank reconciliation and proof cash.

LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Identify what items are included as cash and cash equivalents.
2. Calculate the correct balance of petty cash fund.
3. Identify bank and book reconciling items.
4. Prepare bank reconciliation and proof of cash.

SUMMARY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR CASH

Cash Items

Unrestricted and
For use other than for
immediately available for
current operations
use in the current
operations

- For payment of operating expenses

- For payment of current liabilities
- For acquisition of current assets

Other Noncurrent
“Cash” in the current asset
Financial assets
section

DEFINITION OF CASH

Cash includes and other negotiable instrument that is payaple in money and acceptable by the
bank for deposit and immediate credit. It includes cash on hand are unrestricted for the use in
current operations.

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1. Cash on Hand (CUTCMoBa)

C Customer’s check awaiting deposit

U Undeposited cash collections (currencies such as bills and coins)
T Traveler’s Check
C Cashier’s / Official / Treasurer’s / Manager’s check’s
Mo Postal money orders (a demand credit instrument issued and payable by a post
office)
Ba Bank drafts (a written order addressed to the bank to pay an amount of money to
the order of the maker)

2. Cash in bank

a. Demand deposit / Commercial deposit / current account / checking account

- Generally non-interest bearing
- Withdrawable by checks against bank
b. Savings deposit (Savings Account-SA)
- Generally non-interest bearing
- Depositor is issued an ATM card or passbook
- Withdrawable in ATM station or within the bank

3. Cash fund for current operations (CP2RIntPeDiT2)

C Change Fund
P Payroll
Purchasing Fund (for purchasing of inventories)
R Revolving fund (fund that is used for limited or specific purpose by management.)
In Interest fund
t
Pe Petty cash fund (for small and miscellaneous disbursements)
Di Divided Fund
T Travel Fund
Tax Fund

Fund for Noncurrent Operations

Fund for noncurrent operation should not be included as part of Cash but as part of non-current
assets. Examples are as follows. (P2ACIS)
Generally noncurrent investment but
P Pension fund If related liability is current then pension fund
is current thus part of CASH
Preferred redemption fund Noncurrent investment (unless the preferred
share capital has a mandatory redemption and
the redemption is already within one year from
the reporting period in which case the fund is
reported as part of current investment)
A Acquisition of property, plant and Always noncurrent even if expected to be
equipment disbursed next year
C Contingent Fund Noncurrent investment
I Insurance fund Noncurrent investment
S Sinking Fund If the related bonds payable is current, then
sinking fund is current, thus part of cash
Note: Classification of cash fund as current or noncurrent should parallel the classification
applied to the related liability. Thus an entity should reclassify such noncurrent asset if the
related liability becomes current.

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CASH EQUIVALENTS
Cash equivalents are 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 the value
because of changes in interest rates.[PAS 7.6] Only high liquid investment that are acquired three
months before the maturity can qualify as cash equivalents. Examples of cash equivalents are as
follows:
1. Time Deposit
2. Money Market Instrument of Commercial Paper.
3. Treasury Bills.
4. Redeemable preference shares with mandatory redemption period and acquired three
months before maturity.

Time Deposit, Money Market Instrument, T-bills Treatment

1) Originally invested/acquired for more than
Three months before maturity date
a) Remaining term is three months or less from the Short-term
reporting date. investments
b) Remaining term is more than three months but within Short-term
one year investments
c) Remaining term is more than one year Long-term
investment

2) Originally invested/ acquired for three months or less before Cash equivalents
maturity date.

Comparison among T-Bills, T-notes and T-Bonds

Difference in maturity date Similarities
Treasury bills 90 days to less than 1 year All are issued by
Treasury Notes 1 year to 10 years the government
Treasury Bonds More than 10 years

Note:
 If an item cannot be included as cash equivalent because it did not qualify the cutoff time
period (i.e. three months), it always be classified as investment (short term or long term)
depending on the period up to maturity.
 If the problem silent with regard to:
1. Treasury Note – assumed investment
2. Cash in money market account – cash and cash equivalent
3. Time Deposit – cash and cash equivalent.

Some Measurement Issues and Frequent Encountered Tricks in Cash and Cash
Equivalents Computation

Items Remarks
Cash Measured at face value
Cash in foreign currency Should be translated to the Philippine Peso using the closing rate
or sport rate at the reporting date.
Deposit in foreign bank a. Unrestricted – included cash
b. Restricted – if material, classified separately among
noncurrent assets as receivables
Cash in closed banks / Measured at estimated realizable value and be included among
Banks in bankruptcy noncurrent assets if the amount recoverable is lower than face
value.
Bank overdraft Definition: Negative balance in the cash in bank account.

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 Treatment: if the company is maintaining two accounts in
a. Different banks – current liabilities or may be netted
against other bank if immaterial.
b. Same bank - maybe netted against the account with
positive amount but cannot be offset against restricted
account.
Note: An overdraft may also be netted against other account
with positive balance if it is part of cash management. [PAS
7.8]

Compensating balance Definition: Compensating balance is minimum checking or

demand deposit account balance that must be maintained in
connection with a borrowing agreement with a bank
Treatment:
a. Not legally restricted – part of cash
b. Legally restricted – if the account is legally restricted as to
withdrawal, check the related loan:
1) Short-term – presented as “ cash held as compensating
balance” (current receivable)
2) Long-term – presented as “cash compensating balance”
(noncurrent receivable)
Note: if the problem is silent with regard to compensating
balance, it assumed not legally restricted.

Effect of compensating balance on:

a) Yield rate (lender) – increase
b) Effective rate – (borrower) – increase
(Effective rate) = Not interest expense
Net Proceeds
Undelivered/unreleased Reverted back to cash by a
check Dr Cash xx
Cr A/P xx
Stale checks / Checks long Definition: Checks are enchased by the payee with relatively a
outstanding long period of time (under normal banking practice, checks are
considered as stale if not enchased within 6 months from its date.)

Treatment: Stale checks are reverted to cash by a

Dr Cash xx
Cr Accounts payable xx(if material)
Misc. income xx(if not material)

Postdated checks Definition: Checks dated after the reporting date

Treatment:
a. For company own PDC – reverted to cash by a
Dr Cash xx
Cr Accounts payable xx
b. Customer’s check – not yet cash (A/R)
IOUs (I owe you) Included as part receivable, not cash and cash equivalents.
Equity securities Cannot be classified as cash equivalents because shares do not
have maturity date (with the exception of redeemable preference
shares)
Redeemable preference Preference shares with specified redemption date and acquired
share three months before redemption date are classified as cash
equivalents
Callable preference shares Not classified as cash equivalents. It is part of shareholder’s
equity on the part of issuer and part of long term investment of
the holder
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 NSF/DAUD/DAIF Definition:
NSF – no sufficient funds
DAUD – drawn against unclear deposits
DAIF – drawn against insufficient funds
Treatment: Reverted back as part of receivables.
Expense Advance (e.g. Receivables or prepaid expense
travel advances, postage
stamps)
Temporary investment in Either FVTPL or FVTOCI but never be included as part of cash
share of stocks and cash equivalents
Unused credit line Definition: Difference between the amount of line of credit
applied for and approved by a bank and the amount actually
borrowed

Treatment: Disclosed in the notes

Treasury Warrants Definition: A warrant for the payment of money into or from
public treasury.
Treatment: Included as part of cash.
Escrow Deposit Definition: Restricted amount held in trust another party, e.g., a
deposit required by a court of law for a pending case
Treatment: Part of other current / noncurrent asset and reported
as liability
Unrecorded cash Record the disbursements by debit to Accounts
disbursements Payable or other appropriate account and credit to cash
Unrecorded cash Record the collection by debit to cash and Credit to Accounts
collection/ receipts receivable or other appropriate account.
Certificate of Deposit Definition: A savings certificate entitling the bearer to receive
(CD) interest. A CD bears a maturity date, a specified fixed interest rate
and can be issued by commercial banks and insured the PDIC.
The term of a CD generally ranges from one month to five years.
Treatment:
a. Invested three months before maturity
b. Invested for more than three months investment (short or
long-term)
Postage stamps on hand Should be reported as office supplies or as a prepaid expenses

Bank Overdraft That was Netted or Deducted from Cash in Bank

Bank overdraft that was netted or deducted from cash in bank should be added back to compute
for the correct balance of cash in bank should be presented as current liability.

Illustration 1: Cash Composition

On December 31, 2016, Huwag Kang Aayaw Co’s “cash and cash equivalents account” balance
per ledger of ₱5,700,000 includes:

Manager’s checks ₱ 70,000

Traveler’s checks 100,000
Treasury note 50,000
Treasury shares purchased on 12/1/2016, to be reissued on 3/1/2017 150,000
Escrow deposit 200,000
Bank drafts 20,000
Postal money orders 20,000
Demand deposit 100,000
Treasury bills, purchased December 16, 2016 due March 15,2017 50,000
160-day treasury bill 30,000

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 Time deposit – PCIB, one-year, due March 31, 2017 180,000
Time deposit – PNB – 90 days 170.000
Time deposit – BPI – 120 days 45,000
Money market instrument-due date 2/28/2017 40,000
Money market instrument-due date 6/1/2017 70,000
Cash in bank- Metrobank, which includes a compensating balance of
₱50,000 for long term borrowing arrangement.
1,050,000
The compensating balance is legally restricted as to withdrawal.
Cash in bank – Metrobank (100,000)
Cash in bank – Firstbank,which includes a compensating balance of
₱50,000 for long term borrowing arrangement.
4,50,000
The compensating balance is legally restricted as to withdrawal.
Cash in bank – Secondbank (60,000)
Cash in bank – Seatacbank, which includes a compensating balance of
₱40,000 for short-term borrowing arrangement. 150,000
The compensating balance is legally restricted as to withdrawal.
Cash in bank – Seabank, which includes a compensating balance of ₱40,000
250,000
for short-term borrowing arrangement
Petty cash fund, which includes an unreplenished voucher for ₱4,000. 10,000
Payroll fund 100,000
Travel fund 20,000
Interest fund 40,000
Tax fund 30,000
Sinking fund 420,000
Preferred redemption fund 100,000
Contingent fund 200,000
Insurance fund 500,000
Fund for acquisition of Property, Plant & Equipment expected to be
800,000
disturbed in 2017
IOU from officers 20,000
Customer’s post-dated checks 70,000
Customer’s checks returned by bank marked “NSF” 20,000
Redeemable preferred shares – acquired 3 months to maturity date 15,000
Unused credit line 200,000
Revolving fund 100,000
Visa Card – credit limit 20,000
Total ₱ 5,700,000

Required: Compute the cash and cash equivalents that should be shown in the statement of
financial position.

Illustration 2: Cash Composition

On December 31, 2016, GAME K N BA? Co’s cash and cash equivalents account balance per
ledger of ₱ 4,000,000 includes:

Demand deposit ₱ 2,200,000

Undeposited collection 300,000
Time deposit – 30 days 500,000
NSF check of customer 20,000
35 day money market placement due 1/28/2017 300,000
45-day commercial papers due 2/4/2017 80,000
Savings deposit in closed bank 50,000
IOU from an employee 150,000
Preferred redemption fund 400,000
Total ₱ 4,000,000

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Additional information:

a) Included in the demand deposit of P2, 200,000 was a customer check amounting to ₱ 50, 000
dated January 25, 2017.

b) Also included in the demand deposit is a customer check amounting to ₱ 90, 000 dated
December 31, 2014. GAME K N BA? Neglected to encash the check. On December 31,
2016, the customer was informed and he was willing to replace this with a new one. New
check is yet to be received from the customer.

c) Check of ₱ 60, 000 dated January 31, 2017 in payment of accounts payable was recorded and
mailed December 31, 2016.

d) Check of ₱ 70, 000 in payment of accounts payable was recorded on December 31, 2016 but
mailed to creditors on January 15, 2017.

e) The company uses the calendar year. The cash receipts journal was held open until January
15, 2017, during which time ₱ 80, 000 was collected and recorded on December31, 2016.

Required:

1. Prepare adjusting entries to correct the cash account.

Compute the cash and cash equivalents to be shown on December 31, 2016 statement of
financial posi

PETTY CASH FUND

Imprest system is a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursements should be made by means of check. However, it is
impractical for the company to make each payment through check. Therefore, a Petty Cash Fund
is established to cover small and miscellaneous expenditures. Petty cash fund may be accounted
for using the following two methods:
1. Imprest fund system
2. Fluctuating fund system

Comparison of journal entries:

Imprest Fund System Fluctuating System

a. To established the fund
Petty cash fund Petty cash fund X
XX
X
Cash in bank XX Cash in bank XX
b. Payment of expenses
Memo entry in the petty cash journal Expenses X
X
Petty cash fund XX
c. Replenishment of petty cash payments
Expenses XX Petty cash fund XX
Cash in bank XX Cash in bank XX
d. To adjust the unreplenished expenses
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 Expenses XX No adjusting entry
Petty cash fund XX
e. Increase in the fund
Petty cash fund XX Petty cash fund XX
Cash in bank XX Cash in bank XX
f. Decrease in the fund
Cash in bank XX Cash in bank XX
Petty cash fund XX Petty cash fund XX

The Cash Over and Short account is used as a plug (miscellaneous expenses or miscellaneous
revenue) when the petty cash fund fails to turn out to be satisfactory. Replenishment will be the
total expense plus the cash shortage and less the cash overage.

The Petty Cash Fund Count Sheet

The count sheet has basically four parts as follows:
1. Accounting for petty cash items
2. Accountabilities
3. Petty cashier’s acknowledgement
4. Auditors adjusting entries

Accounting for Petty Cash Items

All petty cash items, inclusive of the impurities are accounted in the working papers as the
presence of the impurities may indicate some weaknesses is the accpounting control systems. (A
summary of the weaknesses in the accounting control systems would be submitted to the
management after the general audit of the accounting records, hence the documentation of the
impurities in the count sheet.)

Petty Cash Impurities

Petty cash impurities are items which do not belong to the fund but for cost reason or another are
nevertheless found in the petty cash box. Examples of petty cash impurities are:
a. Bills and coins and customer’s check from the cashier’s collection (as these should have
in the general cash)
b. Checks issued by the client in payment of utility bills ( as these should have delivered to
the payees)
c. Checks issued to the client in payment of personal advances (as these should have been in
the general cash)

Accountabilities
The accountabilities in the count sheet consist of the following:
1. Cash fund balance per general ledger
2. Petty cash impurities except issued to the client in settlement of cash advanced from the
petty cash fund.

Computation of Petty cash shortage

Petty cash accounted XX
Less: Petty cash accountabilities XX
Overage (or shortage) XX

Computation of Petty Cash Accounted and Pretty Cash Accountabilities

Petty cash accounted Petty cash accountabilities

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Coins and currencies XX PC Fund ledger balance XX
Unexpected employees Petty cash impurities except checks
contributions (e.g. contributions for XX issued in settlement of cash XX
Christmas party, birthday party etc.) advanced from the PCF;
Cash collections of accounts Unexpected employees
receivable or sales. XX contributions (e.g contributions for XX
Christmas party, birthday party etc.)
Unclaimed salary Collections of accounts receivable
XX XX
or sales (in cash or in check)
Checks for deposits XX Unclaimed salary XX
Stale checks XX Stale check XX
Post-dated checks (checks that are Company’s check in payment of a
dated after reporting date AND cash XX liability (e.g. utilities) (if among the
XX
count date) checks for deposits)
Unreplenished vouchers (expenses,
IOUs that are taken from the Pc XX
Fund
Note: For unexpected employees contributions, unclaimed salary and cash collections of
accounts receivable or sales, they should be included in the accounted only when it is intact or
the envelope is still closed on the cash count date. However, it is included as part of cash
accountabilities whether intact or not.

Examples of Checks:
1. Employee’s checks (good, NSF or PDC) in settlement of cash advanced from the petty cash
fund;
2. Check of the company as a replenished of petty cash fund; and
3. Check of the company payable to the petty cash custodian representing his/her salary

Employee’s checks or checks issued to the client in settlement of cash advanced from the petty
cash fund are not treated as accountabilities in the Count Sheet as these checks simply serve as
evidence that there were cash advances drawn from the petty cash fund. These are
accommodated checks or checks cash out from the fund.

Note: If the problem is silent, a check in which the payee is to “Cash” is assumed to be an
accommodated check.

Examples of checks for deposits that are part of the petty cash impurities and if included in the
petty cash accounted, must be included also in the petty cash accountabilities.

1. Customer’s checks- These are checks in the name of the client company and the maker is a
customer. These represent collection of accounts receivable from a customer.
2. Company’s check in payment of a liability (e.g. utilities)

Cash Collections of accounts receivable or Sales

Cash collections of accounts receivable of Sales may be evidenced by sales invoices or official
receipts that are included in the petty cash box.

Computation of adjusted PCF balance:

Coins and currencies (excluding collections, unexpected employees contribution, and
XX
unclaimed salary)

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Add: Expenses paid out of the PCF after reporting date XX
Check of the company in the name of Petty cash Custodian as a
a. Replenishment check of the Petty Cash Custodian XX
b. Salary of Petty Cash Custodian XX
Employees’ check (good check not the NSF Check) XX
Adjusted PCF balance XX

Illustration 1: Petty Cash Fund

Your firm has been engaged to examine the financial statements of the Perlita Company for the
year ended December 31, 2016. In connection with this audit, you have been assigned to audit
the Petty cash fund. You conducted your count at 9:15am on January 4, 2017 in the presence of
Mr. Rodel E. Ocon, the cashier and at the same time the petty cash custodian. A count of the
petty cash fund under the custody of Rodel E. Ocon showed its composition as follows:

Currencies:
Denomination Quantity
Bills: ₱1,000 3
500 7
100 6
50 4
20 5
Coins 10 48
5 20
1 20

Checks:
Maker Date Payee Particulars Amount
Rodel 03/01/16 Client Payment for cash advances ₱ 9,600
Ocon drawn from the petty cash
fund January 1, 2016
Merilou- 12/02/16 Client Payment for cash advances ₱ 1,000
Employee drawn from the petty cash
fund but was returned by
the bank for sufficiency of
fund.
Debora- 12/20/16 Client Payment for cash advances ₱ 3,000
President drawn from the petty cash
fund December 1, 2016
Perlita 12/28/65 Petty cash ₱ 16,000
Replenishment of PCF
Company custodian

Vouchers:
Particulars Date Amount
Taxi fare- OR No. 155 December 15, 2016 2,400
Gasoline- OR No. 688 December 16, 2016 1,600
Office supplies December 22, 2016 2,000
OR #64794- Post Office December 23, 2016 1,200
IOU signed by Jigo-company messenger December 24, 2016 4,800

Others:
 Unused stamps, P400
 The general ledger shows an imprest petty fund balance of P50,000

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Required:
1. Prepare the working paper for Petty Cash Fund
2. Compute for any petty cash shortage or overage.
3. Compute for the adjusted petty cash fund.
4. Prepare the adjusting journal entries.

Solution:
Required No. 1: Working Paper for the Petty Cash Fund

Perlita Company
Petty Cash Count Sheet
January 4, 2017; 9:15AM

Denomination Quantity Total

Bills ₱1,000 3 ₱ 3,000
500 7 3,500
100 6 600
50 4 200
20 5 100
Coins 10 48 480
5 20 100
1 20 20
Total Bills and Coins ₱ 8,000

Checks for Deposits:

Maker Date Payee Particulars Amount
Payment for cash
Merilou December 20, 2016 Client ₱ 1,000
advances-NSF

Payment of Cash
Debora December 20, 2016 Client ₱ 3,000
Advances
Perlita Petty cash
December 28, 2016 PCF replenishment ₱ 16,000
Company custodian
Total checks for deposit ₱ 20,000

Vouchers:
Particulars Date Amount
Taxi fare December 15, 2016 2,400
Gasoline December 16, 2016 1,600
Office Supplies December 22, 2016 2,00
Postage December 23, 2016 1,200
Advances- employees December 24, 2016 4,800
Total voucher payment 12,000

Bills and coins ₱ 8,000

Checks for deposit 20,000
Stale checks 9,600
Vouchers paid 12,000
Total Petty Cash Accounted 49,600
Less: Petty cash accountabilities 59,600
Petty Cash Shortage (10,000)

Petty cash accountabilities

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Petty cash imprest balance 50,000
Stale checks of Rodel Ocon 9,6000
Petty cash accountabilities 59,600

Acknowledgment

I hereby acknowledge that the above petty cash fund items were counted in my presence
and the same were returned to me intact. I further acknowledge a petty cash short of ten thousand
(₱ 10,000). I have no other fund accountabilities.

Rodel Ocon
Petty Cash Custodian
Requirement No. 2
Bills and coins ₱ 8,000
Checks for deposit 20,000
Stale checks 9,600
Vouchers paid 12,000
Total Petty Cash Accounted 49,600
Less: Petty cash Accountabilities 59,600
Petty Cash Shortage (10,000)

Requirement No. 3
Coins and currency ₱ 8,000
Replenishment check 16,0000
Petty cash fund, 12/31/2016 ₱ 24,000

Requirement No. 4: Adjusting Entries Debit Credit

a) Transportation expense 2,400
Gasoline expense 1,600
Office supplies expense 2,000
Postage expense 1,200
Advances to employees 4,800
Petty cash fund 12,000
b) Unused postage stamps 400
Postage Expense 400
c) Advances to employees 4,000
Petty cash fund 4,000
d) Receivable from custodian 10,000
Petty cash fund 10,000

Illustration 2: Petty Cash Fund

You are examining the accounts of ABC Co. Your count of the imprest cash fund, made at 9:00
a.m. on January 4, 2018, in the presence of Stef Pangilinan petty cashier, revealed:

Quantity Denomination
2 1,000 2,000
3 500 1,500
5 200 1,000
1 100 100
5 20 100
15 10 150

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6 5 30

Checks Date Payee Amount

G. Na, Asst. Manager 12/12/17 ABC Co. 1,000
I. Thor, cashier 12/15/17 ABC Co. 500
(I. Thor’s check was returned by the bank because of insufficiency of funds)

Unreimbursed vouchers
Payee Date Account charged Amount
A. Co 12/12/17 Advances to employees 150
B. Na 12/15/17 Supplies 200
C. Da 12/18/17 Freight 300
D. Na 12/19/17 Repairs 480

IOUs Date Amount

E. Na 12/12/17 550
F. Ta 12/15/17 400
P. Cu 12/18/17 250

Additional information:
The balance of the petty cash fund per books is ₱11,000.

Required:
For each of the following independent cases, compute for the following:
1. Petty cash shortage or overage
2. Adjusted petty cash fund balances as of December 31, 2017

CASE NO. 1: Use the above data

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers (150 + 200 + 300 + 480) 1,130
IOUs (550 + 400+ 250) 1,200 8,710
Less: Petty cash accountabilities 11,000
Shortage (2,290)

Requirement No. 2
Coins and currencies 4,880
Check of G. Na 1,000
Adjusted Petty cash fund 5,880

I. Thor’s check was not included because of insufficiency of fund.

CASE NO. 2: With replenishment check, check of customers for collection, stale checks,
post-dated checks
Assume instead that the checks included the following:
Maker Date Payee Amount
Stef Pangilinan, 02/15/17 ABC Co 600
J. Muel, customer 12/15/17 ABC Co 1,00

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G. Ma, bookkeeper 12/15/17 ABC Co 8880
ABC Co 12/15/17 Stef Pangilinan 2,800
ABC Co 12/26/17 Utility Company 1,200
R. Hood, employee 01/15/18 ABC Co 550

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits ( 1,000+880+2,800+1,200) 5,880
Postdated check 550
Stale Check 600
Unreimbursed vouchers 1,130
IOUs 1,200 14,240
Less: Petty cash accountabilities
Petty cash fund balance 11,000
Stale check 600
Payment of utility company 1,200 12,800
Overage 1,440

Requirement No. 2
Coins and currencies 4,880
G. Ma, bookkeeper 880
ABC Co- replenishment check 2,800
Adjusted petty cash fund 8,560

CASE NO. 3: With postage, unused stamps and expenses cash out of PCF after reporting period:

Go back to the original data and assume the following additional information:

Unreimbursed vouchers
Payee Date Account charged Amount
Bureau of Posts 12/12/17 Postage 800
M. Gaddo 01/02/18 Supplies 300

Unused stamps, ₱50

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers (1,130+800+300) 2,230
IOUs 1,200 9,810
Less: Petty cash accountabilities 11,000
Shortage (1,190)

(Unused stamps amounting to ₱50 is not included in the unreimbursed vouchers since there is
already disbursement for postage.)

Requirement No. 2
Coins and currencies 4,880

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Check of G. Na 1,000
Payment of supplies after reporting date 300
Adjusted petty cash fund 6,180

CASE NO. 4: Without postage with unused stamps and expenses cash out of PCF after
reporting period

Go back to the original data and assuming the following additional information:

Unreimbursed vouchers
Payee Date Account charged Amount
M. Gaddo 01/02/18 Supplies 300

Unused stamps, ₱ 50

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers (1,130+800+*50) 1,480
IOUs 1,200 9,060
Less: Petty cash accountabilities 11,000
Shortage (1,940)

*Unused stamps amounting to ₱50 is included in the unreimbursed vouchers since there is no
disbursement for postage.

Requirement No. 2
Coins and currencies 4,880
Check of G. Na 1,000
Payment of supplies after reporting date 300
Adjusted petty cash fund 6,180

CASE NO. 5: With unexpended employees contributions and unclaimed salary (amounts
are intact)

Go back to the original data and assuming the following additional information:
A sheet of paper with names of employees together with contribution for a birthday gift of a co-
employee in the amount of ₱500. The following employees’ pay envelopes have not been opened
and the money still intact. Each envelope was marked “unclaimed.”
J. Masiliyan ₱400
X. Humiwat 200

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers 1,130
IOUs 1,200
Unexpended employees contribution 500

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 Unclaimed salary 600 9,810
Less: Petty cash accountabilities
Petty cash fund balance 11,000
Unexpended employees contribution 500
Unclaimed salary 600 12,100
Shortage (2,290)

Requirement No. 2
Coins and currencies 4,880
Check of G. Na 1,000
Adjusted petty cash fund 5,880

CASE NO.6: With unexpended employees contributions and unclaimed salary-amounts

are not intact

Go back to the original data and assuming the following additional information:
A sheet of paper with names of employees together with contribution for a birthday gift of a co-
employee in the amount of ₱500. The following employees’ pay envelopes have been opened
and the money removed. Each envelope was marked “unclaimed.”
J. Masliyan ₱400
X. Humiwat 200

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers 1,130
IOUs 1,200
Unexpended employees contribution 500 9,210
Less: Petty cash accountabilities
Petty cash fund balance 11,000
Unexpended employees contribution 500
Unclaimed salary 600 12,100
Shortage (2,890)

Requirement No. 2
Coins and currencies 4,880
Less: Unclaimed salary 600
Check of G. Na 1,000
Adjusted petty cash fund 5,280

CASE NO. 7: With cash sales evidenced by sales invoice

Go back to the original data and assuming the following additional information:
Sales invoice (for cash sales, all in cash, no checks)

Invoices Date Amount

#143 12/30/16 2,000
#144 12/31/16 600
#145 01/02/17 2,050

16
Assume that for the purpose of computing the petty cash balances, available cash applies to cash
collections and any remaining amount is for the petty cash fund.

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers 1,130
IOUs 1,200 8,7 10
Less: Petty cash accountabilities
Petty cash fund balance 11,000
Cash sales 4,650 15,650
Shortage (6,940)

Requirement No. 2
Coins and currencies 4,880
Check of G. Na 1,000
Total cash 5,880
Less: Cash sales 4,650
Adjusted petty cash fund 1,230

CASE NO. 8 With cash sales evidenced by sales records and deposits slips

Go back to the original data and assuming the following additional information:
Cash sales of January 2, 2018 amounted to ₱9, 000 per sales records, while cash receipts book
and deposit slip showed that only P8, 000 was deposited in the bank on January 3, 2018.

Requirement No. 1
Petty cash accounted:
Coins and currencies 4,880
Checks for deposits 1,500
Unreimbursed vouchers 1,130
IOUs 1,200 8,7 10
Less: Petty cash accountabilities
Petty cash fund balance 11,000
Undeposited collection (9,000-8,000 deposited) 1,000 12,000
Shortage (3,,290)

Requirement No. 2
Coins and currencies 4,880
Check of G. Na 1,000
Total cash 5,880
Less: Undeposited collection 1,000
Adjusted petty cash fund 4,880

BANK RECONCILIATION
Bank reconciliation is a schedule prepared that accounts for the differences between cash
balances per book and per bank statement. It is prepared only for checking account/ demand
deposit and is usually prepared monthly because the bank provides the depositor with the bank
statement at the beginning (normally first week) of the following month.

17
Forms of Bank Reconciliation
1. Adjusted balance method
2. Book to bank method
3. Bank to Book

Reconciling items:
1) Book reconciling items
a. Credit memos
b. Debit memos
c. Errors
2) Bank reconciling items
a. Deposits in transit
b. Outstanding checks
c. Errors

Deposits in Transit. These are deposits already recorded in the cash books in one period but
were taken up by the bank only in the next period.

Examples:
a) Collections already forwarded to the bank for deposit but too late to appear in the bank
statement.

b) Undeposited collections or those still in the hands of the depositor. In effect these are cash on
hand awaiting delivery to the bank for deposit.

Outstanding Checks. These are checks written and released to payees and are already recorded
in the cash books but are not yet presented for encashment to the bank.

Certified Checks. These are checks that the bank already certified as having sufficiency of fund
and thus technically are no longer outstanding checks.

Debit Memo. These are charges and deductions made by the bank to the account of the company
but not yet recorded by the entity.

Examples:

a. Bank service charges. These include bank charges for interest, collection, checkbook and
penalty.
b. NSF or no sufficient fund checks or Drawn against insufficient funds checks (DAIF). These
are check deposited and already recorded by the bank but subsequently returned by the bank
to the entity because of insufficiency of fund.
c. Technically defective checks. These are checks deposited but returned by the bank because
of technical defects such as absence of signature with erasures, mutilated checks, and conflict
between amount in words and in figures.
d. Payment of loan. This pertains to amount deducted from the current account of the depositor
in payment for loan which the depositor owes to the bank and which has already matured.

Credit Memo. These are collections or deposits made by the bank to the account of the company
but not yet recorded by the entity.

Examples:
a. Collections made by the bank on behalf of the entity.

18
b. Proceeds of the bank loan credited to the account of the entity.
c. Matured time deposits transferred by the bank to the current account of the depositor.

Bank or Depositor (book) Errors. Errors made by the company or the bank that must be
corrected for the reconciliation to balance.

The following are rules for errors assuming the company is using the adjusted balance method
of presenting bank reconciliation:

Effect of the errors Treatment

1. Understatement of cash receipts. Add on the unadjusted cash in bank
balance
2. Overstatement of cash receipts Deduct from the unadjusted cash in
bank balance
3 Understatement of cash disbursements Deduct from the unadjusted cash in
bank balance.
4. Overstatement of cash disbursement Add on the unadjusted cash in bank
balance.

Illustration 1: One –month bank reconciliation

On October 31, 2015, the bank statement for the checking account Driftwood Company shows a
balance of ₱126, 300, while the company’s records show a balance of ₱123,310. Information that
might be useful in preparing bank reconciliation is as follows:

a) Outstanding checks are ₱14,300 which includes a certified check for ₱2, 000.
b) The October 31 cash receipts of ₱7, 850 are not deposited in the bank until November 2.
c) One check written in payment of utilities for ₱1,370 is correctly recorded by the bank but is
recorded by Driftwood as a disbursement of ₱1, 370.
d) In accordance with prior authorization, the bank withdraws ₱6,500 directly from the
checking account as payment of note payable. The interest portion of that payment is ₱500
and the principal is ₱6,000 Driftwood has not recorded the direct withdrawal
e) Bank service charges of ₱240 are listed on the bank statement.
f) A deposit of ₱5, 670 is recorded by the bank on October 31, but it did not belong to
Driftwood. The deposit should have been made to the checking account of Hollybuster
Company, a separate company.
g) The bank statement includes a charge of ₱750 for an NSF check. The check is returned with
the bank statement and the company will seek payment from the customer.

Required:
1. Prepare bank reconciliation as of July 31.
2. Prepare the necessary adjusting journal entries.

SOLUTION:
Requirement No. 1
Bank Book
Unadjusted balances ₱ 126,300 ₱ 123,310
Outstanding check, net of certified checks (12,300) -
Deposit in transit (Undeposited collection) 7,850 -
Book error – disbursement for utilities - 360
Note charged by the bank, including interest - (6,500)
Bank service charge - (2,400)

19
Erroneous bank credit (5,670) -
NSF check - (750)
Adjusted balance ₱ 116,180 ₱ 116,180

Requirement No. 2
The following are the adjusting entries to be recorded in the company’s books. Note that only
book reconciling items are recorded.
ADJUSTING ENTRIES Debit Credit
1) Cash 360
Utilities expense 360
2) Notes payable 6,000
Interest expense 500
Cash 6,500
3) Bank service charge 240
Cash 240
4) Accounts receivable 750
Cash 750

Illustration 2: One- month bank reconciliation

You gathered the following data in the preparation of bank reconciliation on December 31, 2016
for Armelia Company:
a) Balance per bank statement, ₱ 2, 000,000.
b) Balance per book, ₱ 1, 350,000.
c) Bank service charge, ₱ 5,000.
d) Outstanding checks, ₱ 300,000.
e) Deposit in transit, ₱ 237,500.
f) Proceeds of bank loan, December 1, discounted for six months at 12% not recorded on
Armelia Company’s books, ₱ 470,000.
g) Customers checks charged back by bank for lack of countersignature, ₱ 25,000.
h) Check of Joy Company charged by the bank against Armelia account, ₱ 75,000.
i) Customer’s note collected by bank in favor of Armelia Company,
Face amount 200,0000
Interest 20,000
Total 220,000
Less: Service charge 2,500 217,500

j) Deposit of 50,000 incorrectly recorded by bank as, ₱ 5,000.

k) Erroneous debit memo of December 28, to charge Armelia account with settlement of bank
loan, ₱ 100,000.
l) Deposit of Joy Company credited to Armelia account, ₱ 150,000.

Required:
1. Prepare bank reconciliation as of December 31, 2016?
2. Prepare adjusting journal entries except amortization of discount on loans payable.

SOLUTION:
Requirement No. 1
Balance per bank 2,000,000
Add: Deposit in transit 237,500
Understatement of deposit (50,0000-5,000) 45,000
Erroneous bank charge 75,000

20
 Erroneous debit memo 100,000 457,500
Total 2,457,500
Less: Outstanding check 300,000
Erroneous bank credit 150,000 450,0000
Adjusted bank balance 2,007,500
Balance per book 135,000
Add: Proceeds of bank loan 470,000
Note collected by bank 217,500 687,500
Total 2,037,500
Less: Service charge 5,000
Customer’s check charged back 25,000 30,000
Adjusted book balance 2,007,500

Requirement No. 2: Adjusting entries

1) Cash in bank 470,000
discounts on loans payable 30,000
discounts on loans payable 500,000
To record bank loan discount (470,000 divided by (100% minus(12% times 6/12)minus 470,000)
2) Cash in bank 217,500
bank service charge 2,500
interest income 200,000
notes receivable 20,000
To record collection of note and interest income less service charges.
3) Bank service charge 5,000
Cash in bank 5,000
4) Accounts receivable 25,000
cash in bank 25,000
To record check charged back by the bank
PROOF OF CASH (TWO-DATE BANK RECONCILIATION)
Proof of cash of four column bank reconciliation or two date bank reconciliation is an expanded
reconciliation that includes proof of receipts and disbursement.

Formulas:
Deposit in transit beginning XX
Add: Deposit of company made this month XX
Total Deposits to be acknowledge by the bank XX
Less: Deposit acknowledged by the bank this month XX
Deposit in transit, end XX
Outstanding checks beginning XX
Add: checks issued by the company this month XX
Total checks to be paid by the bank XX
Less: checks paid by the bank this month XX
Outstanding check, end XX

Computations of the deposits made by the company and the deposits acknowledged by the
Bank:

Book receipts (Debits) XX Bank receipts (Credits) XX

Less: XX Less: XX
Credit memo last month XX Credit memo last month XX
Book error last month Bank error last month
corrected this month: corrected this month:
Understatement of CR XX Understatement of CR XX
Overstatement of CD XX Overstatement of CD XX

21
 Book errors this month: Bank errors this month:
Overstatement of CR XX Overstatement of CR XX
Add: Understatement of CR XX Add: Understatement of CR XX
Deposits made by the company this Deposits acknowledged by the bank
month XX this month XX

Computations of the checks issued by the company and checks paid by the bank

Book disbursements (Credit) XX Bank disbursement (Debits) XX

Less: Debit memo last month XX Less: Debit memo last month XX
Book errors last month Bank errors last month
corrected this month: corrected this month:
Overstatement of CR XX Overstatement of CR XX
Understatement of CD XX Understatement of CD XX
Book errors this month: Bank errors this month:
Overstatement of CD XX Overstatement of CD XX
Add: Understatement of CD XX Add: Understatement of CD XX
Checks issued by the company this Checks paid by the bank this month
month XX XX

Note:
1) Deposit in transit should exclude customers post dated checks. If this were included and
recorded as receipts for the month, the following treatment will be required by the proof of
cash or bank reconciliation assuming the adjusted balance method is to be used:

Beg. Receipts Disb. End

Unadjusted book balance (XX) (XX)

2) Outstanding checks should exclude the following:

a) Company’s post dated checks.
b) Unreleased or undelivered company’s checks. If this were included and recorded as
disbursements for the month the following treatment will be required in the proof of cash
of bank reconciliation assuming the adjusted balance method is to be used.

Beg. Receipts Disb. End

Unadjusted book balance (XX) XX

Illustration: Computation of deposit in transit

The following data are available for the Cash in Bank of Ellen Company for February of the
current year:
A. Deposit made by the company this February, ₱120,000.
B. Deposit in transit January 31, ₱200,000.
C. Customer's check representing receipts in January amounting to ₱21,000 was erroneously
recorded by the company as ₱12,000.
D. Check of the company in January amounting to ₱2,000 was erroneously recorded by the
company as ₱20,000.
E. Deposit acknowledged by the bank in February, ₱150,000.
F. Erroneous bank charge in January 31, ₱13,000.
G. Erroneous bank credit in February 28, ₱14,000.
H. Customers note collected January 31, ₱10,000.

22
 I. Customers note collected February 28, ₱12,000.

Required: Compute for the following:

1. Deposit in transit February 28
2. Unadjusted book receipts in February
3. Unadjusted bank receipts in February

SOLUTION:
Requirement No. 1
Deposit in transit, January 31 200,000
Add: Deposit made by the company 120,000
Total 320,000
Less: Deposit acknowledge by the bank this month 150,000
Deposit in transit end 170,000

Requirement no. 2
Deposit made by the company February 120,000
Add: credit memo January 31-customers note collected 10,000
Errors in January corrected in February’s book receipts:
Understatement of cash receipts on January for customers’ check (21,000-
12,000) 9,0000
Overstatement of cash disbursement in January for customers check(20,000-
2,000) 18,000
Total unadjusted book receipts 157,000

Note: In computing for the total deposit made by the company this month, assuming the
unadjusted book receipts is given in the problem; simply deduct the ₱10,000 credit memo in
January, the ₱9000 understatement cash receipts in January and the ₱18000 overstatement cash
disbursement this January.

Requirement no. 3
Deposit acknowledged by the bank February 150,000
Add: Credit memo in February 28-Customer’s notes collected 12,000
Errors in January corrected in February's bank receipts:
Overstatement of Cash receipts in January -Erroneous bank charge January 31 13,000
Errors in February affecting bank receipts:
Overstatement of cash receipts in February-Erroneous bank credit February 28 14,000
Total unadjusted bank receipts 189,000

Note: In computing for the total deposits acknowledged by the bank this month, assuming the
unadjusted bank receipt is given in the problem; simply deduct the ₱12,000 credit memo in
February, the ₱13,000overstatement of cash disbursements in January (erroneous bank charge)
and the ₱14,000 overstatement of cash receipts in February arising from erroneous bank credit.

Illustration: Deposit in Transit

In your audit the cash account of Ann Company, you have ascertained the following data relative
to the debits per books and credits per bank:

Book debits in February ₱380,000

Bank credits in February 310,000
Interest earned on the deposits in January but taken up in the books in
February 5,000
Interest earned on the deposits in February but taken up in the books in 6,000

23
March
Collection by the bank for the account of the depositor (this amount was
collected by the bank in January but was taken up in the books of the
depositor in February) 15,000
Loan granted by the bank to the depositor(this amount was
credited by the bank on February 27 but not yet taken up in the books of
the depositor in February) 30,000
Check from customer in January amounting to ₱ 20,000 but was taken up
in the books as 2,000
Check issued to supplier in January amounting to ₱1,000 but was taken up
in the books as 10,000
Erroneous bank credit – February 18,000
Erroneous bank charge-January 10,000
Undeposited collections as of January 31 250,000

Required: Compute for the undeposited collections at the end of February.

SOLUTIONS:
Undeposited collections , January 31 250,000
Add : Deposits made by the company
Book debits 380,000
Less: interest earned in Jan. 5,000
Collection by the bank in Jan. 15,000
Understatement in CR in Jan.( ₱20,0000-₱2,000) 18,000
Overstatement in CD in Jan.( ₱10,000-₱1,000) 9,000 333,000
Total 583,000
Less: deposits acknowledged by the bank
Bank credits 310,000
Less interest earned in Feb 6,000
Loan granted by the bank in Feb. 30,000
Erroneous bank credit-February 18,000
Erroneous bank charge- January 10,000 246,000
Undeposited collection, February 28 337,000

Illustration: Outstanding checks

The following data are available for the cash in bank of Rizza Company for the February of the
current year:
A. Checks issued by the company this February , ₱150,000
B. Outstanding check s, January 31 ₱52,000
C. Customers checks representing receipts January amounting to ₱12,000 was erroneously
recorded by as ₱21,000
D. Check of the company in January amounting to ₱20,000 was erroneously recorded by
the company as ₱2,000
E. Checks paid by the bank in February , ₱130,000
F. Erroneous bank credit in January 31, ₱10,000
G. Erroneous bank charge in February 28 ₱12,000
H. Bank service charge, January, ₱2,000
I. Bank service charge, February, ₱3,000

Required: Compute the following:

1. Outstanding checks in February 28
2. Unadjusted book disbursement in February
3. Unadjusted bank disbursement in February

24
SOLUTION:
Requirement No. 1
Outstanding checks January 31 52,000
Add: checks issued by the company this January 31 150,000
Total 202,000
Less: checks paid by the bank this February 130,000
Outstanding checks end 72,000

Requirement No. 2
Checks issued by the company this February 150,000
Add: debit memo in January 31-bank service charge 2,000
Errors in January corrected in Februarys book disbursement:
Overstatement of cash receipts in January in customers checks(₱21,000-
₱12,000) 9,000
Understatement of cash disbursement in January for customers
check(₱20,000-₱2,000) 18,000
Total unadjusted book disbursement: 179,000

Note: In computing for the total checks issued by the company this month, assuming the
unadjusted book disbursement is given in the problem, simply deduct the ₱2,000 bank service
charge in this January, the ₱9,000 overstatement cash receipts in January and the
₱18,000understatement of cash disbursement in January.
Requirement no. 3
Checks paid by the bank this February 130,000
Add: Debit Memo in February - bank service charge 3,000
Errors in January corrected in February’s bank disbursement:
Overstatement of cash receipts in January(erroneous bank credit January 31) 10,000
Error in February affecting bank disbursement
Overstatement of Cash disbursement in February- Erroneous bank charge
February 12,000
Total unadjusted bank disbursement 155,000

Note: In computing for the total checks paid by the bank this month assuming the unadjusted
bank disbursement is given in the problem simply deduct the ₱3,000 bank service charge in
February, the ₱10,000 overstatement of cash receipts in January (erroneous bank credit) and the
₱18,000 overstatement of cash disbursement in February arising from erroneous bank charge.

Illustration: Outstanding Checks

In the examination of cash account of the Prudylyn Inc. the following information, relative to the
credits per books and debits per banks, were disclosed by the records of the company and its
bank statement with BPI.

Credits per books in February ₱ 200,000

Debits per bank statement in February 150,000
Check from customer in January amounting to ₱2,000 but was taken up in a
book as 20,000
Check issued to supplier in January amounting to ₱10,000 but was taken up in
a book as 1,000
Check issued to supplier in February amounting to ₱12,000 but was taken up
in the book as 21,000
Check of the company recorded in the bank in January as ₱10,000 when the
correct amount is 15,000
25
Amortization of PAG-IBIG housing loan automatically debited by the bank on
January 31, as per automatic debit agreement, but taken up in the books of the
depositor in February. 15,000
Amortization of PAG-IBIG housing loan automatically debited by the bank on
February 28, as per automatic debit agreement, but taken up in the books of the
depositor in March. 15,000
Erroneous bank credit- January 18,000
Erroneous bank-charge- February 10,000
Deposits in January properly recorded by the company as ₱15,000 but was
recorded in the bank as 51,000
Outstanding checks, January 31 15,000
Bank service charge for January 1,000
Bank service charge for February 2,000

Required: compute for outstanding checks at the end of February

SOLUTION:
Outstanding checks January 1 ₱ 15,000
Add: Checks issued by the company this month
Book credits ₱ 200,000
Less: Overstatement of CR in Jan. (20,000-2,000) 18,000
Understatement of CD in Jan.(10,000-1,000) 9,000
Overstatement of CD in Feb. (21,000-12,000) 9,000
Amortization of PAG-IBIG housing loan in Jan. 15,000
Bank service charge January 1,000 148,000
Total ₱ 163,000
Less: Checks paid by the bank
Bank debits ₱ 150,000
Less: Understatement of CD in Jan. (15,000-10,000) 5,000
Amortization of PAG-IBIG housing loan in Feb. 15,000
Erroneous bank credit- January 18,000
Erroneous bank charge – February 10,000
Overstatement of deposit(51,000-15,000) 36,000
Bank service charge –Feb. 2,000 64,000
Outstanding checks February 28 ₱ 99,000

Summary of Treatment for Proof of Cash

Adjusted balance Beg. Ending
Method Balance Receipts Disb. Balance
Cash in bank per books XX XX XX XX
Credit memo- last month XX (XX)
Credit memo-this month XX
Debit memo- last month (XX) (XX)
Debit memo-this month XX (XX)
Adjusted balance methods XX XX XX XX

Notes :
 Ending cash balance is equal to beginning balance plus Receipts minus disbursements.
 “Credit memo last month” was added to the beginning cash balance because the receipts
last month were understated resulting to the understatement of the beginning cash
balance. Also the book receipts during the current month were overstated brought about
by the addition of this “credit memo last month”. Thus “credit memo last month” was

26
 deducted from the books receipts this month.
 The book receipt for the current month and the cash ending balance were understated
because the “credit memo this month” was not added. Thus in the proof of cash
presentation this amount was added both to the book receipts and ending cash balance.
 “Debit memo last month” was deducted from the beginning cash balance because the
disbursement last month were understated resulting to the overstatement of the beginning
cash balance. Also the book disbursement during the current month was overstated
brought about by the addition of this amount. Thus this amount was deducted from the
book disbursement this month.
 The book disbursement for the current month was understated while the cash ending
balance was overstated because the “Debit memo this month” was not added to the book
disbursement. Thus in the proof of cash presentation, this amount was added to the book
disbursements and deducted from ending cash balance.

Adjusted balance Beg. Ending balance

Method Balance Receipts Disb.
Cash in bank per bank XX XX XX XX
DIT- last month XX (XX)
DIT -this month XX
OC- last month (XX) (XX)
OC-this month XX (XX)
Adjusted balance XX XX XX XX
LEGEND: DIT-Deposit in transit; OC-Outstanding check

Notes:
 Ending cash balance is equal to Beginning balance plus receipts minus disbursement.
 “Deposit in transit last month” was added to the beginning cash balance because the
receipts last month were understated resulting to the understatement of the beginning
cash balance. Also, the bank receipts during the current month were overstated brought
about by the addition of this “Deposit in transit last month”. Thus the “Deposit in transit
last month” was deducted from the bank receipts this month.
 The bank receipts for the current month and the cash ending balance were understated
because the “Deposit in transit this month” was not added. Thus, in the proof of cash
presentation this amount was added both to the bank receipts and ending cash balance.
 “Outstanding checks last month” was deducted to the beginning cash balance because the
disbursement last month were understated resulting to the overstatement of the beginning
cash balance. Also, the bank disbursements during the current month were overstated
brought about by the addition of this amount. Thus this amount was deducted from the
bank disbursement this month.
 The bank disbursement for the current month was understated while the cash ending
balance was overstated because the debit memo this month was not added to the bank
disbursement. Thus in the proof of cash presentation, this amount was added to the bank
disbursements and deducted from ending cash balance.

ERRORS (both on books and banks)

The amount to be presented herein is the DIFFERENCE between the correct amount and the
erroneous amount.

Beg. Rec. Disb. End.

1) Errors last month corrected this month:
a) Overstatement of CR (XX) (XX)
b) Understatement of CR XX (XX)
c) Overstatement of CD XX (XX)

27
 d) Understatement of CD (XX)
2) Errors last month not yet corrected this month:
a) Overstatement of CR (XX) (XX)
b) Understatement of CR XX XX
c) Overstatement of CD XX XX
d) Understatement of CD (XX) (XX)
3) Errors this month not yet corrected:
a) Overstatement of CR (net amount) (XX) (XX)
b) Understatement of CR (net amount) XX XX
c) Overstatement of CD (net amount) (XX) XX
d) Understatement of CD (net amount) XX (XX)
Legend: CR-Cash receipts; CD –Cash disbursement

FREQUENTLY ENCOUNTERED TRICKS IN PROOF OF CASH

Note: All amounts are assumed figures. Current month (end) is February while previous period
(beginning) is assumed January.
Adjusted method -BOOK BOOKS February BOOKS
Beg. Rec. Disb. End
1. NSF check amounting to ₱3,399 returned in (3,399) (3,399)
February.
This was deposited in January.
2. NSF checks amounting to ₱8,900deposited in (8,900) (8,900)
February and returned in March. (see note 1)
3. NSF check recorded as reduction of cash
receipts
a. Returned January recorded February ₱ 300 (300) 300
b. Returned February recorded February 500 500
₱500
4. Unrecorded disbursement January corrected in (800) (800)
February ₱800
5. Unrecorded receipts January corrected in 1,000 (1,000)
February ₱1,000
6. Unrecorded disbursement January not yet (1,200) (1,200)
corrected in February ₱1,200
7. Unrecorded receipts January not yet corrected in 1,400 1,400
February ₱1,400
8. Unrecorded disbursement for this month of 1,600 (1,600)
February ₱1,600
9. Unrecorded receipts for the month of February 1,800 1,800
₱1,800
10. Post-dated or unreleased check of the company (2,000) 2,000
included as outstanding checks for the month of
February ₱2,000
11. Post-dated check from customer in February (1,200) (1,200)
recorded as receipts in February ₱1,200
12. Cancellations of company’s checks recorded by 2,600 (2,600)
a reduction of cash disbursements , ₱2,600
13. Check of the company issued in January was 2,700 2,700

28
 mutilated and returned by a payee. A
replacement check was issued. both checks
were entered in the check register but no entry
was made to cancel the mutilated check ₱2,700
( in addition this should not be included as part
of outstanding checks in January)
14. Check issued in January was included in the 2,700 2,700
outstanding checks in January was recorded for
₱3,000 but when the bank statement was
received in February the correct amount of this
check is ₱300. No correction was made in
February. (₱300 should be included as
outstanding checks in January)
15. The company issued a stop payment order to the (3,200) (3,200)
bank in February for check issued in February
which was not received by the payee. A new
check was written and recorded in the check
registered in February. the old check was
written off by a journal entry also in February
₱3,200

Adjusted method -BANK BANK February BANK

Beg. Rec. Disb. End
1. Customers NSF checks returned by bank in January (3,400 3,400
and redeposit and cleared in February(no entry in )
January and February) ₱ 3,400
(1,000) (1,000)
2. Payment directly from the collections (paid out in
currency) ₱1,000
3. Erroneous bank credit made in February corrected (3,100) (3,100
by debit disbursement also in February ₱3,100 )
4. Customers dishonored checks in February recorded (2,400) (2,400
as reduction of cash receipts the dishonored checks )
are redeposited also in February and are recorded as
regular receipts ₱2,400
5. NSF check amounting to ₱2,000 returned this (2,000) (2,000
month and redeposited this month ( no entry was )
recorded in the books both on the return and
redeposit)

Note: This is the traditional treatment in the textbooks. However, as the check received by the
company was returned due to insufficient funds effectively the company did not receive payment
at all. Thus in actual practice, the amount of returned check should be deducted from the bank
balance end and from the book receipts and added back to the receivables as these are still
collectible from the customer.

PAID OUT IN CURRENCY (PAYMENT OUT OF COLLECTION)

According to imprest system, all cash collection received by the company should be deposited
intact to the bank, and all disbursement, should be made through the use of check, except for

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payment of small and miscellaneous items. Therefore payment directly out of the collection is a
violation of this internal control. For purposes of accounting all the receipts and disbursement
during a certain period, the following treatment should be presented in the proof of cash
presenting starting from the unadjusted cash balance bank:

Beg. Rec. Disb. End.

Unadjusted cash in bank – bank XX XX XX XX
Paid out of the collection XX XX

Note that in the presentation, the payment out of collection is assumed have been deposited in
the bank and a check was issued for the payment.

Illustration: proof of cash

Data concerning the cash records of Lyndon company for the months of September and October
2016 follow:

a. Unadjusted book balance on September 30 amounted to ₱2,258,000

b. Total receipts per book in October ₱1,400,000
c. Total disbursement per book in October ₱2,400,000
d. Unadjusted bank balance on September 30 amounted to ₱2,100,000
e. Total credits per bank in October amounted to ₱1,200,000
f. Total debits per bank in October amounted to ₱2,500,000
g. NSF checks on September 30 amounted to ₱60,000 while on October 31 amounted to
₱40,000
h. Collection of accounts receivable not recorded by the company on September 30 , ₱30,000
and ₱50,000 on October 31
i. Erroneous bank charge on September 30 , ₱10,000 and ₱18,000 on October 31
j. Erroneous bank credit on September 30, ₱7,000 and ₱9,000 on October 31.
k. Understatement of check in payment of rent payable on September 30, ₱90,000 and
₱120,000 on October 31.
l. Deposit in transit on September 30, ₱130,000
m. Outstanding checks on October 31, ₱30,000

Required: Based on the above data answer the following questions

1. How much is the deposit in transit October 31?
2. How much is the outstanding check September 30?
3. How much is the adjusted cash in bank balance September 30?
4. How much is the adjusted cash receipts during October?
5. How much is the adjusted cash in bank balance October 31?
6. Provide the adjusting journal entries.

SOLUTION
Requirement No. 1
Deposit in transit beginning ₱130,000
Add: Deposits made by the company
Bank receipts ₱1,400,000
Less:Credit last month 30,000 1,370,000
Total ₱1,500,000
Less: Deposits acknowledged by the bank
Bank receipts ₱1,200,000
Less:Credit memo this month 50,000

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 Erroneous bank charge – September 10,000
Erroneous bank charge –October 9,000 1,131,000
Deposit in transit, end ₱ 369,000

Requirement No. 2
Outstanding checks beginning (squeeze) ₱95,000
Add: checks issued by the company ₱2,400,000
Book disbursement ₱60,000
Less: Debit last month 1,370,000
Understatement of check in payment rent in
September ₱90,000
Add: Understatement of check in payment of rent -
October ₱120,000 2,370,000
Total 2,465,000
Less: Checks paid by the bank
Bank disbursement ₱2,500,000
Less: Debit memo this month 40,000
Erroneous bank charge –October 18,000
Erroneous bank charge – September 7,000 2,435,000
Outstanding checks end ₱30,000

Requirement Nos. 3-5

Balance October Balance
Sep.30 Receipts Disbursement October 31
Bank bal. 2,100,000 120,000 250,000 80,000
Deposit in transit
Sep 30 130,000 (130,000)
Oct 31 369,000 369,000
Outstanding checks
Sep 30 (95,000) (95,000)
Oct 31
Erroneous bank charge
Sep 30 10,000 (10,000)
Oct 31 (18,000) 18,000
Erroneous bank credit
Sep 30 (7,000) (7,000)
Oct 31 (9,000) (9,000)
Adjusted bal. ₱2,138,000 ₱1,420,000 ₱2,400,000 ₱1,258,000

Balance October Balance

Sep.30 Receipts Disbursement October 31
Book bal. 2,258,000 140,000 240,000 1,258,000
NSF checks
Sep 30 (60,000) (60,000)
Oct 31 40,000 (40,000)
Credit memo
Sep 30 30,000 (30,000)
Oct 31 50,000 50,000
Understatement of

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checks in payment (90,000) (90,000)
Sep 30
12,000 (12,000)
Oct 31
Adjusted bal. ₱2,138,000 ₱1,420,000 ₱2,410,000 ₱1,148,000

Requirement No. 6: adjusting entries Debit Credit

1. Accounts receivable 40,000
Cash in bank 40,000
2. Cash in bank 50,000
Accounts receivable 50,000
3. Rent payable 120,000
Cash in bank 120,000

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