Cash and Cash

Equivalents
 Topic Learning Objectives
• Describe the nature and composition of cash and
cash equivalents
• Determine how Cash and cash equivalents are
measured and recognized in the accounting
records
• Present and disclose Cash and cash equivalents in
the financial statements
“For better or worse, cash
is the oxygen of your
business, and you can't
last long in any
environment without it.”

Neil Blumenthal
 What is Cash?
● From a layman’s point of view, it means money, which is the
standard medium of exchange in business transactions.
● In accounting, ”cash” means more than the term “money”:
○ Money
○ Checks

○ Bank Drafts
○ Money Orders

■ However, POSTDATED checks are not considered

cash since these are unacceptable by banks for
deposit.
Unrestricted Cash
● Take note: There is no specific accounting standard that
deals with cash.
● PAS 1 (Presentation of Financial Statements): An entity
shall classify an asset as current when the asset is cash or
a cash equivalent unless it is restricted to settle a liability
for more than twelve months after the end of reporting
period.
● Therefore, to be reported as ”cash”, an item must be
unrestricted in use.
● Meaning, the cash item must be readily available in
payment of obligations and must NOT be subject to any
restrictions.
General Items Included in Cash

Cash on Cash in Cash

Hand Bank Fund
 Cash on Cash in Cash
Hand Bank Fund

Includes undeposited Cash deposited in a Set aside for current

cash collections and bank that must be purposes, which is
other cash items unrestricted as to usually for day-to-day
awaiting deposit. withdrawal. operations.

1. Customers’ checks 1. Demand deposit 1. Petty cash fund

2. Cashier’s checks 2. Checking account 2. Payroll fund
3. Manager’s checks, 3. Savings account 3. Dividend fund
4. Traveler’s checks 4. Interest fund
5. Bank drafts 5. Travel fund
6. Money orders 6. Tax fund
Cash Equivalents
● PAS 7 (Statement of Cash Flows)
○ Cash equivalents are short-term and highly liquid investments that
are readily convertible into cash.
○ Their maturity is so near that they present insignificant risk of
changes in value because of changes in interest rates.
○ Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents.
● Examples:
○ 3-month BSP Treasury Bill
○ 3-year BSP Treasury Bill purchased 3 months before date of
maturity
○ 3-month time deposit
○ 3-month money market instrument or commercial paper
Cash Equivalents
● Take note:
○ Equity securities CANNOT qualify as cash equivalents
because they have no maturity date.
■ EXCEPTION: Preference shares with (1) specified
redemption date AND (2) acquired 3 months before
redemption date.
○ Hence, it is important that the date of purchase should be
three months or less before maturity.
○ This follows that it is NOT classified as cash equivalent if
the company purchased a BSP treasury bill but such
treasury bill was purchased one year before its maturity.
 Measurement of Cash
● Cash is measured at face value.
● If cash is of foreign currency, it is measured at the current
exchange rate.
● If cash is held by a bank or financial institution, which is in
bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.
 Presentation in the FS
● The line item “Cash and Cash Equivalents” should be shown as the first
line item under current assets.
● Cash and Cash Equivalents include the total amount of ALL cash items.
This means that it includes the following:
○ Cash on Hand
○ Cash in Bank
○ Cash Funds
○ Cash Equivalents
● Again, remember that these items should be considered as unrestricted
in use.
● The details (i.e. specific items of cash) comprising the Cash and cash
equivalents must be disclosed in the Notes to the FS.
Presentation in the FS
Presentation in the FS
 Cash Fund
● If the cash fund is set aside for use in current operations or
for payment of current liabilities, it is considered as part of
Cash and Cash Equivalents.
○ It is a current asset.
● However, if the cash fund is set aside for noncurrent purpose
or payment of noncurrent liabilities, it is considered as a
long-term investment and it is NOT part of Cash and Cash
Equivalents.
○ It is a noncurrent asset.
Cash Fund: Classification
If the Cash Fund Then the Classification
Examples
is Related to a of Cash Fund is
Current 1. Petty Cash fund
liability/purpose 2. Payroll fund
Current Asset
(i.e. will be settled 3. Travel fund
(i.e. part of Cash and Cash
within one year from 4. Interest fund
Equivalents)
end of the reporting 5. Dividend fund
period) 6. Tax fund
Noncurrent
1. Sinking fund
liability/purpose
2. Preference Share Redemption fund
(i.e. will be settled
Noncurrent Asset 3. Insurance fund
beyond one year
4. Fund for acquisition/construction of
from end of the
Plant, Property and Equipment (PPE)
reporting period)

Hence, the classification of cash fund (whether current or noncurrent)

should parallel the classification of the related liability/purpose.
Cash Fund: Classification Example

March 1, 2021

Amount: P50,000,000
Maturity: December 31, 2025

ear
1y
t h an
r e
Mo
December 31, 2021
Sinking Fund: P10,000,000 for the issued
bonds maturing December 31, 2025 NCA
Cash Fund: Classification Example

March 1, 2021

Amount: P50,000,000
Maturity: December 31, 2025

“Cash and Cash

year Equivalents”
n 1
ithi
W
December 31, 2024
Sinking Fund: P40,000,000 for the issued
bonds maturing December 31, 2025 CA
 Investment of Excess Cash
● Control and proper use of cash is an important aspect of
cash management.
● The rule is that the entity must maintain sufficient cash
for use in current operations.
● However, as part of business strategy, it is possible that the
entity will invest temporarily in some type of revenue
earning investment.
● Reason: Earn interest income
● Forms of temporary investment include: (1) time deposits;
(2) money market instruments; and (3) treasury bills.
Investment of Excess Cash: Classification
TERM CLASSIFICATION
Cash and Cash Equivalents
3 months or less (i.e. part of the line item
Cash and Cash Equivalents)

More than 3 months; Less Short-Term Financial Assets

than 1 year (i.e. part of current assets)

Long-Term Investments
(i.e. part of non-current assets)
More than 1 year
NOTE: However, if the investment become due within one
year from the end of the reporting period, they are reclassified
as ST Financial Assets (i.e. as part of current asset)
 Bank Overdraft
● Happens when cash in bank account has a credit balance.
○ Remember that in your basic accounting, cash has a normal
balance of debit.
● Bank overdraft occurs when there is issuance of checks in excess of
the deposit.
○ Example: Company A issued a check amounting to P1,000,000;
however, its savings account only has P800,000 balance.
Therefore, there is an overdraft amounting to P200,000.
● Classification of Bank Overdraft: Current Liability
○ This because the entity issuing the check has the obligation to
pay for the excess amount.
 Bank Overdraft
● Moreover, a bank overdraft should NOT be offsetted against
the balance of other bank accounts with debit balances.
○ This means that if there is a bank overdraft, such
overdraft must be presented separately as a current
liability.
● Example: Drake Company maintains two bank accounts:
○ Toosie Bank Account – with credit balance of
P100,000
○ Slide Bank Account – with debit balance of
P1,000,000.
Bank Overdraft: Example

Cash – P900,000 (CA)

Cash – P1,000,000 (CA)

Overdraft – P100,000 (CL)
 Bank Overdraft
● However, there is are exceptions to the prohibition on
offsetting of bank overdraft. These are:
1. When an entity maintains two or more accounts in one
bank and one account can be offset against the other
bank account with debit balance.
2. An overdraft can also be offset against other bank
account if the amount is NOT material.
3. Under IFRS, bank overdraft can be offset against other
bank account when payable on demand and often
fluctuates from positive to negative as an integral part
of cash management.
 Compensating Balance
● Compensating balance: minimum checking or demand
deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.
● Example: Utang Corporation borrows P20M from Galante
Bank. As part of the borrowing agreement, Utang agreed to
maintain a 10% (P2M) minimum compensating balance in a
demand deposit account.
○ Effectively, it is as if Utang Corporation borrowed only
P18M as it cannot withdraw the 10% or P2M
compensating balance.
 Compensating Balance: Classification
NATURE CLASSIFICATION

Deposit is NOT LEGALLY

Cash and Cash Equivalents
RESTRICTED as to withdrawal by
(Part of the cash balance, i.e. current asset)
the borrower

Cash Held as Compensating Balance

(Part of current assets IF the related loan is short-
term)
Deposit is LEGALLY RESTRICTED
as to withdrawal by the borrower
However, if the related loan is long-term, the
compensating balance is classified as noncurrent
investment, i.e. noncurrent asset.
Checks
TYPE DEFINITION/NATURE ADJUSTING ENTRY
• Merely drawn and recorded but not given to the
payee before the end of the reporting period.
• There is really no payment if the check is
pending delivery to the payee at the end of the
Undelivered or Cash XXXX
reporting period.
Unreleased Check Accounts Payable XXXX
• Reason: The undelivered/unreleased check is
still subject to the payor’s control and may be
canceled anytime before delivery at its
discretion
• Check drawn, recorded and already given to the
payee but it bears a date after the end of the
reporting period.
Postdated check Cash XXXX
• Effectively, the effect of this type of check is
delivered Accounts Payable XXXX
similar to an undelivered/unreleased check
since there is no actual payment made at the
end of the accounting period.
Checks
TYPE DEFINITION/NATURE ADJUSTING ENTRY
• A check that is NOT encashed by the payee
within a relatively long period of time.
• Determination of “reasonable time” would
depend on the nature of the instrument, usage If amount is IMMATERIAL:
of trade or business. Cash XXXX
• The law does not specifically state a definite Misc. Income XXXX
Stale Check period within which checks must be presented.
• But general banking practice dictates that a If amount is MATERIAL:
check becomes stale if not encashed within 6 Cash XXXX
months from the time of issuance. Accounts Payable XXXX
• However, if the entity has a different practice,
such practice must be followed to determine if
the check has become stale
 Accounting for Cash Shortage or Overage

● There are instances when a company encounters shortage or

overage of cash.
● Cash shortage = Cash count < Cash balance per book/records

● Cash overage = Cash count > Cash balance per book/records

● When either cash shortage or cash overage happens, there is a

need to adjust the balance of cash.
 Adjusting Entries: Cash Shortage
Entry 1 (Entry to adjust the cash balance
because of the shortage)
Cash Short or Over XXXX
Cash XXXX

Entry 2A (Entry if the cashier/cash

custodian was held responsible of the
shortage)
Due from cashier XXXX
Cash Short or Over XXXX

Entry 2B (Entry if reasonable efforts fail to

disclose the cause of the shortage)
Loss from cash shortage XXXX
Cash Short or Over XXXX
 Adjusting Entries: Cash Overage
Entry 1 (Entry to adjust the cash balance
because of the Overage)
Cash XXXX
Cash Short or Over XXXX

Entry 2A (Entry if the cashier/cash

custodian properly identified as the owner
of the excess cash)
Cash Short or Over XXXX
Payable to Cashier XXXX

Entry 2B (Entry if there is no claim on the

excess cash)
Cash Short or Over XXXX
Miscellaneous Income XXXX
Imprest System
● 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.
● But practically speaking, using checks in all
transactions is impossible.
● As such, it may be more economical and convenient
to pay in cash rather than issue checks.
Imprest System
● 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.
● But practically speaking, using checks in all
transactions is impossible.
● As such, it may be more economical and convenient
to pay in cash rather than issue checks.
● This would result to the establishment of the so-
called Petty Cash Fund.
Petty Cash Fund
● It is the money set aside to pay small expenses, which
cannot be paid conveniently through checks.
● There are two methods of handling petty cash, to wit:
1. Imprest Fund System – the method usually
followed in handling petty cash transactions; the
checks drawn to replenish the fund is equal to the
petty cash disbursements.
2. Fluctuating Fund System – the checks drawn to
replenish the fund do not necessarily equal the
petty cash disbursements.
 Imprest Fund System: Journal Entries
TRANSACTION JOURNAL ENTRY/EXPLANATION

1. Check is drawn to establish Petty Cash Fund XXXX

the petty cash fund (PCF) Cash in Bank XXXX

2. Payment of expenses out of NO ENTRY; the petty cashier generally requires a signed petty cash voucher for such
the fund payments and simply prepares memorandum entries in the petty cash journal.

Whenever the PCF fund runs low, a check is drawn to replenish the fund. This check (called
replenishment check) is usually equal to the petty cash disbursements. It is at this time that
3. Replenishment of Petty the petty cash disbursements (no. 2) are recorded.
Cash Payments
Expenses XXXX
Cash in Bank XXXX
Expenses XXXX
4. Adjustment of the
Cash in Bank XXXX
unreplenished expenses in
order to state the correct petty
The abovementioned adjusting entry is to be reversed at the beginning of the next accounting
cash balance
period.
Petty Cash Fund XXXX
5. Increase in the PCF
Cash in Bank XXXX
Cash in Bank XXXX
6. Decrease in the PCF
Petty Cash Fund XXXX
 Fluctuating Fund System: Journal Entries
TRANSACTION JOURNAL ENTRY/EXPLANATION

1. Check is drawn to establish Petty Cash Fund XXXX

the petty cash fund (PCF) Cash in Bank XXXX (Same with the Imprest Fund System)
Expenses XXXX
Petty Cash Fund XXXX
2. Payment of expenses out of
the fund
Under this system, the disbursements from the PCF are immediately recoded (different from
the Imprest Fund System)
Petty Cash Fund XXXX
Cash in Bank XXXX
3. Replenishment of PCF
Take note that the replenishment check may or may not be the same as the petty cash
disbursements (hence the term “fluctuating”)
4. Adjustment of the
unreplenished expenses in NO adjustment is necessary because the petty cash expenses are recorded outright (see
order to state the correct petty entry no. 2)
cash balance
Petty Cash Fund XXXX
5. Increase in the PCF
Cash in Bank XXXX (Same with the Imprest Fund System)
Cash in Bank XXXX
6. Decrease in the PCF
Petty Cash Fund XXXX (Same with the Imprest Fund System)
 Sources
ü Intermediate Accounting Volume 1
Valix, Peralta, Valix

ü Google Images

ü Slides Go Website
Thank
you!