Financial Instrument is any contract that gives rise
to a financial asset of one entity and a financial
liability or equity of another entity.
CASH AND CASH EQUIVALENTS
Financial asset is any asset that is:
● Cash
● An equity instrument of another entity
● A contractual right:
- To receive cash or another financial
asset from another entity
- To exchange financial assets or
financial liabilities with another entity
under conditions that are potentially
favorable to the entity
● A derivative:
- Its value changes in response to
change in specified interest rate,
commodity price, financial instrument
price, foreign exchange rate, price index,
credit rating or credit index, or other
variables
- It requires no initial net investment, or
initial net investment smaller than the
required in similar contracts
- It is settled at a future date.
Cash as Financial Asset
Items of cash on hand (COH)
● Customer’s checks awaiting deposit
● Undeposited cash collections (currencies
such as bills and coins)
● Traveler’s check
● Cashier’s / Official / Treasurer’s /
Manager’s checks
● Postal money orders (A demand credit
instrument
● issued and payable by a post office
● Bank drafts (a written order addressed to
the bank to pay an amount of money to
the order of the maker)
Items of cash in bank (CIB)
● Demand deposit/ Commercial Deposit/
Current account/ Checking account
- Generally non-interest bearing
- Withdrawable by checks against bank
● Savings account
- Generally non-interest bearing
- Deposit is issued an ATM card or
passbook
- Withdrawable in ATM station or within
the bank
Items of cash fund for current operations
● Change fund
● Payroll fund
● Purchasing fund
● Revolving fund
● Interest fund
● Petty cash fund
● Dividend fund
● Travel fund
● Tax fund
| CASH EQUIVALENTS
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. Only highly liquid investments that are
acquired three months before maturity can
qualify as cash equivalents.
Cash equivalents
● Time Deposit (if the problem is silent)
● Money Market Instrument or Commercial
● Paper (if the problem is silent)
● Treasury Bills
● Redeemable preference shares with
● mandatory redemption period and
● acquired three months before maturity.
Treatment for cash and cash equivalents:
Originally invested/acquired for more than three
months before date: Remaining term is three
months or less from the reporting date =
Short-term investments
Originally invested/acquired for more than three
months before date: Remaining term is more
than three months but within one year
= Short-term investments
Originally invested/acquired for more than three
months before date: Remaining term is more
than one year
= Long-term investments
Originally invested/acquired for three months or
less before maturity date
= Cash Equivalents
COMPLICATIONS:
● Cash in foreign currency
Should be translated to Philippine peso using the
exchange rate at the end of the reporting period
(closing rate).
● Deposit in foreign bank
If Unrestricted – Cash
If Restricted – Separately reported
● Cash in closed/bankrupt bank
Receivables – should be written down to its
recoverable amount
● Bank overdraft
Current Liability – cannot be offset against a
positive balance in another bank account with the
same bank, UNLESS there is a right of offset exists
between the bank and the depositor.
● Compensating balance
Not legally restricted – Cash
Legally restricted – Separately reported If the
problem is silent it is assumed not legally restricted
● Undelivered checks
REVERTED back to Cash and Accounts payable.
● Post dated checks delivered
If company own PDC – reverted to Cash and
Accounts Payable;
If Customer’s postdated check – not yet cash
(Accounts Receivable)
● Stale checks (own)
If company own Stale checks – Reverted to Cash
and A/P
If Customer’s Stale checks - Reverted to Accounts
Receivable
● IOUs (I owe you) - Receivable
● Equity Securities - Investment
● Redeemable preference shares
- Preference shares with specified redemption date
and acquired three months before redemption date
are classified as cash and cash equivalents
● NSF/DAUD/DAIF - Reverted to
Receivables
● Reverted to Receivables
- Reverted to Receivables
● Postage Stamps
- Office supplies or prepaid expense
 PCF two methods:
● Unrecorded cash - Imprest fund system
If unrecorded cash disbursements – Credit to - Fluctuating fund system
cash
If unrecorded cash receipts – Debit to cash Comparison of journal entries:
1. To establish the fund:
Imprest Fund System:
| CASH MANAGEMENT Petty cash fund xxx
Cash in bank xxx

A. Segregation of duties for handling

Fluctuating System:
cash and recording cash transactions
Petty cash fund xxx
Cash in bank xxx
B. Imprest system - usually used related to
2. Payment of expenses:
petty cash fund.
Imprest Fund System:
- All cash receipts must be deposited
Memo entry in the petty cash journal
immediately to the bank.
- Except for internal cash funds like petty
Fluctuating System:
cash, make all disbursements by check.
Expenses xxx
Petty cash fund xxx
C. Voucher system - a method for
3. Replenishment of Petty cash fund
authorizing disbursement of cash. A
Imprest Fund System:
voucher is filled out that identifies what is
Expenses xxx
to be paid, the amount to be paid and the
Cash in bank xxx
account number to be charged. The
voucher needs to be approved, before
Fluctuating System:
the responsible person is authorized to
Expenses xxx
issue the payment.
Petty cash fund xxx
D. Fraudulent Practices
4. To adjust the unreplenished expenses:
- Window dressing
Imprest Fund System:
- Lapping
Expenses xxx
- Kiting
Petty cash fund xxx
- Skimming
Fluctuating System:
CASH AND CASH EQUIVALENTS
Expenses xxx
| PETTY CASH FUND Petty cash fund xxx
Imprest System - All cash receipts are deposited 5. Increase in the fund:
intact and all cash payments should be made by Imprest Fund System:
means of checks. However, it is impractical for Petty cash fund xxx
the company to make each payment through Cash in bank xxx
check. Therefore, a Petty Cash Fund is Fluctuating System:
established to cover small and miscellaneous Petty cash fund xxx
expenditures. Cash in bank xxx
6. Decrease in the fund RECONCILING ITEMS
Imprest Fund System:
Cash in bank xxx - Items recorded in the company’s books but not
Petty cash fund xxx yet by the bank.

Fluctuating System: - Items recorded by the bank but not yet

Cash in bank xxx
Petty cash fund xxx
Cash short or Over
Cash over or Short account is used as a plug
(misc. exp or misc. rev) when the petty cash
fund fails to turn out to be satisfactory.
Replenishment will be the total expense + cash
shortage and less the cash overage.
| BANK RECON
➢ a schedule explaining any differences
between the bank’s and the company’s records
of cash.
➢This process brings into agreement the
company’s accounting records for cash and the
bank statement issued by the company’s bank.
➢ PURPOSE:
- explains the difference between the balances
reported by the company and by the bank on a
given date
- proves the accuracy of both the company’s and
the bank’s records, and reveals any errors made
by either party.
- can help detect attempts at theft and
manipulation of records.
- establishes the adjusted ending cash balance
and provides information to be used for the
adjusting entries.
recorded in the company’s books
- Errors made either by the company or the bank
ITEMS RECORDED IN THE COMPANY’S
BOOKS BUT NOT YET BY THE BANK
1. Deposit in transit.
DIT Beg xx
Cash receipts reflected in the company’s records
(it should exclude charges to cash account result
from bank credit memos in the previous month)
xx
Deposits during the month as reflected in the
bank statement (it should exclude bank credit
memos for the current month) (xx)
Deposit in transit, ending xx
2. Outstanding checks
OST checks, beg XX
Checks drawn by the company during the month
(it should exclude credits for bank debit memos
of theprevious month) XX
Checks paid during the month as reflected in
then bank statement (it should exclude bank
debit memos of the current month) (XX)
Outstanding checks, ending XX
ITEMS RECORDED BY THE BANK BUT NOT
YET RECORDED IN THE COMPANY’S
BOOKS

1. Credit Memorandum.
The collection of receivables (e.g. loan
receivable and related interest) may be made by
a bank on behalf of the company.
2. Debit Memorandum. The charges made by a Understated Disbursements
bank on behalf of the company. • Deduct from the unadjusted cash in bank
balance
➢ No Sufficient Fund (NSF) or Drawn Against
Uncleared Deposits (DAUD) or Drawn Against Overstated Deposits
Insufficient Fund (DAIF) checks. • Deduct from the unadjusted balance per bank
➢ Bank Service Charge. statement
➢ Other auto-debit transactions
Understated Deposits
ERRORS MADE BY THE COMPANY • Add from the unadjusted balance per bank
Overstated Receipts statement
• Deduct from the unadjusted cash in bank
balance Overstated Charges
• Add from the unadjusted balance per bank
Understated Receipts statement
• Add from the unadjusted cash in bank balance
Understated Charges
Overstated Disbursements • Deduct from the unadjusted balance per bank
• Add from the unadjusted cash in bank balance statemenT

| FORMS OF BANK RECONCILIATION

1. Adjusted balance method.
the book balance and the bank balance are brought to the correct cash balance that must be presented
in the statement of financial position.

2. Book to Bank method.

the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank
balance.
3. Bank to book method.
the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book
balance.

| PROOF OF CASH

❖ A proof of cash or the four-column bank reconciliation 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.
❖A proof of cash can also uncover instances of fraud.
❖The proof of cash is also a most powerful tool to identify the fraudulent technique known as kiting and
lapping.