UNIVERSITY OF CALOOCAN CITY – NORTH

BACHELOR OF SCIENCE IN ACCOUNTANCY

LECTURE
WEEK#
Cash & Cash Equivalents
Cash- In accounting parlance, it connotes more than money. It includes any other negotiable instrument
that is payable in money and acceptable by bank for deposit and immediate encashment.

Gen. Rule: For an item to be classified as such, it should be Unrestricted.

Cash items included in cash

a. Cash on hand- This includes cash collections and other cash items awaiting deposit such as
customer’s checks, cashier’s or manager’s checks, traveler’s checks, bank drafts and money
orders.
b. Cash in bank- This includes demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.
c. Cash fund- set aside for current purposes such as petty cash fund, payroll fund, and dividend
fund.

Cash equivalents
PAS7- Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes in value.

An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition.
Examples:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial paper

Equity Investments are excluded from cash equivalents unless they are, in substance, cash equivalents,
for example preferred shares acquired within a short period of their maturity and with a specified
redemption date.

Bank borrowings are generally considered to be financing activities. However, in some countries, bank
overdrafts which are repayable on demand form an integral part of an entity’s cash management.
Hence, bank overdrafts are included as a component of cash and cash equivalents.

Cash flows are excluded movements between items that constitute cash or cash equivalents.

Important Points to Consider:

1. Cash should be measured at face Value.
2. Cash in Foreign currency should be translated to Philippine peso using current exchange rate.
3. Deposits in foreign countries/foreign banks which are not subject to any foreign exchange
restriction can be included as part of cash.
4. Deposit in foreign countries/foreign banks which are subject to any exchange restriction should
be presented as part of noncurrent assets with disclosure, if material.
 UNIVERSITY OF CALOOCAN CITY – NORTH
BACHELOR OF SCIENCE IN ACCOUNTANCY
LECTURE
WEEK#
Financial Statement Presentation- The caption “cash and cash equivalents” should be shown as the first
line item among current asset.
The details comprising the “cash and cash equivalents” should be disclosed in the notes to financial
statements.

Cash Fund for a certain purpose

If the cash fund is set aside for use in current operations or for the payment of current obligation, it is
current asset. It is included as part of cash and cash equivalents.
On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent
obligation, it is shown as long-term investment.

Classification of Cash Fund

The classification of cash fun as current or noncurrent should parallel the classification of related
liability.
For example, a sinking fund that is set aside to pay a bond payable shall be classified as current asset
when the bond payable is already due within one year after the end of reporting period.
However, a cash fund set aside for the acquisition of noncurrent asset should be classified as noncurrent
regardless of the year of disbursement.

Bank Overdraft- When the cash in bank account has a credit balance, it is said to be an overdraft. The
credit balance in the cash in bank account results from the issuance of checks in excess of deposits.
Gen. Rule: A bank overdraft is classified as current liability
● Within the same bank- regardless of materiality, Offsetting is allowed.
● Not within the same bank-
-Material/silent- Offsetting is not allowed
-Immaterial- Offsetting is allowed

Compensating Balance
A compensating balance generally takes the form of minimum checking or demand deposit account
balance that must be maintained in connection with borrowing arrangement with a bank.
● Unrestricted: part of cash and cash equivalent
● Restricted
-Result of short-term loan: part of current assets
-Result of long-term loan: part of noncurrent assets

Undelivered or Unreleased Check

An undelivered or unreleased check is one that merely drawn and recorded but not given to the payee
before the end of reporting period.

Postdated Check delivered

A postdated check delivered is check drawn, recorded and already given to the payee but it bears a date
subsequent to the end of reporting period.

Stale Check or Check Long Outstanding

A stale check is a check not encashed by the payee within a relatively long period.
 UNIVERSITY OF CALOOCAN CITY – NORTH
BACHELOR OF SCIENCE IN ACCOUNTANCY
LECTURE
WEEK#
Accounting for Cash Shortage
Where the cash count shows cash which is less than the balance per book, there is cash shortage to be
recorded as follows:
Temporary Entry If the cashier or custodian is held Failure to disclose the cause of
responsible shortage
Cash short or over xxx Due from cashier xxx Loss from cash shortage xxx
Cash xxx Cash short or over xxx Cash short or over xxx
Accounting for Cash Overage
Where the cash count shows cash which is more than the balance per book, there is cash overage to be
recorded as follows:
Temporary Entry Cash overage if there is no claim If cash overage is found to be
money of the cashier
Cash xxx Cash short or over xxx Cash short or over xxx
Cash short or over xxx Miscellaneous Income xxx Payable to cashier xxx

Petty Cash Fund

The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by
means of check.
Two methods of handling petty cash:
a. Imprest fund system
b. Fluctuating fund system

Imprest System
The imprest sytem is a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursement should be made by means of check.

Fluctuating Fund System

The system is called “fluctuating fund system” because the checks drawn to replenish fund do not
necessarily equal to petty cash disbursements.

Petty Cash System:

Nature of Transaction Imprest Fund System Fluctuating Dividend

a. Establishment of fund
b. Payment of Expenses
c. Replenishment of Fund
d. Adj. for unreplenished
expenses
Dr. Petty Cash Fund xxx Dr. Petty Cash Fund xxx
Cr. Cash in Bank xxx Cr. Cash in Bank xxx
Memo Entry Dr. Expenses xxx
Cr. Petty Cash Fund xxx
Dr. Expenses xxx Dr. Petty Cash Fund xxx
Cr. Cash in bank xxx Cr. Cash in Bank xxx
Dr. Petty Cash Fund xxx N/A
Cr. Cash in Bank xxx
 UNIVERSITY OF CALOOCAN CITY – NORTH
BACHELOR OF SCIENCE IN ACCOUNTANCY
LECTURE
WEEK#

Theory
1. Deposits in foreign bank which are subject to foreign exchange restriction should be classified
a) Separately as current asset with appropriate disclosure.
b) Separately as noncurrent asset with appropriate disclosure.
c) Be written off as loss.
d) As part of cash and cash equivalents.
2. All of the following can be classified as cash and cash equivalents, except
a) Redeemable preference shares acquired and due in 60 days.
b) Commercial papers held and due for repayment in 90 days.
c) Equity Investments
d) Bank Overdraft
Problems
1. Argentian Company reported the following accounts on December 31, 2017:
Cash on hand 1,000,000
Petty cash fund 50,000
Security Bank current account 2,000,000
PNB current account 1,500,000
BDO Current account (overdraft) (200,000)
BSP treasury bill- 120 days 3,000,000
BPI time deposit- 90 days 2,000,000
Bond sinking fund 2,500,000
● The cash on hand included a customer postdated check of P 150,000 and postal money
order of P50, 000.
● The petty cash fund included unreplenished petty cash vouchers for 10,000 and
employee check for P 5,000 dated January 31, 2018.
● The BPI time deposit is set aside for acquisition is set aside for acquisition of land to be
made in early January 2018.
● The bond sinking fund is set aside for payment of bond payable due December 31, 2018.
Required:
1. Prepare adjusting entries on December 31, 2017.
2. Compute the total amount of cash and cash equivalents.

SOLUTION:
1. Journal Entries:
a. Accounts Receivable 150,000
Cash 150,000
b. Expenses 10,000
Receivable from Employee 5,000
Petty cash fund 15,000

Cash on hand 1,000,000

Postdated check (150,000)
 UNIVERSITY OF CALOOCAN CITY – NORTH
BACHELOR OF SCIENCE IN ACCOUNTANCY
LECTURE
WEEK#
Adj. Cash on hand 850,000

Petty cash fund 50,000

Unreplenished petty cash expenses (10,000)
Postdated employee check (5,000)
Adj. Petty cash fund 35,000

Cash on hand P 850,000

Petty cash fund 35,000
Security Bank current account 2,000,000
PNB current account 1,500,000
Bond sinking fund 2,500,000
Total Cash &Cash Equivalents P 6,885,000