CASH AND CASH EQUIVALENT

DEFINITIONS

• Cash
Includes money and any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.

Standard medium of exchange and the basis of accounting

measurements.

MEASUREMENT OF CASH

• Cash
We measure cash at face value.

• Cash in foreign currency

Measured at the current/spot exchange rate

(A spot exchange rate is the current price level in the market to directly exchange one
currency for another, for delivery on the earliest possible value date.)

IMPORTANT POINTS

• CASH

1. No specific standard, only guidance in PAS 1, par. 66, also tackled in PFRS 9 (we
should measure cash at fair value)
2. UNRESTRICTED in use – readily available in payment of current obligations
and not be subject to any restrictions.

CASH ITEMS
A cashier's check is a check guaranteed by a bank,
• CASH ON HAND drawn on the bank's own funds and signed by a cashier.

• Coins and currencies (centavos, pesos)

• Undeposited cash collections
• Other cash items awaiting deposit (e.g. customer’s check, cashier’s or
manager’s check, traveler’s checks, bank drafts and money orders)

• CASH IN BANK A manager's check is a secure check that a bank

• Demand deposit/checking account issues for an individual who has purchased it.
- non interest bearing accounts
• Savings deposit - bears interest and may be able to use for current purposes
• CASH FUND – set aside for current purposes
• Petty Cash Fund - purpose: for miscellaneous or small expenditures
• Revolving Fund - purpose: for change (sinsilyo), cash advance
• Payroll Fund - purposes of payroll
• Dividend Fund - distributions

A bank draft is a guarantee by bank to advance

funds on the demand by the party to whom the draft
was directed.

EXAMPLES OF NON-CASH ITEMS

1. Postdated checks received – checks dated at a future date (treated as receivable)

- receivable

December 27, 2019 December 31, 2019 January 6,2020

Date check was received Year End Date of Check

BPI Philippines December 27, 2019

Date: December 27, 2019
Cash 100,000
Pay to the order of Mr. X amounting to PHP 50,000. A/R 100,000

Sgd. Customer

RCBC December 31, 2019

Date: December 29, 2019
A/R 20,000
Pay to the order of Mr. X amounting to PHP 30,000. Cash 20,000

Sgd. Customer

BPI Philippines January 06, 2020

Date: January 6, 2020
Cash 20,000
Pay to the order of Mr. X amounting to PHP 20,000. A/R 20,000

Sgd. Customer

EXAMPLES OF NON-CASH ITEMS

1. Postdated checks received – checks dated at a future date (treated as receivable)
2. IOUs or advances to employees (treated as receivable)
3. Unused postage stamps (treated as prepaid supplies)
4. Cash funds for noncurrent purposes - bond sinking fund

CASH FUND

• Examples of funds for noncurrent purposes:

• Sinking fund - set aide or build up in order to accumulate your liability
• Redemption fund
• Contingent fund - for long term purpose
• Insurance fund - fund allotted for the insurance

CLASSIFICATION OF CASH FUND

• Should parallel the classification of the related liability (except the fund for the
acquisition of noncurrent asset)

FOREIGN CURRENCY

• If not subject to any foreign exchange restriction – CASH

• If subject to foreign exchange restriction – noncurrent asset

UNRELEASED/UNDELIVERED CHECKS

• These are checks drawn and recorded but not given to the payee before the end of the
reporting period.

December 27, 2019 December 31, 2019 January 6, 2020

Date check was drawn Year end Date check was released/delivered

BPI Philippines Dec. 27, 2019

Date: December 27, 2019 Journal Entry to record check
drawn to pay liability:
Pay to the order of Supplier amounting to PHP 50,000.
Sgd. Mr. X A/P 50,000
Cash 50,000
December 31, 2019
Adjusting entry to restore the cash balance and set up the liability:

Cash 50,000
A/P 50,000
January 06, 2020
Journal entry to record release of check:

A/P 50,000
Cash 50,000

UNRELEASED/UNDELIVERED CHECKS

• These are checks drawn and recorded but not given to the payee before the end of the
reporting period.

• Reason: These checks are still subject to entity’s control and may be cancelled any time
before delivery at the discretion of the entity.

POSTDATED CHECKS DELIVERED

• These are checks drawn, recorded and already given to the payee but bear dates
subsequent to the end of reporting period.

• Adjusting entry to restore the cash balance and set up the liability:

Cash xxx
Appropriate Account xxx

• Reason: No payment until the check can be presented to the bank for encashment or
deposit.

STALE CHECKS

• These are checks not encashed by the payee within relatively long period of time
(banking practice: within six months from the time of issuance; but still a matter of entity
policy)

• If immaterial, adjusting entry is as follows:

Cash xxx
Miscellaneous Income xxx

• If material, adjusting entry is as follows:

Cash xxx
Appropriate Account xxx
REMEMBER!!!

• Cash – readily available for UNRESTRICTED USE

• Postdated check received is not cash but a receivable; postdated check drawn is cash at
the end of reporting date.
• Undelivered check drawn is cash at the end of reporting date.
• Stale check is cash at the end of reporting date.

DEFINITION

• Cash equivalents
(Philippine Accounting Standards 7, par. 6) 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 value because of changes in interest rates.

Acquired THREE MONTHS BEFORE MATURITY

IMPORTANT POINT

• CASH EQUIVALENTS

1. Only highly liquid investments that are ACQUIRED THREE MONTHS BEFORE
MATURITY can qualify as cash equivalents.

EXAMPLES OF CASH EQUIVALENTS

• Three-month BSP treasury bill

A short-term obligation issued by the government at a discount.

• Three-year BSP treasury bill purchased three months before date of maturity
• Three-month time deposit

A form of bank deposit normally made in fixed denomination,

bears interest higher than that of regular deposits, and has a
pre-agreed maturity. This is evidenced by a certificate deposit.

• Three-month money market instrument or commercial paper

Investment in portfolios Short-term, unsecured, notes

payable issued in large denominations by large
companies with high credit
ratings to other companies
and institutional investors of
short-term securities.
Equity securities (investments in stocks) CANNOT QUALIFY as cash equivalents – do
not have MATURITY DATE

Preference shares with specified redemption date – can qualify

FINANCIAL STATEMENT PRESENTATION

Continental Ltd.
Comprehensive Statement of Financial Position
As of 30 June 2018

2018 2017
Current Assets
Cash 95,000 105,000
Accounts Receivable 330,000 150,000
Allowance for Doubtful Debt (20,000) (10,000)
Inventory 270,000 260,000
Prepaid Insurance 10,000 5,000

Non - Current Assets

Land 540,000 480,000
Equipment 587,000 585,000
Accumulated Dep. - Equipment (332,000) (245,000)
TOTAL ASSETS 1,480,000 1,330,000

Current Liabilities
Accounts Payable 190,000 360,000
Wages Payable 64,000 52,000
Dividends Payable 24,000 16,000

Non - Current Liabilities

Borrowings 746,000 488,000
TOTAL LIABILITIES 1,024,000 916,000
Net assets 456,000 414,000

Shareholders’ equity
SHARE CAPITAL 250,000 240,000

Cash and Cash Equivalents

First line item under current assets
INVESTMENT OF EXCESS CASH

• Cash equivalents – term: 3 months or less; included in “cash and cash equivalents”
• Short-term financial asset – term: more than 3 months but within one year; presented
separately as current assets
• Long-term investments – term: more than one year; presented as noncurrent unless
they become due within one year from the end of the reporting period

COMPENSATING BALANCE - maintaining balance

• This generally takes the form of minimum checking or demand deposit account balance
that must be maintained in connection with borrowing arrangement with a bank.

• Classification:
• Not legally restricted (as to withdrawal) - part of cash; informal compensating
balance agreement
• Legally restricted – formal compensating balance agreement; (a) “cash held as
compensating balance” under current assets if related to short-term loan; or (b)
“noncurrent investment” if related to long- term loan

ACCOUNTING FOR PETTY CASH FUND

PETTY CASH FUND: IMPREST VS. FLUCTUATING FUND SYSTEM

Definitions:
• Petty Cash Fund – money set aside to pay small expenses which cannot paid
conveniently by means of check.

• Imprest System – system control of cash which requires all cash receipts should be
deposited intact and all cash disbursements should be made by means of check.

• Fluctuating Fund System – system where checks drawn to replenish the fund do not
necessarily equal petty cash disbursements.
IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM

• Drawing of check to establish the fund • Drawing of check to establish the fund

Petty Cash Fund xxx Petty Cash Fund xxx

Cash in Bank xxx Cash in Bank xxx

• Payment of expenses out of the fund • Payment of expenses out of the fund

No journal entries. Various Expenses xxx

Petty Cash Fund xxx
Only memorandum entries in the
petty cash journal. • Replenishment of petty cash payments

Signed petty cash vouchers Petty Cash Fund xxx

generally required. Cash in Bank xxx

• Replenishment of petty cash payments Replenishment check may or may not be

equal to the petty cash disbursements
Various Expenses xxx
Cash in Bank xxx • At the end of the reporting period, no
adjustment is necessary because petty
Usually equal to the petty cash cash expenses are recorded outright.
disbursements; replenishment by means
of check and not from undeposited
collections.

• Adjustment of unreplenished expenses

to state the correct petty cash balance at
year end.

Various expenses xxx

Petty Cash Fund xxx

To be reversed at the beginning of the

next accounting period.
 CASH OVERAGE/ CASH SHORTAGE

Accounting for Cash Shortage/Overage

Cash Shortage Cash Overage

Cash count is less than the balance per book. Cash count is more than the balance
per book.
Suspense account: Suspense account:
Cash short or over Cash short or over

To record cash shortage: To record cash shortage:

Cash short or over xxx Cash xxx

Cash xxx Cash short or over xxx

To close suspense account: To close suspense account:

Due from cashier xxx Cash short or over xxx

Cash short or over xxx Miscellaneous income xxx
Or Or
Loss from cash shortage xxx Cash short or over xxx
Cash short or over xxx Payable to cashier xxx

Concealment of Cash Shortages

1. Lapping – occurs when collection of receivable from one customer is misappropriated

and then concealed by applying a subsequent collection from another customer.

Dec. 29 Cashier collected P10,000 from customer A, put money in her purse, and
made no journal entry.

Dec. 3 Cashier went on a date with security guard and spent all money.

Jan. 01 Cashier collected P15,000 from customer B, put P5,000 in her purse and
made the following journal entry:

Cash 10,000
Accounts receivable – Mr. A 10,000

Jan. 05 Mr. Auditor came to audit and confirmed only “material” accounts. Lapping
wasn’t detected. Mr. Auditor was happy that audit was finished. Cashier was
happier (LOL – lapping out loud); planned a date with security guard of
another building.
2. Kiting – occurs when cash shortage is concealed by overstating the balance of cash.
This is made possible by exploiting the float period (i.e. the time it takes for a check to
clear at the bank where it was drawn).

Dec. 23 Bookkeeper drew P100,000 check from Metrobank account for herself. No
journal entry was made.

Dec. 25 Bookkeeper encashed check and spent all money shopping at SM.
Dec. 31 Fearing auditors would detect the fraud, the bookkeeper:

a. Drew unrecorded check of P100,000 from BPI account and

deposited it to Metrobank account. The shortage was concealed because
Metrobank increased the account balance upon deposit while the check
drawn did not yet clear at BPI (not yet deducted) until the following
month. No entry was made until after year-end.
b. Prepared bank reconciliation for BPI account showing no
outstanding check.

3. Window dressing – in a broad sense, this is a form of fraudulent financial reporting and
not primarily a method of concealing cash shortages. This occurs when books are not
closed at year-end and transactions in the subsequent period are deliberately recorded in
the current period in order to improve the entity’s financial performance or financial
ratios.

Bank overdraft

Credit Balance of Cash (i.e. issuance of checks in excess of the deposits)

Should be classified as current liability and should not be an offset against

other bank accounts with debit balances, EXCEPT:

1. When the entity maintains 2 or more accounts in the same bank;

2. When overdraft is immaterial; and
3. Per IFRS, when overdraft is payable on demand and often fluctuates from positive to
negative as an integral part of cash management.

In the Philippines, generally overdrafts are not permitted.