CASH AND CASH EQUIVALENTS

GENERAL RULE: Current Liability / Borrowings

CASH – in accounting parlance, it connotes more than money. If it’s repayable on demand, it will form as an integral part of an
It includes any other negotiable instrument that is entity's cash management then it is included as a component of
payable in money and acceptable by bank for deposit cash and cash equivalents. A characteristic of such a banking
and immediate encashment arrangement is that the bank balance often fluctuates from being
positive to overdrawn
General Rule: For an item to be classified as such, it should be
UNRESTRICTED!  within the same bank– regardless of materiality
- OFFSETTING IS ALLOWED
Exceptions:
 not within the same bank –
1. used to pay expenses for current operations (i.e payroll fund) - material / silent
OFFSETTING IS NOT ALLOWED
2. used to pay currently maturing obligations (i.e. sinking fund
securing bonds payable due in one year after BS date) - immaterial
OFFSETTING IS ALLOWED
Composition of Cash

a. Cash on Hand – undeposited cash collections, bank drafts and Compensating Balance
money orders
- minimum checking account balance that must be
b. Cash in Bank maintained as a result of loan arrangement
b.1. demand deposit / current account - can be interest-bearing or non-interest bearing
b.2 savings deposit
 UNRESTRICTED – part of cash and cash equivalents
c. Cash Fund – set aside for current purposes  RESTRICTED
- Result of short term loan – part of current assets
INVESTMENT OF EXCESS CASH - Result of long term loan – part of noncurrent
assets
1. 3 months or less – cash equivalents
Anomalies over Cash
2. More than 3 months but within one year – short term
investments 1. Window Dressing
3. More than 1 year – long term investments 2. Lapping
3. Kiting

CASH EQUIVALENTS
– short term highly liquid investments that are readiy convertible
into cash and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates
- are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
RULES: (in order of priority)
1. Term should be 3 months only
2. Should be acquired 3 months prior to maturity
(Example: Time deposit with term of 1 year with due date of Feb
1, 2017 but acquired on November 1, 2016)
Accounting for Cash Shortage/Overage
 Material – receivable from /payable to
 Immaterial – other income/other expense
Internal Control over Cash
1. Segregation of Duties – i.e. treasury and recording function
2. Rotation of Jobs among personnel
3. Imprest System – a. deposits daily of collections
b. disbursement thru checks
c. basis of petty cash system

Important Points to Consider: 4. Bank Reconciliation – applicable only to demand deposit /

1. Cash should be measured at FACE VALUE current account

2. Cash in foreign currency should be translated to Philippines

pesos using CURRENTE EXCHANGE RATE
MISCELLANEOUS ITEMS
3. Deposits in foreign countries / foreign banks which are not
1. Postdated Checks
subject to any foreign exchange restriction can be included as part
of CASH 2. Undelivered Checks

4. Deposits in foreign countries / foreign banks which are subject 3. Stale Checks
to any foreign exchange restriction should be presented as part of
noncurrent assets with disclosure, if material

Bank overdraft
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Cash and Cash Equivalents Aljon J. Roque, CPA, MBA
Petty Cash System

Nature of Transactions Imprest Fund System Fluctuating Fund System

a. Establishment of Fund Dr. Petty Cash Fund xxx

Dr. Petty Cash Fund xxx
Cr. Cash in Bank xxx
Cr. Cash in Bank xxx

b. Payment of Expenses MEMO ENTRY in Petty Cash Journal

Dr. Expenses xxx
Cr. Petty Cash Fund xxx

c. Replenishment of Fund Dr. Expenses xxx

Dr. Petty Cash Fund xxx
Cr. Cash in Bank xxx
Cr. Cash in Bank xxx

d. Adjustment for unreplenished

expenses Dr. Expenses xxx
NOT APPLICABLE
Cr. Petty Cash Fund xxx

BANK RECONCILIATION - process of matching the balances in an

entity's accounting records for a cash account to the
corresponding information on a bank statement.

The goal of this process is to ascertain the differences between

the two, and to book changes to the accounting records as
appropriate.

1. BANK RECONCILITING ITEMS

 Deposits in Transit
 Oustanding Checks
 Errors

2. BOOK RECONCILITING ITEMS

 Credit Memo
 Debit Memo
 Errors

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Cash and Cash Equivalents Aljon J. Roque, CPA, MBA