1.3.1.

The Concept of Cash and Cash Equivalents

Cash is the most liquid of all assets of the company and is used as the medium of exchange in
most business transactions.   It is also used for measurement of items recognized in the financial
statements.  In accounting, cash has a broader meaning than just referring to money. Cash
includes money and any other negotiable instrument that is payable in money and acceptable by
the bank for deposit and immediate credit.  Cash must be unrestricted for use and considered to
be a current asset under IAS 1, par 66 which classifies assets as current when “the asset is cash or
a cash equivalent (as defined in IAS 7) unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.”
Cash and Cash Equivalent is presented in the statement of financial position to include the
following common items:
 
1. Cash items. The following forms of cash must be currently available, negotiable and
unrestricted.   Items included under Cash on Hand must be scrutinized as to fitness of bills and
coins, legal dates of negotiability of checks and drafts, and technical compliance. 
Deposit accounts must be unrestricted and consideration to be me made with regards to treatment
of overdraft, compensating balance, and aggregation of balances of deposits. Cash funds on the
other hand are deposits for special purpose that is set aside for use in current operation.  
Examples:
1. Cash on hand
o Undeposited cash (bills and coins)
o Customers’ checks
o Cashier’s or manager’s checks
o Traveller’s checks
o Bank drafts
o Money orders
o Foreign currencies (readily convertible to peso and unrestricted)
2. Cash in Bank
o Demand deposit or checking account
o Savings deposited (unrestricted a to withdrawal)
3. Cash fund
o Payroll fund
 o Petty cash fund
o Dividend fund
o Travel fund
o Interest fund
o Tax fund.
 
2. Cash Equivalents as defined by IAS 7, par 6 as “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.” The investment must be acquired three
months (or less) before its maturity in order for it to be considered as cash equivalents. Any
investment with maturity of more than three months but within one year will be considered as
short-term financial asset. If maturity is more than one year, then considered as long-term
investments.
 Examples:
1. Three-month BSP treasury bill
2. Three-year (or longer) BSP treasury bill purchased three months before date of maturity.
3. Three-month time deposit
4. Three-month money market instrument or commercial paper
 
Measurement of Cash
Cash is measured at face value.  In instances where cash is deposited in banks or financial
institutions, cash may be subjected to write down to net realizable value when the bank of
financial institution holding the cash is experiencing financial difficulty or bankruptcy.  In the
case of foreign currencies included in Cash, it is translated to Philippine pesos at the current
exchange rate.
Bank Overdraft
There are generally two types of deposit accounts in the bank, savings account and checking
account (demand deposit).   Deposits in savings account are withdrawable over the counter by a
withdrawal slip (ATM card for some) while deposits in checking accounts are done through the
issuance of checks.   Some banks offer combination of savings and checking account, where a
depositor makes deposit to savings account and withdraw by check.  
When the company issues check, it is with understanding that the check is funded (enough
deposit for withdrawal).   The payee of the check can go the bank to encash the check, or deposit
the check to their bank account.   If the issued check is unfunded, or that the deposit is less than
the amount indicated in the check, a bank overdraft occurs.   The bank account will reflect a
negative balance.   If taken in combination with other cash, the negative balance will actually
reduce the reported cash balance.    The company should therefore classify the overdraft amount
as current liabilities
 
Example:
The Cash in Bank balances of BABA Company show the following accounts:
 
              Cash in Bank – A Bank                  P  130,000
              Cash in Bank – B Bank                      200,000
              Cash in Bank – C Bank                     ( 50,000)         
              Net Cash Balance                          P  280,000
 
The correct cash balance that should be reported will be P330,000 and recognize a liability of
P50,000.
             Cash in Bank                                  P 330,000
              Bank Overdraft (liability)                  50,000
 
Exception to Bank Overdraft
Bank overdrafts are included as a component of cash if such overdrafts are repayable on demand
and are an integral part of a company's cash management a(such as the common practice of
establishing offsetting arrangements against other accounts at the same bank). Offsetting of
overdrafts may be allowed when an entity maintains two or more accounts in one bank and one
account has an overdraft.  It is allowed to offset the overdrafts against other bank accounts if the
amount is immaterial. 
 
Compensating Balance
A compensating balance is “that portion of any demand deposit (or any time deposit or
certificate of deposit) maintained by a company which constitutes support for existing borrowing
arrangements of the company with a lending institution. Such arrangements would include both
outstanding borrowings and the assurance of future credit availability.”  Classification of
compensating balance depends on the following:
 
 1. Deposit – not legally restricted as to withdrawal, the compensating balance is part of
cash.
2. Deposit – legally restricted because of formal compensating balance agreement, the cash
is reported separately as “cash held as compensating balance” either as current (if related
loan is current) or non-current (if related loan is long term).
 
Check Issuances
When an entity issues check, it should normally be recorded as a reduction in cash in bank
balance.  The entity passes the following entry:
 
Accounts Payable (or appropriate account)                       P xxx                  
              Cash                                                                                            P  xxx
                                          
However, the following considerations must be made:
1. Undelivered or unreleased check – representing written or drawn check but not yet
given to the payee before the end of the reporting period. It represents no payment made,
thus adjusting entry must be made to restore the cash balance and set up the liability:
Entry:
Cash                                                                                            P xxx
              Accounts Payable (or appropriate account)                          P xxx
 
        The entry will be reversed on the date when check is delivered to the payee.
2. Postdated check delivered. This represents a check drawn and given to the payee, but
the date on the check is in the future.  Since the check is not currently negotiable, no
entry crediting cash will be made, even if the check is already in the hands of the payee. 
The entry will be made on the date written on the check, debiting accounts payable and
crediting cash.
3. Stale check or check long outstanding. The check is considered stale when the payee
has not encashed or deposited the check for collection in a long period of time.   The
banking practice in the Philippines considers check not encashed or presented for
payment within six months from the date of issuance.  Therefore, if the check is
presented to the bank after six months, the bank will not honor the check.   The payee can
request replacement of the check from the issuer.   For long outstanding checks, where
 payee can no longer be contacted, the entity may record miscellaneous income, if
immaterial in amount:
 
   Cash                                                                                            P xxx
                  Miscellaneous Income                                                             P xxx
 
              If amount is material:
   Cash                                                                                            P xxx
                   Accounts Payable                                                                      P xxx
 
Accounting for Cash Shortage or Over
Periodic verification of cash balances (actual and books) should be made.  Any difference
between actual count (for cash on hand) against the ledger balance should be recorded.  
Verification may indicate actual cash count greater than balance per book.  If no error in
recording has been made, then a cash overage is indicated. Therefore the following entry will be
made:
 
                             Cash                                                                              P xxx
                                           Cash Short or Over                                                    P xxx
If no claims to the cash overage, the Cash Short or Over account will be closed to miscellaneous
income at the end of the year.  Thus:
                             Cash Short or Over                                                    P xxx
                                           Miscellaneous Income                                               P xxx
If the cash count however reveals cash on hand less than the balance in the book, it may indicate
cash shortage, thus entry is:
 
                             Cash Short or Over                                                    P xxx
                                           Cash                                                                               P xxx
Depending on the policy of the entity on handling cash shortages, at the end of the accounting
period, the following entries may be made:
 
Charge the shortage to cashier:
                             Due from Cashier                                                      P xxx
                                           Cash Short or Over                                                     P xxx
 
Charge to operations:
                             Loss from cash shortage                                          P xxx
                                           Cash Short or Over                                                     P xxx

Illustration A. Composition of Cash and Cash Equivalents Account

The following information regarding cash was gathered from Pinuno Company as of December
31, 2020:
 

Current account at Metro-Bacolod Bank   2,000,000.00

Current account at Bank of the Philippines -    100,000.00

Payroll account      500,000.00

Dollar bank account (restricted, in equivalent peso)   1,000,000.00

Postage stamps          1,000.00

Employees' postdated check          4,000.00

IOU from cashier's sister        10,000.00

Credit memo from a supplier for a purchase return        20,000.00

Traveler's check        50,000.00

Check returned by bank stamped  Insufficient Funds        15,000.00

Postal Money Order        30,000.00

Petty Cash fund (P4,000 in currency and expense receipts for P6,000)        10,000.00

Treasury bills, due 3/31/2021 (purchased December 29, 2020)      200,000.00

Treasury bills, due 1/31/2021 (purchased February 1, 2020)      300,000.00

                            
How much should be reported as Cash and Cash Equivalent as of December 31, 2020?
 
Solution:

Current account at Metro-Bacolod Bank   2,000,000.00

Payroll account      500,000.00

Traveler's check        50,000.00

Postal Money Order        30,000.00

Petty Cash fund (P4,000 in currency only)          4,000.00

Treasury bills, due 3/31/2021 (purchased December 29,

     200,000.00
2020)

Total Cash and Cash Equivalents   2,784,000.00

 
Explanation to accounts not included:
1. Current account at Bank of the Philippines – overdraft, therefore current liabilities.
2. Foreign bank account (restricted) – other noncurrent asset
3. Postage stamps – Office Supplies
4. Employee’s postdated check – Trade and other receivables (advances made by employee)
 5. IOU from cashier’s sister – Trade and other receivables (should not be allowed, charge to
cashier)
6. Credit memo from supplier for a purchase return – deduction from accounts payable and
included in the computation of Cost of Sales.
7. Returned check stamped Insufficient funds – Check issued by the customer with
insufficient funds - Trade and other receivables.
8. Petty Cash Fund expense receipts of P6,000 – record as operating expenses
9. Treasury bills, due 1/31/2021 (purchased 2/1/2020) – Short term investment.
 
Illustrations B. (E7.1).  The controller for Wallaby plc is attempting to determine the amount of
cash and cash equivalents to be reported on its December 31, 2019, statement of financial
position. The following information is provided.
1. Commercial savings account of £600,000 and a commercial checking account balance of
£800,000 are held at First National Bank of Olathe.
2. Money market fund account held at Volonte Co. (a mutual fund organization) permits
Wallaby to write checks on this balance, £5,000,000.
3. Travel advances of £180,000 for executive travel for the first quarter of next year
(employee to reimburse through salary reduction).
4. A separate cash fund in the amount of £1,500,000 is restricted for the retirement of long-
term debt.
5. Petty cash fund of £1,000.
6. An I.O.U. from Marianne Koch, a company customer, in the amount of £150,000.
7. A bank overdraft of £110,000 has occurred at one of the banks the company uses to
deposit its cash receipts. At the present time, the company has no deposits at this bank.
8. The company has two certificates of deposit, each totaling £500,000. These CDs have a
maturity of 120 days.
9. Wallaby has received a check that is dated January 12, 2020, in the amount of £125,000.
10. Wallaby has agreed to maintain a cash balance of £500,000 at all times at First National
Bank of Olathe to ensure future credit availability.
11. Wallaby has purchased £2,100,000 of commercial paper of Sergio Leone Co. which is
due in 60 days.
12. Currency and coin on hand amounted to £7,700.
Instructions
A. Compute the amount of cash (and cash equivalents) to be reported on Wallaby plc's statement
of financial position at December 31, 2019.
B. Indicate the proper reporting for items that are not reported as cash on the December 31, 2019,
statement of financial position.
 
Solutions:
A. Cash includes the following:
     Commercial savings account—   First National Bank of Olathe                            £   600,000
     Commercial checking account—First National Bank of Olathe                                  800,000
     Money market fund—Volonte                                                                                     5,000,000
     Petty cash                                                                                                                             1,000
     Commercial paper (cash equivalent)                                                                           2,100,000
     Currency and coin on hand                                                                                                 7,700
     Cash reported on December 31, 2019, statement of financial position              £8,508,700
 
B. Other items classified as follows:
1. Travel advances (reimbursed by employee) * should be reported as receivable—
employee in the amount of £180,000.
2. Cash restricted in the amount of £1,500,000 for the retirement of long-term debt should
be reported as a noncurrent asset identified as “Cash restricted for retirement of long-term
debt.”
3. An IOU from Marianne Koch should be reported as a receivable in the amount of
£150,000.
4. The bank overdraft of £110,000 should be reported as a current liability.**
5. Certificates of deposits of £500,000 each should be classified as temporary investments.
6. Postdated check of £125,000 should be reported as an accounts receivable.
7. The compensating balance requirement does not affect the balance in cash. A note
disclosure indicating the arrangement and the amounts involved should be described in
the notes.
*If not reimbursed, charge to prepaid expense.
**If cash is present in another account in the same bank on which the overdraft occurred,
offsetting is required.
 
Illustration C. Everlast Company reported the following information at the current year-end:
 Investment securities of P1,000,000. These securities are share investments in entities
that are traded in the Philippine Stock Exchange.  As a result, the shares are very actively
traded in the market.
 Investment securities of P2,000,000. These securities are government treasury bills.  The
treasury bills have a 10-year term and purchased on December 31 at which time they had
two months to go until they mature.
 Cash of P3,400,000 in the form of coin, currency, savings account and checking account.
 Investment securities of P1,500,000. These securities are commercial papers. The term of
the papers is nine months and they were purchased on December 31 at which time they
had three months to go until they mature.
What total amount should be reported as cash and cash equivalents at the current year-end?
 
Solutions:
Government treasury bills                                                     P 2,000,000
Cash                                                                                            3,400,000
Commercial papers                                                                    1,500,000
Total cash and cash equivalents                                             P 6,900,000
 
The share investments are not included as it do not have a maturity.
The commercial paper is money market placements.

1.3.2. Cash Internal Control and The Petty Cash Fund

The Imprest Petty Cash System
Almost every company finds it necessary to pay small amounts for miscellaneous expenses such
as taxi fares, minor office supplies, and employee's lunches. Disbursements by check for such
items is often impractical, yet some control over them is important. A simple method of
obtaining reasonable control, while adhering to the rule of disbursement by check, is the imprest
system for petty cash disbursements (Kieso, et.al. 2019).
 
Accounting for Petty Cash Fund under Imprest System:
1. The company designates a petty cash custodian, and gives the custodian a small amount of
currency from which to make payments. It records transfer of funds to petty cash as:
Petty Cash fund                             300
Cash in Bank                                                300
2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays
cash, attaching evidence of the disbursement to the petty cash receipt. Petty cash transactions are
not recorded until the fund is reimbursed; someone other than the petty cash custodian records
those entries.
3. When the supply of cash runs low, the custodian presents to the controller or accounts payable
cashier a request for reimbursement supported by the petty cash receipts and other disbursement
evidence. The custodian receives a company check to replenish the fund. At this point, the
company records transactions based on petty cash receipts.
Supplies Expense                              42
Postage Expense                               53
Miscellaneous Expense                    76
Cash Over and Short                          2
           Cash in Bank                                                 173
4. If the company decides that the amount of cash in the petty cash fund is excessive, it lowers
the fund balance as follows.
Cash in Bank                                                 50
           Petty Cash Fund                                              50
Subsequent to establishment, a company makes entries to the Petty Cash account only to increase
or decrease the size of the fund.  A company uses a Cash Over and Short account when the petty
cash fund fails to prove out. That is, an error occurs such as incorrect change, overpayment of
expense, or lost receipt. If cash proves out short (i.e., the sum of the receipts and cash in the fund
is less than the imprest amount), the company debits the shortage to the Cash Over and Short
account. If cash proves out over, it credits the overage to Cash Over and Short. The company
closes Cash Over and Short only at the end of the year. It generally shows Cash Over and Short
on the income statement as an “Other expense or revenue.”
5. There are usually expense items in the fund except immediately after reimbursement.
Therefore, to maintain accurate financial statements, a company must reimburse the funds at the
end of each accounting period and also when nearly depleted. At the end of the accounting
period, it is necessary to adjust the unreplenished expenses in order to state the correct petty cash
balance:
Expenses                                         xxx
              Petty Cash Fund                                           xxx
The adjustment is to be reversed at the beginning of the next accounting period. The reversal is
made in order that the normal replenishment procedures may be followed by simply debiting
expenses and crediting cash in bank without distinguishing whether the expenses pertain to the
current period or prior period.
Under the imprest system, the petty cash custodian is responsible at all times for the amount of
the fund on hand either as cash or in the form of signed receipts. These receipts provide the
evidence required by the disbursing officer to issue a reimbursement check. Further, a company
follows two additional procedures to obtain more complete control over the petty cash fund:
1. A superior of the petty cash custodian makes surprise counts of the fund from time to
time to determine that a satisfactory accounting of the fund has occurred.
2. The company cancels or mutilates petty cash receipts after they have been submitted for
reimbursement, so that they cannot be used to secure a second reimbursement.
 
Fluctuating Fund System
Under the fluctuating fund system, the checks drawn to replenish the fund do not necessarily
equal the petty cash disbursements.  The replenishment check drawn is upon the request of the
petty cash custodian.  The petty cash disbursements are immediately recorded thus:
 
1. Establish the Fund:
Petty cash fund                                            xxx
              Cash in bank                                                 xxx
2. Payment of expenses out of the petty cash fund:
Expenses (itemize)                                      xxx
              Petty cash fund                                            xxx
3. Replenishment or increase of the fund:
Petty cash fund                                            xxx
              Cash in bank                                                 xxx
       The replenishment check may or may not be the same as the petty cash disbursements.
4. At the end of the accounting period, no adjustment is to be made as the petty cash expenses
have already been recorded.
5. Decrease in fund:
Cash in Bank                                                 xxx
              Petty cash fund                                            xxx
 
 
Illustration E7.22.  McMann, Inc. decided to establish a petty cash fund to help ensure internal
control over its small cash expenditures. The following information is available for the month of
April.
1. On April 1, it established a petty cash fund in the amount of $200.
2. A summary of the petty cash expenditures made by the petty cash custodian as of April
10 is as follows.
Delivery charges paid on merchandise purchased               $60
Supplies purchased and used                                                  25
Postage expense                                                                      40
I.O.U. from employees                                                           17
Miscellaneous expense                                                            36
              The petty cash fund was replenished on April 10. The balance in the fund was $12.
3. The petty cash fund balance was increased $100 to $300 on April 20.
Instructions:
Prepare the journal entries to record transactions related to petty cash for the month of April.
 
Solution:
 
1. April 1               Petty Cash fund                                                          200       
                                                         Cash in bank                                                200
                                                         
 2. April 10 Inventory (Transportation-in)                                      60         
                                           Supplies Expense                                        25         
                                           Postage Expense                                         40         
                                           Accounts Receivable—Employees             17         
                                           Miscellaneous Expense                               36         
                                           Cash Over and Short                                   10         
                                                         Cash ($200 – $12)                                        188
                                                         
3. April 20                     Petty Cash                                                     100       
                                                         Cash                                                               100

1.3.3. Bank Reconciliation

Cash is one of the most susceptible to misappropriation and losses. Companies establish internal
control measures to safeguard all cash receipts and disbursements.  Therefore companies would
deposit all cash receipts in the bank and disbursements are made by issuance of checks. The
petty cash fund is maintained in order to pay for minor expenses and keep small change in
custody. For internal control purposes, current day’s receipts are deposited intact and in no way
be used for any disbursements. 
 
The record of all cash receipts and disbursements must be accounted for.  The company must
periodically prove the balance in the general ledger by comparing actual cash on hand
(undeposited cash, petty cash fund, change fund) against bank records.    A bank reconciliation
compares company’s record and the bank’s record of the company’s cash.
 
Bank Deposits
Most companies maintain a general checking account or otherwise known as a demand deposit. 
It is a noninterest bearing deposit account that allows deposits but withdrawals are mainly
through checks. Savings deposits on the other hand are interest bearing to which a passbook is
given to depositor to show record of deposits and withdrawal in the account.   Some companies
may sometimes avail of a combination deposit of savings and checking where its checking
account is linked to the passbook savings account.   In this way, maintaining balance in checking
account is kept at a minimum while the bulk is in the savings accounts where interest is earned.  
All check issuances are posted a withdrawal in the passbook account.
 
Reconciliation of Balances
At the end of each calendar month the bank supplies each customer with a bank statement (a
copy of the bank's account with the customer) together with the customer's checks that the bank
paid during the month. If neither the bank nor the customer made any errors, if all deposits made
and all checks drawn by the customer reached the bank within the same month, and if no unusual
transactions occurred that affected either the company's or the bank's record of cash, the balance
of cash reported by the bank to the customer equals that shown in the customer's own records.
This condition seldom occurs due to one or more of the reconciling items presented below
(adopted from Kieso, et.al. 2019):
Reconciling Items
 
 Deposits in Transit. End‐of‐month deposits of cash recorded on the depositor's books in
one month are received and recorded by the bank in the following month.
 Outstanding Checks. Checks written by the depositor are recorded when written but
may not be recorded by (may not “clear”) the bank until the next month.
 Bank Charges. Charges recorded by the bank against the depositor's balance for such
items as bank services, printing checks, not‐sufficient‐funds (NSF) checks, and safe‐
 deposit box rentals. The depositor may not be aware of these charges until the receipt of
the bank statement.
 Bank Credits. Collections or deposits by the bank for the benefit of the depositor that
may be unknown to the depositor until receipt of the bank statement. Examples are note
collection for the depositor and interest earned on interest‐bearing checking accounts.
 Bank or Depositor Errors. Errors on either the part of the bank or the part of the
depositor cause the bank balance to disagree with the depositor's book balance.
 
Hence, a company expects differences between its record of cash and the bank's record.
Therefore, it must reconcile the two to determine the nature of the differences between the two
amounts. A bank reconciliation is a schedule explaining any differences between the bank's and
the company's records of cash. If the difference results only from transactions not yet recorded
by the bank, the company's record of cash is considered correct. But, if some part of the
difference arises from other items, either the bank or the company must adjust its records.
 
The Bank and Book Transactions
The cash records of the company and of the bank should match.  Any entry in the books of the
company should have a corresponding entry in the books of the bank.  For cash receipts for
example, the company debits Cash in Bank while the bank credits Company’s account.
 
Example:
Assume that BA Company maintains a deposit in DC Bank.  When BA Company collects cash
from a customer (assuming from sales) for P50,000, the said amount is deposited to DC Bank. 
The journal entries in both books are:
BA Company:
                             Cash in Bank (DC Bank)                                                           50,000
                                           Sales                                                                             50,000
 
Upon deposit to the bank, DC Bank records:
                             Cash                                                                              50,000
                                           BA Company                                                               50,000
Assume further that BA Company issued a check for P15,000 in payment for an accounts
payable, the entries to be made are:
BA Company:
                             Accounts Payable                                                       15,000
                                           Cash in Bank (DC Bank)                                            15,000
DC Bank             
                             BA Company                                                               15,000
                                           Cash                                                                              15,000
If no other transactions occurred, then the cash ledger balance in BA Company would be
P35,000, while DC Bank will report a P35,000 balance in BA Company’s account.  
In most instances, the two records are not in balance because of time difference.   The company
may have on hand cash collections that are still undeposited to the bank.   Upon receipt of cash,
an entry has been made debiting the Cash in Bank account; therefore the cash ledger would be
greater than the balance in the bank’s records.
Also the company may have issued check in payment of an obligation, passing an entry crediting
Cash in Bank.  The check may not have yet been presented to the bank, thus no corresponding
entry debiting the company’s account has yet been made.   
On the side of the bank, they are may be items that the bank record in the depositor’s account
which have not yet taken up in the company’s books.  Examples:
1. The bank charged the company with service charges, debiting the account.
2. The bank may have collected notes receivable of the company and credited to the
company’s account.
 
The Statement of Bank Reconciliation
The bank reconciliation brings into agreement the cash balance per book and cash balance per
bank. The company’s cash ledger balance is reconciled with the bank statement issued by the
bank.  The bank statement is a monthly report issued by the bank to its depositors.  It contains:
1. The cash balance per bank at the beginning of the month.
2. The deposits made by the depositor acknowledged by the bank.
3. The checks issued by the company and paid by the bank.
4. The cash balance per bank at the end of the month.
 
Specific Explanation of Reconciling Items (Valix)
Credit Memos – refer to items not representing deposits credited by the bank to the account of
the deposit but not yet recorded by the deposit as cash receipts. The credit memos have the effect
of increasing the bank balance.  Examples:
1. Note receivable collected by bank in favor of the depositor and credited to the account of
the depositor.
2. Proceeds of bank loan credited to the account of the depositor.
3. Matured time deposits transferred by the bank to the current account of the depositor.
Debit Memos – refer to items not representing checks paid by bank which are charged or debited
by the bank to the account of the depositor but not yet recorded by the deposit as cash
disbursements.   The debit memos have the effect of decreasing the bank balance. Examples:
1. NSF or no sufficient fund checks (or drawn against insufficient fund, DAIF) – these are
checks deposited but returned by the bank because of insufficiency of fund.
2. Technically defective checks – checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not
countersigned, mutilated checks, conflict between amount in words and mount in figures.
3. Bank service charges – these include bank charges for interest, collection, checkbook and
penalty.
4. Reduction of loan – this pertains to amount deducted from the current account of the
depositor in payment for loan which the depositor owes to the bank and which has
already matured.
Deposit in Transit – are collections already recorded by the company as cash receipts but not
yet reflected on the bank statement. These include:
1. Collections already forwarded to the bank for deposit but too late to appear in the bank
statement.
2. Undeposited collections or those still in the hands of the company. In effect, these are
cash on hand awaiting delivery to the bank for deposit.
Outstanding Checks – are checks already recorded by the depositor as cash disbursements but
not yet reflected on the bank statement. These include:
1. Checks drawn and already given to payees but not yet presented for payment.
2. Certified checks – a certified check is one where the bank has stamped on its face the
word “accepted” or “certified” indicating sufficiency of fund. The account of the
depositor is immediately debited or charged to insure the eventual payment of the check.
 
Forms of Bank Reconciliation
 1. Adjusted balance method – the book balance and the bank balance are
brought to a correct cash balance that must appear 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.

Proforma Reconciliation

Adjusted Balance Method

Book balance                        xxx
Add: credit memos               xxx
Total                                       xxx
Less: debit memos                xxx
Adjusted book balance        xxx
 
Bank balance                        xxx
Add: deposits in transit       xxx
Total                                      xxx
Less: outstanding checks    xxx
Adjusted bank balance       xxx
Note: any errors are reconciling items of the party which committed them.

Book to Bank Method

Book balance                                                  xxx

Add: credit memo               xxx

Outstanding checks            xxx        xxx

Total                                                    xxx

Less: debit memos             xxx

Deposit in transit               xxx        xxx

 Bank balance                                                xxx

Bank to Book Method

 Bank balance                                          xxx

Add: Deposit in transit    xxx

Debit memo                   xxx        xxx

Total                                                       xxx

Less: Outstanding checks      xxx

          Credit memos               xxx        xxx

Book balance                                         xxx

Illustration A.  (Kieso)
Nugget Mining Company's books show a cash balance at the Denver National Bank on
November 30, 2019, of $20,502. The bank statement covering the month of November shows an
ending balance of $22,190. An examination of Nugget's accounting records and November bank
statement identified the following reconciling items.
1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank
statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327         $ 150
             #7348         4,820
             #7349               31
3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on
Sequoia Co. bonds held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget's books.
5. The bank returned one of Nugget's customer's checks for $220 with the bank statement,
marked “NSF.” The bank treated this bad check as a disbursement.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for
$131 in payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to
Nugget accompanied the statement.
Nugget reconciled the bank and book balances to the correct cash balance of $21,044.
 

The journal entries required to adjust and correct Nugget's books in early December 2019 are
taken from the items in the “Balance per books” section and are as follows.
 
To record interest on Sequoia Co. bonds, collected by bank
Cash                                                               600
Interest Revenue                                         600
To correct error in recording amount of check #7322
Cash                                                               180
Accounts Payable                                          180
To record bank service charges for November
Office Expense (bank charges)                  18
Cash                                                                18
To record customer's check returned NSF
Accounts Receivable                                   220
Cash                                                                220
After posting the entries, Nugget's cash account will have a balance of $21,044. Nugget should
return the Nugent Oil Co. check to Denver National Bank, informing the bank of the error.

Comprehensive Illustration (Valix)

The cash records of Company X shoe the following for the month of January:

The general ledger of the company will show cash in bank account for January of P50,000.
The bank statement for January received from First Bank:

Additional information:
 The CM of P15,000 on January 26 represents proceeds of not collected by the bank in
favor of the company.
 The RT of P5,000 represents check of customer deposited previously but returned by the
bank because of “no sufficient fund” or NSF.
 
General procedures:
 1. Determine the balance per book and the balance per bank: P50,000 for the books and
P84,000 for the bank.
2. Trace the cash receipts to the bank statement to ascertain whether there are deposits not
yet acknowledged by the bank.
o Cash receipt of P40,000 on Jan 31 does not appear in the bank statement. This
represents deposit in transit.
3. Trace the checks issued to the bank statement to ascertain whether there are checks not
yet presented for payment.
o Checks no. 725 for P37,000 and 726 for P28,000 do not appear in the bank
statement. These are outstanding checks.
4. The bank statement should be examined to determine whether there are bank credits or
bank debits not yet recorded by the depositor. There is CM for P15,000 and DM for
returned check of P5,000 and service charge of P1,000.
5. Watch out of errors.
 
Bank Reconciliations:

 
 
 

Adjusting entries:
 
To record the note collected by bank:
Cash in bank                                  15,000
              Notes receivable                           15,000
 
To record the NSF customer check:
Accounts receivable                     5,000
              Cash in bank                                  5,000
 
To record the bank service charge:
Bank service charge                      1,000
              Cash in bank                                  1,000
 
 
Some errors and their correction:
1. Understatement of cash receipts on the book of the depositor. Example, the collection from
customer which is deposited amounts to P10,000 but recorded in the book only as P1,000. There
is an understatement of cash receipt of P9,000. The error is added to the book balance and
adjusted as follows:
Cash in bank                                                 9,000
              Accounts receivable                                    9,000
2. Understatement of checks drawn by depositor. For example, a check in payment of accounts
payable amounting to P20,000 is recorded in the books as P2,000. There is an understatement of
cash disbursement and a consequent overstatement of book balance in the amount of P18,000. 
The error is deducted from the book balance and adjusted as follows:
Accounts payable                                        18,000
              Cash in bank                                                 18,000
3. Deposit of another entity is credited by the bank to the account of the depositor. This is a
deduction from the bank balance because it erroneously increased the account balance of the
depositor in the bank.  No adjustment is necessary on the book of the depositor.
4. Check of another entity charged to the account of the depositor. This is an addition to the bank
balance because it erroneously decreased the account balance of the depositor in the bank.  No
adjustment is necessary on the book of the depositor.

1.3.4. Proof of Cash

Proof of cash is an expanded bank reconciliation. It includes the proof of receipts and
disbursements. This approach is useful in discovering possible discrepancies in handling
cash particularly when cash receipts have been recorded but have not been deposited.
It follows the same procedure as the one-date reconciliation.  The same method may be
used. The complication occurs when certain facts or data are omitted which may be one
or a combination of the following:

1. Book balance – beginning and ending

2. Bank balance – beginning and ending
3. Deposits in transit – beginning and ending
4. Outstanding checks – beginning and ending.

 
The following formulae may be used to compute for ending balances.  Reverse the same
formula to compute for the beginning balances.
 
Computation of book balance:
Balance per book – beginning of the month
Add: book debits during the month
Total
Less: book credits during the month
Balance per book – end of the month
 
Computation of bank balance:
Balance per bank – beginning of the month
Add: bank credits during the month
Total
Less: bank debits during the month
Balance per bank – end of month
 
Computation of deposits in transit:
Deposit in transit – beginning of the month
Add: cash receipts deposited during the month
Total deposits to be acknowledged by bank
Less: deposits acknowledged by bank during the month
Deposit in transit – end of month
 
 
Computation of outstanding checks:
Outstanding checks – beginning of the month
Add: checks drawn by depositor during the month
Total checks to be paid by bank
Less: checks paid by bank during the month
Outstanding checks – end of month
 
Illustration (Valix)
 
Given:

 
Bank reconciliation for January may be computed, however reconciliation for the month
of February requires computations of balance per book, balance per bank, deposits in
transit and outstanding check.
 
 
 
Proof of Cash