CASH & CASH

EQUIVALENTS

Valix, C. T. et al. Intermediate

Accounting Volume 1. (2019). Manila:
GIC Enterprises & Co.; Inc.
What is Cash?

• Includes money and any other negotiable

instrument that is payable in money and
acceptable by the bank for deposit and
immediate credit.
• Includes checks, bank drafts, and money orders
because these are acceptable by bank for deposit
or immediate encashment.
Unrestricted Cash
(Based on PAS1, par 66)

• An entity shall classify an asset as current when the asset

is cash or a cash equivalent unless it is restricted to
settle a liability for more than 12 months after the end
of the accounting period.
• Cash » Unrestricted in Use
• Cash » Readily Available in the Payment of Current
Obligations
• Cash » Not Subject to Any Restrictions
 Cash items included in CASH

• Cash on Hand
includes undeposited cash collections and other cash items awaiting deposits
such as customers’ checks, cashier’s or manager’s checks, traveler’s checks, bank
drafts and money orders
• Cash in Bank
includes demand deposit or checking account and savings deposit which are
unrestricted as to withdrawal
• Cash Fund
fund set aside for current purposes such as petty cash fund, payroll fund, and
dividend fund
What are Cash Equivalents?
(Based on PAS7, 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.
– Only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents.
 Investment of Excess Cash

• Entity must maintain sufficient cash for use in current

operations.
• Any cash accumulated in excess of that needed for current
operations should be invested even temporarily in some type
of revenue earning investment.
• Excess cash may be invested in time deposits, money market
instruments and treasury bills for the purpose of earning
interest income.
Classification of Investment of
Excess Cash
Terms
< or = 3 months
> 3 months but = 1 year
> 1 year
> 1 year but will become due
within one year from end of the
accounting period
Classification
Cash Equivalents
Short-term Financial Assets or
Temporary Investments reported
as Current Assets
Long-term Investments reported
as Non-Current Assets
Temporary Investments reported
as Current Assets
Measurement of Cash

• Cash is measured at Face Value.

• Cash in foreign currency is measured at the current exchange rate.
• If bank or financial institution holding the funds of the entity is in
bankruptcy or financial difficulty, cash should be written down to
estimated realizable value if the amount recoverable is estimated
to be lower than the face value.
Financial Statement
Presentation
• The caption Cash and Cash Equivalents should be shown as the
first line item under current assets.
• This caption includes all cash items, such as cash on hand, cash in
bank, petty cash fund and cash equivalents which are unrestricted
in use for current operations.
• Details comprising the cash and cash equivalents should be
disclosed in the notes to financial statements.
Foreign Currency

• Cash in foreign currency must be translated to Philippine Pesos

using the current exchange rate.
• Deposits in foreign countries which are not subject to any foreign
exchange restriction are included in “cash”.
• Deposits in foreign bank which are subject to foreign exchange
restriction, if material, should be classified separately among non-
current assets and the restriction clearly indicated.
 Cash Fund for A Certain Purpose

Use/Purpose Classification

For use in current operations

Cash and Cash Equivalents
For payment of current obligations

For non-current purpose

Long-term Investments
For payment of non-current obligation
 Classification of Cash Fund

• Should parallel the classification of the related liability. Example: Bond Sinking Fund
Classification of Liability Classification of Fund

Non-current when term is more than 1 year Non-current: Long-term investment

Current: Due within 1 year Current: Cash and Cash Equivalents

• Cash fund set aside for the acquisition of non-current asset should be classified as
non-current (long-term investment) regardless of the year of disbursement.
Bank Overdraft

• When cash in bank has a credit balance

• Resulting from the issuance of checks in excess of deposits
• Classified as a current liability
• Should not be offset against other bank accounts with debit
balances
• NOTE: Overdrafts are not permitted in the Philippines.
Bank Overdraft

Example:
Bank Balance Accounting Treatment

P1,000,000 Current Asset:

Cash in Bank

Current Liability:
(P200,000) Bank Overdraft
Exception to the rule on overdraft
(Rule: Overdrafts are not permitted in the Philippines.)

Bank Balance Accounting Treatment

Can be offset
P1,000,000
Current Asset:

Cash in Bank, net of bank

overdraft
(P200,000) Php800,000
Exception to the rule on overdraft
(Rule: Overdrafts are not permitted in the Philippines.)

Bank Balance Accounting Treatment

Can be offset
P1,000,000
Current Asset:

Cash in Bank, net of bank

overdraft
(P2,000) Php998,000
Exception to the rule on overdraft
(Rule: Overdrafts are not permitted in the Philippines.)

• An overdraft can be offset against the other account in the same

bank with a debit balance
• An overdraft can also be offset against the other bank account if
the amount is not material
• Under IFRS, bank overdraft can be offset against other bank
account when payable on demand and often fluctuates from
positive to negative as an integral part of cash management
Compensating Balance

• Generally takes the form of minimum checking or demand deposit

account balance that must be maintained in connection with a
borrowing arrangement with a bank.
• Effects:
Reduction in the proceeds of amount borrowed
Provides a source of fund to the bank
Used as partial compensation for the loan extended
 Classification of Compensating
Balance
Nature of Restriction Related Loan Accounting Treatment
Not legally restricted as to Short-term Compensating balance is
withdrawal because of an Long-term part of CASH
informal compensating
balance agreement
Short-term Current Asset:
Legally restricted as to Cash held as compensating
withdrawal because of balance
formal compensating
balance agreement Long-term Non-current Investment
 Undelivered or Unreleased
Check
• A check that is merely drawn and recorded but not given to the payee at the end
of the reporting period.
• No payment
• Check is still subject to the entity’s control and may be canceled any time before
delivery
Cash xxx
• AJE:
Accounts Payable or Appropriate Account xxx
• In practice:
no adjustment is made because the amount is not very substantial and
there is no evidence of actual cancelation of the check in the subsequent period
Postdated check delivered

• Check drawn, recorded and given to the payee but bears a date
subsequent to the end of the reporting period.
• No payment until the check can be presented to the bank for
encashment or deposit.
• AJE:
Cash xxx
Accounts Payable or Appropriate Account xxx
 Stale Check or Check Long
Outstanding
• A check not encashed by the payee within a relatively long period
of time.
The Negotiable In banking practice, a As a matter of entity
Instruments Law check becomes stale if policy, even after three
provides that where the not encashed within six months only, the entity
instrument is payable months from the time may issue “stop
on demand, of issuance. payment order” to the
presentment must be bank for the
made within a cancelation of
reasonable time after previously issued check.
issue.
 Stale Check or Check Long
Outstanding

Amount AJE
Cash xxx
Immaterial
Miscellaneous Income xxx
Cash xxx
Material
Accounts Payable or Appropriate Account xxx
 Cash Shortage or Overage

Cash Count Result Journal Entry Cashier is held responsible Cause can’t be
(CC) VS (money of Cashier) determined (no claim on
Balance overage)
per Book
(BB)
CC < BB Cash Shortage Cash Short or Over Due from Cashier Loss from Cash Shortage
Cash Cash Short or Over Cash Short or Over

CC > BB Cash Overage Cash Cash Short or Over Cash Short or Over
Cash Short or Over Payable to Cashier Miscellaneous Income
 Imprest System

• A system of control of cash which requires that ALL cash receipts be deposited
intact and ALL cash disbursements should be made by means of check.
• Ideally, all payments should be made thru check, but this is sometimes
impossible.
• There are instances when issuance of checks becomes impractical or
inconvenient.
• Consequently, in such instances, it may be more economical and convenient to
pay in cash rather than issue checks.
Petty Cash Fund

• A money set aside to pay small expenses which cannot be paid

conveniently by means of checks.
• Two methods of handling petty cash fund:
1. Imprest fund system
2. Fluctuating fund system
 Imprest VS Fluctuating

Transaction Imprest Fluctuating

Check is drawn to establish Petty Cash Fund Petty Cash Fund
the fund. Cash in Bank Cash in Bank
Payment of expenses out of No formal journal entries Expenses
the fund. are made. Petty Cash Fund
Replenishment of the fund. Expenses Petty Cash Fund
Cash in Bank Cash in Bank
 Imprest VS Fluctuating

Transaction Imprest Fluctuating

At end of accounting period: Expenses No Adjustment
Adjust the unreplenished Petty Cash Fund
expenses
At beginning of accounting Petty Cash Fund No Reversal
period: Reverse adjustment Expenses
 Imprest VS Fluctuating

Transaction Imprest Fluctuating

Increase the fund Petty Cash Fund Petty Cash Fund
Cash in Bank Cash in Bank
Decrease the fund Cash in Bank Cash in Bank
Petty Cash Fund Petty Cash Fund
End of Chapter