CHAPTER 1 ▪To understand the concept of cash.

▪To understand the concept of cash

equivalents.
CASH AND CASH EQUIVALENTS TECHNICAL
KNOWLEDGE ▪To identify items considered cash.
▪To identify items considered cash
equivalents.
▪To know the accounting for petty
cash fund.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

DEFINITION OF CASH Unrestricted cash

▪ As contemplated in accounting, cash includes money PAS 1, paragraph 66.
and any other negotiable instrument that is payable An entity shall classify an asset as current when the
in money and acceptable by the bank for deposit asset is cash or a cash equivalent unless it is
and immediate credit. restricted to settle a liability for more than twelve
▪ Cash includes checks, bank drafts and money orders months after the end of the reporting period.
because these are acceptable by the bank for
deposit or immediate encashment.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Cash Cash equivalents

a. Cash on hand includes undeposited cash collections PAS 7, paragraph 6, defines cash equivalents as
and other cash items awaiting deposit such as short-term and highly liquid investments that are
customers' checks, cashier's or manager's checks,
traveler's checks, bank drafts and money orders. readily convertible into cash and so near their maturity
that they present insignificant risk of changes in value
b. Cash in bank includes demand deposit or checking
account and saving deposit which are unrestricted as because of changes in interest rate.
to withdrawal. The standard further states that only highly liquid
c. Cash fund set aside for current purposes such as investments acquired three months before maturity
petty cash fund, payroll fund and dividend fund. can qualify as cash equivalents.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 ▪ Equity securities or equity investments cannot qualify
Examples of cash equivalents are: as cash equivalents because shares do not have a
a. Three-month BSP treasury bill maturity date. However, preference shares with
specified redemption date and acquired three months
b. Three-year BSP treasury bill purchased three before redemption date can qualify as cash
months before date of maturity equivalents.
c. Three-month time deposit
d. Three-month money market instrument or
commercial paper

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Investment of excess cash Accordingly, excess cash may be invested in time deposits, money market
instruments and treasury bills for the purpose of earning interest income.
The control and proper use of cash is an Investments in time deposit, money market instruments and treasury bills
important aspect of cash management. should be properly classified.
Basically, the entity must maintain sufficient a. If the term is three months or less, such instruments are classified as cash
cash for use in current operations. equivalents.
b. If the term is more than three months but within one year, such investments
Any cash accumulated in excess of that are classified as short-term or temporary investments and presented
needed for current operations should be separately as current assets.
invested even temporarily in some type of c. If the term is more than one year, such investments are classified as
revenue earning investment. noncurrent or long-term investments.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Measurement and Presentation of Cash Deposits in foreign bank which are subject to foreign
Cash is measured at face amount. exchange restriction should be classified separately
among noncurrent assets and the restriction clearly
If a bank or financial institution holding the funds of an entity is indicated.
in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount recoverable The caption cash and cash equivalents should be
is estimated to be lower than the face amount. shown as the first line item under current assets.
Cash in foreign currency should be translated to Philippine
pesos using the current exchange rate. However, the details comprising the cash and cash
Deposits in foreign countries which are not subject to any equivalents should be disclosed in the notes to financial
foreign exchange restriction are included in cash. statements.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 The classification of a cash fund as current or noncurrent
Classification of cash fund for certain should parallel the classification of the related liability.
purpose
If the cash fund is set aside for use in current operations or for A sinking fund set aside for the payment of a bond payable
the payment of current obligation, it is a current asset and shall be classified as current asset when the bond payable is
included as part of cash and cash equivalents. already due within one year after the end of reporting period.
Examples of this fund are petty cash fund, payroll fund, travel
fund, interest fund, dividend fund and tax fund. However, a cash fund set aside for the acquisition of a
noncurrent asset should be classified as noncurrent regardless
On the other hand, if the cash fund is set aside for noncurrent of the year of disbursement.
purpose or payment of noncurrent obligation, it is shown as
long-term or noncurrent investment.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Bank overdraft Exception to the rule on overdraft

When the cash in bank account has a credit balance, it is said When an entity maintains two or more accounts in one bank
to be an overdraft. The credit balance in the cash in bank and one account results in an overdraft, such overdraft can be
account results from the issuance of checks in excess of the offset against the other bank account with a debit balance in
deposits. order to show cash, net of bank overdraft or bank overdraft,
A bank overdraft is classified as a current liability and should net of other bank account.
not be offset against other bank accounts with debit balances.
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.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Compensating balance Classification of compensating balance

A compensating balance generally takes the form If the deposit is not legally restricted as to withdrawal by the
of minimum checking or demand deposit account borrower because of an informal compensating balance
balance that must be maintained in connection agreement, the compensating balance is part of cash.
with a borrowing arrangement with a bank. If the deposit is legally restricted because of a formal
compensating balance agreement, the compensating balance
is classified separately as cash held as compensating balance
under current assets if the related loan is short-term.
If the related loan is long-term, the compensating balance is
classified as noncurrent investment.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 Undelivered or unreleased check Postdated check delivered
▪ One that is merely drawn and recorded but not given to the ▪Is a check drawn, recorded and already given to the
payee before the end of reporting period. There is no payee but it bears a date subsequent to the end of
payment when the check is pending delivery to the payee at reporting period.
the end of reporting period.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

In banking practice, a check becomes stale if not encashed

Stale check or check long outstanding within six months from the time of issuance. Of course, this
▪A stale check is a check not encashed by the payee is a matter of entity policy.
within a relatively long period of time. The Negotiable
Instruments Law provides that where the instrument is Thus, even after three months only, the entity may issue a stop
payment order to the bank for the cancelation of a previously
payable on demand, presentment must be made within issued check.
a reasonable time after issue.
If the amount of stale check is immaterial, it is simply accounted
for as miscellaneous income.
However, if the amount is material and liability is expected to
continue, the cash is restored and the liability is set up.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Accounting for cash shortage Hence, if the cashier or cash custodian is held responsible for
the cash shortage, the adjustment should be:
Where the cash count shows cash which is less
balance per book, a cash shortage is to be Due from cashier xx
recorded. Cash short or over xx
Cash short or over xx However, if reasonable efforts fail to disclose the cause of the
shortage, the adjustment is
Cash xx
Loss from cash shortage xx
The cash short or over account is only a Cash short or over xx
temporary or suspense account. When financial
statements are prepared the same should be
adjusted.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 Where the cash count shows cash which is more than the balance But where the cash overage is properly found to be the money
per book, a cash overage is to be recorded. of the cashier, a liability should be established.
Cash xx
Cash short or over xx
Cash short or over xx
Payable to cashier xx
Note that whether it is a cash shortage or cash overage, the
offsetting account is cash short or over account.
The cash short or over account should be adjusted when financial
statements are made.
The cash overage is treated as miscellaneous income if there is no
claim on the same.
Cash short or over xx
Miscellaneous income xx
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

While internal control ideally requires that all payments should

be made by means of check, this is sometimes impossible.
Imprest system
There are occasions when the issuance of checks becomes
The imprest system is a system of impractical or inconvenient such as when small amounts are
paid or things are hurriedly bought or customers are
control of cash which requires that
entertained.
all cash receipts should be
deposited intact and all cash Consequently, in such instances, it may be more economical
and convenient to pay in cash rather than issue checks.
disbursements should be made by
means of check.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Petty Cash There are two methods of handling the petty cash, namely:

Fund a. Imprest fund system

b. Fluctuating fund system
The petty cash fund is
money set aside to
pay small expenses
which cannot be paid
conveniently by
means of check.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
Imprest fund system c. Replenishment of petty cash payments.

Accounting Procedures Whenever the petty cash fund runs low, a check is drawn to
replenish the fund.
a. A check is drawn to establish the fund.
Petty cash fund xx The replenishment check is usually equal to the petty cash
Cash in bank xx
disbursements.
b. Payment of expenses out of the fund.. It is at this time that the petty cash disbursements are recorded.
▪ No formal journal entries are made. Expenses xx
▪ The petty cashier generally requires a signed petty cash voucher for
such payments and simply prepares memorandum' entries in the petty Cash in bank xx
cash journal. The petty cash disbursements should be replenished only by
means of check and not from undeposited collections.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

d. At the end of the accounting period, it is necessary to adjust e. An increase in the fund is recorded normally.
the unreplenished expenses in order to state the correct petty
cash balance. Petty cash fund xx
Expenses xx Cash in bank xx
Petty cash fund xx
The adjustment is to be reversed at the beginning of the next
accounting period. f. A decrease in the fund is recorded normally.
The reversal is made in order that the normal replenishment Cash in bank xx
procedures may be followed by simply debiting expenses and
crediting cash in bank without distinguishing whether the
Petty cash fund xx
expenses pertain to the current period or prior period.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

29 Replenished the fund. The petty cash items include the

Illustration following:
2023 Currency and coin 2,000
Supplies 5,000
Nov. 10 The entity established an imprest fund of P
Telephone 1,800
10,000.
Postage 1,200
Petty cash fund 10,000
Cash in bank 10,000 29 The journal entry to record the replenishment is:
Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 Dec. 31 The fund was not replenished. An adjustment is
necessary to record the unreplenished expenses.
Fluctuating fund system
The fund is composed of the following: currency and coin P
7,000, supplies P 1,500, postage P500, miscellaneous The accounting for petty cash is called fluctuating fund
expense P 1,000. system because the checks drawn to replenish the fund
do not necessarily equal the petty cash disbursements.
Supplies 1,500
Postage 500
The replenishment checks are simply drawn upon the
Miscellaneous expense 1,000 request of the petty cashier.
Petty cash fund 3,000

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Moreover, petty cash disbursements are immediately recorded Under this system, the disbursements from the petty cash fund
thus resulting in a fluctuating petty cash balance per book from are immediately recorded in contradiction with the imprest fund
time to time: system where the disbursements are recorded upon the
replenishment of the fund.
a. Establishment of the fund:
c. Replenishment or increase of the fund:
Petty cash fund xx
Cash in bank xx Petty cash fund xx
Cash in bank xx
b. Payment of expenses out of the petty cash fund:
The replenishment check may or may not be the same as the
Expenses xx petty cash disbursements.
Petty cash fund xx
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Illustration
d. At the end of the reporting period, no adjustment is Nov. 10 The entity established a petty cash fund of
necessary because the petty cash expenses are recorded P10,000.
outright.
Petty cash fund 10,000
e. Decrease of the fund is reverted to the general cash. Cash in bank 10,000

Cash in bank xx Nov. 11-28 Petty cash disbursements amounted to P8,000.

Petty cash fund xx
Expenses 8,000
Petty cash fund 8,000

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
Nov. 29 Issued a check for P 10,000 to replenish the fund.
Petty cash fund 10,000 Illustrative Problem 1
Cash in bank 10,000 On December 31, 2024, Kageyama Company provided the following data:

Cash in bank - P3,000,000 Saving deposit - P500,000

Time deposit — 30 days - P1,000,000 Sinking fund for bond payable due June 30, 2026 - P1,500,000
Dec. 1-30 Petty cash expenses amounted to P9,000. Money market placement due on June 30, 2025 - P2,000,000 Petty cash fund - P50,000

▪
Expenses 9,000 ▪
The cash in bank included customer check of P 200,000 outstanding for 18 months.
Check of in payment of P250,000 accounts payable was dated and recorded on December 31, 2024 but mailed to creditors
Petty cash fund 9,000 on January 15, 2025.
▪ Check of P100,000 dated January 31, 2025 in payment of accounts payable was recorded and mailed December 31, 2024.
▪ The reporting period is the calendar year.

31Issued a check for P 15,000 to replenish the fund. The cash receipts journal was held open until January 15, 2025 during which time an amount of P450,000 was collected from
Petty cash fund 15,000 customers and recorded on December 31, 2024.

Cash in bank 15,000 Required:

1. Prepare adjusting entries on December 31, 2024.
2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2024.
3. Explain the presentation of the items excluded from cash and cash equivalents.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Illustrative Problem 2 Illustrative Problem 3

Nishinoya Company reported the following accounts on December 31, 2024: Kenma Company reported the following information on December 31, 2024:
Cash on hand - P1,000,000
Cash on hand - P1,000,000
Petty cash fund - P50,000 Petty cash fund - P50,000
Security Bank current account - P2,000,000 Cash in bank - P4,000,000
BDO current account (overdraft) - (P200,000)
BPI time deposit — 90 days for land acquisition - P2,000,000 ▪ The petty cash fund consisted of the following items:
Sinking fund for bond payable due December 31, 2025 - P2,500,000 Currency and coins - P2,000
Employees' IOUs - P10,000
▪ The cash on hand included a customer postdated check of P 150,000 and postal Currency in envelope marked collections for Christmas party - P5,000
money order of P50,000. Check drawn by Kenma payable to petty cashier - P33,000
▪ The petty cash fund included unreplenished petty cash vouchers for P 10,000 and ▪ Check recorded and dated December 22, 2024 and delivered to payee on January 5, 2025, P200,000.
an employee check for P5,000 dated January 31, 2025. ▪ Check recorded December 26, 2024 and dated January 31, 2025 delivered to payee on December 26, 2024,
Required: P300,000.
Required:
1. Prepare adjusting entries on December 31, 2024. 1. Prepare adjusting entries on December 31, 2024.
2. Compute the total amount of cash and cash equivalents. 2. Compute the total cash on December 31, 2024.

Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.

Illustrative Problem 4 Illustrative Problem 5

Oikawa Company reported the following accounts on December 31, 2024: Kuroo Company established a petty cash fund.
Cash on hand - P200,000 City Bank current account No. 2 (overdraft) - (P100,000)
Petty cash fund - P20,000
Philippine Bank Current account - P5,000,000
Asia Bank saving account - P250,000
Asia Bank time deposit 120 days - P2,000,00
1. Established a petty cash fund of P20,000 on January 2.
City Bank current account No. 1 - P4,000,000
● Cash on hand included the following items:
2. Petty cash expenses — January 2-31 are:
○ Customer check for P35,000 returned by bank December 26, 2024 due to insufficient fund but subsequently Postage - P3,000
redeposited and cleared by the bank on January 10, 2025.
○ Customer check for P15,000 dated January 10, 2025, received December 23, 2024. Supplies - P11,000
● The petty cash fund consisted of the following items: Transportation - P2,400
Currency and coins - P5,000
IOUs from officers - P2,000 Miscellaneous expense - P1,600
Unreplenished petty cash vouchers - 12,000
● Included among the checks drawn by Oikawa Company against the Philippine Bank current account and recorded in
3. The fund is replenished on February 1 and increased by P5,000.
December 2024 were the following:
○ Check dated December 23, 2024 and delivered to payee n January 31, 2025, P25,000.
○ Check dated January 30, 2025 and delivered to payee on December 28, 2024, P45,000 Required:
Prepare journal entries to record the transactions under the fluctuating fund system
Required:
1. Compute the total cash and cash equivalents. and imprest fund system.
2. Prepare adjusting entries on December 31, 2024.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.
 Illustrative Problem 6 Illustrative Problem 7
Tsukishima Company provided the following chronological transactions in relation to petty Hinata Company closed the accounts on December 31. The entity provided the following transactions:
cash: 2023
1. The entity established a petty cash fund of P20,000. Nov. 2 The entity established an imprest fund of P20,000. Dec. 31 The fund was not replenished. The fund is
29 The fund is replenished. The petty cash items include: composed of the following:
2. Petty cash disbursements were: Currency and coin - P4,000 Currency and coin - P12,000
Postage - P3,000 Postage - P2,000 Supplies - P4,000
Supplies - P6,000 Supplies - P6,000 Postage - P2,000
Transportation - P5,000 Transportation - P2,000
3. Petty cash disbursements were: Miscellaneous expense - P3,000
Transportation - P2,000 2024
Accounts payable - P7,000 Jan. 15 The fund is replenished and increased to P30,000.
4. Issued check for an amount to replenish the fund and bring the balance of the petty cash Currency and coin - P6,000
Supplies - 7,000
to P30,000. Postage - P3,000
Transportation - P3,000
Required: Miscellaneous expense - P1,000
Prepare journal entries to record the transactions under fluctuating fund system and imprest
Required:
fund system. Prepare journal entries to record the transactions under imprest fund system and fluctuating fund system.
Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc. Valix, C. T., Peralta, J. F., & Valix, C. A. M. (2023). Intermediate Accounting 1. Manila, Philippines: GIC Enterprises & Co., Inc.