Financial Accounting and Reporting (Assets) - CASH

CASH - includes money and any other negotiable instrument that is payable in money and acceptable by
the bank for deposit or immediate encashment.

Accordingly, cash includes checks, bank drafts and money orders because these are acceptable by the bank for
deposit or immediate encashment.

Cash items included in cash:

a. Cash on Hand - This includes undeposited cash collections and other cash items awaiting deposit
such as customer’s checks, cashier’s or manager’s checks, traveler’s checks, bank drafts and
money orders.
b. Cash in Bank - This includes demand deposit (checking account), savings account which are
unrestricted as to withdrawal.
c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund.

When do we include items as part of Cash?

- If it’s unrestricted in use. (Pertaining to Cash on Hand and Cash in Bank)
- If it’s unrestricted as to withdrawal. (Pertaining to Cash in Bank)
- If it’s used to settle for current purposes. (Pertaining to Cash funds)
What does it mean to settle for current purposes?
These are cash funds that are intended to be made to settle current liabilities or operating
expenses.

Examples of cash:
a. Cash on Hand
- Coins and Currencies (Bills), Checks (except to Undelivered Checks, Postdated Checks, Stale
Checks and NSF Checks), Bank Drafts, Money Orders.
b. Cash in Bank
- Checking Accounts and Savings Accounts.
c. Cash Funds
● To settle current liabilities.
- Payroll Fund, Dividend Fund and Tax Fund.
● For operating expenses.
- Petty Cash Fund, Revolving Fund and Change Fund.

Items that is not included as cash:

a. Check with irregularities.
- Such as undelivered checks, post dated checks, stale checks and NSF checks. (This will be
further discussed)
b. IOU or advances to employees
- These are treated as receivable and not part of cash items.
c. Postage Stamps
- Unused postage stamps are treated as prepaid supplies.
d. Depreciation Fund
- Form of asset replacement fund wherein cash payments to the fund are equal to the
periodic depreciation charges on the related asset. When the asset is fully depreciated,
the fund can be used to acquire a replacement.
e. PPE Acquisition Fund
- Always classified as non-current. The nature of PPE is non-current.
f. Contingency Fund
g. Preference Share Redemption Fund
 Financial Accounting and Reporting (Assets) - CASH

h. Insurance Fund
i. Bonds Sinking Fund
Take note : Bonds sinking fund can also be classified as part of cash funds. When the bonds are expected to be
retired within the current period.

IS CASH IN FOREIGN CURRENCY CAN BE INCLUDED AS PART OF CASH?

- Yes, but not all cash in foreign currency can be classified as part of cash. Those that are only
“unrestricted in use” can be classified as part of cash.
- Restricted cash in foreign currency is classified as long-term investments.

MEASUREMENT OF CASH:
- CASH is measured at FACE VALUE.
- CASH in FOREIGN CURRENCY is measured at the current exchange rate.
Take note : Current exchange rate means the exchange rate value that is present at that current date.

FINANCIAL STATEMENT PRESENTATION:

- All classified as included part of “Cash” is presented in the Balance Sheet as a line item “Cash and
Cash Equivalent” (First line item under Current Assets.)
- The details comprising the cash and cash equivalent is disclosed in the Notes to Financial
Statements.

SPECIAL ITEMS AFFECTING CLASSIFICATION OF CASH

I. BANK OVERDRAFT
- Happens when cash in bank account has a negative balance (credit balance).
- It occurs upon issuance of checks that are excess of the amount of the bank account.
- A bank overdraft is classified as current liability and should not be offset against other
bank accounts with positive balances.

Scenario A:
Charles Company has the following records:

Cash in Bank - BPI 200,000

Cash in Bank - BDO (120,000)

In this scenario, offsetting is not allowed because two bank accounts came from different banks.

When bank overdraft can be included as part of Cash?

a. When an entity has two accounts in a certain bank that one contains a positive balance.
Offsetting is allowed here.

Charles Company has the following records:

Cash in Bank - BPI 200,000

Cash in Bank - BPI (120,000)

Here, we can offset the negative balance to the positive balance. In net effect, the reported cash under
“Cash in Bank - BPI is 80,000”.

b. When the amount is immaterial.

 Financial Accounting and Reporting (Assets) - CASH

Scenario A:
Belinda Company has the following records:
Cash on Hand 700,000
Petty Cash Fund 13,000
Time Deposit 515,000
Bank Overdraft (10,000)
Inventory 130,000
FVPL - Equity 175,000
Inv. in Assoc. 300,000

Take Note : The bank overdraft here cannot be deducted over the cash balances, because it is presumed to be a
material amount. As a general rule when the “Bank Overdraft does not explicitly say that it is immaterial, it
should be considered as material amount (regardless of the amount shown in the problem).

Scenario B:
Belinda Company has the following records:
Cash on Hand 700,000
Petty Cash Fund 13,000
Time Deposit 515,000
Bank Overdraft,immaterial (10,000)
Inventory 130,000
FVPL - Equity 175,000
Inv. in Assoc. 300,000

Take Note : The bank overdraft here in the given scenario can be deducted among the cash balances of the
account.

c. As an integral part of cash management.

Take Note : The problem should explicitly say that the bank overdraft is an integral part of cash management to
be included as classification of cash.

II. COMPENSATING BALANCE (MAINTAINING BALANCE)

- It is the required amount to be maintained in the bank account.
- Not all compensating balances are classified as cash items. Here are the different treatments for
compensating balance.
a. Unrestricted Compensating Balance
- It is included under the classification of cash. Therefore, anytime the amount can be
withdrawn.
b. Legally Restricted Compensating Balance - Short Term
- Not part of cash, instead part only of “current assets”.
c. Legally Restricted Compensating Balance - Long Term
- Not part of cash, instead part only of “non-current assets”.

Scenario A:
Garet Company has the following balances:
Cash in Bank - BPI Account 1,000,000
Cash in Bank - LANDBANK 300,000
 Financial Accounting and Reporting (Assets) - CASH

Cash in Bank - PSBank 170,000

Additional information:
a. The P150,000 cash in bank under BPI Account is subject to legally restricted compensating
balance for 5 months.
b. The P30,000 cash in bank under PSBank Account is subject to legally restricted compensating
balance for 2 years.
c. The P100,000 cash in bank under Landbank Account is subject to compensating balance.
d. The P20,000 cash in bank under BPI Account is subject to compensating balance.
e. The P5,000 cash in bank under Landback Account is subject to legally restricted compensating
balance for 15 months.

How much is Cash? 1,285,000

How much is classified under Current Assets? 1,435,000
How much is classified under Non-Current Assets? 35,000

CHECKS WITH IRREGULARITIES

- These are the checks that are not included under the classification of Cash.

A. Undelivered Checks
- These are the checks that are recorded as “cash disbursement” by the issuing company but not
yet given to the recipient of check.
- These are the checks that are recorded as “cash receipt” by the recipient company but not yet
received.

There are two POV under the Undelivered Checks

1. As issuer (giver) of the Undelivered Checks.

- There are also two scenarios under which the issuer of the Undelivered Checks.
a. Recorded
b. Unrecorded

Scenario 1 : Recorded in the POV of the issuer of the Undelivered Checks.

On December 27,2023 Juliana signed a check worth P30,000 as payment to the supplier for inventory. It
was recorded under the book that the check is already recorded as cash disbursement. The check
remained undelivered until the last reporting date.

Here are the pro-forma entries made by Juliana in her book:

December 27, 2023

Accounts Payable (or other liability account) 30,000
Cash 30,000

Necessary adjusting entries to be made by Juliana in her book at the year end:

December 31, 2023

Cash 30,000
Accounts Payable 30,000
 Financial Accounting and Reporting (Assets) - CASH

Explanation : As if there was not yet payment already done therefore in the book of Juliana, she reversed the
entry by debiting Cash and crediting Accounts payable.

Scenario 2 : Unrecorded in the POV of the issuer of the Undelivered Checks.

On December 27,2023 Juliana signed a check worth P30,000 as payment to the supplier for inventory. It
was not yet recorded in the book. The check remained undelivered until the last reporting date.

Explanation : There is no need to record an adjusting entry, there was no entry made before. Juliana did not
record any cash disbursement yet.

2. As recipient of the Undelivered checks.

Scenario 1 : Recorded in the POV of the recipient of the Undelivered Checks.

On December 29,2023 Ryan recorded in his books a receipt of P50,000 as payment for the service he
rendered last month. It was recorded in his book as a cash receipt. Upon checking, the issuing company
confirmed that the check was undelivered until the end of the year.

Here are the pro-forma entries made by Ryan in his book:

Cash 50,000
Accounts Receivable 50,000

Necessary adjusting entries to be made by Ryan in his book:

Accounts Receivable 50,000
Cash 50,000

Explanation : As if there was no payment yet done to Ryan because the check remains undelivered. Therefore
the receivable should remain to exist.

Scenario 2 : Unrecorded in the POV of the recipient of the Undelivered Checks.

Explanation : There is no need to record an adjusting entry, there was no entry made before. Ryan did not
record any cash receipt yet.

B. Postdated Checks
- Checks that are allowed to be encashed in the latter date.
- Here are checks not allowed for encashment in the present.

There are two POV under the Postdated Checks

1. As issuer (giver) of the Postdated Checks.

- There are also two scenarios under which the issuer of the Postdated Checks.
c. Recorded
d. Unrecorded

Scenario 1 : Recorded in the POV of the issuer of the Postdated Checks.

 Financial Accounting and Reporting (Assets) - CASH

On December 26, 2023 Rosette Company signed a check worth P120,000 as payment for the equipment
purchased. The check was dated on January 5, 2024. The said payment was recorded already in the book
of the company.

Here are the pro-forma entries made by Rosette Company in its book:
Accounts Payable 50,000
Cash 50,000

Necessary adjusting entries to be made by Rosette Company in its book:

Cash 50,000
Accounts Payable 50,000

Explanation : As if there was no payment yet done because the check issued to the seller cannot be encashed
until January 5,2024.

Scenario 2 : Unrecorded in the POV of the issuer of the Postdated Checks.

On December 26, 2023 Rosette Company signed a check worth P120,000 as payment for the equipment
purchased. The check was dated on January 5, 2024. The said payment was not yet recorded in the book of
the company.

Explanation : There is no need to record an adjusting entry because there was not yet recorded a cash
disbursement and in reality there was no liability being settled already.

2. As recipient of the Postdated Checks.

- There are also two scenarios under which the recipient of the Postdated Checks.
a. Recorded
b. Unrecorded

Scenario 1 : Recorded in the POV of the recipient of the Postdated Checks.

On December 29, 2023 Bravo Company received a check worth P190,000 as payment for the service
rendered last month. The check was dated on January 11,2024. The cash receipt transaction was already
recorded in the book of the company.

Here are the pro-forma entries made by Bravo Company in its book:
Cash 50,000
Accounts Receivable 50,000

Necessary adjusting entries to be made by Bravo Company in its book:

Accounts Receivable 50,000
Cash 50,000

Explanation : As if there was no payment yet done because the check issued to Bravo Company cannot be
encashed until January 11,2024.

Scenario 2 : Unrecorded in the POV of the recipient of the Postdated Checks.

 Financial Accounting and Reporting (Assets) - CASH

On December 29, 2023 Bravo Company received a check worth P190,000 as payment for the service
rendered last month. The check was dated on January 11,2024. The cash receipt transaction was not yet
recorded in the book of the company.

Explanation : There is no need to record an adjusting entry because there was not yet recorded a cash receipt
and in reality there were no receivables being settled already.

C. Stale Checks
- Check not encashed by the recipient for a long period.
- The provision of the law does not provide when a check remains valid or the one should be
classified as stale one.
- In banking practice : Check become stale when not encashed within 6 months (this can be
differed regarding with the policy of the Bank)

There are two POV under the Stale Checks

1. As issuer (giver) of the Stale Checks.

- There are also two scenarios under which the issuer of the Undelivered Checks.
a. Recorded
b. Unrecorded

Scenario 1 : Recorded in the POV of the issuer of the Stale Checks.

On June 1, 2023 Delta Company issued a check worth P300,000 as payment for the land acquired by the
company to Juliet Company. It was recorded in the book of the company. After 6 months the check
remained not cashed yet.

Pro-forma entry in the book of Delta Company

June 1, 2023
Accounts Payable 300,000
Cash 300,000

December 31, 2023

Cash 300,000
A/P 300,000

If Delta Company issued a new check in exchange for the payment.

Accounts Payable 300,000
Cash 300,000

Scenario 2 : Unrecorded in the POV of the issuer of the Stale Checks.

On June 1, 2023 Delta Company issued a check worth P300,000 as payment for the land acquired by the
company to Juliet Company. It was not recorded in the book of the company. After 6 months the check
remained not cashed yet.
 Financial Accounting and Reporting (Assets) - CASH

Take Note: There is no need for adjusting entry for the stale check because in the first place it was not recorded
yet as cash disbursement.
There will only be a pro-forma entry for the issuance of a new check as payment to Juliet
Company.

2. As recipient of the Stale Checks.

- There are also two scenarios under which the recipient of the Stale Checks.
c. Recorded
d. Unrecorded

Scenario 1 : Recorded in the POV of the recipient of the Stale Checks.

On June 1, 2023 Delta Company issued a check worth P300,000 as payment for the land acquired by the
company to Juliet Company. It was recorded in the book of the company. After 6 months the check
remained not cashed yet.

Pro-forma entry in the book of Juliet Company

June 1, 2023
Cash 300,000
A/R 300,000

December 31, 2023

A/R 300,000
Cash 300,000

If Juliet Company successfully received a new check in exchange for the payment.
Cash 300,000
A/R 300,000

Scenario 2 : Unrecorded in the POV of the recipient of the Stale Checks.

On June 1, 2023 Delta Company issued a check worth P300,000 as payment for the land acquired by the
company to Juliet Company. It was not recorded in the book of the company. After 6 months the check
remained not cashed yet.

Take Note: There is no need for adjusting entry for the stale check because in the first place it was not recorded
yet as cash receipt.
There will only be a pro-forma entry for the receipt of a new check as payment to Juliet
Company.

If Delta Company issued a new check in exchange for the payment.

Cash 300,000
A/R 300,000

D. NSF Checks
- Also known as bounced checks.
 Financial Accounting and Reporting (Assets) - CASH

- Occurs when the amount in the bank account is insufficient to cover the amount of check signed
by the issuer.
- Also called as Drawn Against Insufficient Fund (DAIF) and Drawn Against Uncleared Deposits
(DAUD).

There are two POV under NSF Checks.

1. Issuer of the NSF checks.

There is also two scenarios

a. Recorded
b. Unrecorded

Scenario 1 : Recorded in the POV of the Issuer of the NSF Checks.

December 23, 2023 Xebec Company signed a check worth P95,000 for payment to the supplier of the
inventories delivered a few days ago. Upon checking in the bank, the check was labeled as DAIF check and
was returned to the issuer. After 7 days the issuer re-deposit the amount to his bank and after 15 days the
check was cleared. The transaction was recorded in the book of the company.

Pro-forma entry in the book of Xebec Company.

A/P 95,000
Cash 95,000
Necessary Adjustments in the book of Xebec Company.
Cash 95,000
A/P 95,000

If the check was cleared before or on the reporting date:

A/P 95,000
Cash 95,000

If the check was cleared after the reporting date:

NO NECESSARY ENTRY

Scenario 2: Unrecorded in the POV of the Issuer of the NSF Checks.

December 23, 2023 Xebec Company signed a check worth P95,000 for payment to the supplier of the
inventories delivered a few days ago. Upon checking in the bank, the check was labeled as DAIF check and
was returned to the issuer. After 7 days the issuer re-deposit the amount to his bank and after 15 days the
check was cleared. The transaction was not recorded in the book of the company.

If the check was cleared before or on the reporting date:

A/P 95,000
Cash 95,000

If the check was cleared after on the reporting date:

NO NECESSARY ENTRY
 Financial Accounting and Reporting (Assets) - CASH

Take Note : Since there was an unrecorded transaction before the event of bouncing of check, there is no need
to do adjusting entries.

1. Recipient of the NSF checks.

There is also two scenarios

a. Recorded
b. Unrecorded

Scenario 1 : Recorded in the POV of the Recipient of the NSF Checks.

December 23, 2023 Xebec Company signed a check worth P95,000 for payment to the Supplier Company
of the inventories delivered a few days ago. Upon checking in the bank, the check was labeled as DAIF
check and was returned to the issuer. After 7 days the issuer re-deposit the amount to his bank and after
15 days the check was cleared. The transaction was recorded in the book of the company.

Pro-forma entry in the book of Supplier Company.

Cash 95,000
A/R 95,000
Necessary Adjustments in the book of Supplier Company.
A/R 95,000
Cash 95,000

If the check was cleared before or on the reporting date:

Cash 95,000
A/R 95,000

If the check was cleared after the reporting date:

NO NECESSARY ENTRY

Scenario 2: Unrecorded in the POV of the Recipient of the NSF Checks.

December 23, 2023 Xebec Company signed a check worth P95,000 for payment to the Supplier Company
of the inventories delivered a few days ago. Upon checking in the bank, the check was labeled as DAIF
check and was returned to the issuer. After 7 days the issuer re-deposit the amount to his bank and after
15 days the check was cleared. The transaction was not recorded in the book of the company.

If the check was cleared before or on the reporting date:

Cash 95,000
A/R 95,000

If the check was cleared after on the reporting date:

NO NECESSARY ENTRY

Take Note : Since there was an unrecorded transaction before the event of bouncing of check, there is no need
to do adjusting entries.
Financial Accounting and Reporting (Assets) - CASH

END OF DISCUSSION