Intermediate Accounting

Reference: Sir Win Lecture and IA Valix

ACCOUNTING FOR CASH

 In history, whenever they trade, they do not use cash but apply barter system; it’s a win-win
situation
 Cash includes money and any negotiable instruments that is payable in money and accepted
by the bank for deposit and immediate credit
 Cash is currency and coins that is circulating and is *legal tender (*means ginadawat sa
tanan/majority)
 Cash = money, the standard medium of exchange
 (unrestricted) Cash is a current asset
 Cash will be non-current asset this is when cash is restricted for at least 12 months after the
end of the reporting period
 Cash is measured initially at face value and cash is measured subsequently at face value
 cash is measured at estimated realizable amount when cash cannot be recovered fully/ if
banks deposited is bankrupt
 cash in foreign currency should be converted to Philippine Pesos using the current exchange
rate
 Cash Items:
a. Cash on hand are undeposited collections, and other cash items awaiting deposit such as
customer’s check, managers check, cashier’s check, travelers check, bank draft and
money order.
b. Cash on bank are demand deposit/checking account and savings deposit which are
unrestricted as to withdrawal
c. Cash funds are set aside for current purposes such as change fund, tax funds, payroll fund,
dividend fund, and petty cash fund
 Undelivered checks/unreleased checks is one that is merely drawn and recorded but not given
to the payee before the end of the reporting period. In other words, they are checks that are
not delivered/ no deduction of cash happen thus the entry of it will be:
Dr. Cash xx
Cr. A/P xx
 Postdated checks are checks that has dates higher/later the date today. Whenever you have
postdated check you’re not yet paid/ no checks is delivered our entry will be the same to the
undelivered check. In other words, there is no payment until the check can be presented to the
bank for encashment/deposit.
 Postdated check cannot be considered as cash yet because the postdated checks are
unacceptable by the bank for deposit and immediate credit or outright encashment
 Stale check is a check not encashed by the payee within a relatively long period of time.
Negotiable Instrument Law provides that where the instrument is payable on demand,
presentment must be made within a reasonable time after issue. Reference is made to usage of
trade or business practice. In banking practice, a check becomes stale if not encashed within 6
months from the time of issuance. Thus, even after 3 months only, the entity may issue a stop
payment order to the bank for the cancelation of a previously issued check.
 If the amount of stale check is immaterial, it is simply accounted for a miscellaneous income
Dr. cash xx
Cr. Miscellaneous income xx
 However, if the cash is material and liability is expected to continue, the cash is restored and
the liability is again set up

Ianne Kristie L. Quider

BS Accountancy Student
 Dr cash xx
Cr A/P xx
 Bank overdrafts is when cash in bank account has credit balance; results from the issuance of
checks in excess of the deposits
 Banks overdrafts is classified as a current liability and should not be offset against other bank
accounts with debit balances
 Generally, overdrafts are not permitted in the Philippines
 However, an exception to the rule of overdraft is when an entity maintains two or more
accounts in one bank and one account results in an overdraft, such overdraft can be offset
against the other bank account with debit balance in order to show cash, net of bank overdraft
or bank overdraft, net of other bank account.
 An overdraft can also be offset against the other bank account if the amount is immaterial
 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. The arrangement results in the reduction of the amount borrowed because the
compensating balance provides a source of fund to the bank as partial compensation for the
loan extended.
 Informal restriction of compensating balance is considered cash since no restriction of cash is
practice
 Informal restriction is followed if the compensating problem is silent.
CASH EQUIVALENT

 Are 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
 Examples are:
a. Three-month BSP Treasury bills
b. Three-month time deposit
c. Three-month money market instrument or commercial paper
d. Xxx-year T-bills/ commercial paper/ redeemable preference share purchased three
months before maturity date
 Redeemable preference share is an example of substance over form. It has maturity date. In
substance RFS is a liability since it has a maturity date
 Note that shares such as ordinary and preference share generally has no maturity date
 If the investment is 3 months or less its classification is cash equivalent
 If the investment is more than 3 months but not more than 12 months its classification is short
term investment
 If the investment is more than 12 months its classification is long term investment
PETTY CASH FUND

 Is money set aside to pay small expenses which cannot be paid conveniently by means of
check
 Two methods of handling the petty cash fund: (a) Imprest System and (b) Fluctuating fund
System
 Petty cash custodian/cashier is a person that handles the petty cash fund
 Book maintained by the petty cash custodian/cashier is petty cash memorandum book
 Imprest system a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursements should be made by means of check
 Imprest fund system is the one usually followed in handling petty cash transactions

Ianne Kristie L. Quider

BS Accountancy Student
  In imprest fund system movement of cash is not yet/immediately recorded but are first
listed/intact
 Accounting procedure of Imprest fund system
a. First step in accounting for petty cash fund is establishment. Where check is drawn to
establish fund.
Dr. Petty cash fund xx
Cr. Cash in bank xx
b. Payment of expenses out of the fund. No formal journal entries made. Since in imprest
fund system they intact the expenses first, applying the cost benefit principle. Petty cash
custodian prepares memorandum entries in the petty cash journal and not in general
journal itself. In other words, the disbursement are recorded upon the replenishment of
the fund
c. Replenishment of petty cash payments. Check is drawn to replenish the fund whenever
petty fund runs low and its usually equal to the petty cash disbursement. Entry for petty
cash disbursement is recorded
Dr. Expenses xx
Cr. Cash in bank xx
d. At the end of the accounting period, its necessary to adjust the unreplenished expenses in
order to state the correct petty cash balance
Dr. Expenses xx
Cr. Petty Cash Fund xx
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 w/out distinguishing whether the
expenses pertain to the current period/prior period.
e. An increase in fund is recorded normally
Dr. PCF xx
Cr. CinB xx
f. A decrease in fund is recorded normally
Dr. CinB xx
Cr. PCF xx
 In fluctuating fund system any movement of cash are recorded immediately. In other words
petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash
balance per book from time to time
 In fluctuating fund system, the checks drawn to replenish the fund do not necessarily equal
the petty cash disbursements. Replenishment checks are simply drawn upon the request of the
petty cashier
 Accounting procedure of fluctuating fund system
a. First step in accounting for petty cash fund is establishment. Where check is drawn to
establish fund.
Dr. Petty cash fund xx
Cr. Cash in bank xx
b. Payment of expenses out of the petty cash fund are immediately recorded
Dr. Expenses xx
Cr. Petty cash fund xx
c. Replenishment or increase of fund:
Dr. Petty cash fund xx
Cr, Cash in bank xx
Replenishment may or may not be the same as the petty cash disbursement

Ianne Kristie L. Quider

BS Accountancy Student
 d. At the end of the reporting period. No adjustment is necessary because the petty cash fund
expenses are recorded outright.
e. Decrease of the fund is reverted to general cash
Dr. Cash in bank xx
Cr. Petty cash fund xx
 In fluctuating fund system.
a. Accounting for cash shortage
Dr. Cash shortage xx
Cr. PCF xx
b. Accounting for cash overage
Dr. PCF xx
Cr. Cash overage xx
 In imprest fund system
a. Accounting for cash shortage
Dr. Cash shortage xx
Cr. Cash in bank xx
b. Accounting for cash overage
Dr. CinB xx
Cr. Cash overage xx
 Cash shortage and overage are suspense account/temporary account which needs to be
investigates as to why cash has shortage/overage. When FS are prepared the same should be
adjusted
 Hence, if the cashier or custodian is held responsible for the cash shortage, the adjustment
should be
Dr. receivable/due from cashier xx
Cr. Cash short/over xx
 However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is
Dr. loss from cash shortage
Cr. Cash short/over
 On the other hand, cash overage is treated as miscellaneous income if there is no claim on the
same
Dr. cash short/over xx
Cr. Miscellaneous income xx
 But, where the cash overage is properly found to be the money of the cashier, the journal
entry is
Dr. cash over/short xx
Cr. Payable from cashier/custodian xx
 Note that whether its cash shortage or overage, the offsetting account is cash short or over
account, such account should be adjusted when statements are made.
 In imprest fund system, if fund was not replenished at the year end an adjustment is necessary
to record the unreplenished expenses.
Dr. Expenses xx
Cr. PCF xx
But generally, no record will be made if fund was not replenished in imprest method
 However, the adjustment made on year end is reversed.
BANK RECONCIALIATION

 Is a statement which bring into agreement the cash balance per book and cash balance per
bank
 Bank deposits are:

Ianne Kristie L. Quider

BS Accountancy Student
 1. Demand deposit also known as checking or current account. Withdrawable on demand
2. Savings deposit. Bears interest
3. Time deposit. Can be short- or long-term investment. Bears interest
 Most of the time the company books and bank book are equal, however through different
book reconciling items and bank reconciling items they don’t equal
 Credit and debit memos are memos delivered to the other party
 Book reconciling items are:
1. Credit memos
2. Debit memos
3. Error
 Note that book reconciling items are from the bank delivered to the depositor to notify the
increase (credit memos) and decrease (debit memos) of its account
 Bank Reconciling items are:
1. Deposit in transit
2. Outstanding checks
3. Errors

Ianne Kristie L. Quider

BS Accountancy Student