FINANCIAL ACCOUNTING AND REPORTING

TOPIC 3: CASH AND CASH EQUIVALENTS

CASH
Definition Recognition
Cash includes money and Since there is no specific standard governing cash and cash equivalents, the related
any other negotiable standard is". The only guidance is found in PAS 1, paragraph 66, which provides that "an
instrument that is payable entity shall classify an asset as current when it is cash or a cash equivalent unless
in money and acceptable it is restricted from being exchanged or used to settle a liability for at least twelve
by the bank for deposit and months after the end of reporting period." In conclusion, to report an item as part of
immediate credit. cash, it should be UNRESTRICTED IN USE.

Measurement of CASH
ITEM MEASUREMENT
Cash in local currency At face value
Cash in foreign currency At face value but translated to Philippine Peso
Cash in closed bank or banks in bankruptcy Estimated realizable value

Composition
PART OF
CATEGORY ITEMS CLASSIFICATIONS
CASH?
Coins and

Currencies
Checks Normal Customer

Checks
Cashiers’, Managers’

& Travelers’ Check
CASH ON
Undelivered & Drawn by the entity  Revert to payable
HAND
Postdated Check Drawn by other person X Receivable
Stale Checks Drawn by the entity Revert to payable / other

income
Drawn by other person X Receivable
Other Money Order 
instruments Bank Drafts 
Demand Deposit (Non-interest bearing) 
Savings Deposit (Interest bearing) 
Escrow Deposit (Interest bearing) X Long-term investment
Time Deposit (Interest bearing) X Cash equivalents
Unrestricted/ informal *if
Compensating 
CASH IN silent
Balance
BANK Restricted/formal X
GR & Silent X Current liability
EXP:
Offset from other bank
Bank Overdraft 1. 2 or more accounts 
accounts
with the same bank
2. Immaterial  Offset from cash accounts
Current asset 
For asset
Non-current asset X Long-term investment
EX: Change, payroll
For use in fund, revolving fund,

operations petty cash fund, travel
fund
CASH FUND
Current Liability EX: Interest fund,

Dividend fund, tax fund
For settlement of Non-current Liability EX: Pension fund,
liabilities Contingent fund,
X Long-term investment
Insurance fund, Bond
sinking fund

ADDITIONAL INFORMATION

The following rules shall be observed regarding post-dated checks, stale checks, and unreleased checks.
CHECK ITEMS POINT-OF-VIEW TREATMENT
Payee (e,g,. an entity receiving post- Shall be excluded from cash balance, and shall
POST-DATED CHECKS
dated customer’s checks) not decrease the accounts receivable balance
Payor (e,g,. an entity writing a post- Shall still form part of cash and shall not decrease
dated checks for suppliers) the accounts payable balance

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 Payee (e,g,. an entity did not encash a
STALE CHECKS customer check for more than six (6)
months after the date of check)
Payor (e,g,. a check written was not
encashed by the supplier for more than
six (6) months after the date of check)
UNRELEASED CHECKS Payee (N/A)
Payor (e,g,. an entity has written a check
but was not given to the payee)
Shall form part of accounts receivable and shall
not form part of cash balance
Shall form part of accounts payable and part of
cash balance
N/A
Shall still form part of cash balance and accounts
payable

FROM THE CUSTOMERS WRITTEN BY THE ENTITY

POST-DATED CHECKS
Dr. Accounts Receivable Dr. Cash in Bank
POV
Cr. Cash in Bank Cr. Accounts Payable
STALE CHECKS
Dr. Accounts Receivable
POV
Cr. Cash
UNRELEASED CHECKS
N/A Dr. Cash
POV
Cr. Accounts Payable

The following rules shall be observed regarding post-dated checks, stale checks, and unreleased checks.
CHECK ITEMS POINT-OF-VIEW TREATMENT
Payee (e,g,. an entity receiving post- Shall be excluded from cash balance, and shall
POST-DATED CHECKS
dated customer’s checks) not decrease the accounts receivable balance
Payor (e,g,. an entity writing a post- Shall still form part of cash and shall not decrease
dated checks for suppliers) the accounts payable balance
Payee (e,g,. an entity did not encash a Shall form part of accounts receivable and shall
STALE CHECKS customer check for more than six (6) not form part of cash balance
months after the date of check)
Payor (e,g,. a check written was not Shall form part of accounts payable and part of
encashed by the supplier for more than cash balance
six (6) months after the date of check)
UNRELEASED CHECKS Payee (N/A) N/A
Payor (e,g,. an entity has written a check Shall still form part of cash balance and accounts
but was not given to the payee) payable

ADDITIONAL INFORMATION:
FROM THE CUSTOMERS WRITTEN BY THE ENTITY
POST-DATED CHECKS
Dr. Accounts Receivable Dr. Cash in Bank
POV
Cr. Cash in Bank Cr. Accounts Payable
STALE CHECKS
Dr. Accounts Receivable
POV
Cr. Cash
UNRELEASED CHECKS
N/A Dr. Cash
POV
Cr. Accounts Payable

Other Topics
Fraudulent activities in cash
a. Lapping - consists of misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.

b. Window dressing - is a practice of opening the books of accounts beyond the close of the accounting period
for the purpose of showing a better financial position and performance.

c. Kiting - is a transfer of cash from one bank to another bank. Kiting is usually employed at the end of the month.
Kiting occurs when a check is drawn against a first bank and depositing the same check in a second bank to cover
the shortage in the latter bank.

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Accounting for Petty Cash Fund
Petty cash fund – is the money set aside to defray relatively small amount of cash disbursement.

SUMMARY OF JOURNAL ENTRIES

IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM
A. Establishment Petty Cash Fund XX Petty Cash Fund XX
Cash in Bank XX Cash in Bank XX
B. Payment of Expense Expenses XX
Memo Entry Only
Petty Cash Fund XX
C. Replenishment Expenses XX Petty Cash Fund XX
Petty Cash Fund XX Cash in Bank XX
D. A.E. for Expenses XX
NO ENTRY
Unreplenished Fund Petty Cash Fund XX
E. Increase in Fund Petty Cash Fund XX Petty Cash Fund XX
Cash in Bank XX Cash in Bank XX
F. Decrease in Fund Cash in Bank XX Cash in Bank XX
Petty Cash Bank XX Petty Cash Bank XX

Accounting for Cash Shortage and Cash Overage

SUMMARY OF JOURNAL ENTRIES

CASH SHORTAGE CASH OVERAGE

Cash short / over XX Cash on Hand XX
UPON DISCOVERY
Cash on Hand XX Cash short / over XX
UPON INVESTIGATION Due from cashier XX Cash short / over XX
(cashier is accountable) Cash short / over XX Due to Cashier XX
UPON INVESTIGATION Loss from shortage XX Cash short / over XX
(cannot trace anymore) Cash short/ over XX Other Income XX

CASH EQUIVALENTS
Definition
PAS 7, paragraph 6, defines
cash equivalents 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.
Recognition Composition
Only debt instruments acquired within 3 months A. Time Deposit
or less before their maturity date can qualify as B. Money Market Placement
cash equivalents. and Commercial Paper
C. Treasury Bills
Note: Equity securities cannot qualify as cash
equivalents since they do not have maturity date,
except redeemable preference shares (with
mandatory redemption) that are acquired 3
months before their redemption date can qualify
as cash equivalents.

Classification of investments in TIME DEPOSIT, MONEY MARKET PLACEMENTS/INTRUMENT, and TREASURY BILLS
a. If the term is three months or less, such instrument are classified as cash equivalents and therefore included in the
caption “cash and cash equivalents”.
b. If the term is more than three months but within one year, such investments are classified as short-term or
temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as long-term investments.

BANK RECONCILIATION
Bank reconciliation is accounting for the sources or reasons for the difference between the cash in bank per books and cash
in bank per bank. In practice, bank reconciliations are made on a per bank account basis and normally made at the end of each
month.

The aforementioned sources or reasons of the difference are classified into “book-reconciling” items and “bank-reconciling”
items. Book-reconciling items are those which will bring the unadjusted cash in bank per books to correct (i.e., adjusted)
amount of cash in bank. Bank-reconciling items are those who will bring the unadjusted cash in bank per bank to correct (i.e.,
adjusted) amount of cash in bank.

Bank reconciliation format to get the adjusted cash in bank balance starting with unadjusted cash in bank balance per books
(or “balance per ledger”, “balance per ledger”, etc.

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 Unadjusted cash in bank balance per book Pxx

Additions:
Credit Memos:
Net proceeds from accounts/notes receivable collected by the bank on behalf of the entity xx
Bank loan proceeds directly credited to the entity’s bank account xx
Proceeds of matured investments managed by the bank on behalf of the entity that were directly credited to the
entity’s bank account xx
Direct wire transfers from another bank xx

Errors:
Non-recording of cash receipts xx
Understatement in the recording of cash receipts xx
Overstatement in the recording of check made xx

Deductions:
Debit Memos
No-sufficient fund (NSF) check xx
Bank service charge xx
Matured loan payable to the bank directly charged to bank account xx
Other expenses directly debited by the bank from the entity’s account (i.e., auto-debit arrangements) xx

Errors:
Non-recording of check made xx
Overstatement in the recording of cash receipts xx
Understatement in the recording of check made xx
Adjusted Cash in Bank Balance xx

ADDITIONAL INFORMATION: (BOOK)

 Credit Memos – refer to items not representing deposits credited by the bank to the account of the depositor but not
yet recorded by the depositor as cash receipts. The credit memos have the effect of increasing the bank balance.
Typical example of credit memos are:
a. Notes receivable collected by the bank in favor of the depositor and credited to the account of the depositor.
b. Proceeds of bank loan credited to the account of the depositor.
c. 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 depositor as cash disbursements. The debit memos have the
effect of decreasing the bank balance.
a. NSF or No Sufficient Fund Checks – These are checks deposited but returned by the bank because of
insufficiency of fund. The other name for NSF is DAIF or “drawn against insufficient fund”
b. Technically Defective Checks – These are 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 amount in figures.
c. Bank Service Charge – These include bank charges for interest, collection, checkbook and penalty.
d. Reduction of Loan – This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor in payment for loan which the depositor owes to the bank and which
has already matured.
 Errors

Bank reconciliation format to get the adjusted cash in bank starting with unadjusted cash in bank per bank (or “balance per
bank statement”, “balance per bank records”, etc.):

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 Unadjusted cash in bank balance per bank Pxx

Additions: xx
Deposit in Transit

Errors:
Non-recording of cash deposit of the depositor xx
Recording of check made by the another depositor xx
Understatement in the recording of cash deposit of the depositor xx
Overstatement in the recording of check made by the depositor xx

Deductions:
Outstanding checks xx
Errors:
Non-recording of check made by the depositor xx
Recording of cash deposit made by another depositor xx
Overstatement in the recording of cash deposit of the depositor xx
Understatement in the recording of check made by the depositor xx
Adjusted Cash in Bank Balance

ADDITIONAL INFORMATION: (BANK)

 Deposit in Transit – are collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statements.
a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections or those still in the hands of the depositor. 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 disbursement but not yet reflected on
the bank statement.
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified Checks – A certified check is one where the bank has stamped on its face the word “accepted”
or “certified” indicating sufficiency of fund.
 Errors

PROFORMA RECONCILIATION
ADJUSTED BALANCE METHOD BOOK TO BANK METHOD
Book Balance xx Book Balance xx
Add: Credit Memos xx Add: Credit Memos xx
Total xx Outstanding Checks xx xx
Less: Debit Memos xx Total
Adjusted Book Balance xx Less: Debit Memos xx
Deposit in Transit xx xx
Bank Balance xx Bank Balance xx
Add: Deposit in Transit xx
Total xx
BANK TO BOOK METHOD
Less: Outstanding Checks xx
Book Balance xx
Adjusted Bank Balance xx
Add: Deposit in Transit xx
Debit Memos xx xx
Total
Less: Outstanding Checks xx
Credit Memos xx xx
Bank Balance xx

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PROOF OF CASH

Concepts
Proof of cash is a two-date bank reconciliation showing the total amounts of receipts and disbursements during a
particular period. The two dates in proof of cash include the beginning cash in bank balance and the ending cash in bank
balance.

From the beginning unadjusted cash in bank balances, the ending unadjusted cash in bank balance can be computed as
follows:

Proof of cash general format when using the unadjusted book balances:
PRIOR CURRENT
RECEIPTS DISBURSEMENTS
MONTH MONTH
Unadjusted book balances Pxx Pxx Pxx Pxx

Add:
Credit Memos – Prior Month xx (xx)
Credit Memos – Current Month xx xx

Less:
Debit Memos – Prior Month (xx) (xx)
Debit Memos – Current Month xx (xx)

ERRORS:
Under Receipt – Prior Month xx (xx)
Under Receipt – Current Month xx Xx

Over Receipt – Prior Month (xx) (xx)

Over Receipt – Current Month (xx) (xx)

Under Disbursement – Prior Month (xx) (xx)

Under Disbursement – Current Month xx (xx)

Over Disbursement – Prior Month xx (xx)

Over Disbursement – Current Month (xx) xx
ADJUSTED BALANCES xx xx xx xx

Proof of cash general format when using unadjusted bank balances:

PRIOR CURRENT
RECEIPTS DISBURSEMENTS
MONTH MONTH
Unadjusted book balances Pxx Pxx Pxx Pxx

Add:
Deposit in Transit – Prior Month xx (xx)
Deposit in Transit – Current Month xx xx

Less:
Outstanding Checks – Prior Month (xx) (xx)
Outstanding Checks – Current Month xx (xx)

ERRORS:
Under Receipt – Prior Month xx (xx)
Under Receipt – Current Month xx xx

Over Receipt – Prior Month (xx) (xx)

Over Receipt – Current Month (xx) (xx)

Under Disbursement – Prior Month (xx) (xx)

Under Disbursement – Current Month xx (xx)

Over Disbursement – Prior Month xx (xx)

Over Disbursement – Current Month (xx) xx
ADJUSTED BALANCES xx xx xx xx

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The effects of the errors shall be assessed in a case-by-case basis.

The amount of deposits in transit and outstanding checks at the end of each period can be computed as:
Deposits in Transit, beginning Pxx Outstanding checks, beginning Pxx
Add: Deposits made by the depositor xx Add: Checks made by the depositor xx
Total deposits to be acknowledged by the bank xx Total checks to be paid by the bank xx
Less: Deposits recorded by the bank xx Less: Checks paid by the bank xx
Deposits in Transit, ending xx Outstanding Checks, Ending xx

Computation of the deposits made by the company and the deposits acknowledge by the bank

Book Receipts (Debits) XX Bank Receipts (CREDITS) XX

Less: Credit Memo – PM XX Less: Credit Memo – CM XX
Book errors last month corrected this month Bank errors last month corrected this month:
Understatement of CR – PM XX Understatement of CR – PM XX
Overstatement of CD – PM XX Overstatement of CD – PM XX
Book errors this month: Book errors this month:
Overstatement of CR – CM XX Overstatement of CR – CM XX
Add: Understatement of CR – CM XX Add: Understatement of CR – CM XX
DEPOSITS MADE BY THE COMPANY XX DEPOSITS ACKNOWLEDGE BY THE BANK XX

Computation of the checks issued by the company and the checks paid by the bank

Book Disbursement (Credits) XX Book Disbursement (Debits) XX

Less: Debit Memos – PM XX Less: Debit Memos – CM XX
Book errors last month corrected this month Bank errors last month corrected this month
Overstatement of CR – PM XX Overstatement of CR – PM XX
Understatement of CD – PM XX Understatement of CD – PM XX
Book errors this month Bank errors this month
Overstatement of CD – CM XX Overstatement of CD – CM XX
Add: Understatement of CD – CM XX Add: Understatement of CD – CM XX
CHECKS ISSUED BY THE BANK XX CHECKS PAID BY THE BANK XX