CASH AND CASH

EQUIVALENTS
ACC 205
CASH
▪ Cash means money
▪ Money is the standard medium of exchange in business transactions
▪ Money refers to the currency and coins which are in circulation and legal tender
▪ As contemplated in accounting, cash include money and any other negotiable
instrument that is payable in money and acceptable by the bank for deposit and
immediate credit.
▪ Cash must be readily available in the payment of current obligations and not be
subject to any restrictions, contractual or otherwise.
CASH
▪ Cash items included in cash
▪ Cash on hand – This include undeposited cash collections and other cash items awaiting
deposit such as customer’s checks, cashier’s or manager’s checks, traveler’s check, bank
drafts and money orders.
▪ Cash in bank – This includes demand deposit or checking account and saving deposit
which are unrestricted as to withdrawal.
▪ Cash fund set aside for current purposes such as petty cash fund, payroll fund and
dividend fund.
CASH EQUIVALENTS
▪ PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid
investments that are readily available convertible into cash and so near their
maturity that they present insignificant risk of changes in value because of changes
in interest rates.
▪ The standard further states that only highly liquid investments that are acquired
three months before the maturity can qualify as cash equivalents.
CASH EQUIVALENTS
▪ Examples of cash equivalents are:
▪ Three-month BSP treasury bill
▪ Three-year BSP treasury bill purchased three months before date of maturity
▪ Three-month time deposit
▪ Three-month money market instrument or commercial paper
MEASUREMENT OF CASH
▪ Cash is measured at face value
▪ Cash in foreign currency is measured at the current exchange rate.
FINANCIAL STATEMENT
PRESENTATION
▪ The caption Cash and Cash equivalent should be shown as the FIRST LINE ITEM
under current assets.
▪ Details comprising the cash and cash equivalents should be disclosed in the notes
to financial statements.
FOREIGN CURRENCY
▪ Deposits in foreign countries which are not subject to any foreign exchange
restrictions are included in “cash”.
CASH FUND FOR A CERTAIN
PURPOSE
▪ If cash fund is set aside for noncurrent purpose or payment of noncurrent
obligations, it is shown as long-term investment. (e.g., sinking fund, preference
share redemption fund, contingent fund, insurance fund, and fund for acquisition or
construction of PPE)
CLASSIFICATION OF CASH
FUND
▪ The classification of cash fund as current or noncurrent should parallel the
classification of related liability.
BANK OVERDRAFT
▪ When the cash in bank account has a credit balance, it is said to be an overdraft.
The credit balance in the cash in bank account results from the issuance of checks
in excess of the deposits.
▪ A bank overdraft is classified as current liability and should not be offset against
other bank accounts with debit balances.
▪ Exception to the rule on overdraft: 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 a debit balance in order to show cash, net of
bank overdraft.
COMPENSATING BALANCES
▪ A compensating balance generally takes the form of minimum checking or
demand deposit account balance that must be maintained in connection with
borrowing arrangement with a bank.
▪ If the deposit is not legally restricted as to withdrawal by the borrower because of
an informal compensating balance agreement, the compensating balance is part of
cash.
▪ 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.
UNDELIVERED OR
UNRELEASED CHECK
▪ An undelivered or unreleased check is one that is merely drawn and recorded but
not given to the payee before the end of reporting period.
▪ Accordingly, an adjusting entry is required to restore the cash balance and set up
the liability.
POSTDATED CHECK
DELIVERED
▪ A postdated check delivered is a check drawn, recorded and already given to the
payee but it bears a date subsequent to the end of the reporting period.
▪ The original entry recording a delivered postdated check shall also be reveres and
therefore restores to the cash balance.
STALE CHECK OR CHECK
LONG OUSTANDING
▪ A stale check is a check not encashed by the payee within a relatively long period
of time. bawal iencash after 6 months

▪ The Negotiable Instruments Law provides that where the instrument that where the
instrument is payable on demand, presentment must be made within a reasonable
time after issue.
▪ In banking practice, a check becomes stale if not encashed within six months from
the time of issuance. But entity may still 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 as
miscellaneous income.
▪ If the amount is material and liability is expected to continue, the cash is restored
and the liability is again set up.
kapag immaterial ang stale check, debit cash in bank credit miscellaneous income
IMPREST SYSTEM
▪ The imprest 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.
PETTY CASH FUND
▪ Petty cash fund is money set aside to pay small expenses which cannot be paid
conveniently by means of check.
▪ There are two methods of handling petty cash, namely:
▪ Imprest fund system
▪ Fluctuating fund system
BANK
RECONCILIATIO
N
ACC 205
BANK DEPOSITS
▪ Demand deposits – is the current account or checking account or commercial
deposit where deposits are covered by deposit slips and where funds are
withdrawable on demand by drawing checks against the bank. NON – INTEREST
BEARING
▪ Saving deposits – the depositor is given a passbook upon the initial deposit. The
passbook is required when making deposits and withdrawals. INTEREST
BEARING
▪ Time deposits – evidenced by a formal agreement in an instrument called
certificate of deposit. This may be predetermined or withdrawn on demand or after
a certain period of time agreed upon.
BANK RECONCILIATION
▪ A bank reconciliation is a statement which brings into agreement the cash balance
per book and cash balance per bank.
▪ RECONCILING ITEMS
▪ At the end of every month, comparison between the cash records of the depositor and the
bank statement receive from the bank will yield the following reconciling items:
▪ Book reconciling items
▪ Credit memos
▪ Debit memos
▪ Errors
▪ Bank reconciling items
▪ Deposit in transit
▪ Outstanding checks
▪ Errors
BANK RECONCILIATION
▪ CREDIT MEMOS
▪ 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.

▪ DEBIT MEMOS
▪ 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.
▪ DEPOSITS IN TRANSIT
▪ Deposits in transit are collection already recorded by the depositor as cash receipts but
not yet reflected on the bank statement.
BANK RECONCILIATION
▪ OUTSTANDING CHECKS
▪ Outstanding checks are checks already recorded by the depositor as cash disbursements
but not yet reflected on the bank statement.
▪ FORMS OF BANK RECONCILIATION
▪ Adjusted balance method – Under this method, the book balance and the bank balance
are brought to a correct cash balance that must appear on the balance sheet.
▪ Book to bank method – Under this method, the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.
▪ Bank to book method – Under this method, the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.
PROFORMA RECONCILIATION
▪ Adjusted balance method
▪ Book balance xx
▪ Add: Credit memos xx
▪ Total xx
▪ Less: Debit memos xx
▪ Adjusted book balance xx

▪ Bank balance xx
▪ Add: Deposits in transit xx
▪ Total xx
▪ Less: Outstanding checks xx
▪ Adjusted bank balance xx
PROFORMA RECONCILIATION
▪ Book to Bank Balance Method
▪ Book balance xx
▪ Add: Outstanding Checks xx
▪ Add: Credit memos xx
▪ Total xx
▪ Less: Deposits in transit xx
▪ Less: Debit memos xx
▪ Bank balance xx
PROFORMA RECONCILIATION
▪ Bank to Book Balance Method
▪ Bank balance xx
▪ Add: Deposit in Transits xx
▪ Add: Debit memos xx
▪ Total xx
▪ Less: Outstanding Checks xx
▪ Less: Credit memos xx
▪ Book balance xx
PROOF OF CASH
ACC 205
TWO-DATE BANK
RECONCILIATION
▪ TWO-DATE BANK RECONCILIATION
▪ The bank reconciliation is so-called “two-date because it literally involves two
dates.
▪ The procedures followed for a one-date reconciliation are the same for a two-date
reconciliation
▪ A two-date reconciliation becomes complicated only when certain facts, or data are
omitted, hence the necessity for computing them.
▪ But if all the facts are available, then reconciliation statements will simply be
prepared as of the two dates required.
TWO-DATE BANK
RECONCILIATION
▪ Among others, the omitted information may be any one or a combination of the
following:
▪ Book balance – beginning and ending
▪ Bank balance – beginning and ending
▪ Deposits in transit – beginning and ending
▪ Outstanding Checks – beginning and ending

▪ If the ending balance are not given, the following formulas may help.
▪ If the beginning balance are omitted, the formulas should simply be reversed or
just work back.
COMPUTATION OF BOOK
BALANCE
▪ Balance per book – beginning of month xx
▪ Add: Book debits during the month xx
▪ Total xx
▪ Less: Book credits during the month xx
▪ Balance per book – end of month xx
▪ Book debits – refer to cash receipts or all items debited to the cash in bank account
▪ Book credits – refer to cash disbursements or all items credited to the cash in bank
account.
COMPUTATION OF BANK
BALANCE
▪ Balance per bank – beginning of month xx
▪ Add: Bank credits during the month xx
▪ Total xx
▪ Less: Bank debits during the month xx
▪ Balance per bank – end of the month xx
▪ Bank credits – refer to all items credited to the account of the depositor which
include deposits acknowledged by bank and credit memos.
▪ Bank debits – refer to all items debited to the account of the depositor which
include checks paid by the bank and debit memos.
COMPUTATION OF
DEPOSITS IN TRANSIT
▪ Deposits in transit – beginning of month xx
▪ Add: Cash receipts deposited during the month xx
▪ Total deposits to be acknowledged by bank xx
▪ Less: Deposits acknowledged by bank during the month xx
▪ Deposits in transit – end of month xx
COMPUTATION OF
OUTSTANDING CHECKS
▪ Outstanding checks – beginning of the month xx
▪ Add: Checks drawn by depositor during the month xx
▪ Total checks to be paid by the bank xx
▪ Less: Checks paid by bank during the month xx
▪ Outstanding checks – end of month xx