Chapter 1 Cash and Cash Equivalents

Learning Objectives
1. Define cash and identify the items that are included in the “Cash and Cash Equivalents”
line item.
2. Determined how and what amount cash and cash equivalent are presented in the
statement of financial position.
3. Internal Control to safeguard cash.
4. Account for petty cash funds and cash shortages/overages.
5. Bank Reconciliation

Definition of Cash
Cash is money or its equivalent that is readily available for unrestricted use. Items to be
considered as cash are showed by the illustration.

Cash Item

Unrestricted and immediately available for For use other than current operation
use in current operations (Other non-current financial assets)
(Cash in the current asset section)

For payment of operating expenses

For payment of current liability

For acquisition of CURRENT ASSET

Items included as Cash Items NOT included as Cash

Coins and Currencies Postdated Checks
Demand Deposits and Savings Account IOUs or Advances to Employees
Bank Drafts Postage Stamps
Money Order Cash Fund not available for use in the
Checks current operations
Cash Fund
 Petty Cash Fund  Sinking Fund
 Revolving Fund  Plant Expansion Fund
 Payroll Fund  Depreciation Fund
 Change Fund  Preference Share Redemption
 Dividend Fund Fund
 Tax Fund  Contingency fund
 Travel Fund  Insurance Fund
 Interest Fund
 Other types on imprest bank
accounts used in the current
operations
Cash equivalents
Cash equivalents are “short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.” (PAS
7 Statement of Cash Flows)
Only highly liquid investments that are acquired 3 months or less before maturity can qualify as
cash equivalents.

Presentation of Measurement of Cash in the Financial Statement

Cash is generally measured at face value, which is also its fair value. The following summarizes
several noteworthy considerations in the reporting of cash balance in the statement of financial
position
1. Foreign Currency
Cash in foreign currency and deposits in foreign banks which are subject to immediate
and unrestricted withdrawal, should be translated to Philippines currency using the
exchange rate at the end of the reporting period.

2. Post-dated checks and Unreleased/undelivered checks

Postdated checks received from customers are excluded from cash and should be reported
as receivable.
Postdated checks drawn are included in cash.
Unreleased/undelivered checks drawn are included in cash.

3. NSF Checks (No Sufficient Fund Checks) and IOUs (“I ow you” notes)
NSF checks also described as DAIF (“drawn against insufficient funds”) checks or
DAUD (“drawn against unclear deposit”) and IOUs are excluded from cash and should
be reported as receivable.

4. Cash in closed banks/ bankrupt bank

Cash in closed banks/ bankrupt bank is excluded from cash and presented as receivable
measured at realizable value.

5. Postage stamps and expense advances

Advances such as employees’ travel are excluded from cash and should be reported as
prepaid expenses.

6. Bank overdraft
A bank overdraft is presented as a current liability unless it qualifies to be offset against
cash.

7. Petty cash fund

Petty cash fund is money set aside to defray relatively small amounts of cash
disbursements.
 8. Compensating balance
Compensating balances that are legally restricted as to withdrawal by the borrower are
excluded from cash.

Compensating balances that are not legally restricted as to withdrawal are included in
cash.

Whether restricted or not, compensating balances are disclosed in the notes.

Illustrative Problem
Jimenez Company had the following account balances on December 31, 2020:

Cash in bank – current account 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building
construction expected to be disbursed in 2021 3,000,000
Time deposit, purchased December 15, 2020 and
due March 15, 2021 2,000,000

the cash on hand included a P200,000 check payable to Jimenez, dated January 15, 2021. What
total amount should be reported as “cash and cash equivalents” on December 31, 2020?

Cash in bank- current account 5,000,000

Cash in bank – payroll account 1,000,000
Cash on hand (500,000 – 200,000) 300,000
Time deposit 2,000,000

Total cash and cash equivalents 8,300,000

The cash in bank set aside for payroll is included in cash because it is for the payment of current
liability.

The cash on hand is reduced by the postdated check payable to Jimenez. The postdated check
should be reverted to accounts receivable.

The time deposit is classified as cash equivalent because the term is three months. Under PAS 7,
treasury bills, money market placement and time deposit normally qualify as cash equivalents
only when they have a short maturity of three months or less from the date of acquisition.

The cash in bank restricted for building construction is classified as a noncurrent investment
because it is set aside for the acquisition of a noncurrent asset and not for the payment of a
current liability.
Surigao Company shows the following account balances in their financial records as of
December 31, 2020:

Checking account at Morgan Bank (20,000)

Checking account at Land Bank 500,000
Payroll account – National bank 100,000
Foreign bank accounts-restricted 750,000
Postage stamps 22,000
Employees’ postdated checks
30,000
I.O.U. from president’s brother 75,000
Traveler’s check 50,000
No-sufficient funds check 18,000
Petty cash fund (P16,000 in currency & expenses receipts
for P84,000) 100,000
Cashier’s checks 36,000

What is the correct cash balance to be reported in the statement of financial position of Surigao
Company on December 31, 2020 assuming the bank overdraft is repayable on demand and it’s
integral to the entity’s cash management?

Checking account at Land Bank 500,000

Bank overdraft (20,000)
Payroll account 100,000
Traveler’s checks 50,000
Cashier’s checks 36,000
Petty cash 16,000
Correct cash balance, December 31, 2020 682,000

A bank overdraft is presented as an accounting liability. However, a bank overdraft that is

repayable on demand that forms part of an entity’s cash management should be included as a
component of cash and cash equivalent (PAS 7 par 8).

Internal Controls over Cash

Inherent risk is normal higher for cash compare to other assets because cash is exposed more to
risk of theft and other types of fraud. Adequate and effective internal controls should be in place
to ensure that cash is reasonable safeguarded.

Examples of internal Control over Cash

1. Segregation of incompatible duties
The duties of (a) authorization, (b) execution, (c) recording, and (custody) over cash
should be segregated
 2. Imprest System
All cash receipts should be deposited intact to the bank. Collection should be deposited
intact withing reasonable period from the date of collection and not be used for any type
of disbursement.
All cash disbursement should be made through checks. Disbursement should be made
through checks and not from cash collections. Small amount disbursements should be
made through petty cash fund.

3. Voucher System
Under this system, all disbursement must be supported by properly approved vouchers
and properly recorded.

4. Internal audits at irregular intervals

Cash count conducted by the internal control department are made without advance
notice to the cash custodian. Cash count involves test of checking of transactions and
record-keeping.

5. Minimum Cash Balance

A minimum cash balance should be maintained sufficiently enough to defray specific
business requirements.

6. Periodic Reconciliation of bank statements balance and cash balance

Regular reconciliation of bank balance and book balance for cash uncover immediately
any error or irregularities in recording cash transactions

Petty cash fund

Petty cash fund (PCF) is money set aside to defray relatively small amounts of cash
disbursements.
The following are the accounting procedure for petty cash fund
1. Establishment of the petty cash fund
PCF is established by means of a check in conformed with the imprest system of internal
control for cash. The check is typically drawn by the PCF custodian who is responsible
for the custody of the fund.
The entry to record the establishment of the petty cash fund is a follow:

2. Disbursements out of the petty cash fund

No journal entries are made when disbursements are made from the petty cash fund.
Instead, petty cash payments are initially recorded in a petty cash register and supported
by signed petty cash voucher.

3. Replenishment of the petty cash disbursement

 The PCF is replenished when its balance becomes low. The replenishment is made
through checks and supported by a check disbursement voucher. The petty cash custodian
should surrender the supporting documents to the accounting department upon
replenishment.
The entry to record the replenishment is as follows:
Various Expense Accounts XXX
Cash in Bank XXX

4. At year-end, Prior to the preparation of the financial statement, I'm adjusting entries made
to recognize the payment from the fund that are not there replenish. This adjustment
likewise updates and bring the petty cash fund general Ledger account to an amount
equal to actual cash balance. This would avoid understatement of expense is an
overstatement of cash. This adjustment is usually reverse at the beginning of the
subsequent period. The year-end adjustment is recorded as follow.

Various Expense Accounts XXX

Petty cash fund XXX

5. In the instances the amount in the petty cash fund may be dim in a decade to satisfy the
company's needs, define balances increase and the following journal entry is made:
Various Expense Accounts XXX
Cash in Bank XXX

Illustrative Problem
The cash account in the current asset section of the balance sheet for Kudarat Company showed
a balance of P555,000. It was found to include the following items:

Petty cash fund (1,000 is in the form of paid vouchers) 5,000

Checking account balance, per bank statement
(A P25,000 check is still outstanding) 255,000
Undeposited receipts, including a post-dated check for P5,000 120,000
Currencies and coins awaited deposit 55,000
Bond sinking fund – cash 100,000
Check drawn by manager; returned by bank marked NSF 20,000

What is the correct cash balance for Kudarat Company’s statement of financial position?
Petty cash fund 4,000
Checking account, per bank, (net of outstanding check) 230,000
Undeposited Receipts 115,000
Currencies and Coins 55,000
Correct Cash Balance 404,000

*The postdated check is shown as account receivable.

*The bond sinking fund is shown as long-term investment.
*The NSF check drawn by the manager is shown as non-trade receivable.
*Paid petty cash vouchers not yet replenished should be recognized as expense at the end of the
accounting period.
*The outstanding check is deducted from the balance per bank.

Cash Short and Over

Cash short and over is a nominal account that is debited for cash shortage and credited over
overage in the petty cash fund. A debit balance in cash short and over account at the end of the
period should be reported as miscellaneous expense, while a credit balance is reported as
miscellaneous revenue. However, material cash shortage resulting from cause such as theft
should be charged to receivable account if it's probable that the shortage is to be recovered.

Bank Reconciliation

A bank reconciliation statement is a report that is prepared for purpose of bringing balances of
cash (a) per records and (b) per bank statement into agreement.

Balance per books, end. xx Bal. per bank statement, end. xx

Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted balance xx Adjusted balance xx

Balance per book, end. - the cash balance in the hunting records as of the end of the current
month

Balance per bank statement, end. - the ending cash balance in the bank statement of the current
month
Credit Memos - these are addition (bank credit) made by the bank to the depositor's bank
accounts but not yet recorded by the depositor.
Ex.
i. Collection made by the bank on behalf of the depositor.
ii. interest income earned by the depositor.
iii. Proceeds from loan directly credited or added by the bank to the depositor's account.
iv. Unrolled-over matured time deposit transferred by the bank to the entity’ account

Debit Memos - These are deductions (bank debit) made by the bank to the depositor's bank
account but not yet recorded by the depositor.
Ex.
i. Bank service charges
ii. No Sufficient Fund Checks (NSF)
iii. Automatic Debits
iv. Payment of loans

Book Errors - errors committed by the depositor's

Illustrative Problem
Velasco Company’s bank statement for the month of April included the following information:

Bank service charge for April 15,000

Check deposited by Velasco during April was not collectible
and has been marked “NSF” by the bank and returned 40,000

In comparing the bank statement to its own records, the entity found the following:

Deposits made but not yet recorded by bank 130,000

Checks written and mailed but not yet recorded by bank 100,000

All deposits in transit and outstanding checks have been properly recorded in the entity’s books.

A customer’s check for P35,000 payable to Velasco Company had not yet been deposited and
had not been recorded by the entity. The cash in bank account balance per ledger is P920,000.

What is the adjusted cash in bank on April 30?

Balance per ledger 920,000

Unrecorded customer check 35,000
Bank service charge (15,000)
NSF check (40,000)

Adjusted book balance 900,000

Deposit in Transit - our deposit made but not get credited by the bank to the depositor's bank
account.

Outstanding Checks - these are checks drawn and released to the payees but not yet any cash
with the bank.

If there were no errors existing in the records of both the depositor and the bank, the
computations for the deposits in transit and outstanding checks, respectively, may be
summarized as follows:
To compute deposits in transit:
Deposit in transit, beginning of the month Pxx
Add cash receipts reflected in the company’s
records during the month* xx
Total Pxx
Less deposits during the month as reflected
in the bank statement** xx
Deposits in transit, end of the month Pxx

* the amount does not necessarily represent debits (charges) in the company’s
records. If total of charges to the cash account is given, any credit memo in previous month
should be excluded.
** the amount does not necessarily represent credits in the bank statement. If the
total of credit memo for the current month should be excluded.

To compute for the amount of outstanding checks:

Outstanding checks, beginning of the month Pxx
Add checks drawn by the company during month* xx
Total Pxx
Less checks paid by the bank during the month** xx
Outstanding checks, end of the month Pxx

* the amount does not necessarily represent credits in the company’s records. Of the
total of credits to the cash account is given, any debit memo in previous month should
be excluded.
** the amount does not necessarily represent debits (charges) in the bank statement.
If the total of charges in the bank statement. If the total of charges in the bank statement
is given, any debit memo for the current month should be excluded.

Bank Errors - errors committed by the bank

Illustrative Problem
Victoria Company provided the following data for the month of January of the current year:

Balance per book, January 31 3,130,000

Balance per bank statement, January 31 3,500,000
Collections on January 31 but undeposited 550,000
NSF check received from a customer returned by the bank on February 5
with the January bank statement 50,000
Checks outstanding on January 31 650,000
Bank debit memo for safety deposit box rental not recorded by depositor 5,000
A creditor’s check for P30,000 was incorrectly recorded in the depositor’s
book as 300,000
A customer’s check for P200,000 was recorded by the depositor as 20,000
The depositor neglected to make an entry in its books for a check drawn in
payment of an account payable 125,000

What is the adjusted cash in bank on January 31?

Balance per book 3,130,000

Overstatement of creditor’s check 270,000
Understatement of customer’s check 180,000
NSF check (50,000)
Bank debit memo for safety deposit box (5,000)
Unrecorded check (125,000)
Adjusted book balance 3,400,000

Balance per bank 3,500,000

Undeposited collections 550,000
Checks outstanding (650,000)
Adjusted bank balance 3,400,000
Proof of Cash
a proof of cash in is an expanded bank reconciliation that includes proof of cash receipts and
cash disbursements. A proof of cash is a useful in discovering discrepancies in handling cash
over a certain period of time.
Below are some of the guidelines in proof of cash
1. A proof of cash is like a T-account

Nov. 30 + Receipts = Disbursements Cash in bank

Per books 60 + 30 = 20 Nov. 30 60
ADD: CM Receipts 30 20 Disbursements
November xx xx 70 Dec. 31
December xx
LESS: DM
November xx xx
December xx
Book errors:
November
December
Adjusted bal. xx + xx = xx

2. The previous month ending and current month ending columns follow the regular bank
reconciliation format.
Nov. 30 Receipts Disbursements Dec. 31
Per books xx xx xx xx
ADD: CM
November xx xx
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx xx xx xx
3. The “Receipts” and “Disbursements” columns pertain to the current month only - in
this illustration, like the month of December below.
Nov. 30 Receipts Disbursements Dec. 31
Per books 60 xx xx 70
ADD: CM
November 25 xx
December xx 35
LESS: DM
November (65) xx
December xx (95)
Book errors:
November
December
Adjusted bal. 20 xx xx 10

4. CREDIT MEMO: LAST MONTH (November)

The November credit memo is a collection last month. However, it is only recorded this
month (i.e., December).
Therefore, it is deducted from the “Receipts” column because only the receipts in
December should be included in this column.

Nov. 30 + Receipts = Disbursements + Dec. 31

Per books 60 + 30 = 20 + 70
ADD: CM
November 25 + (25) = +
December xx xx
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx + xx = xx + xx
 5. CREDIT MEMO: THIS MONTH (December)
The December credit memo is a collection this month. However, it is not yet recorded
this month (it will only be recorded next month).
Therefore, it is added in the “Receipts” column because it is an unrecorded receipt in
December.
Nov. 30 + Receipts = Disbursements + Dec. 31
Per books 60 + 30 = 20 + 70
ADD: CM
November 25 + (25) =
December + 35 = + 35
LESS: DM
November xx xx
December xx xx
Book errors:
November
December
Adjusted bal. xx + xx = xx + xx

The proof of cash is completed as follows:

Nov. 30 Receipts Disbursements Dec. 31

Per books 60 30 20 70
ADD: CM
November 25 (25)
December 35 35
LESS: DM
November (65) (65)
December 95 (95)
Book errors:
November
December
Adjusted bal. 20 40 50 10
Video Reference
https://www.youtube.com/watch?v=7HyqunYlU8E
https://www.youtube.com/watch?v=tRMm29qI6JU
https://www.youtube.com/watch?v=4gT1nPXRE1M