CHAPTER 1:

CASH AND
CASH
EQUIVALENTS
What is cash?
In accounting, cash includes money and any
other negotiable instrument that is payable
in money and acceptable by the bank for
deposit and immediate credit.
Cash includes the following:
Checks
Bankdrafts
Money orders
• These are acceptable by the bank for deposit or immediate
encashment.

**Note
• Postdated checks received cannot be considered as cash because
these are unacceptable by the bank.
Unrestricted Cash
 The only guidance is found in PAS 1, paragraph 66,
which provides that an entity shall classify an asset as
current when the asset is cash or a cash equivalent
unless it is restricted to settle a liability for more than
twelve months after the end of the reporting period.
Cash items included in cash:
 Cash on hand – includes undeposited cash
collections and other cash items awaiting deposit
 Cash in bank – 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
What is Cash equivalents?
 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 insignificant5 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 maturity can qualify as cash equivalents.
** Note that what is important is the date of purchase which should be three
months or less before maturity.
Examples of cash equivalents are:

a. Three-month BSP treasury bill

b. Three-year BSP treasury bill purchased three months before
date of maturity
c. Three- month time deposit
d. Three- month money market instrument or commercial paper
Classifications of investment of excess
cash:
a. If the term is three months or less, such instruments are classified as cash
equivalents.
b. If the term is more than three months but within a year , such investments
are classified as short-term financial assets.
c. If the term is more than one year, such investments are classified as
noncurrent or long-term investments.
**Note
If such investments become due within one year from the end of the reporting
period, they are reclassified as current or temporary investments.
 Cash is measured at face value.
 Cash in foreign currency is measured at the current exchange rate.
 If a bank holding the fund is in bankruptcy, cash should be written down
to estimated realizable value if the amount recoverable is estimated to be
lower than the face value.
 The caption cash and cash equivalents should be shown as the first line
item under current assets.
 If the cash fund is set aside for the use in current operations or for the
payment of current obligation, it is a current asset. It is included as part
of cash and cash equivalent.
 The classification of a cash fund as current or noncurrent should
parallel the classification of the related liability.
 When the cash in bank account has a credit balance, it is said to be an
overdraft.
A bank overdraft is classified as a current liability and should not be
offset against other bank accounts with debit balance.
 However, 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 or bank overdraft, net of other bank
account.
 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.
 Ifthe 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.
 Ifcompensating balance is legally restricted, treat such as “cash held as
compensating balance” reported as either current or non-current asset
depending on the term of the loan or borrowing.
 Undelivered or unreleased checks are is one that is merely drawn and recorded but not given to the
payee before the end of reporting period.
Cash xx
Accounts Payable xx
 Postdated checks are check drawn, recorded and already given to the payee but it bears a date
subsequent to the end of reporting period.
Cash xx
Accounts Payable xx
 Stale checks is a check not encashed by the payee within a relatively long period of time.
If stale check is immaterial:
Cash xx
Miscellaneous Income xx
If stale check is material:
Cash xx
Accounts Payable xx
Accounting for Cash Shortage
Recorded as follows:
Cash short or over xx
Cash xx
If the cashier or cash custodian is held responsible for the cash
shortage:
Due from cashier xx
Cash short or over xx
If reasonable efforts fail to disclose the cause of the shortage:
Loss from cash shortage xx
Cash short or over xx
Accounting for Cash Overage·
Recorded as follows:
Cash xx
Cash short or over xx
If there is no claim:
Cash short or over xx
Miscellaneous Income xx
If cash overage is properly found to be the money of the cashier:
Cash short or over xx
Payable to cashier xx
Imprest System
 It is a system of control of cash which requires that all cash receipts
should be deposited intact and all cash disbursement should be made
by means of check.
Petty Cash fund
 It is a money set aside to pay sall expenses which cannot be paid
conveniently by means of check.
Two methods of handling petty cash fund:
1. Imprest fund system
 it is the one usually followed in handling petty cash transactions.
2. Fluctuating fund system
 the checks drawn to replenish the fund do not necessarily equal the
petty cash disbursements.
Cash in checking account ₱ 350,000
Cash in money market account 750,000
Treasury bill purchased November 1, 2017
maturing January 31,2018 3,500,000
Total cash and cash equivalents ₱ 4,600,000
1. What total amount should be reported as cash?

Cash - Coin ,currency, saving and checking ₱ 3,400,000

2. What total amount should be reported as cash equivalents?

Government treasury bills ₱ 2,000,000

Commercial papers 1,500,000
Total cash equivalents ₱ 3,500,000
CHAPTER 2:

BANK
RECONCILIATION
Bank Deposits
 Demand deposit
A demand deposit is money deposited into a bank account with funds that can be
withdrawn on-demand at any time. It is noninterest bearing.
 Saving deposit
A savings deposit is a safe way to save money for unexpected expenses, as
you can always add money to the deposit and it can be easily withdrawn.
 Time deposit
A time deposit is an interest-bearing bank account that has a pre-set date of
maturity. The money must remain in the account for the fixed term in order to
earn the stated interest rate.
What is bank reconciliation?
 Itis a statement which brings into agreement the cash balance per book
(general ledger) and the cash balance per bank (bank statement). It is
usually prepared on a monthly basis.
Reconciling items:
1. Book reconciling items 2. Bank reconciling items
a. credit memos a. deposit in transit
b. debit memos b. outstanding checks
c. errors c. errors
 Credit memos refers 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. (increase cash balance per book)

 Debit memos refers 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 disbursement. (decrease
cash balance per book)
 Depositin transit are collections already recorded by the
depositor as cash receipts but not yet reflected on the bank
statement. (increase cash balance per book)

 Outstanding checks are checks already recorded by the

depositor as cash disbursement but not yet reflected on the
bank statement. (decrease cash balance per book)
FORMS OF BANK
RECONCILIATION
1. ADJUSTED BALANCE METHOD

The book balance and the bank balance are brought to a

correct cash balance that must appear on the balance
sheet
BOOK BALANCE
CREDIT MEMOS already increased the bank balance but have no effect on the
book balance because these are not yet recorded by the depositor.
* This makes the book balance understated. Hence, credit memos are added to the
book balance.

DEBIT MEMOS already decreased the bank balance but have no effect on the book
balance because these are not yet recorded by the depositor.
*This makes the book balance overstated. Hence, debit memos are deducted from
the book balance.
BANK BALANCE
DEPOSITS IN TRANSIT already increased the book balance but have no effect
on the bank balance because the deposits are not yet received by the bank.
*This makes the bank balance understated. Hence, deposits in transit are added to
the bank balance

OUTSTANDING CHECKS already decreased the book balance but have no effect
on the bank balance because the checks are not yet paid by the bank
*This makes the bank balance overstated. Hence, outstanding checks are deducted
from the bank balance.
 PROFORMA
BOOK BALANCE XX
ADD: CREDIT MEMOS XX
TOTAL XX
LESS: DEBIT MEMOS XX
ADJUSTED BOOK BALANCE XX

BANK BALANCE XX
ADD: DEPOSIT IN TRANSIT XX
TOTAL XX
LESS: OUTSTANDING CHECKS XX
ADJUSTED BOOK BALANCE XX
2. BOOK TO BANK METHOD

THE BOOK BALANCE IS ADJUSTED

TO EQUAL THE BANK BALANCE
* When the reconciliation starts with the book balance and ends
with the bank balance, the usual book reconciling items are
treated in the same manner they are treated in adjusted balance
method. (credit memos=add; debit memos=deduct)

*Since DIT is added to the bank balance, it is now deducted

from the book balance and since Outstanding Check is
deducted from the bank balance it is now added to the book
balance.
 PROFORMA
BOOK BALANCE XX
ADD: CREDIT MEMOS XX
OUTSTANDING CHECKS XX XX
TOTAL XX
LESS: DEBIT MEMOS XX
DEPOSITS IN TRANSIT XX XX
BANK BALANCE XX
3. BANK TO BOOK METHOD

THE BANK BALANCE IS ADJUSTED

TO EQUAL THE BOOK BALANCE
* When the reconciliation starts with the bank balance and
ends with the book balance, the usual bank reconciling items
are treated in the same manner they are treated in adjusted
balance method. (DIT=add; OC=deduct)

*Since credit memos are added to the book balance, it is now

deducted from the bank balance and since debit memos are
deducted from the book balance it is now added to the bank
balance.
CHAPTER 3:

PROOF OF CASH
Proof of cash is an expanded
reconciliation in that it includes proof of
receipts and disbursements
BOOK BALANCE

BOOK DEBITS – Refers to cash receipts

or all items debited to the cash in bank
account.

BOOK CREDITS – Refers to cash

disbursements or all items credited to the
cash in bank account
BANK BALANCE

BANK DEBITS- Refers to all items credited to the

account of the depositor which include deposits
acknowledged by bank and credit memos

BANK CREDITS- Refers to all items debited to the

account of the depositor which include checks paid by
bank and debit memos
COMPUTATION OF DEPOSITS IN TRANSIT

DEPOSIT IN TRANSIT, BEG XX

ADD:CASH RECEIPTS DEPOSITED THIS MONTH
BOOK DEBITS XX
LESS: CREDIT MEMOS LAST MONTH (XX) XX
TOTAL DEPOSITS ACKNOWLEDGED BY BANK
LESS: DEPOSITS ACKNOWLEDGED BY BANK THIS MONTH XX
BANK CREDIT XX
LESS: CREDIT MEMOS THIS MONTH (XX) (XX)
DEPOSIT IN TRANSIT, END XX

COMPUTATION OF OUTSTANDING CHECKS

OUTSTANDING CHECK, BEG XX

ADD:CHECKS DISBURSEMENT THIS MONTH
BOOK CREDITS XX
LESS DEBIT MEMOS THIS MONTH (XX) XX
TOTAL CHECKS TO BE PAID BY BANK XX
LESS:CHECK ACTUALLY PAID BY BANK
BANK DEBITS XX
LESS:DEBIT MEMOS THIS MONTH (XX) (XX)
OUTSTANDING CHECKS,END XX