CASH & CASH

EQUIVALENTS
 QUESTION:

 Is CASH only includes MONEY? Why or Why not?

ANSWER:
 DEFINITION OF CASH

 No, because in accounting, cash connotes more than money. It has a special and broader
meaning.
 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 checks, bank drafts, and money orders because they are acceptable by the
bank for deposit and immediate encashment.
 But postdated checks received cannot be considered as cash yet because these checks are
unacceptable by the bank for deposit and immediate credit or outright encashment.
 UNRESTRICTED CASH

 There is no specific standard dealing with cash

 The only guidance is found in PAS 1, stating that an entity shall classify an asset as current
when the asset is cash or cash equivalent unless it is restricted to settle a liability for more
than 12 months after the end of the reporting period.
 This means that cash must readily available in payment of current obligations and not
subject to any restrictions, contractual or otherwise.
 CASH ITEMS INCLUDED IN CASH

 Cash on Hand- this includes 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

 Cash Equivalents- 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.
 The standard further states that “only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents”
 Examples of Cash Equivalents:
a. 3-month BSP Treasury bill
b. 3-year BSP Treasury bill purchased three months before date of maturity
c. 3-month time deposit
d. 3-month money market instrument or commercial paper.
 QUESTION

 Is equity securities can be classified as Cash equivalent?

ANSWER
 ANSWER

 No, equity securities cannot be classified as cash equivalents because shares do not have
maturity dates.

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 CASH EQUIVALENTS

 However, preference shares with specified redemption date and acquired 3 months before
redemption date can qualify as cash equivalents.
 Note that what is important is the date of purchase which should be 3 months or less before
maturity.
 Thus, BSP treasury bill that was purchased one year ago cannot qualify as cash equivalents
even if remaining maturity is 3 months or less.
 INVESTMENT OF EXCESS CASH

 Excess cash may be invested in time deposits, money market instruments and treasury bills
for the purpose of earning interest income.
 Classifications of investment of excess cash:
a. If the term is 3 months or less, such as instruments are classified as cash equivalents and
therefore included in “cash & cash equivalents”
b. If the term is more than 3 months but within 1 year, such investments are classified as
short-term financial assets or temporary investments and presented separately as current
assets.
c. If the term is more than 1 year, such investments are classified as noncurrent or long term
investments.
 MEASUREMENT OF CASH

 Cash is measured at face value

 Cash in foreign currency is measured at the current exchange rate
 If a bank or financial institution holding the funds of an entity is in bankruptcy or financial
difficulty, the cash should be written down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.
 CASH FUND FOR A CERTAIN PURPOSE

 Current:
 If the cash fund is set aside for use in current operations or payment for current obligation.
(Cash & Cash Equivalents)
 Example: petty cash fund, payroll fund, travel fund, interest fund, dividend fund, and tax
fund
 Non Current:
 If the cash fund is set aside for non current purpose or payment of noncurrent obligation, it
is shown as long term investments.
 Example: sinking fund, preference shares redemption fund, contingent fund, insurance
fund, and fund for acquisition or construction of property, plant and equipment.
 QUESTION:

 A sinking fund that is set aside to pay a bond payable when the bond is already due within
one year after the reporting period, is it current or non current asset? Why?
 ANSWER:

 It is CURRENT asset because the classification of liability is current therefore it is also

current asset.
 ANSWER:

 It is CURRENT asset because the classification of liability is current therefore it is also

current asset.
 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 balance.
 For example, an entity maintains 2 bank accounts:
a. Cash in bank- First Bank, which is overdrawn by 10,000
b. Cash in bank- Second Bank, with a debit balance of 100,000
The proper statement classification of 2 accounts is as follows:
Current assets:
Cash in bank- Second Bank 100,000
Current liability:
Bank overdraft- First Bank 10,000
 QUESTION
 What if an entity maintains two or more accounts in 1 bank and one account results to
overdraft, can it be offset or not?

ANSWER
 EXCEPTION TO THE RULE OF
OVERDRAFT
 But when an entity maintains two or more accounts in 1 bank and one account results to
overdraft, such overdraft can be offset against other bank account with a debit balance.
 Moreover, an overdraft can also be offset against other bank account if the amount is not
material.
 COMPENSATING BALANCE
 Compensating balance- generally take the form of minimum checking or demand deposit
account balance that must be maintained in connection with a borrowing arrangement with
a bank.
 This arrangement results in reduction of the amount borrowed because the compensating
balance provides a source of fund to the bank as partial compensation for the loan
extended.
 Classification:
A. CASH- if the deposit is not legally restricted as to withdrawal by the borrower because of
an informal compensating balance agreement.
B. CURRENT ASSET-CASH HELD AS COMPENSATING BALANCE- if the deposit is
legally restricted because of a formal compensating balance agreement if loan is short term
C. NON CURRENT INVESTMENT- if the related loan is long term, under this compensating
balance.
 UNDELIVERED OR UNRELEASED
 An undelivered or unreleased checkCHECK
is one that is merely drawn and recorded but not given
to the payee before the end of the reporting period.
 There is no payment when the check is pending delivery to the payee at the end of the
reporting period.
 Because the undelivered check is still subject to the entity’s control and may thus be
cancelled anytime before the delivery at the discretion of the entity.
 Accordingly, an adjusting entry is required to restore the cash balance and set up the
liability as follows:
Cash xx
Accounts Payable(or liability account) xx
 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 reversed and
therefore restored to the cash balance as follows:
Cash xx
Accounts payable (or liability account) xx
 Reason: there is no payment until the check can be presented to the bank for the
encashment or deposit.
 STALE CHECK OR CHECK LONG
OUSTANDING
 Stale check- is a check not encashed by the payee within relatively long period of time.
 The question is how long a time must the check remain outstanding?
 The Negotiable instruments Law provides that where the instrument is payable on demand and this includes
checks, presentment must be made within a “reasonable time” after its issue.
 In banking practice, a check becomes stale if not encashed within 6 months from the time of issuance. Of course
this is a matter of entity policy.
 Thus even after 3 months only, the entity may issue “stop payment order” to the bank for the cancellation of a
previously issued check.
 If stale check is immaterial, it is accounted as miscellaneous income:
Cash xx
Miscellaneous Income xx
 If stale check is material:
Cash xx
Accounts payable (liability acct) xx
 ACCOUNTING FOR CASH SHORTAGE
 Where the cash count shows cash which is less than the balance per book, there is cash shortage
to be recorded as follows:
Cash short or over xx
Cash xx
 The cash short or over acct is only a temporary or suspense account. So it needs to be adjusted
based on the reason of cash shortage.
 If the reason of shortage is cashier or cash custodian responsible:
Due from cashier xx
Cash short or over xx
 If reasonable efforts fail to disclose the cause of shortage:
Loss from cash shortage xx
Cash short or over xx
 ACCOUNTING FOR CASH OVERAGE
 Where the cash count shows cash which is more than the balance per book, there is cash
overage to be recorded as follows:
Cash xx
Cash short or over xx
 Cash short or over should be adjusted as follows:
 If there is no claim on cash overage:
Cash short or over xx
Miscellaneous income xx
 If the cash overage is found to be the money of the cashier:
Cash short or over xx
Payable to cashier xx
 IMPREST SYSTEM
 The Imprest system is 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.
 There are occasions when the issuance of checks becomes impractical or inconvenient such as
when small amounts are paid or things are hurriedly bought or customers entertained.
 So it may be more economical and convenient to pay in cash rather than issue check.
 Therefore, petty cash fund is sometimes being set up to pay this small amounts.
 PETTY CASH FUND
 Petty Cash Fund is money set aside to pay small expenses which cannot be paid conveniently by
means of check.
 2 methods of handling petty cahs:
A. Imprest fund system
B. Fluctuating fund system
 IMPREST FUND SYSTEM
 The imprest fund system is the one usually followed in handling petty cash transactions.
 Accounting procedures:
a. A check is drawn to establish the fund:
Petty cash fund xx
Cash in bank xx
b. Payment of expenses out of the fund.
 No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for
such payments and simply prepares memorandum entries in the petty cash journal.
c. Replenishment of petty cash payments
 Whenever the petty cash fund runs low, a check is drawn to replenish the fund. The replenishment equal
to the petty cash disbursements.
Expenses xx
Cash in bank xx
 IMPREST FUND SYSTEM
d. At the end of the period, it is necessary to adjust the unreplenished expenses in order to state the
correct petty cash balance:
Expenses xx
Petty cash fund xx
 The adjustment is to reversed at the beginning of the next accounting period for normal
replenishment procedures may be followed.
e. An increase in the fund is recorded as follows:
Petty cash fund xx
Cash in bank xx
f. A decrease in the fund is recorded as follows:
Cash in bank xx
Petty cash fund xx
 ILLUSTRATION
 Nov 10, 2017- The entity established an imprest fund of P10,000
Petty cash fund 10,000
Cash in bank 10,000
 Nov 29- Replenished the fund. The petty cash items include the ff:
Currency and coin 2,000
Supplies 5,000
Telephone 1,800
Postage 1,200
 Nov 29- The journal entry to record replenishment:
Supplies expense 5,000
Telephone expense 1,800
Postage expense 1,200
Cash in bank 8,000
 ILLUSTRATION
 Dec 31- The fund was not replenished.
 The fund is composed of the following: currency and coin 7,000, supplies 1,500, postage 500,
miscellaneous expense 1,000.
Supplies expense 1,500
Postage expense 500
Miscellaneous expense 1,000
Petty cash fund 3,000
 2018, Jan 1- The adjustment made on December 31, 2017, is reversed.
Petty cash fund 3,000
Supplies expense 1,500
Postage expense 500
Miscellaneous expense 1,000
 ILLUSTRATION
 Feb 1, 2018- The fund is replenished and increased to 15,000
The composition of the fund: currency and coin 1,000, supplies 4,500, postage 3,000, and
miscellaneous expense 1,500
Petty cash fund 5,000
Supplies expense 4,500
Postage expense 3,000
Miscellaneous expense 1,500
Cash in bank 14,000
 FLUCTUATING FUND SYSTEM
 Fluctuating fund system- checks drawn to replenish the fund do not necessarily equal the petty cash
disbursements.
 The replenishment checks are simple drawn upon the request of the petty cashier.
 Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty
cash balance per book from time to time:
a. Establishment of the fund:
Petty cash fund xx
Cash in bank xx
b. Payment of expenses out of the petty cash fund:
Expenses xx
Petty cash fund xx
c. Replenishment or increase of the fund
Petty cash fund xx
Cash in bank xx
 FLUCTUATING FUND SYSTEM
d. At the end of the reporting period, no adjustment is necessary because the petty cash expenses are
recorded outright.
e. Decrease of the fund is recorded as follows:
Cash in bank xx
Petty cash fund xx

Example:
 Nov 10- The entity established a petty cash fund of 10,000
Petty cash fund 10,000
Cash in bank 10,000
 Nov 11-28- Petty cash disbursements amounted to 8,000
Expenses 8,000
Petty cash fund 8,000
 FLUCTUATING FUND SYSTEM
 Issued a check for 10,000 to replenish the fund:
Petty cash fund 10,000
Cash in bank 10,000
 At this point, the petty cash balance per book is 12,000
 Dec 1-30- Petty cash expenses amounted to 9,000
Expenses 9,000
Petty cash fund 9,000
 Dec 31- Issued a check for 15,000 to replenish the fund
Petty cash fund 15,000
Cash in bank 15,000
- At this point, the petty cash balance is 18,000