CASH AND CASH

EQUIVALENTS
CASH
WHAT IS CASH?

• In layman’s point of view, “Cash” simply means money.

• Money refers to the currency and coins which are in
circulation and legal tender.
WHAT IS CASH?

• But in accounting parlance, the term “Cash” has a special

and broader meaning.
• It connotes more than money.
CASH IN ACCOUNTING

• As contemplated in accounting, cash includes money and other

negotiable instrument that is payable in money and acceptable by bank
for deposit and immediate credit.
• Accordingly, cash includes the following which are acceptable by the
bank for immediate credit:
a. Checks
b. Bank Drafts
c. Money Orders
CASH IN ACCOUNTING

• For example, when checks are received in full settlement of

an account receivable, cash is immediately debited.
• 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

• According to PAS 1, Paragraph 66, an entity shall classify an asset as

current when the assets is cash or cash equivalents unless it is restricted
to settle a liability for more than twelve months after the end of the
reporting period.
• Therefore, to be reported as “Cash”, an item must be unrestricted in use.
UNRESTRICTED CASH

• Unrestricted means that the cash must be readily available

in the payment of current obligations and not be subject to
any restrictions, contractual or otherwise.
CASH ITEMS INCLUDED IN CASH

• Cash on Hand
• Cash in Bank
• Cash Fund
 CASH ON HAND

• Cash on Hand- It includes the following:

a. Undeposited Cash Collections
b. Customer’s Checks
c. Cashier’s or Manager’s Checks
d. Traveler’s Checks
e. Bank Drafts
f. Money Orders
CASH IN BANK

• Cash in Bank- This includes the following:

a. Demand Deposit or Checking Account
b. Savings Deposit which are unrestricted as to
withdrawal.
CASH FUND

• Cash Fund- Set aside for current purposes such as the

following:
a. Petty Cash Fund
b. Payroll Fund
c. Dividend Fund
 CASH
EQUIVALENTS
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
insignificant risk of changes in value because of changes in
interest rates.
CASH EQUIVALENTS

• 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

• Three- month treasury bil

• Three- year BSP treasury bill purchased three months
before date of maturity
• Three- month time deposit
• Three- month money- market instrument or commercial
paper
CASH EQUIVALENTS

• Take note that what is important is the date of

purchase which should be three months or less
before maturity.
MEASUREMENT
OF CASH
MEASUREMENT OF CASH

• Cash is measured at Face Value.

• Cash in foreign currency is measured at the current
exchange rate.
• For a bank or financial institutions holding the funds of an
entity is in bankruptcy or financial difficulty, cash should be
written down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.
 FINANCIAL
STATEMENT
PRESENTATION
FINANCIAL STATEMENT PRESENTATION

• Cash and Cash Equivalents should be shown as

“first line item” under current assets.
CASH FUND
CASH FUND FOR A CERTAIN PURPOSE

• The cash fund is included as part of Cash and Cash

Equivalents.
CASH FUND FOR A CERTAIN PURPOSE

• Examples:
a. Petty Cash Fund
b. Payroll Fund
c. Travel Fund
d. Interest fund
e. Dividend Fund
f. Tax Fund
CASH FUND SET ASIDE FOR NON- CURRENT
PURPOSE

• If the cash fund is set aside for non- current purpose or

payment of non- current obligations, it is shown as long-
term investment.
CLASSIFICATION OF CASH FUND

• The classification of a cash fund should parallel the

classification of related liability.
• For example, a sinking fund that is set aside to pay a bond
payable shall be classified as current asset when the bond
payable is already due within one year after the end of the
reporting period.
CLASSIFICATION OF CASH FUND

• However, a cash fund set aside for the acquisition of a non-

current asset should be classified as non- current regardless
of the year of disbursement.
BANK OVERDRAFT
BANK OVERDRAFT

• When the cash in bank account has a credit balance, it is

said to be an overdraft.
• A bank overdraft is classified as current liability and should
not be offset against other bank accounts with debit
balances.
EXAMPLE OF BANK OVERDRAFT

An entity maintains two bank accounts:

a. Cash in Bank- First Bank, which is overdrawn by
Php10,000.
b. Cash in Bank- Second Bank, with a debit balance of Php
100,000.
The net cash balance is Php 90,000.
EXAMPLE OF BANK OVERDRAFT

The proper statement classification of the two accounts is as

follows:
Current Assets:
Cash in Bank- Second Bank Php 100,000
Current Liability:
Bank Overdraft- First Bank Php 10,000
EXAMPLE OF BANK OVERDRAFT

• Note that it is not necessary to adjust and open a bank

overdraft account in the ledger.
• In other words, the Cash In Bank- First Bank account is
maintained in the ledger with a credit balance.
• It is to be stated that generally overdrafts are not permitted
in the Philippines.
EXCEPTION TO THE RULE ON OVERDRAFT

• An overdraft can be offset against the other bank account

with the debit balance if the entity maintains two or more
accounts in “One Bank” only.
• An overdraft can also be offset against the other bank
account if the amount is material.
COMPENSATING
BALANCE
COMPENSATING BALANCE

• Generally, it takes the form of minimum checking or

demand deposit account balance that must be maintained in
connection with a borrowing agreement with a bank.
• For example, an entity borrows Php 5,000,000 from a bank
and agrees to maintain a 10% or Php 500,000 minimum
compensating balance in a demand deposit account.
COMPENSATING BALANCE

• In effect, 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 OF COMPENSATING BALANCE

• If not legally restricted, the compensating balance is part of

cash.
• If legally restricted, 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
non- current investment.
UNDELIVERED OR
UNRELEASED
CHECK
UNDELIVERED OR UNRELEASED CHECK

• It is one that is merely drawn and recorded but not given to

the payee before the end of reporting period.
• There is no payment when the check is pending delivery to
the payee at the end of the reporting period.
UNDELIVERED OR UNRELEASED CHECK

• Accordingly, an adjusting entry is required to restore the

cash balance and set up the liability.
Cash xxx
Accounts Payable or Appropriate Account xxx
POSTDATED CHECK
DELIVERED
POSTDATED CHECK DELIVERED

• It is a check drawn, recorded and already given to the payee but it bears
a date subsequent to the end of reporting period.
• The original entry recording a delivered postdated check shall also
reversed and therefore restored to the cash balance.
Cash xxx
Accounts Payable or Appropriate Account xxx
STALE CHECK OR
CHECK LONG
OUTSTANDING
STALE CHECK OR CHECK LONG OUTSTANDING

• A stale check is a check not encashed by the payee with a

relatively long period of time.
• In banking practice, a check becomes stale if not encashed
within six (6) months from the time of issuance. Of course,
this is a matter of entity policy.
STALE CHECK OR CHECK LONG OUTSTANDING

• Thus, even after three months only, the entity may 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.
Cash xxx
Miscellaneous Income xxx
STALE CHECK OR CHECK LONG OUTSTANDING

• However, if the amount is material and liability is expected

to continue, the cash is restored and the liability is again set
up.
Cash xxx
Accounts Payable or Appropriate Account xxx
ACCOUNTING FOR
CASH SHORTAGE
ACCOUNTING FOR CASH SHORTAGE

• Where the cash count shows cash which is less than the
balance per book, a cash shortage is to be recorded.
Cash Short or Over xxx
Cash xxx
ACCOUNTING FOR CASH SHORTAGE

• The cash short or over account is only a temporary or suspense account.

When financial statements are prepared the same should be adjusted.
• Hence, if the cashier or cash custodian is held responsible for the cash
shortage, the adjustment should be:
Due from Cashier xxx
Cash Short or Over xxx
ACCOUNTING FOR CASH SHORTAGE

• However, if reasonable efforts fail to disclose the cause of

the shortage, the adjustment is
Loss from Cash Shortage xxx
Cash Short or Over xxx
ACCOUNTING FOR
CASH OVERAGE
ACCOUNTING FOR CASH OVERAGE

• Where the cash count shows cash which is more than the
balance per book, a cash overage is to be recorded.
Cash xxx
Cash Short or Over xxx
ACCOUNTING FOR CASH OVERAGE

• Note that whether it is a cash shortage or cash overage, the offsetting

account is cash short or over account. Such account should be adjusted
when statements are made.
• The cash overage is treated as miscellaneous income if there is no claim
on the same.
Cash Short or Over xxx
Miscellaneous Income xxx
ACCOUNTING FOR CASH OVERAGE

• But where the cash overage is properly founded to be the

money of the cashier, the journal entry is:
Cash Short or Over xxx
Payable to Cashier xxx
IMPREST
SYSTEM
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.
• While internal control ideally requires that all payments should
be made by means of check, this is sometimes impossible.
PETTY CASH
FUND
PETTY CASH FUND

• The 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 the petty cash, namely:
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- IMPREST FUND
SYSTEM

• A check is drawn to establish the fund.

Petty Cash Fund xxx
Cash in Bank xxx
ACCOUNTING PROCEDURES- IMPREST FUND
SYSTEM

• Payment of expenses out of the fund

No formal journal entries are made.
The Petty Cashier generally requires a signed petty cash
vouchers for such payments and simply prepares
memorandum entries in the petty cash journal.
ACCOUNTING PROCEDURES- IMPREST FUND
SYSTEM

• Replenishment of Petty Cash payments.

Whenever the petty cash fund runs low, a check is drawn to replenish the
fund.
The replenishment check is usually equal to the petty cash disbursements.
It is at this time that the petty cash disbursements are recorded.
Expenses xxx
Cash in Bank xxx
ACCOUNTING PROCEDURES- IMPREST FUND
SYSTEM
• At the end of the accounting period it is necessary to adjust the
unreplenished expenses in order to state the correct petty cash balance.
Expenses xxx
Petty Cash Fund xxx
The adjustment is to be reversed at the beginning of the next accounting
period.
ACCOUNTING PROCEDURES- IMPREST FUND
SYSTEM

• An increase in the fund is recorded as follows:

Petty Cash Fund xxx
Cash in Bank xxx
ACCOUNTING PROCEDURES- IMPREST FUND
SYSTEM

• A decrease in the fund is recorded as follows:

Cash in Bank xxx
Petty Cash Fund xxx
ILLUSTRATION- IMPREST FUND SYSTEM

Nov. 10 The entity established an imprest fund of Php

10,000
Petty Cash Fund 10,000
Cash in Bank 10,000
ILLUSTRATION- IMPREST FUND SYSTEM

Nov. 29 Replenished the fund. The Petty Cash items include the
following:
Currency and Coins 2,000
Supplies 5,000
Telephone 1,800
Postage 1,200
ILLUSTRATION- IMPREST FUND SYSTEM

Nov. 29 The journal entry to record the replenishment is:

Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in Bank 8,000
ILLUSTRATION- IMPREST FUND SYSTEM

De. 31 The fund was not replenished.

The fund is composed of the following: Currency and
Coins Php 7,000, Supplies Php 1,500, Postage Php 500,
Miscellaneous Expense, Php 1,000.
ILLUSTRATION- IMPREST FUND SYSTEM

Dec. 31 Journal Entry:

Supplies 1,500
Postage 500
Miscellaneous Expense 1,00
Petty Cash Fund 3,000
ILLUSTRATION- IMPREST FUND SYSTEM

Jan. 1The adjustment made on December 2020 is reversed.

Petty Cash Fund 3,000
Supplies 1,500
Postage 500
Miscellaneous Expense 1,000
ILLUSTRATION- IMPREST FUND SYSTEM

Feb. 1 The fund is replenished and increased to Php 15,000

The composition of the fund:
Currency and Coin 1,000
Supplies 4,500
Postage 3,000
Miscellaneous Expense 1,500
ILLUSTRATION- IMPREST FUND SYSTEM

Feb. 1 Journal Entry:

Petty Cash Fund 5,000
Supplies 4,500
Postage 3,000
Miscellaneous Expense 1,500
Cash in Bank 14,000
FLUCTUATING FUND SYSTEM

• The system is called “fluctuating fund system” because the checks

drawn to replenish the fund do not necessarily equal the petty cash
disbursements.
• The replenishment checks are simply drawn upon the request of the
petty cashier.
• Moreover, petty cash disbursements are immediately recorded this
resulting in a fluctuating petty cash balance per book from time to time.
ACCOUNTING PROCEDURES- FLUCTUATING
FUND SYSTEM

• Establishment of the fund:

Petty Cash Fund xxx
Cash in Bank xxx
ACCOUNTING PROCEDURES- FLUCTUATING
FUND SYSTEM

• Payment of expenses out of the petty cash fund:

Under this system, the disbursements from petty cash funds
are immediately recorded in contradistinction with the
imprest fund system where the disbursements are recorded
upon the replenishment of the fund.
ACCOUNTING PROCEDURES- FLUCTUATING
FUND SYSTEM

• Replenishment or increase of the fund:

Petty Cash Fund xxx
Cash in Bank xxx
The replenishment check may or may not be the same as the
petty cash disbursements.
ACCOUNTING PROCEDURES- FLUCTUATING
FUND SYSTEM

• At the end of the reporting period, no adjustment is

necessary because the petty cash expenses recorded
outright.
ACCOUNTING PROCEDURES- FLUCTUATING
FUND SYSTEM

• Decrease of the fund is reverted to the general cash.

Cash in Bank xxx
Petty Cash Fund xxx
END