FINANCIAL ACCOUNTING

Topic: Cash and Cash Equivalents

Objectives:
 Students will surely understand the concept of cash
 They will be understand the concept of cash equivalents
 They will be able to identify items considered as cash
 They will be able to identify items considered as cash equivalents
 They will know the accounting for petty cash fund

Lesson 1. Definition of terms

Cash (Layman’s term) - cash simply means “Money”

Money - the standard medium of exchange in business

transaction
-it refers to the currency and coins which are in circulation
and legal tender

Cash (Accounting) - more than money

-it includes money and other negotiable instrument that is
payable in money and acceptable by bank for deposit and
immediate credit
-includes checks, bank drafts and money orders

Note: Postdated checks received or postdated customers checks cannot be considered

as cash yet because these checks are unacceptable by the bank for deposit and immediate
credit or outright encashment

Lesson 2. Unrestricted Cash

PAS 1, paragraph 66
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.

 To be reported as “cash” an item must be unrestricted in use

Cash items included in cash

 Cash on Hand includes undeposited cash collection and other cash items awaiting
deposit such as customer’s checks, cashier’s or manager’s checks,
traveler’s check, bank drafts and money order

Cash in Bank includes demand deposit or checking account and savings deposit
which are unrestricted as to withdrawal

Cash Fund set aside for current purposes such as petty cash fund, payroll fund
and dividend fund
Lesson 3. Cash Equivalents
PAS 7, paragraph 6
Cash equivalents is a short-term and highly liquid investment that are readily
convertible into cash and so near their maturity that they present insignificant risk of
change in value because of changes in interest rates

The standard further states that only highly liquid investment that are acquired
three months before maturity can qualify as cash equivalents

Examples of Cash Equivalents

1. Three-month BSP treasury bill
2. Three-year BSP treasury bill purchased three months before date of maturity
3. Three-month time deposit
4. Three-month money market instrument or commercial paper

Note:

 Equity instrument cannot qualify as cash equivalents because shares do not

have a maturity date. However, preference shares with specified redemption
date and acquired three months before redemption date can qualify as cash
equivalents

 The important is the date of purchase which should be three months or less
before maturity

Classification of investment of excess cash

Investment in time deposit, money market instruments and treasury bills

should be classified as follows:

1. If the term is three months or less they are classified as cash equivalents and
therefore included in the caption “Cash and Cash Equivalents”
 2. If the term s more than three months but within one year they are classified as
short-term financial assets or temporary investment and presented separately
as current assets/ marketable securities

3. If the term is more than one year they are classified as noncurrent or long-
term investments

Note: However, if such investments become due within one year from the end of the
reporting period they are reclassified as current or temporary investments

Measurement of Cash

 Cash is measured at face value

 Cash in foreign currency is measured at the current exchange rate
 Cash is written down to estimated realizable value if the amount recoverable is
estimated to be lower than the face value
Financial Statement Presentation

The caption cash and cash equivalents should be shown as first line item under current
assets

This caption includes cash on hand, cash in bank, petty cash fund and cash
equivalents which are unrestricted in use for current operations. However, details
comprising the cash and cash equivalents should be disclosed in the notes to
financial statements

Cash fund for a certain purpose

 If the cash fund is set aside for 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
equivalents

Examples: Petty cash fund, payroll fund, travel fund, interest fund, dividend fund
and tax fund

 If cash fund is set aside for noncurrent purposes or payment of noncurrent

obligation, it is shown as long-term investment

Examples: Sinking fund, preference share redemption fund, contingent fund,

insurance fund and fund for acquisition or construction of property, plant and
equipment.

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 amount results from the issuance of checks in excess of
the deposit.

A bank overdraft is classified as current liability and should not be offset against other
bank accounts with debit balances.
Compensating Balance

A 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.

For example, an entity borrows P3,000,000 from a bank and agrees to maintain a 10% or
P 300,000 minimum compensating balance in a demand deposit account.

Classification of Compensating Balance

 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 formal compensating balance

agreement, the compensating balance is classified separately as “Cash held as
compensating balance” under current asset if related loan is short-term
 If the related loan is long-term the compensating balance is classified as
noncurrent investment

Types of checks

1. Undelivered or un released check

-An undelivered check is one that is merely drawn and recorded but not given
to the payee before the end of the reporting period

Entry of recovery:

Cash XX
Accounts payable or appropriate account XX

2. Postdated Checks
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.

Entry of recovery:

Cash XX
Accounts payable or appropriate account XX
 3. Stale Checks
A stale check is a check not encashed by the payee within a relatively long
period of time.

In banking practice, a check becomes stale if not encashed within six months
from the time of issuance. Of course, this is a matter of entity policy

If the amount of stale is immaterial

Cash XX
Miscellaneous income XX

If the amount is material

Cash XX
Accounts payable or appropriate account XX

Example

The statement of financial position of Kwarta Company shows cash of 330,820. The
following items were found to comprise this total amount:

Checking account in Metrobank (outstanding checks as of 105,200

year-end totaled 15,200)
Savings account at Far East bank 30,800
Petty cash fund (including expense receipts for 250) 1,500
Cash on Hand (undeposited sales receipts) 4,200
Sinking fund cash 35,000
Cash in foreign bank (in equivalent pesos) 65,000
Customer’s check on hand:
Traveler’s Check 14,000
Manager’s Check 23,120
Short term treasury bills 52,000

What is the correct amount of cash?

Checking account in Metrobank P105,200

Savings account at Far East Bank 30,800
Petty cash fund (1,500-250) 1,250
Cash on Hand (undeposited sales receipts) 4,200
Cash in foreign bank (in equivalent pesos) 65,000
Customer’s check on hand:
Traveler’s Check 14,000
Manager’s Check 23,120
Total Amount of Cash P243,570

Accounting for Cash Shortage

Where the cash count shows cash which less than the balance per book, there is a cash
shortage to e recorded as follows:

Cash short or over XX

Cash XX

If 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 short or over XX

Cash short or over XX

Accounting for Cash Overage

Where cash count shows cash which is more than the balance per book, there is a
cash overage.

Cash XX
Cash short or over XX

Note: Whether it is cash shortage or overage, the offsetting account is Cash short or
over

If there is no claim on the same

Cash short or over XX

Miscellaneous income XX

If it is properly found to be the money of the cashier

Cash short or over XX

Payable to cashier XX
 Imprest fund System
The imprest fund system 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

The petty cash fund is money set aside to pay small expenses which cannot be
paid conveniently by means of checks.

Two methods of handling petty cash

 Imprest Fund System
 Fluctuating Fund System

Imprest Fund System

The imprest fund system is the one usually followed in handling petty cash transaction.

Accounting Procedure
A. A check is drawn to established the fund

Petty Cash Fund XX

Cash in Bank XX

B. Payment of expenses out of the fund

No formal journal entries are made

C. Replenishment of petty cash payment

Expenses XX
Cash in Bank XX

D. At the end of the accounting period, it is necessary to adjust the unreplenished expenses

Expenses XX
Petty Cash Fund XX

E. An increase in the fund recorded as:

Petty Cash Fund XX

Cash in Bank XX

F. A decrease in the fund recorded as:

 Cash in Bank XX
Petty Cash Fund XX

Fluctuating Fund System

The system is called “fluctuating fund system” because the check drawn to replenish
the fund do not necessarily equal the petty cash disbursement

A. A check is drawn to established the fund

Petty Cash Fund XX

Cash in Bank XX

B. Payment of expenses out of the fund

Expenses XX
Petty Cash Fund XX

C. Replenishment of petty cash payment

Petty Cash Fund XX

Cash in Bank XX

D. At the end of the accounting period, no adjustment is necessary because the petty cash
expenses are recorded outright.

E. A decrease in the fund recorded as:

Cash in Bank XX
Petty Cash Fund XX

Example:

Zealous Company provided the following chronological transactions in relation to petty cash:

1. The entity established a petty cash fund of P15,000 on January 3

2. Petty cash disbursements- January 3-31 are:

Postage 2,500
Supplies 3,000
Transportation 1,000
Miscellaneous expense 500
 3. The fund is replenished on February 1 and increased by 5,000

Solutions:

Imprest Fund System

January 3 Petty Cash Fund 15,000

Cash in Bank 15,000

January 31 No Entry

February 1 Postage 2,500

Supplies 3,000
Transportation 1,000
Miscellaneous expense 500
Cash in Bank 7,000

Petty Cash Fund 5,000

Cash in Bank 5,000

Fluctuating Fund System

January 3 Petty Cash Fund 15,000

Cash in Bank 15,000

January 31 Postage 2,500

Supplies 3,000
Transportation 1,000
Miscellaneous expense 500
Petty Cash Fund 7,000

February 1 Petty Cash Fund 12,000

Cash in Bank 12,000
Assessment

Problem 1
Kuton Company’s checkbook balance at December 31, 2019 was 180,000. In addition, Kuton
held the following items in its safe on that date:
 Check payable to Kuton dated January 2, 2020 in payment of a sale made in
December 2019, included in December 31 checkbook balance P65,000
  Check payable to Kuton deposited December 15, but returned by bank DAIF,
P20,000
 Check drawn on Kuton’s account, payable to a vendor dated and recorded on
December 30 but not yet mailed to payee as of December 31,2019, P15,000

What is the correct cash balance of the company?

Problem 2

ABC Company provided the following transactions:

2019
Nov 3 The entity established an imprest petty cash fund of P10,000

31 An examination of the cash fund disclosed:

Currency and coins 4,000
Postage stamps 2,500
Supplies 3,500

A check was drawn to replenish the fund and to increase its amount to P20,000

Dec 31 The fund was not replenished

Currency and coins 10,000
Postage 4,000
Supplies 5,000
Deposit for 20 cases of soft drinks 1,000

2020
Jan 2 The deposit for 20 cases of soft drinks is collected

31 A check was drawn to replenish the fund

Currency and coins 3,000

Stamps 500

Memoranda showing expenditure since November 30, 2019 for:

Postage 6,000
Supplies 7,000
Payment of account 3,000

Required:
Prepare journal entries to record the transactions.
 BANK RECONCILIATION
OBJECTIVES:
 To know the reconciling items affecting the cash in bank per ledger.
 To know the reconciling items affecting the cash in bank per bank statement.
 To be able to prepare a bank reconciliation
 To be able to prepare the necessary adjusting entries to reconcile the cash in bank per
ledger with the cash in bank per bank statement.

BANK DEPOSITS
1. DEMAND DEPOSIT
- 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.
- Noninterest bearing
2. SAVING DEPOSIT
- The depositor is given a passbook upon the initial deposit. The passbook is required
when making deposits and withdrawals.
- Interest bearing
3. TIME DEPOSIT
- Evidenced, however, by a formal agreement embodied in an instrument called
certificate of deposit
- Interest bearing

BANK RECONCILIATION
- Statement which brings into agreement the cash balance per book and cash balance
per bank
- BANK STATEMENT is a monthly report of the bank to the depositor showing:
a. cash balance per bank at the beginning
b. the deposits made by the depositor and acknowledged by the bank
c. checks drawn by the depositor and paid by the bank
d. daily cash balance per bank during the month

 Assume that Company ABC (depositor) collected Php 200,000 from a customer in
settlement of an account. The collection is deposited at the XYZ Bank.

The journal entry to record the collection and the subsequent deposit is:
Cash in bank 200,000
Accounts Receivable 200,000
On the books of the bank, the journal entry is:
Cash 200,000
Company ABC 200,000
 RECONCILING ITEMS
1. BOOK RECONCILING ITEMS
a. Credit memos
b. Debit memos
c. Errors
2. BANK RECONCILING ITEMS
a. Deposits in transit
b. Outstanding Checks
c. Errors

CREDIT MEMOS
- Not representing deposits credited by the bank to the account of the depositor but not
yet recorded by the depositor as cash receipts.
a. Notes receivable collected by bank
b. Proceeds of bank loan
c. Matured time deposits

DEBIT MEMOS
- 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.
a. NSF or no sufficient fund checks or DAIF – checks deposited but returned but the bank
because of insufficiency of fund.
b. Technically defective checks – checks deposited but returned but the bank because of
technical defects such as absence of signature.
c. Bank Service Charge – bank charges for interest, collection.
d. Reduction of Loan – amount deducted from the current account of the depositor in
payment for loan which the depositor owes to the bank and which has already matured.

DEPOSITS IN TRANSIT
- Collections already recorded by the depositor as cash receipts but not yet reflected on
the bank statement.
a. Collections already forwarded to the bank for deposit but too late to appear in the bank
statement.
b. Undeposited collections or those still in the hands of the depositor. In effect, these are
cash on hand awaiting delivery to the bank for deposit.

OUTSTANDING CHECKS
- Checks already recorded by the depositor as cash disbursements but not yet reflected
on the bank statement.
a. Checks drawn and already given to payees but not yet presented for payment.
 b. Certified checks is one where the bank has stamped on its face word “accepted” or
“certified” indicating sufficiency of fund. Immediately debited or charged to insure the
eventual payment of check.
It should be deducted from the total outstanding checks (if included) because they are no
longer outstanding for bank reconciliation purposes.

FORMS OF BANK RECONCILIATION

A. ADJUSTED BALANCE METHOD – the book balance and the bank balance are
brought to a correct cash balance that must appear on the balance sheet.
B. BOOK TO BANK METHOD – the book balance is reconciled with the bank balance or
the book balance is adjusted to equal the bank balance.
C. BANK TO BOOK METHOD – the bank balance is reconciled with the book balance or
the bank balance is adjusted to equal the book balance

 Adjusted balance method is preferred over the two.

PROFORMA RECONCILIATION
ADJUSTED BALANCE METHOD
Book balance XX
Add: Credit Memo XX
Total XX
Less: Debit Memo XX
Adjusted book balance XX

Bank balance XX
Add: Deposits in XX
Transit
Total XX
Less: Outstanding XX
Checks
Adjusted bank balance XX

BOOK TO BANK METHOD

Book balance XX
Add: Credit Memos XX
Outstanding XX XX
Checks
Total XX
Less: Debit Memos XX
Deposits in XX XX
Transit
Bank Balance XX
 BANK TO BOOK METHOD
Bank balance XX
Add: Deposits in XX
transit
Debit Memos XX XX
Total XX
Less: Outstanding XX
checks
Credit Memos XX XX
Book Balance XX

ADJUSTING ENTRIES
a. To record the note collected by bank:

Cash in bank XX
Notes Receivable XX
b. To record the NSF customer check:

Accounts Receivable XX
Cash in bank XX
c. To record the bank service charge

Bank Service charge XX

Cash in bank XX

SOME ERRORS AND THEIR CORRECTION

a. Understatement of cash receipts on the book of depositor.

Example:
The collection from customer which is deposited amounts to P 20,000 but recorded in the
book only as P 2,000. There is an understatement of cash receipt of P 18,000. The error is
added to the book balance and adjusted as follows:
Cash in bank 18,000
Accounts Receivable 18,000
b. Understatement of checks drawn by depositor

Example:
A check in payment of account payable amounting to P 21,000 is recorded in the book as
P 12,000. There is an understatement of cash disbursement and a consequent
overstatement of book balance in the amount of P 9,000. The error is deducted from the
book balance and adjusted as follows”
Accounts Payable 9,000
Cash in bank 9,000
c. Deposit of another entity is credited by the bank to the account of the depositor.
A deduction from the bank balance because it erroneously increased the account balance
of the depositor in the bank. No adjustment needed.
 d. Check of another entity charged to the account of the depositor.
An addition to the bank balance because it erroneously decreased the account balance of
the depositor in the bank. No adjustment needed.

EXAMPLES
See problem 2-1 to 2-6 in the book page 53-59

ASSESSMENT
1. LMN Company provided the following information:

LMN Company

Date Check Withdrawal Deposits Balance

No.
May 1 300,000 300,000
3 103 20,000 280,000
7 104 30,000 50,000 300,000
10 101 70,000 230,000
13 100,000 330,000
16 106 120,000 210,000
22 108 50,000 160,000
25 CM 80,000 240,000
29 Service 2,000 238,000
Charge DM
31 Service 3,000 235,000
Charge DM

EFG Bank
May 1 Deposit 300,000 May 1 Check No. 101 70,000
7 Deposit 50,000 2 Check No. 102 50,000
13 Deposit 100,000 3 Check No. 103 20,000
31 Deposit 200,000 7 Check No. 104 30,000
10 Check No. 105 10,000
13 Check No. 106 120,000
15 Check No. 107 10,000
17 Check No. 108 50,000
25 Check No. 109 60,000
650,000 420,000
230,000

The credit made by the bank on May 25 represents the proceeds of a note received from a
customer which was given to the bank for collection by entity on May 20.
 a. Prepare a bank reconciliation using adjusted balance method
b. Prepare adjusting entries

Balance per bank 235,000

Add: Deposit in Transit 200,000
Total 435,000
Less: Outstanding Checks
Check No. 102 50,000
105 10,000
107 10,000
109 60,000 (130,000)
Adjusted Bank Balance 305,000

Balance per book 230,000

Add: Proceeds of note 80,000
collected
Total 310,000
Less: Service Charge 2,000
3,000 ( 5,000)
Adjusted Book Balance 305,000

Adjusting entries
Cash in Bank 80,000
Accounts Receivable 80,000
Bank Service Charge 5,000
Cash in Bank 5,000
2.
STU Company provided the following information for the month of April:
Balance per book 850,000
Balance per bank statement 1,000,000
Outstanding Checks, including certified check 400,000
of P50,000
Deposits in Transit 260,000
Proceeds of customers note 300,000
NSF Checks 140,000
Service charge for the current month 20,000
A creditor’s check for 20,000 was incorrectly 200,000
recorded in the depositor’s book as
Check of MNO Company charged by banks 100,000
against STU Company

a. Prepare bank reconciliation on April 30 following the adjusted method.

b. Prepare adjusting entries on April 30
Balance per bank 1,000,000
Add: Deposit in Transit 260,000
Total 1,260,000
Less: Outstanding Checks 400,000
Certified checks (50,000)
(350,000)
Erroneous bank
charge (100,000)
Adjusted Bank Balance 810,000

Balance per book 850,000

Add: Proceeds of note 300,000
collected
Total 1,150,000
Less: NSF Checks
(140,000)
Service charge (20,000)
Error
(180,000)
Adjusted Book Balance 810,000

Cash in bank 300,000

Notes Recievable 300,000
Accounts Receivable 140,000
Cash in bank 140,000
Bank service charge 20,000
Cash in bank 20,000
Accounts Receivable 180,000
Cash in bank 180,000