MODULE 1 CASH & CASH EQUIVALENTS

LEARNING OBJECTIVES:
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Account for petty cash funds and cash shortages/overages.
4. Prepare a bank reconciliation.

OVERVIEW
Cash is the most liquid of all company assets. It is what a business generally uses to settle
debts and acquire goods. Cash is generally any currency a business owns. Any currency the
business has at its headquarters, branches, or in its bank accounts is included as part of its
cash account on its financial statements.

Acquiring new knowledge

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A synchronous discussion for this lesson will be scheduled on AUGUST 11, 2020 (Tuesday
7:30 – 8:30 AM)

Definition
Cash includes legal tender, bills, coins, checks received but not deposited, and checking and
savings accounts. Cash equivalents are any short-term investment securities that have maturity
periods of 90 days or less. These include bank certificates of deposit, banker’s acceptances,
Treasury bills, commercial paper, and other money market instruments.

Cash is the
► Most liquid asset.
► Standard medium of exchange.
► Basis for measuring and accounting for all other items.
► Current asset.

Examples: coin, currency, available funds on deposit at the bank, money orders, certified
checks, cashier’s checks, personal checks, bank drafts and savings accounts.

Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present insignificant risk of changes in interest rates.

Examples: Treasury bills, commercial paper, and money market funds.

Restricted Cash
When material in amount:
 Segregate restricted cash from “regular” cash.
 Current assets or non-current assets
Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and (3)
compensating balances.

Bank Overdrafts
When a company writes a check for more than the amount in its cash account.
 Generally reported as a current liability.
 Offset against cash account only when available cash is present in another account in
the same bank on which the overdraft occurred.

Summary of Cash-Related Items

Cash Controls
Management faces two problems in accounting for cash transactions:
1. Establish proper controls to prevent any unauthorized transactions by officers or
employees.
2. Provide information necessary to properly manage cash on hand and cash
transactions.

Petty Cash Fund System

Petty cash, also known as imprest cash, is a fund established for making small payments that
are impractical to pay by check. Examples include postage due, reimbursement to employees
for small purchases of office supplies, and numerous similar items.
The accounting procedures for petty cash fund are as follows:

1. Petty cash fund is establish -Record 300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. Disbursement out of the petty cash fund

No entries are recorded - Petty cash custodian obtains signed receipts from each
individual to whom he or she pays cash.

Replenishment of petty cash disbursements

3. Custodian receives a company check to replenish the fund.

Office Supplies Expense 42

Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash 173

To decrease the fund

4. If the company decides that the amount of cash in the petty cash fund is excessive by
50, it lowers the fund balance as follows.

Cash 50
Petty cash 50

5. Adjustment for unreplenished fund at reporting date

When preparing financial statements, any unreplenished petty cash fund should be
adjusted in order not to overstate cash and not to understate expenses.
The adjusting entry is as follows:

Various expense accounts xx

Cash shortage or overage xx
Petty cash fund xx

The cash shortage or overage account (receivable to custodian) is debited when there is
shortage, and credited when there is an overage.

Physical Protection of Cash Balances

Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as practicable.
 Periodically prove (reconcile) the balance shown in the general ledger.
 Bank Reconciliation
One of the most common cash control procedures is the bank reconciliation. In
business, every bank statement should be promptly reconciled by a person not
otherwise involved in the cash receipts and disbursements functions. The reconciliation
is needed to identify errors, irregularities, and adjustments for the Cash account. Having
an independent person prepare the reconciliation helps establish separation of duties
and deters fraud by requiring collusion for unauthorized actions.

Using Bank Accounts

To obtain desired control objectives, a company can vary the number and location of
banks and the types of accounts.
► General checking account
► Demand deposit
► Savings deposit

Bank Reconciliation
Schedule explaining any differences between the bank’s and the company’s records of
cash.
Purpose of Bank Reconciliation
The bank reconciliation process offers several advantages including:
 Detecting errors such as double payments, missed payments, calculation errors etc.
 Tracking and adding bank fees and penalties in the books
 Spot fraudulent transactions and theft
 Keeping track of accounts payable and receivables of the business

Pro forma bank reconciliation statement

Angel Co.
Bank Reconciliation
For the Month Ended Aug. 31, 2021
Balance per books, end P xx Balance per bank statement, end P xx
Add: Credit memos (CM) xx Add: Deposit in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/Less: Book errors xx Add/Less: Banks errors xx
Adjusted Balance P xx Adjusted balance P xx

Book - Reconciling Items:

Credit memos – are additions made by the bank not representing deposits
made by the depositor (book), and not yet recorded by the depositor.

Examples of credit memos include:

a. Collections made by the bank on behalf of the depositor.
b. Interest income earned by the depositor.
c. Proceed from loan directly credited or added by the bank to the depositor’s account.
d. Unrolled-over matured time deposits transferred by the bank to the depositor’s
account.

Debit memos – are deductions by the bank not representing checks issued
by the depositor.

Examples of debit memos include:

a. Bank service charges representing bank charges for fees, interest, penalties, and
surcharges.
b. No sufficient funds checks (NSF) – these are checks deposited and already added
by the bank to the account, but subsequent returned because of insufficient funds by
the drawer to pay for the check.
c. Automatic debits, such as when the depositor and the bank agree that the bank will
make automatic payments of bills on behalf of the depositor.
d. Payment of loans which the entity (depositor) agreed to be made out directly from its
bank account.

Book errors – errors committed by the depositor (e.g., erroneous recording in the
books).

Bank – Reconciling Items:

Deposit in transit – sometimes called undeposited collection, recognize as deposit

by the book but not yet credited by the bank. Deposit in transit often occur when
deposits are mailed to the bank, deposits place in a night depository, or deposit made
after the bank cut-off.

Outstanding checks – are checks issued and released to the payee

but not yet encashed with the bank.

Outstanding checks exclude the following:

a. Certified checks – the bank when certifying a checks, automatically
debits the depositors accounts.
b. Stale checks – checks that remains outstanding for a relatively long
period of time, are reverted back to cash, and are excluded from the from
outstanding checks.

Bank errors – errors committed by the bank.

a. Credit memos, debit memos and book errors are referred to as book reconciling
items. The depositors should make reconciling entries for those items.
b. Deposit in transit, outstanding checks and book errors are referred to as bank
reconciling items. The depositors does not make reconciling entries for these items.

Bank Reconciliation: A Step-by-Step Guide

You receive a bank statement, typically at the end of each month, from the bank. The
statement itemizes the cash and other deposits made into the checking account of the
business. The statement also includes bank charges such as for account servicing fees.
Once you’ve received it, follow these steps to reconcile a bank statement:
1. COMPARE THE DEPOSITS
Match the deposits in the business records with those in the bank statement. Compare
the amount of each deposit recorded in the debit side of the bank column of the
cashbook with credit side of the bank statement and credit side of the bank column with
the debit side of the bank statement. Mark the items appearing in both the records.

2. ADJUST THE BANK STATEMENTS

Adjust the balance on the bank statements to the corrected balance. For doing this, you
must add deposits in transit, deduct outstanding checks and add/deduct bank errors.
Deposits in transit are amounts that are received and recorded by the business but are
not yet recorded by the bank. They must be added to the bank statement.

3. ADJUST THE CASH ACCOUNT

The next step is to adjust the cash balance in the business account.
Adjust the cash balances in the business account by adding interest or deducting
monthly charges and overdraft fees. 
To do this, businesses need to take into account the bank charges, NSF checks and
errors in accounting.

 Bank charges are service charges and fees deducted for the bank’s processing of
the business’ checking account activity. This can include monthly charges or charges
from overdrawing your account. They must be deducted from your cash account. If
you’ve earned any interest on your bank account balance, they must be added to the
cash account.
 An NSF (not sufficient funds) check is a check that has not been honored by the
bank due to insufficient funds in the entity’s bank accounts. This means that the
check amount has not been deposited in your bank account and hence needs to be
deducted from your cash account records.
 Errors in the cash account result in an incorrect amount being entered or an amount
being omitted from the records. The correction of the error will increase or decrease
the cash account in the books.

4. COMPARE THE BALANCES

 After adjusting the balances as per the bank and as per the books, the adjusted
amounts should be the same. If they are still not equal, you will have to repeat the
process of reconciliation again.

 Once the balances are equal, businesses need to prepare journal entries for the
adjustments to the balance per books.
 MODULE # 1 Post-test
PRACTICAL ACCOUNTING 1 – REVIEW
CASH & CASH EQUIVALENTS

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.
All answers shall be submitted on or before AUGUST 14, 2020 (Friday)

1. Tricia Company provided the following information with respect to cash and cash equivalents at year-end:
Checking account on First Bank 1,200,000
Checking account at Second Bank (500,000)
Value added tax account 250,000
Money Order 100,000
IOU from president 75,000
No sufficient fund check 150,000
Payroll account 750,000
What total amount should be reported as cash at year-end?
a. 2,375,000 b. 2,300.000 c. 1,875,000 d. 1,800,000

2. The following information has been extracted from the accounting records of the SUNFLOWER COMPANY at
December 31, 2021:
Cash on hand (undeposited sales receipts) 40,800
Certificate of time deposit with maturity of 3 months 1,000,000
Customer’s note receivable 40,000
Reconciled balance in AA Bank checking account (14,000)
Reconciled balance in BB Bank checking account 374,000
Balance in CC savings account 342,400
Customer’s postdated check 54,000
Employee travel advances 64,000
Cash in bond sinking fund 48,000
Bond sinking fund investments 323,600
Postage stamps 17,200

What total amount should SUNFLOWER COMPANY report as ‘’Cash’’ at December 31, 2020?
a. 805,200 b. 757,200 c. 743,200 d. 703,200

3. Your audit of the December 31,2021 financial statements of Dionisio Corp. reveals the following:

Current Account at Prime Bank (30,000)

Current Account at Prudent Bank 135,000

Treasury Bills (acquired 3 months before maturity) 300,000
Treasury bills (maturity is December 31, 2022) 1,500,000
Payroll account 390,000
Foreign bank account – restricted (translated using
the December 31, 2021 exchange rate) 2,000,000
 Postage stamps 1,250
Employees postdated check 4,500
IOU from the vice-president 8,000
Credit memo from a supplier for a purchase return 8,100
Traveler’s check 21,000
Money order 12,900
Petty cash fund (3,000 in currency
and expense receipts for 12,000) 15,000

What amount would be reported as “cash and cash equivalents” in the statement of financial
position on December 31, 2021?
a. 840,050 b.    873,900 c. 849,400 d. 861,900

4. A count of the petty cash fund on January 3, 2021 revealed the following composition:

Bills and coins P 7,300

Vouchers:
December 2020 dates 850
January 2021 dates 200
IOUs (all dated December 2020) 4,200
Employee’s check dated December 27, 2020 2,800
Employee’s check dated January 14, 2021 4,250
Unsigned pay envelope payable to an employee (the envelope
has been opened and the money has been removed) 5,000

The balance of petty cash fund per books is P 15,000.

1. How much is the cash shortage or overage?

a. 350 b. 400 c. 500 d. 550

2. What is the correct amount of petty cash fund to be shown on the statement of financial position as of December
31, 2020?
a. 9,500 b. 10,300 c. 2,800 d. 5,300

5. An examination on the morning of January 2, 2021 by the auditor for the Joseph Company discloses the following
items in the petty cash drawer:

Postage stamps P 220.00

Currency and coins 1,156.60
IOUS from members of the office staff 1,210.00
An envelope containing collections for a gift for a departing
employee, with office names attached 350.00
Petty cash vouchers for miscellaneous expenses (including a
PCV for stamps purchased for 450.00) 985.00
Employee's check postdated January 15, 2021 1,500.00
Employee's check marked "DAIF" 1,890.00
Check drawn by Joseph Company to Petty Cash 3,450.00
P 10,761.60
 The ledger account discloses a 10,500 balance for Petty Cash.

1. How much is the cash shortage or overage as of December 31, 2020?

a. P 308.40 b. P 41.60 c. P 88.40 d. P 658.40

2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31, 2020?
a. P 10,761.60 b. P 1,156.60 c. P 4,606.60 d. P 5,141.60

6. Ace De la Paz is reviewing the cash accounting for BBQ, Inc. Ace’s review will focus on the petty cash fund accou nt
for the month ended May 31, 2019. She has collected the following information from BBQ’s bookkeeper for this task.
Petty Cash Fund
1. The petty cash fund was established on May 2, 2019, in the amount of 10,000.
2. Expenditures from the fund by the custodian as of May 31, 2019, were evidenced by approved petty
cash vouchers for the following:
Various office supplies 3,920
IOU from employees 1,200
Shipping Charges 2,298
Miscellaneous Expense 1,526
On May 31, 2019, the petty cash fund was replenished and increased to 12,000; currency and coin in the fund at that
time totaled P756.

1. What is the amount of petty cash shortage?

a. 2,300 b. 11,244 c. 300 d. 0

2. The journal entry to record the replenishment and increase in the petty cash fund includes a credit to
a. Cash of 10,944 b. Cash of 11,244 c. Petty cash fund of 10,944 d. Petty cash fund of 11,244

7. On March 1, Therese Company established an imprest petty cash fund for P 20,000 by writing a check drawn against
the checking account. On March 31, the fund contained the following:

Currency and coins 2,550

Receipts for postage still unused 11,000
Receipts for office supplies 6,000
Receipts for transportation 450

On March 31, the entity wrote a check to replenish the fund. What is the amount of replenishment under the imprest
fund system?
a. 20,000 b. 17.450 c. 17,000 d. 6,450

8. Oslo Company provided the following data for the purpose of reconciling the cash balance per book with the cash
balance per bank statement on December 31:
Balance per bank statement 2,000,000
Balance per book 850,000
Outstanding checks (including certified check of P100,000) 500,000
Deposit in transit 200,000
December NSF checks 150,000
(of which P50,000 had been redeposited and cleared by December 27)
Erroneous credit to Oslo account representing 300,000
 proceeds of loan granted to another entity
Proceeds of note collected by bank for Oslo, 750,000
net of service charge of P20,000

What is the cash in bank to be reported on December 31?

a. 1,400,000 b. 1,500,000 c. 1,450,000 d. 1,800,000

9. Cooper Company provided the following data pertaining to the cash transactions and the bank account for August of
the 2020:

 Cash balance per book 1, 830,000

 Cash balance per bank statement 3,300,000
 Bank service charge 5, 000
 Debit memo for printed checks 17, 000
 Check No.1113 issued to a supplier enter in the accounting
record as 190, 000 but deducted in the bank statement at an
erroneous amount of
100,000
 Stolen check without an authorized signature deducted from 82,000
Cooper’s account by the bank in error

 customer’s check returned due to insufficient balance; and is 80,000

not recorded.
 Proceeds from a customer’s promissory note, principal
amount of P890,000 collected by the bank but not taken up in
the book’s record with interest 900, 000
 Outstanding checks 680, 000
 Deposit in August not recorded by bank until September 1, 700, 000
2020
 Proceeds from a bank loan on August 30, 2020 , not
recorded in the accounting period, net of interest
674, 000
What is the adjusted cash in bank?
a. 3,030,000 b. 3,000,000 c. 3.302,000 d. 4,500,000

10. You are attempting to determine an apparent cash shortage that you believe resulted from an employee’s theft. You
have assembled the following information for the month of March:
Cash balance per books, March 1 115,963.70
Cash receipts for March, per books 246,475.00
Cash disbursements for March, per books 334,709.10
Cash balance, per bank statement, March 31 15,341.40
Deposit in transit, March 31 9,000.00
Outstanding checks, March 31 2,703.80
Bank service charge for March 92.00

What is the amount of the suspected ash shortage?

a. 5,800 b. 6,350 c. 6,000 d. 5,500
11. Knights Company received the bank statement for the month of March. However, the closing balance of the account
was unreadable.
Attempts to contact the bank after hours did not secure the desired information.
 Feb 28 book balance 2,669,000
 Note collected by bank 800,000
 Interest earned on note 87,000
 NSF check of customer 170,000
 Bank service charge 10,000
 Other bank service charges 7,000
 Outstanding checks 370,000
 Deposit of Feb 28 placed in night
depository 105,000
 Check issued by Pirates Company
charged to Knight’s 80,000

What is the cash balance per bank statement?

a. 3,369,000 b. 3,184,000 c. 3,112,000 d. 3,269,000

12. Tricia Company reported the following accounts on Dec 31, 2020:
Cash on hand 1,000,000
Petty cash fund 50,000
Metrobank current account 2,000,000
DBP current account 1,500,000
BDO current account (overdraft) (200,000)
BSP treasury bill – 150 days 3,000,000
BPI time deposit – 60 days 2,000,000
Bond sinking fund 2,500,000

* The cash on hand included a customer postdated check of 150,000 and postal money order of 50,000
* The petty cash fund included unreplenished petty cash vouchers for 10,000 and an employee check for
5,000 dated January 31, 2021.
* The BPI time deposit is set aside for acquisition of land to be made in early January 2021.
* The bond sinking fund is set aside for payment of bond payable due December 30, 2021.

What is the total amount of cash and cash equivalents?

a. 4,335,000 b. 4,185,000 c. 4,285,000 d. 4,135,000

13. In reconciling the cash balance on December 31, 2020 with that shown in the bank statement, Kelly Company
provided the following information:

Balance per bank statement. 3,000,000

Balance per book. 2,500,000
Outstanding checks. 500,000
Deposit in Transit. 378,000
Service Charge. 12,000
Proceeds of bank loan, December 1,
discounted for 6 months at 12%, not
recorded on Kelly Company's books. 854,000
Customer's check charged back by bank as
for absence of counter signature. 40,000
 Deposit of 100,000 incorrectly recorded by bank as. 15,000
Check of Rish Company charged by bank
against Sam account. 145,000
Customer's note collected by bank in favor of Kelly Company.
Face 500,000
Interest. 50,000
Total. 550,000
Collection Fee. 4,000 546,000
Erroneous debit memo of December 28,
to charge Kelly account with
settlement of bank loan. 196,000
Deposit of Rish Company credited to Kelly account. 215,000

What is the adjusted cash in bank on December 31, 2020?

a. 4,483,000 b. 4,348,000 c. 4,384,000 d. 4,400,000

14. The petty cash fund (imprest balance of 45,000) of Joseph Company on December 31, 2020 is composed of the
following:

Coins and currencies P 17,000

Petty cash vouchers:
Postage Stamps 1,000
Supplies 2,000
Cash advances to employees 3,000
Employee's check returned by bank marked DAIF 4,000
Replenishment check drawn by the company payable
to the order of Maria Cortez,
petty cash custodian 18,000
Unused postage 500
Check payable to Meralco, for payment of the
company's utility bills 3,500
A sheet of paper with names of employees together with
contribution for a birthday gift of a
co-employee in the amount of 4,500
Total P 53,500

1. How much is the cash shortage or overage as of December 31, 2020? Indicate whether shortage or overage.
a. Overage of 4,000 b. Overage of 4,500 c. Shortage of 4,000 d. Shortage of P4,500

2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31, 2020?
a. 38,000 b. 20,000 c. 35,000 d. 17,000

15. You were assigned to audit the Cash account of COC, Inc. as of December 31, 2020. Your cash count of the Petty
Cash Fund and undeposited collections as of that date showed the following:

Currency and coins P 6,400.00

Expense vouchers 3,000.00
Employees' IOUs 5,500.00
Customers' checks in payment of accounts 4,800.00
Total P 19,700.00
The amount of Petty Cash Fund per general ledger is P15,000. Upon comparing the official receipts with the bank
validated deposit slips, you noted that P5,500 was not yet deposited to the bank.

1. What is the amount of cash shortage?

a. 100 b. 800 c. 5,400 d. 10,200

2. What is the amount of Petty Cash Fund to be shown on December 31, 2020 statement of financial position?
a. 11,200 b. 5,700 c. 15,000 d. 7,100