CONCEPTUAL FRAMEWORK MODULE

SCHOOL OF ACCOUNTANCY

MODULE 2
CASH

OVERVIEW:
This module will serve as an introduction to the accounting standards for cash and cash equivalents. This
module shall give you the basic knowledge in the accounting and proper classification of accounts related
to or within the description of cash.

KNOWLEDGE REQUIRED:
This module requires knowledge in the fundamentals of accounting, including analyzing, journalizing and
preparation of adjusting entries.

LEARNING OBJECTIVES
After studying this module, you should be able to:
1. Identify whether an account may be considered as part of cash or not.
2. Prepare adjusting entries to correct wrong classification and use of different cash accounts.

INTRODUCTION
Cash includes money and other negotiable instrument that is payable in money and acceptable by bank for
deposit or immediate encashment. These negotiable instruments include checks, bank drafts and money
orders.

A bank draft and a money order are both

prepaid, with a specified and printed amount.
However, a bank draft is a check drawn on a
bank's funds after accepting the amount from
the issuer's account, whereas cash is used
when purchasing a money order. These
negotiable instruments are often used by
people who need money for transaction but do
not want to bring money with them for safety
purposes.

Persons receiving money order and bank drafts have less worries in terms of availability of funds because
these negotiable instruments represent an amount of money guaranteed by bank or other financial
institution.

LESSON 1: MEASUREMENT OF CASH

Cash should be recorded at face value, except cash in bank under bankruptcy, wherein cash is measured
at estimated realizable value, which is normally lower than the face amount.

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LESSON 2: CLASSIFICATIONS
Cash may be grouped into two:
2.1 Restricted – cash that the company already has set a purpose aside from using it in normal
operations
Example 1: Money in a bank that the company saved and has set aside for the purpose of
purchasing a building.
- It should be noted that restricted cash is different from normal cash in a way that it is
not free to be used for anything else.
Restricted cash is classified in other line item, within current or noncurrent, depending on purpose.
In our previous example, the restricted cash is under noncurrent asset because it will be used for
purchase of noncurrent asset.

Example 2: Cash set aside for payment of a liability.

In this case, the restricted cash is classified as current or noncurrent depending on the classification
of the liability. You should use parallelism for this. If our balance sheet date is December 31, 2019,
for example, and we have restricted cash that is due until December 31, 2020, that cash should be
classified as current. And of course, when liability falls due beyond December 31, 2020, it is
included as part of noncurrent assets in 2019 balance sheet.

2.2 Unrestricted – cash with no other purpose, only for normal operations
- Under this group, cash may be classified as:
o Cash on Hand – in possession, or awaiting deposit
o Cash in Bank – well, obviously, cash that is in the possession of banks
o Cash Fund – cash set aside for current purposes (e.g. petty cash fund, payroll
fund, dividend fund)

LESSON 3: POSTDATED CHECK

We need to broaden our knowledge of cash. In layman’s term, cash is money. For accounting purposes, we
need to think that cash is not mere bills and coins, as defined above. It includes negotiable instruments.
For example, a check received from a customer may be considered as cash.

However, negotiable instruments,

like money, may not be classified
as part of company’s cash
account. A good example of this is
postdated check. A check, when
received by the company, does
not automatically mean that cash
has been received, because
sometimes, check is not yet
acceptable by bank for
encashment.

Scenario: Postdated check received from customer

It is December 29, 2019, when our company received a check of P10,000 from a customer as payment of
account. The check was dated January 15, 2020. As of December 31, 2019, our balance sheet date, the
money that the check represents cannot be given to us yet, even though we go to the bank for encashment.

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CONCEPTUAL FRAMEWORK MODULE
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The bank will tell us that the check may only be turned into cash (encashed) starting January 15. So, for
reporting purposes, the postdated check is still a receivable.

If on December 29, 2019, due to confusion, you have journalized the receipt as follows,
Date Account Titles Debit Credit

Dec 29 Cash 1 0 0 0 0
Accounts Receivable 1 0 0 0 0
To record receipt of payment from customer

you have to create an adjusting entry to correct it:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 1 0 0 0 0
Cash 1 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

Scenario: Postdated check delivered to supplier

It is December 20, 2019, when our company paid a supplier for supplies worth P20,000 purchased through
issuing a check. The check was dated January 10, 2020. As of December 31, 2019, our balance sheet date,
the money that the check represents will not reduce our cash balance yet, because our supplier may only
encash the check starting January 10. We are still the rightful owner of the cash in bank as of the balance
sheet date.

If on December 20, 2019, you have entered the following entry upon issuing a check:
Date Account Titles Debit Credit
Dec 20 Accounts Payable 2 0 0 0 0
Cash 2 0 0 0 0
To record receipt of payment from customer

You must create an adjusting entry to reverse the previous one:

Date Account Titles Debit Credit
Dec 31 Cash 2 0 0 0 0
Accounts Payable 2 0 0 0 0
To adjust the entry on receipt of postdated check
from customer

LESSON 4: STALE CHECK OR CHECKS LONG OUTSTANDING

As discussed previously, the date on a check connotes the starting day of encashment. This does not mean
that the payee (the person who receives the check) may encash the check anytime after that day. We have
what we call “expiration date” for check encashment. Checks not encashed within relatively long period of
time is called stale or long outstanding. In accounting, the “expiration” depends on company policy, but
legally, banks are only required to honor checks for six months.

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Scenario: Checks received

It was February 1, 2019 when we received a check dated that same day, from a customer as payment for
accounts due amounting P30,000. We have forgotten to encash the check. On reporting date, December
31, 2019, the check is considered stale, because it was not encashed for 11 months. So, if we have entered
in our journal an entry as follows:
Date Account Titles Debit Credit
Feb 1 Cash 3 0 0 0 0
Accounts Receivable 3 0 0 0 0
To record payment by customer

We need to prepare an adjusting entry, as follows:

Date Account Titles Debit Credit
Dec 31 Accounts Receivable 3 0 0 0 0
Cash 3 0 0 0 0
To adjust payment by customer, the check
received became stale

We have to contact the customer and inform them about the stale check, and request for a new check to
be issued.

If the check is only for an immaterial amount, and not related to receivables, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Miscellaneous Expense 3 0 0 0 0
Cash 3 0 0 0 0
To adjust for a check received that has become
stale

Scenario: Checks issued

It was March 1, 2019 when we issued a check to a supplier amounting to P40,000. That was for payment
of our accounts payable to them. On December 31, 2019, the check was still outstanding, meaning the
supplier failed to encash the check we gave. If we have entered the following entry on our journal on March
1:
Date Account Titles Debit Credit
Mar 1 Accounts Payable 4 0 0 0 0
Cash 4 0 0 0 0
To record payment of accounts payable

We need to prepare adjusting entries as follows:

Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Accounts Payable 4 0 0 0 0

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To adjust previous payment of accounts payable

due to check becoming stale

If the check is only for an immaterial amount, and not related to liabilities, we may prepare an adjusting
entry like this:
Date Account Titles Debit Credit
Dec 31 Cash 4 0 0 0 0
Miscellaneous Income 4 0 0 0 0
To adjust previous payment of accounts payable
due to check becoming stale

LESSON 5: FOREIGN CURRENCY

Cash in foreign currency (e.g. Dollars, Yen, Won, etc.) needs to be translated to Philippine peso, for
reporting purposes. You need to use the current exchange rate in translation. For example, if your company
has a foreign currency account in ABC Bank, it is considered as a company asset, and translated to Philippine
Peso. Assuming you have $1,000 in the account, and on December 31, 2019, reporting date, the exchange
rate is P50 for $1. The amount to be included as part of cash amount to P50,000.

LESSON 6: UNDELIVERED/UNRELEASED CHECKS

Sometimes, a company has already prepared and recorded a disbursement through check, but the check
itself is not yet delivered to the payee. It happens when the payee failed to claim the check from the
company premises. At this point, even though the check is not postdated, the amount will not be deducted
from the company’s cash balance, because the payee may not go to the bank for encashment without the
check.

Scenario: Checks drawn and recorded, but not delivered

It was November 2, 2019 when a company wrote a check amounting to P50,000 in favor of N. Lustre
Company, as payment for an accounts payable to them. On December 31, 2019, report date, the check is
still on hand. If you have recorded the following entry upon drawing the check
Date Account Titles Debit Credit
Nov 2 Accounts Payable 5 0 0 0 0
Cash 5 0 0 0 0
To record payment of accounts payable to N.
Lustre

You must prepare an adjusting entry, as follows, because the company cash has not been reduced by the
transaction and the liability is not yet settled because N. Lustre has not yet received the cash
Date Account Titles Debit Credit
Dec 31 Cash 5 0 0 0 0
Accounts Payable 5 0 0 0 0
To record payment of accounts payable to N.
Lustre

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CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

LESSON 7: COMPENSATING BALANCE

A compensating balance is a minimum balance that must be maintained in a bank account, normally used
to offset the cost incurred by a bank to set up a loan. The compensating balance may not be available for
company use, and may need to be disclosed in the borrower's notes to the financial statements. Our
treatment to compensating balance depends on the agreement made with the banks:

7.1 Informal Agreement – The balance is not restricted as to withdrawal, meaning the company
may withdraw the balance when they want to. In this case, the compensating balance is part of
company’s cash.
Note: Compensating balance is already included in the total cash balance in an account

7.2 Formal Agreement - The bank restricts the use of compensating balance because it serves like
a collateral for a loan to the company by the bank. Due to this restriction, the compensating balance
may not be included as part of cash. This restricted cash, like what we have discussed earlier, will
be classified as current or noncurrent, depending on the corresponding liability.

LESSON 8: BANK OVERDRAFT

Sometimes, cash in bank account has credit balance. This means that the company issued check amounting
to a total more than the actual amount of deposits. The excess is classifying as bank overdraft and should
be reported as a liability account. Please be reminded that bank overdrafts should not be offset against
other bank accounts with debit balances, except:
a. When an entity maintains two or more accounts in the same bank, and the other accounts
have debit balances
b. When the overdraft is immaterial

Scenario: Two accounts in one bank

Casa Maila Company has two bank accounts in Maharlika Bank. Account no. 1 has a debit balance of
P200,000. Account No. 2 has credit balance of P30,000. In this case, the P30,000 may be offset against the
P200,000, resulting to P170,000 net debit balance in Maharlika Bank.

Scenario: Two accounts in two banks

Casa Maila Company has one bank account in Maharlika Bank with a debit balance of P200,000. It also has
an account with the Malaya bank that has a credit balance of P30,000. In this case, the P30,000 may not be
offset against the P200,000, because the two accounts do not belong under the same bank. The P200,000
should be reported as part of cash and cash equivalents, while P30,000 is in current liability section.

REFERENCES:
Valix, Financial Accounting and Reporting Volume 1, 2017
investopedia.com

ADDITIONAL READINGS:
Financial Accounting 1, Volume 1 Part 1, by Christian Valix, Jose Peralta, and Chrsitian Valix, Chapter 7

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CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

ACTIVITY SECTION

ACTIVITY 1:
PROVIDE ADJUSTING ENTRIES. (ASSUME FS DATE: DECEMBER 31, 2019)
1. On November 30, 2019, you have received a check from Baby Blue Company for a service that you
have already done on account. The check was dated February 13, 2020. Upon checking, you have
only journalized the recognition of receivable and income, but not the payment transaction. What
adjusting entry should you make?
Date Account Titles Debit Credit

2. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated December
20, 2019, for an equipment purchased on the same date. You failed to record any transaction.
Date Account Titles Debit Credit

3. On October 5, 2019, you have paid a supplier P50,000 through issuance of a check dated February
20, 2019, for an equipment purchased on the same date. You failed to record any transaction.
Date Account Titles Debit Credit

4. On November 2, 2019, you have drawn and recorded a check amounting to P20,000 to pay J. Reid
Company for a Land purchased on that day. On December 31, 2019, the reporting date, the check
was still in the company’s premises, because J. Reid have forgotten to claim it.
Date Account Titles Debit Credit

ACTIVITY 2
Determine whether the following is included or excluded from cash:

___________________1. Postdated checks received from customers

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CONCEPTUAL FRAMEWORK MODULE
SCHOOL OF ACCOUNTANCY

___________________2. Postdated checks drawn

___________________3. Unreleased checks drawn
___________________4. Compensating balances that are legally restricted as to withdrawal by the
borrower
___________________5. A bank overdraft, in general
___________________6. Money order
___________________7. Cash fund set aside for payment of salaries
___________________8. Traveler’s check
___________________9. Restricted foreign currency deposit
___________________10. Check received that became stale
___________________11. Check issued that became stale

EVALUATION

Which part of the discussion did you Which part of the discussion did you
find most enjoyable to learn? find most difficult?

Do you have question(s) in mind? Write it here

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