Module 1 - CASH AND CASH EQUIVALENTS

Site: New Era University Virtual Learning Environment Printed by: Paula Michelle G. Guiao
Course: ACTG03-19 - Intermediate Accounting 1 Date: Sunday, 21 January 2024, 1:04 PM
Book: Module 1 - CASH AND CASH EQUIVALENTS
 3. Cash and cash equivalents

Definition of Cash

PAS 7 provides that “cash comprises cash on hand and demand deposits”.
Simply means money use as a medium of exchange
As contemplated in accounting, cash includes money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and
immediate credit.

Measurement of cash

a. At face value

b. At current exchange rate – for cash in foreign currency

c. At estimated realizable value – for funds of an entity in bank or financial institutions which is in bankruptcy or financial difficulty

Items included in cash

PAS 1 provides that “an entity shall classify an asset as current when the asset is cash or a cash equivalent (as defined in PAS 7) unless the asset is restricted
from being exchanged or used to settle a liability for at least twelve months after the reporting period.”
Thus, an item to be included in cash, it must be:

a. Unrestricted

It must be readily available in the payment of current operations

Not subject to any restrictions, contractual or otherwise

b. Immediately available for use in current operations

Set aside for current operation

Example: for payment of operating expenses or current liabilities, and fund set aside for current assets (to buy inventories or trading securities)

Specific items that may be included in cash

1. Cash on hand

a. Bills & Coins

b. Different checks

Considered cash if at reporting date, the check is:

i. Receive from a customer on or before reporting date; and

ii. Dated on or before reporting date.

Examples of checks considered as cash:

i. Customer’s checks – should be received on or before reporting date and dated on or before reporting date

ii. Traveler’s checks – good as cash; as security feature, a second signature of the owner should be placed on the check before
encashment

iii. Manager’s checks – prepared by the manager of the bank; there is already an assurance that there is fund for the its encashment.

iv. Cashier’s checks – prepared by the cashier of the bank; same as the manager’s check

v. Company’s undelivered checks – merely drawn and recorded but not given to the payee before end of the reporting period
 vi. Company’s Postdated checks – check drawn, recorded and already given to the payee but it bears a date subsequent to the end of
reporting period

vii. Company’s Stale checks – 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

c. Bank Drafts

d. Postal money orders

2. Cash in bank (unrestricted)

a. Savings account

b. Checking account
 c. Bank accounts in Foreign currency – measured at current exchange rate

d. Unrestricted Compensating balance – minimum checking or demand deposit account balance

If unrestricted – part of cash

If legally restricted – current asset (cash held as compensating balance account) if related loan is short term or presented as non-current
asset if related loan is long-term

3. Working funds

Cash funds that are intended for acquisition of non-current assets, regardless of timing of disbursement, do not qualify as part of current assets (Ex.
Sinking fund, preference share redemption bond, contingent fund, insurance fund, and fund for acquisition or construction of property, plant and
equipment)
Examples of working funds:

a. Petty Cash Fund

b. Change Fund

c. Payroll Fund

d. Dividend Fund

e. Tax Fund

f. Interest Fund

Specific items NOT included in cash

1. Receivables

a. Cash in closed banks or banks having financial difficulty – cash that can’t be recovered should be classified as receivables

b. Customer’s postdated checks – check was already received by the company but with a future date. It cannot be cashed prior to the date written on it.

c. Customer’s NSF checks – No Sufficient Fund Checks. Checks paid by the customer but was returned by the bank due to insufficiency of fund

i. DAIF checks – Drawn Against Insufficient Funds

ii. DAUD checks – Drawn Against Unclear Deposits

d. Customer’s stale checks – checks received by the company that are not encashed for 6 months or more.

e. IOU – “I owe you”

f. Restricted compensating balance for short-term loan – not part of cash but will be presented as current asset

2. Prepaid assets

a. Advances for employee travel

b. Postage stamps

c. Supplies

3. Temporary investments

a. Trading securities – investments of the company

b. Short-term papers acquired more than 3 months before its maturity – this are temporary investments

4. Non-current assets

a. Restricted foreign bank accounts

b. Restricted compensating balance for long-term loan

c. Bond sinking fund

d. Plant Expansion/Acquisition Fund

e. Preferred Redemption fund

 f. Retirement Fund

g. Pension Fund

h. Insurance Fund

i. Contingent Fund

5. Current liability

a. Bank overdraft

If it is a bank overdraft, it means that the company’s bank account has a credit balance. It should be presented as current liability and should not be
offset against other bank accounts with debit balances
Exception: when two or more accounts in one bank and once account results to overdraft, such overdraft can be offset against the other bank
account with debit balance in order to show Cash, net of bank overdraft or bank overdraft, net of other bank account. (Valix, Peralta, & Valix, 2020)

6. Expenses

a. Unreplenished expense vouchers

Definition of cash equivalents

PAS 7 defines cash equivalents as “short‑term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
“An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition.”
Date of purchase should be three months or less before maturity

Financial statement presentation

Cash and cash equivalents should be shown as first line items under current assets
Details comprising the cash and cash equivalents should be disclosed in the notes to financial statements
 4. Cash management

Investment of excess cash

Cash management includes the investment of excess cash in some type of revenue earning investment.
Such investments should be classified as follows:

a. Cash and cash equivalents – term is three months or less

b. Current assets – term is more than three months but within one year

c. Non-current assets or long-term investments – term is more than one year

If become due within one-year from the end of the reporting period, they are reclassified as current or temporary investments

Internal cash controls

1. Segregation of duties – no single person should have complete control

2. Imprest system – requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check. Exception is the
petty cash fund.

3. Voucher system – authorizing the disbursement of cash

4. Internal audit at irregular intervals

5. Periodic bank reconciliation – to be discussed on Module 2

Accounting for cash shortage

Cash shortage means that cash count is less than the balance per book
Cash shortage is recorded as follows:

Cash short or over xx

Cash xx

“Cash short or over account” is only a temporary or suspense account. It should be adjusted.

a. If cashier or custodian is held responsible, the adjustment should be:

Due from cashier xx

Cash short or over xx

b. If reasonable efforts fail to disclose the cause of the shortage, the adjustment should be:

Loss from cash shortage xx

Cash short or over xx

Accounting for cash overage

Cash overage means that cash count is more than the balance per book
Cash overage is recorded as follows:

Cash xx

Cash short or over xx

“Cash short or over account” is only a temporary or suspense account. It should be adjusted.

a. If there is no claim on the cash overage, it should be treated as miscellaneous income. The adjustment should be:

Cash short or over xx

 Miscellaneous income xx

b. If cash overage is properly found to be the money of the cashier, the adjustment should be:

Cash short or over xx

Payable to cashier xx
 5. Accounting for Petty Cash

An example of a working fund to pay small expenses which cannot be paid conveniently by means of check

2 Methods of handling petty cash

A. Imprest fund system

– one usually followed in handling petty cash transactions

- Whenever petty cash fun runs low, a check is drawn to replenish the fund. Replenishment check is usually equal to the petty cash disbursements

- Petty cash disbursements should be replenished only by means of check and not from undeposited collections

B. Fluctuating fund system

– checks drawn to replenish the fund do not necessarily equal the petty cash disbursement

- Replenishment checks are simply draw upon the request of the petty cashier

Petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash balance per book from time to time

Accounting Procedures

Imprest system Fluctuating fund system

1. Establishment of the fund 1. Establishment of the fund

Petty cash fund xx Petty cash fund xx

Cash in bank xx Cash in bank xx

2. Payment of expenses out of the fund 2. Payment of expenses out of the fund

No journal entries are made Expenses xx

Petty cash fund xx

- The petty cashier generally requires a signed petty

cash voucher for such payments and simply prepares
memorandum entries in the petty cash journal

3. Replenishment of petty cash payments 3. Replenishment of petty cash payments

Expenses xx - may or may not be the same as the petty cash

disbursement
Cash in bank xx

Petty cash fund xx

Cash in bank xx

4. At the end of the period, it is necessary to adjust for 4. At the end of the period, no adjustment is necessary
the unreplenished expenses because the petty cash expenses are recorded outright.

Expenses xx

Petty cash fund xx

5. Increase in the fund 5. Increase in the fund

Petty cash fund xx Petty cash fund xx

Cash in bank xx Cash in bank xx

6. Decrease of fund 6. Decrease of fund

Cash in bank xx Cash in bank xx

Petty cash fund xx Petty cash fund xx

Click the link below for the illustration

Illustration (Petty cash)