Iv.-Cash and Cash Equivalents

Ateneo de Zamboanga University
ACCOUNTANCY ACADEMIC ORGANIZATION

A School of Management and Accountancy Student Government
Cash and Cash Equivalent

Cash Cash Equivalents
 Includes money or its equivalent (i.e.  Short-term, highly liquid investments
negotiable instruments) that is readily that are readily convertible to known
available for unrestricted use amounts of cash and which are subject
 May be: to an insignificant risk of changes in
a.Cash on hand – includes undeposited value
collections awaiting deposit and other  Only those highly liquid investments
current funds that are acquired 3 months or less
b. Cash in bank – includes deposits in before maturity can qualify as cash
banks that are available for withdrawal equivalents
and unrestricted use  Examples:
 Examples: a.3-month Treasury bill
a.Coins and currencies b. 90-day money market
b. Demand deposits and savings account instrument or commercial paper
c.Bank drafts and money orders c.3-month time deposit
d. Checks (i.e. Cashier’s, Personal, d. 1-year Treasury bill acquired
Manager’s and Certified Checks) 3 months before maturity
e.Cash funds set aside for use in current e.Redeemable preference shares
operations (i.e. petty cash, revolving, acquired 3 months before redemption
payroll, change, dividend, tax, travel and date
interest funds)  Checks and bank drafts cannot qualify
f. Unrestricted deposits in foreign banks as cash equivalents because these are
g. Compensating balances that are not not short-term investments and when
legally restricted for withdrawal they are available for unrestricted use,
h. Stale checks – checks delivered to they are included as cash but not cash
payees but are not encashed within a equivalents.
relatively long period. They are reverted  Equity securities cannot qualify as
back to cash. cash equivalents because they do not
i. Undelivered and postdated checks drawn have maturity date.
– no actual payment has been made
hence is reverted back to cash Bank Overdraft
 Items not included as cash: Bank overdraft (cash overdraft) is a negative
a.Postdated checks received – only (credit) balance in the cash in bank
available for use at a future date and (checking) account resulting from
thus, are not cash. They are reverted overpayment of checks in excess of the
back to accounts receivable at reporting amount of deposit.
date.
Overdrafts are payable on demand, thus,
b. IOUs (“I owe you”) or advances to
they are presented as current liabilities. They
employees – treated as receivables
are not offset to cash, except in cases where
c.Postage stamps – treated as prepaid supplies
offsetting is permitted:
d. Restricted deposits in foreign banks
e.Compensating balances that are legally When two or more accounts are maintained
restricted for withdrawal in the same bank, an overdraft in one
f. Cash funds not available for use in account may be offset or deducted from
current operations (i.e. sinking, plant another with positive balance; provided, the
expansion, depreciation, preference other bank account is also unrestricted and
share redemption, contingency and such overdrafts form an integral part of the
insurance funds) entity’s cash management.
g. Unused credit line – disclosed only
in the notes
Recognition, Presentation and Measurement of Cash

Accountancy Academic Organization Tutorials 2020 1
Cash is recognized when it meets the requirements for asset recognition and is available for
unrestricted use in current operations.
Unrestricted cash and unrestricted cash equivalents acquired 3 months or less before maturity are
combined and presented as one line item under the caption “Cash and cash equivalents”. The
breakdown of which is shown in the notes. Restricted cash is excluded from cash and presented
under other line item as either current or non-current asset.
Cash is measured at face amount (face value). Cash denominated in foreign currency is
translated at the current exchange rate as of reporting date. Cash maintained in a bank
undergoing bankruptcy is excluded from cash and presented as receivable at realizable value.
Internal controls over cash
1. Segregation of incompatible duties – authorization, execution, recording and custody over
cash should be segregated to reduce the risk of embezzlement of cash
2. Imprest system – all cash receipts should be deposited intact and all cash disbursements
should be made through checks
3. Bank reconciliation – requires timely reconciliation of the differences between the cash
balance per books and the cash balance per bank statement.
4. Cash counts – periodic tally of actual cash and reconciliation with the cash balance per records
5. Minimum cash balance – maintaining minimum cash balance that is sufficient only to defray
specific business requirements
6. Lockbox accounts – used to expedite cash collections and to ensure that cash collections are
deposited intact.
7. Non-encashment of personal checks from petty cash fund – to discourage concealment of
cash shortages
8. Voucher system – a voucher is prepared for every cash disbursement in order to ensure that
each disbursement is properly authorized, made for a valid expenditure, and properly
recorded
Accounting for cash shortages and overages
Cash shortage – occurs when the actual amount through physical cash count is less than the
balance recorded in the books. It is initially debited to a suspense account called “Cash shortage
or overage” pending proper investigation:
Date Cash shortage or overage xx

Cash on hand xx
Depending on the result of the investigation, the shortage may be: (1) closed to a receivable
account if the shortage is due to the fault of an employee, or; (2) charged to loss if the
investigation was without merit:
Date Receivable from cashier/ Loss on cash xx

shortage
Cash shortage or overage xx
Cash overage – occurs when the actual amount through physical cash count is greater than the
balance recorded in the books. It is initially credited to a suspense account called “Cash shortage
or overage” pending proper investigation.
Depending on the result of the investigation, the overage may be: (1) closed to a payable account
if the overage is due to cash belonging to an employee, or; (2) charged to gain if the investigation
was without merit.
Concealment of cash shortages

1. Lapping – occurs when collection of receivable from one customer is misappropriated and
then concealed by applying a subsequent collection from another customer. It is made
possible when the incompatible duties of recording and custody of cash are combined.
2. Kiting – occurs when cash shortage is concealed by overstating the balance of cash. It is made
possible by exploiting the float period (the time it needs for a check to clear at the bank).
3. Window dressing (cooking the books) – occurs when books are not closed at year-end and
transactions in the subsequent period (i.e. sales and disbursements) are deliberately recorded
in the current period in order to improve the entity’s financial performance or financial ratios.
Accounting for petty cash fund
Petty cash fund is money set aside to defray relatively small amounts of cash disbursements. The
accounting procedures for petty cash fund are:
a. Petty cash fund is established – by means of a check drawn to the order of petty cash
custodian in conformance with the imprest system
Date Petty Cash Fund xx

Cash in bank xx
The amount of petty cash fund is fixed by a board resolution. If the original amount
established is ₱10,000 and disbursement during the period reduced the fund balance to
₱2,000, the amount of subsequent replenishment is ₱8,000.
b. Disbursements out of the petty cash fund – no journal entries are made. Instead, petty cash
payments are initially recorded in a petty cash register and supported by signed vouchers.
c. Replenishment of petty cash disbursements – when the fund balance becomes low, it may be
replenished through check and is supported by a check disbursement voucher. A journal
entry is made for the disbursements during the period that were initially recorded in the register:
Date Various expense accounts xx

Cash in bank xx
d. Adjustment for unreplenished fund at reporting date – any unreplenished petty cash fund
should be adjusted at the end of the period in order not to overstate cash and understate expenses:

Petty Cash Fund xx
e. Subsequent changes in ledger balance of petty cash fund:
Date Petty Cash Fund xx

Cash in bank xx
to increase the petty cash fund balance
Date Cash in bank xx
Petty Cash Fund xx
to decrease the petty cash fund balance
f. Shortage in petty cash fund – the amount of replenishment is increased by the cash shortage:

Cash in bank xx
g. Overage in petty cash fund – the amount of replenishment is decreased by the cash overage:

Cash in bank xx
Bank Reconciliation

Bank reconciliation is a schedule prepared on a monthly basis to account for any difference
between the cash balance per books and the cash balance per bank statement.
Bank reconciliations are normally required only for checking accounts. And when the entity has
more than one account, separate reconciliation is made for each of the accounts.
Common causes of differences between cash balances per books and per bank statement (other
than fraud) are:
1. Deposits in transit – deposits already made but not yet received by the bank, or received by
the bank but due to cut-off, are not yet included (credited) in the depositor’s bank statement
2. Outstanding checks – checks drawn and released to payees but are not yet presented for
encashment to the bank. Certified checks should be excluded from outstanding checks as
they are already deducted from the entity’s account, thus, they are no longer outstanding.
Outstanding checks that became stale may appropriately be reverted back to cash.
3. Credit memos – these are additions (bank credits) made by the bank to the entity’s bank
account but not yet recorded by the entity. Examples are:
a.Collections made by the bank in behalf of the entity
b. Proceeds from loan directly credited or added by the bank to the entity’s bank account
c.Unrolled-over matured time deposits transferred by the bank to the entity’s bank account.
4. Debit memos – these are deductions (bank debits) made by the bank to the entity’s bank
account but not yet recorded by the entity. Examples are:
a.Banks service charges for checkbook, interest, collection, penalties and surcharges
b. No sufficient funds checks (NSF) – checks deposited and already recorded by the bank
but subsequently returned because the drawer’s fund is insufficient to the pay the check
c.Automatic debits (i.e. automatic payment of bills by the bank in behalf of the entity)
d. Payment of loans – payment the entity agreed to be made out directly from its bank
account
5. Errors – committed by either the bank (bank error) or the entity (book error)
Deposits in-transit, outstanding checks and errors committed by the bank are bank reconciling
items. No reconciling entries are made by the entity (depositor).
Credit memos, debit memos and errors committed in the books are book reconciling items. The
entity (depositor) should make reconciling entries for these items.
A pro forma bank reconciliation is shown below:
Balance per books, end xx Balance per bank statement, end xx

Add: Credit memos (CM) xx Add: Deposits in transit (DIT) xx
Less: Debit memos (DM) (xx) Less: Outstanding checks (OC) (xx)
Add/less: Book errors xx Add/less: Bank errors xx
Adjusted balance xx Adjusted balance xx

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Ateneo de Zamboanga University

ACCOUNTANCY ACADEMIC ORGANIZATION

Cash and Cash Equivalent

Recognition, Presentation and Measurement of Cash

Date Cash shortage or overage xx

Date Receivable from cashier/ Loss on cash xx

Accountancy Academic Organization Tutorials 2020 2

Date Petty Cash Fund xx

Date Various expense accounts xx

Date Various expense accounts xx

Date Petty Cash Fund xx

Date Various expense accounts xx

Date Various expense accounts xx

Accountancy Academic Organization Tutorials 2020 3

Balance per books, end xx Balance per bank statement, end xx

Accountancy Academic Organization Tutorials 2020 4

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