CASH AND CASH EQUIVALENTS

Cash- includes money and any other negotiable instrument that is payable in money and acceptable by the bank for
deposit and immediate credit.

Examples:

 checks
 bank drafts
 money orders

Unrestricted Cash

a. Cash on hand- includes undeposited cash collections and other cash items awaiting deposit
b. Cash in bank- includes demand deposit or checking account and saving deposit which are unrestricted as to
withdrawal
c. Cash Fund- set aside for current purposes such as petty cash fund, payroll fund, and dividend fund.

Cash Equivalents (PAS 7)- short-term and highly liquid investments that are readily convertible into cash and so near
their maturity that they present insignificant risk of changes in value because of changes in interest rates.

(Standard: ACQUIRED 3 MONTHS BEFORE MATURITY)

Examples:

 Three-month BSP treasury bill

 Three-month time deposit
 Three- month money market instrument or commercial paper

Classification of Cash Fund

The classification of cash fund as current or noncurrent should parallel the classification of the related liability.

IMPORTANT TERMS:

Bank Overdraft- when the cash in bank account has a credit balance, it is said to be overdraft. Bank overdraft is classified
as a current liability and should not be offset against other bank accounts with debit balance.

 Exception: When an entity maintains two or more accounts in one bank and one account results in an overdraft,
such overdraft can be offset against the other bank account with debit balance.

Compensating Balance- takes the form of minimum checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a bank. This classified as:

 Not legally restricted (informal)- compensating balance is part of cash.

 Legally restricted (formal)- compensating balance is separately classified as current asset if the related loan is
short-term and non-current investment if the related loan is long-term.

Undelivered or Unreleased Checks- is one that is merely drawn or recorded but not given to the payee before the end
of the reporting period.
Postdated Checks- is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end
of the reporting period.

Stale Check- is a check not encashed by the payee within a relatively long period of time.

Window Dressing- is a practice of opening the books of accounts beyond the close of the reporting period for the
purpose of showing a better financial position or performance.

Lapping- consists of misappropriating a collection from one customer and concealing this defalcation by applying a
subsequent collection made from another customer

Kiting- occurs when a check is drawn against a first bank and depositing the same in a second bank to cover the shortage
in the latter bank.

IMPREST SYSTEM

Imprest system is a system of control of cash which requires that all cash receipts should be deposited intact and
cash disbursements should be made by means of check.

Petty Cash Fund- is money set aside to pay small expenses which cannot be paid conveniently by means of check.

There are two methods of handling the petty cash, namely:

 Imprest Fund System

 Fluctuating Fund System

BANK RECONCILIATION

Bank Reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank.
The reconciliation is usually prepared monthly because the bank provides the depositor the bank statement at the end
of every month.

A bank statement is a monthly report of the bank to the depositor showing:

a. The cash balance per bank at the beginning

b. The deposits made by the depositor and acknowledged by the bank
c. The checks drawn by the depositor and paid by the bank
d. The daily cash balance per bank during the month

Reconciling Items

1. Book Reconciling Items

a. Credit Memos (Addition to book balance)- refers to items not representing deposits credited by the bank
to the account of the depositor but not yet recorded by the depositor as cash receipts.
Typical Examples:
 Note receivable collected by bank in favour of the depositor and credited to the account of the
depositor
 Proceeds of bank loan credited to the account of the depositor
 Matured time deposits transferred by the bank to the current account of the depositor
 b. Debit Memos (Deduction to book balance)- refer to items 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 disbursements.
Typical Examples:
 NSF or no sufficient fund checks- these are checks deposited but returned by the bank because
of insufficiency of fund.
 Technically Defective Checks
 Bank Service Charges- these include bank charges for interest, collection, checkbook and penalty
 Reduction of loan- amount deduced from the current account of the depositor in payment for
loan which the depositor owes to the bank and which has already matured.
c. Errors
2. Bank Reconciling Items
a. Deposits in transit (Addition to bank balance)- are collections already recorded by the depositor as cash
receipts but not yet reflected on the bank statement.
b. Outstanding Checks (Deduction to bank balance)- are checks already recorded by the depositor as cash
disbursement but not yet reflected on the bank statement.
Outstanding checks include:
 Checks drawn and already given to payees but not yet presented for payment
 Certified checks- a certified check is one where the bank has stamped on its face the word
accepted or certified indicating sufficiency of fund. This should be deducted from the total
outstanding checks because they are no longer outstanding for reconciliation purposes.
c. Errors

Forms of Bank Reconciliation

a. Adjusted balance Method- the book balance and bank balance are brought together 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