CHAPTER 3

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. It includes money, Checks, bank drafts, money orders. It is
free from restriction.

ITEMS TO BE INCLUDED IN CASH

CASH ON HAND – undeposited cash collections and toher cash items awaiting deposit such
customer’s checks, cashier’s check or manager’s check, traveler’s checks, bankdraft and money
order.
CASH IN BANK – demand deposit or checking account, savings account, which are unrestricted
as to withdrawal.
CASH FUND – set aside for current purposes such as petty cash fund, payroll and dividend fund.

CASH EQUIVALENTS – 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 vlaue because of changes in
interest rates.
ONLY HIGHLY LIQUID INVESTMENTS THAT ARE ACQUIRED THREE (3) MONTHS BEFORE
MATURITY CAN QUALITY AS CASH EQUIVALENTS. Eg. 3-month bsp treasury bills, 3-year bsp
treasury bill purchased three months before date of maturity; three months time deposit, 3
month money market instruments or commercial paper.

PREFERENCE SHARES `

***NOTE TO REMEMBER***
Basis: DATE OF PURCHASE WHICH SHOULD BE THREE MONTHS OR LESS BEFORE MATURITY.

EXCLUDED FROM CASH AND CASH EQUIVALENTS

 EQUITY SECURITIES – shares do not have maturity date.
 BSP treasury bill that was purchased one year ago cannot quality as cash equivalent even if the
remaining maturity is three months or less.
 Post dated check not included in cash account
 Restricted cash – used or exchanged to settle a liability for at least 12 months after the reporting
period.

HOW DO WE MEASURE CASH

PESO - at face value.
FOREIGN CURRENCY –current exchange rate
BANKRUPTCY OR FINANCIAL DIFFICULTY – estimated realizable value

FS PRESENTATION OF CASH AND CASH EQUIVALENTS

 CASH AND CASH EQUIVALENTS – first item in current assets; details of cash shall be disclosed in
notes to financial statement.

SHORT TERM FINANCIAL ASSETS OR TEMPORY INVESTMENT– term is more than 3 months but
within one year.

NONCURRENT OR LONG-TERM - term is more than a year

FOREIGN CURRENCY – shall be translated in Philippine peso using current exchange rate.
Deposit in foreign countries – if no foreign restriction; it shall be included in cash

DEPOSIT IN FOREIGN COUNTRIES WITH RESTRICTION – shall be noncurrent asset, and it shall be
disclosed in the notes to fs.

CASH FUND
- USE FOR CURRENT OPERATION OR PAYMENT OF CURRENT OPERATION, CURRENT ASSETS, AS
PART OF CASH. PETTY CASH, PAYROLL FUND, TRAVEL FUNDS, DIVIDEND FUND, INTEREST FUND,
AND TAX FUND.
- CASH FOR NON-CURRENT PURPOSE OR PAYMENT OF NONCURRENT OBLIGATION, it is long-term
investments. Eg. Sinking fund, preference share or redemption fund, contingent fund, insurance
fund, property or construction fund.
NOTE: CLASSIFICATION APPLIED TO THE RELATED LIABILITY.

BANK OVERDARFT (RESULTS FROM THE ISSUANCE OF CHECKS IN EXCESS OF THE DEPOSITS)
- CASH IN BANK HAS CREDIT BALANCE. It shall be classified as current liability and not be offeset
against other banks accounts
- IT IS NOT PERMITTED IN THE PHILIPPINES
EXCEPTION: A. Two accounts with the same bank
B. IF THE AMOUNT IS IMMATERIAL – offset is allowed with other bank.

COMPENSATING BALANCE
LOAN PAYABE AGAINST MAINTAINING BALANCE.

CLASSIFICATION
IF NOT LEGALLY RESTRICTED – it shall be part of cash (normally informal)
IF LEGALLY RESTRICTED – cash held as compensating balance
AS CURRENT ASSETS – if related loan is current
AS NON-CURRENT ASSETS – if related loan is non-current

UNDELIVERED OR UNRELEASED CHECKS – checks not given to payees; that is the control is in the entity,
thus can be cancelled any time.
 ADJUSTING ENTRY:
CASH xxx
ACCOUNTS PAYABLE OR APPROPRIATE ACCOUNT xxx

POSTDATED CHECKS DELIVERED – checks are drawn, recorded and already given to the payees but they
bear a date subsequent to the end of reporting period.
ORIGINAL ENTRY SHALL BE REVERSED:
CASH XXX
ACCOUNTS PAYABLE OR APPROPRIATE ACCOUNT XXX

STALE CHECKS OR CHECKS LONG-outstanding (when the checks are not encashed by the payees within
a reelatively long period of time)
REASONABLE TIME – the law does not specify a definite period.
BANKING PRACTICE – within six months from the date of issuance.

WINDOW DRESSING
– extending of closing of books for the purpose of showing better picture of the financial hihglights and
profit activities of the business.
- It is unacceptable and undesirable.
- It is deliberate misstatement of assets, liabilities, equity, income and expenses.
- When fs contain any untruth or falsity

LAPPING
Concealing a cash shortage. It consists of misappropriating a collection from one customer and
concealing this defalcation by applying a subsequent collection made from another customer.
- It involves series of postponement of the entries for the collection of receivable
- It normally happened when internal control is weak
- Cashier and bookkeeper are one and the same person.

KITTING
To conceal cash shortage. Entity opens 2 or more bank accounts.
It usually employed at the end of the month.
When a check was drawn against a first bank and depositing the same check in a second bank to cover
the shortage in the latter bank. No entry is made for both the drawing and deposit of the check.

HOW TO DETECT: SIMULTANEOUS PREPARATION OF BANK RECONCILIATION.

ACCOUNTING FOR CASH SHORTAGE
CASH SHORTAGE:
CASH SHORT OR OVER xxx
CASH xxx
CASH SHORT IS TEMPORARY ACCOUNT OR SUSPENSE ACCOUNT
IT SHALL BE CLOSED OR ADJUST TO
DUE FROM CASHIER
CASH SHORT OR OVER
IF IMMATERIAL – miscellaneous expense
IF IT REASONABLE – loss from cash shortage

CASH OVERAGE xxx

CASH xxx
CASH SHORT OR OVER xxx

TREATED AS MISCELLANEOUS INCOME

IF FOUND THAT IT IS MONEY OF CASHEIR

CASH SHORT OR OVER xxx

PAYABLE TO CASHIER xxx

IMPREST SYSTEM
Is a system of control of cash which requires that all cash receipts should be deposited intact and all
cash disbursements should be made by means of check? It is impractical to issue check for petty
amount.

PETTY CASH FUND

METHODS OF HANDLING PETTY CASH

IMPREST FUND SYSTEM (normally followed)
PCF xxx
CASH IN BANK xxx

No journal entry for payment of expenses from pcf,. The custodian generally requires signed
petty cash voucher for such payment and simply prepared memo entries in the petty cash journal.

EXPENSES xxx
CASH IN BANK xxx

AT THE END OF ACCOUNTING PERIOD(ADJUST THE CORRECT OR ACTUAL PETTY CASH BALANCE)
EXPENSE xxx
PCF xxx

FLUCTUATING FUND SYSTEM

THE CHECKS DRWAN TO REPLENSH THE FUND DO NOT NECESSARILY EQUAL THE PETTY CASH
DISBURSEMENT.
PCF xxx
CIB xxx

EXPENSES xxx
PCF xxx
DISBURSEMENT OF PCF IS IMMEDIATELY RECORDED.

The end….