Intermediate Accounting 1

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Cash & Cash Equivalents

Module 004: Cash & Cash Equivalents

Course Learning Outcomes:

1. Define cash and identify the items that can be included in the “Cash and
Cash Equivalents” classification.
2. Understand the accounting for petty cash funds and cash
shortages/overages.
3. Understand the basic internal controls for cash.
4. Prepare bank reconciliation and proof of cash.

Definition of Cash
Cash includes money or its equivalent that is readily available for unrestricted use. Money
is the standard medium of exchange and the basis of accounting measurements. Other
negotiable instruments that can be used to settle obligations and are readily available for
unrestricted use may form part of cash.
Cash includes cash on hand and cash in banks.
a. Cash on hand – includes collections awaiting deposit and other current funds held as
of the reporting date.
b. Cash in bank – includes deposits in banks that are available for immediate
withdrawal and unrestricted use.
Examples of items included as cash are as follows:
1. Coins and currencies
2. Demand deposits (checking or current accounts) and savings accounts
3. Bank drafts
4. Money orders
5. Checks – such as Cashier’s checks, Personal checks, Manager’s checks, Traveler’s
checks, and Certified checks received from customers or other external parties.
6. Cash funds set aside for use in current operations such as:
a. Petty cash fund
b. Revolving fund
c. Payroll fund
d. Change fund
e. Dividend fund
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 f. Tax fund
g. Travel fund
h. Interest fund
i. Other types of imprest bank accounts used in current operations.
Examples of items not included as cash are as follows:
1. Postdated checks
2. IOUs or advances to employees
3. Cash funds not available for use in current operations – such as sinking fund, plant
expansion fund, depreciation fund, preference share redemption fund, contingency
fund, and insurance fund.
4. Postage stamps

Postdated Checks Received

Postdated checks received by an entity do not qualify as cash because postdated checks are
not presently available for immediate use. They will only be available for use at a future
date.
Entities normally record check collections on accounts by debiting “Cash” and crediting
“Accounts receivable,” regardless of whether checks received are postdated or not. Thus, at
reporting date, an adjustment is necessary to revert back postdated checks to accounts
receivable.
For example, you received customers’ checks totaling P100,000. The entry to record the
receipt of the checks is as follows:
Date Cash 100,000
Accounts receivable 100,000
At the end of reporting period, you determined that a customer’s check of P20,000 included
in the collections is postdated. The adjusting entry is as follows:
Date Accounts receivable 20,000
Cash 20,000
You will report cash of P80,000 (P100,000 less postdated check of P20,000) in your
financial statements.

Unused Credit Line

Unused credit line is not included in cash but rather disclosed only in the notes. Unused
credit line is the difference between the amount of line of credit and the amount that was
actually borrowed.
For example, you applied for a line of credit of P100,000,000 in a bank. During the year, you
borrowed P70,000,000. The bank automatically credits your account for the P70,000,000
borrowed. This is included in your cash. The unused credit line of P30,000,000
(P100,000,000 les P70,000,000) is disclosed only in the notes because you have not yet
received it in cash.
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Unreleased checks drawn and postdated checks drawn

Entities normally record checks drawn by debiting “Accounts payable” and crediting
“Cash.” However, when the checks drawn are either unreleased or undelivered to the payee
or postdated, no payment has actually been made. Therefore, an adjusting entry is needed
to revert the unreleased check or postdated check back to cash and accounts payable.
For example, you write the following checks today.
 Check #1 is drawn for P10,000 and dated today but yet to be delivered to payee Mr.
A next year.
 Check #2 is drawn for P15,000 and was delivered to payee Mr. B today but the check
is dated 100 years from now.
The entry for the checks drawn is as follows:
Date Accounts payable – Mr. A 10,000
Accounts payable – Mr. B 15,000
Cash 25,000
If financial statements are prepared today, both the checks written should be reverted back
to cash and accounts payable because:
a) There is no way Mr. A can encash check #1 because you still hold the check.
b) Mr. B holds check #2 but he cannot yet encash it until after 100 years (if he’s still
alive).
In both cases, you have reduced the balance of cash but no payments have actually been
made. Therefore, the following adjusting entry is necessary:
Date Cash 25,000
Accounts payable – Mr. A 10,000
Accounts payable – Mr. B 15,000

Stale Checks
When checks delivered to payees are not encashed within a relatively long period of time,
normally 6 months or more, the checks are referred to as “stale.” Stale checks are reverted
back to cash.

Cash Equivalents
Philippine Accounting Standards 7 (PAS 7) Statement of Cash Flows 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.” Cash
equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes.
Furthermore, PAS 7 provides that only highly liquid investments that are acquired 3
months or less before maturity can qualify as cash equivalents.
Examples of cash equivalents:
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 a. 3-month Treasury bill
b. 90-day money market instrument or commercial paper
Money market instruments are investments in portfolios of short-term securities.
Commercial papers consist of short-term, unsecured, notes payable issued in large
denominations by large companies with high credit ratings to other companies and
institutional investors.
c. 3-month time deposit
Time deposit is a form of a bank deposit normally made in fixed denomination,
bears interest higher than that of regular deposits, and has a pre-agreed maturity. A
time deposit is evidenced by a certificate of deposit.
d. 1-year Treasury bill acquired 3 months before maturity date
Treasury bill is a short-term obligation issued by the government at a discount.
Treasury notes and treasury bonds are long-term obligations issued also by the
government.
Illustration: Cash Equivalents
JKL Co. holds the following short-term investments as of December 31, 2018:
1) 1-year Treasury bill maturing on March 30, 2019 acquired on July 1, 2018.
2) 1-year Treasury bill maturing on March 30, 2019 acquired on December 31, 2018.
Requirement: Which of the investments may qualify as cash equivalent?
Solution:
 Only the second T-bill qualifies as cash equivalent because it is acquired 3 months or
less before maturity date, i.e., acquired on December 31, 2018 and matures on
March 30, 2019 – acquired 3 months before maturity.
 The first T-bill does not qualify as cash equivalent because it is acquired more than 3
months before maturity date, i.e., acquired on July 1, 2018 and matures on March
30, 2019 – acquired 9 months before maturity.
Note that what is important is the date of acquisition which should be 3 months or less
before maturity date.

Checks and Equity Securities

Checks and bank drafts cannot qualify as cash equivalents because these are not short-term
investments. When checks and bank drafts are available for unrestricted and immediate
use, they are included as cash but not as cash equivalents.
Equity securities (investment in stocks) cannot qualify as cash equivalents because shares
of stocks do not have a maturity date.
However, redeemable preference shares (preference shares with mandatory redemption)
that are acquired 3 months or less before their specific redemption date may qualify as
cash equivalents. This is because redeemable preference shares are debt instruments
rather than equity instruments.
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Recognition and Derecognition

Cash is recognized when it meets the requirements for asset recognition and is available for
unrestricted use in current operations.
Cash is derecognized when it fails to meet the requirements for asset recognition.

Financial Statement Presentation

Cash and cash equivalents are normally presented as current assets unless they are
restricted from being exchanged or used to settle a liability for at least 12 months after the
reporting period.
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 the line item is shown in the notes.

Measurement of Cash
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 measured at realizable value. Realizable value is the amount expected to be
recovered from the deposit and is determined usually by reference to the insured amount
of the deposit. If the realization is deferred, the amount is discounted to its present value.

Deposit in Foreign Banks

Unrestricted deposits in foreign banks that are available for immediate withdrawal are
included as cash at face amount translated at the current exchange rate as of reporting
date.
Restricted deposits in foreign banks that are not available for immediate withdrawal are
excluded from cash and presented as receivable subject to appropriate allowances for
uncollectibility and impairment. The classification of the restricted deposit as current or
noncurrent depends on the nature of the restriction. The nature of the restriction shall be
disclosed in the notes.

Compensating Balance
Compensating balance is a minimum amount that must be maintained in an entity’s bank
account as support for funds borrowed from the bank.
Compensating balances that are legally restricted as to withdrawal by the borrower are
excluded from cash and shown as part of other current assets or other noncurrent assets
depending on the nature of the restriction.
Compensating balances that are not legally restricted as to withdrawal are included in cash.
Whether restricted or not, compensating balances are disclosed in the notes.

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Bank Overdraft
Bank overdraft (cash overdraft) is a negative (credit balance) in the cash in bank account
resulting from overpayment of checks in excess of the amount of deposit.
Overdrafts are payable on demand, thus, they are presented as current liabilities.
Overdrafts are not offset to cash, except in cases where offsetting is permitted.
When two or more bank accounts are maintained in the same bank and one account results
to an overdraft, the overdraft may be offset or deducted from the other bank account with a
positive balance; provided, the other bank account is also unrestricted. If the other bank
account with a positive balance is restricted, offsetting is not permitted.
PAS 7 provides that if bank overdrafts which are repayable on demand form an integral
part of the entity’s cash management, the overdrafts may be included as component of cash
and cash equivalents as deduction or offset.
It should be noted that offsetting of assets and liabilities is appropriate only when
permitted by a PFRS. Financial assets and financial liabilities may be offset if the entity has
both a legal right of offset and an intention of settling the financial asset and liability at net.

Internal Controls over Cash

Internal control is any action or process effected by management that is designed to help
an entity achieve its objectives. Such objectives may be categorized as reliability of financial
reporting, effectiveness and efficiency of operations, compliance with laws and regulations,
and safeguarding of assets.
Examples of internal controls over cash are as follows:
1. Segregation of incompatible duties – the duties of authorization, execution,
recording, and custody over cash should be segregated.
2. Imprest system – the imprest system requires that all cash receipts should be
deposited intact and all cash disbursements should be made through checks.
3. Bank reconciliation – monthly bank reconciliation should be made immediately
upon receipt of monthly bank statements to bring the balances of cash in bank per
books and per bank statement into agreement.
4. Cash counts – periodic cash counts should be performed to provide reasonable
assurance that actual cash tally with the balance per records.
5. Minimum cash balance – minimum cash balance should be maintained, especially
for cash funds, sufficient only to defray specific business requirements.
6. Lockbox accounts – entities often utilize lockbox accounts to expedite cash
collections and to ensure that cash collections are deposited intact. A lockbox is
rented for a fee and customers are advised to remit their payments directly to the
lockbox account. The bank empties the box at least once a day and immediately
credits the entity’s account for collections.
7. Non-encashment of personal checks from petty cash fund – to discourage
concealment of cash shortages, encashment of personal checks from the petty cash
fund should be prohibited.
8. Voucher system – the voucher system is an internal control over all cash
disbursements. Under this system, a voucher is prepared for every cash
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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

When the cash count results to an amount less than the balance recorded in the books,
there is cash shortage. Cash shortage is initially debited to a suspense account called “Cash
shortage or overage” pending proper investigation of the cause of shortage.
The shortage is initially recorded as follows:
Date Cash shortage or overage xx
Cash on hand xx
When financial statements are prepared, the “Cash shortage or overage” account is closed
to either a nominal or permanent account. Suspense accounts should not appear in the
financial statements.
Depending on the result of investigation, the shortage may be
a. Closed to a “receivable” account if the shortage was due to the fault of an employee;
or
b. Charged to “loss” if the investigation was without merit.
The entry to close the suspense account is as follows:
Date Receivable from cashier/Loss on cash shortage xx
Cash shortage or overage xx
When the cash count results to an amount more than the balance recorded in the books,
there is cash overage. Cash overage is initially credited to the “Cash shortage or overage”
account pending proper investigation of the cause of overage.
The accounting for a cash overage is much the reverse of the accounting for a cash
shortage. Depending on the result of investigation, the overage may be closed to a
“payable” account if the overage was due to cash belonging to an employee that was
commingled with the entity’s cash or to “gain” if the investigation was without merit.

Concealment of Cash Shortages

Cash shortages are fraudulently concealed using numerous ways. Examples of concealing
cash shortages include, but not limited to, the following:
1. Lapping – occurs when collection of receivable from one customer is
misappropriated and then concealed by applying a subsequent collection from
another customer. Lapping is made possible when the incompatible duties of
recording and cash custody are combined.
2. Kiting – occurs when cash shortage is concealed by overstating the balance of cash.
Kiting is made possible by exploiting the float period (the time it needs for a check
to clear at the bank where it was drawn).

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 3. Window dressing – in a broad sense, window dressing is a form of fraudulent
financial reporting and not primarily a method of concealing cash shortages.
Window dressing occurs when books are not closed at year-end and transactions in
subsequent period are deliberately recorded in the current period in order to
improve the entity’s financial performance or financial ratios. This fraudulent
reporting is also called “cooking the books.”

Petty Cash Fund

The imprest system requires all cash receipts to be deposited intact and all cash
disbursements to be made through checks. However, requiring cash disbursements for
relatively small amounts to be made through checks is inexpedient. Thus, it becomes
necessary for an entity to establish a petty cash fund.
Petty cash fund is money set aside to defray relatively small amounts of cash
disbursements. What constitutes a “small” amount is a matter of company policy.
Accounting for Petty Cash
The accounting procedures for petty cash fund are shown below:
a. Petty cash fund is established
Petty cash fund is established by means of a check in conformance with the imprest
system of internal control for cash. The check is typically drawn to the order of a
petty cash custodian who is responsible for the custody of the fund.
The entry to record the establishment of a petty cash fund is as follows:
Date Petty cash fund xx
Cash in bank xx
The amount of petty cash fund initially established is supported by a board
resolution. Such amount is fixed, meaning if the original amount established is
P10,000 and disbursements during the period reduced the fund balance to P2,000,
the amount of subsequent replenishment is P8,000, the amount needed to bring the
fund balance back to its original amount of P10,000.
Any subsequent increase or decrease to the fixed amount of the fund should also be
supported by a board resolution.
b. Disbursements out of the petty cash fund
No journal entries are made when disbursements are made out of the petty cash
fund. Instead, petty cash payments are initially recorded in a petty cash register
(e.g., a log book) and supported by signed petty cash vouchers.
c. Replenishment of petty cash disbursements
When the balance of the petty cash fund becomes low, it shall be replenished also by
means of check and supported by a check disbursement voucher (CDV). This time, a
journal entry is made for a petty cash disbursements during the period which were
initially recorded in the petty cash register.
If there is no shortage or overage, the amount of replenishment is equal to the petty
cash disbursements.
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The entry to record the replenishment is as follows;

Date Various expense accounts xx
Cash in bank xx
d. Adjustment for unreplenished fund at reporting date
When preparing financial statements, any unreplenished petty cash fund should be
adjusted in order not to overstate cash and not to understate expenses.
The adjusting entry is as follows:
Date Various expense accounts xx
Petty cash fund xx
e. Subsequent changes in ledger balance of petty cash fund
If subsequently a board resolution is made to change the ledger balance of the petty
cash fund, the entries are as follows:
To increase the petty cash fund balance:
Date Petty cash fund xx
Cash in bank xx
To decrease the petty cash fund balance:
Date Cash in bank xx
Petty cash fund xx
Again, the petty cash fund balance should stay relatively fixed in the absence of a
board resolution authorizing a change to the initially established fund balance.
For example, if the established petty cash fund is P10,000, at any given point in time,
the balance of coins and currencies and petty cash vouchers in the petty cash box
should equal P10,000. If the total of cash and vouchers in the petty cash box is not
equal to the fixed balance of p10,000, there is either shortage or overage. If the
balance of P10,000 is frequently changed without proper authorization, any
shortage or overage may not be readily detected.
Shortage in Petty Cash Fund
When there is a petty cash shortage, the amount of replenishment is increased by the cash
shortage in order to maintain the fixed balance of the fund.
The entry to record the replenishment when there is a petty cash shortage is as follows:
Date Various expense accounts xx
Cash shortage or overage xx
Cash in bank xx
Overage in Petty Cash Fund
When there is a petty cash overage, the amount of replenishment is decreased by the cash
shortage in order to maintain the fixed balance of the fund.

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The entry to record the replenishment when there is a patty cash overage is as follows:
Date Various expense accounts xx
Cash shortage or overage xx
Cash in bank xx
The “Cash shortage or overage” account is accounted for in much the same way as
shortages or overages in the general cash, i.e., it is either closed to a nominal or permanent
account prior to the preparation of the financial statements.
Illustration 1: Petty Cash Fund – Journal Entries
On September 1, 2018, the board of directors of JKL Co. passed a resolution for the
establishment of a P10,000 petty cash fund. Single disbursements amounting to less than
P2,000 will be made through this fund. Those amounting to P2,000 or more will be made
through checks. The following were the transactions during the period:
Sept. 1, 2018 Established P10,000 petty cash fund.
Sept. 1 through Disbursements are made for the following:
21, 2018 -Groceries for use of employees in the pantry P1,400
-Transportation of Mang Benny, the messenger boy 500
-Snacks during meetings and conferences 1,000
-Gasoline for company vehicles 3,000
-Pedicure of Ms. Ana (secretary of the boss)-authorized 3,000
Total P8,900

September 22, Total coins and currencies in the petty cash box is P500. Replenishment
2018 is made.
Requirement: Provide the journal entries.
Solutions:
Pertinent entries are:
Sept. 1, 2018 Petty cash fund 10,000
Cash in bank 10,000
Sept. 1 to 21, 2018 No journal entry. PCF disbursements are recorded in a petty cash
register or log book.
The summary of petty cash count is shown below:
Coins and currencies 500
Petty cash vouchers 8,900
Total cash count 9,400
Less: Total accountability (Ledger balance of PCF) (10,000)
PCF shortage (600)

Ledger balance 10,000

Coins and currencies (500)
Cash needed to bring the PCF back to its fixed balance 9,500
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The entry to record the replenishment is as follows:

Sept. 22, 2018 Pantry supplies 1,400
Transportation (500 + 3,000) 3,500
Meetings and conferences 1,000
Miscellaneous expense 3,000
Cash shortage or overage 600
Cash in bank 9,500
Assuming that the petty cash custodian admits to have taken money from the fund but
forgot to replace it, the entry to close the suspense account is as follows:
Sept. 22, 2018 Receivable from custodian 600
Cash shortage or overage 600
Assuming that the PCF is not replenished and financial statements are prepared on
September 30, 2018, the adjustment to the PCF is as follows:
Sept. 22, 2018 Pantry supplies 1,400
Transportation (500 + 3,000) 3,500
Meetings and conferences 1,000
Miscellaneous expense 3,000
Receivable from custodian 600
Cash in bank 9,500
When the PCF is not replenished, the amount of petty cash to be presented in the
September 30, 2018 FS is equal to the coins and currencies of P500 (or P10,000 fixed
balance minus P9,500 credit adjustment).
Illustration 2: Petty Cash Fund
As of December 31, 2018, the petty cash fund of JKL Co. with a general ledger balance of
P5,000 comprises the following:

Coins and currencies P850

Petty cash vouchers:
Gasoline for delivery equipment 1,000
Medical supplies for employees 680 1,680
IOU's:
Advances to employees 740
A sheet of paper with names of several employees together with
contribution to bereaved employee, attached is a currency of 800
Checks:
Check drawn to the order of the petty cash custodian 1,000
Personal check drawn by the petty cash custodian 800
Requirements:
a. How much petty cash fund will be included as part of cash in the December 31, 2018
statement of financial position?
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 b. What is the entry to replenish the fund on December 31, 2018?
Solutions:
Requirement (a): Petty cash fund included in cash
Coins and currencies 850
Check drawn to the order of the petty cash custodian 1,000
Petty cash fund included as part of cash 1,850
Requirement (b): Replenishment journal entry
Before replenishment, a petty cash count should be performed as shown below:

Coins and currencies P850

Check drawn to the order of the petty cash custodian 1,000
Petty cash vouchers:
Gasoline for delivery equipment 1,000
Medical supplies for employees 680 1,680
IOU's:
Advances to employees 740
Total as accounted (cash count) 4,270
Total accountability (ledger balance) (5,000)
Shortage (P730)
The contribution to a bereaved employee is not included in the count because, clearly, this
money does not belong to JKL Co.
In the count shown above, the personal check drawn by the petty cash custodian is not
included in the count because it is obviously placed there to conceal the cash shortage. If
the check was erroneously included in the count, the shortage would not have been
identified. There would even be an overage of P70.
The entry to record the replenishment is as follows:
Sept. 22, 2018 Transportation expense 1,000
Medical supplies 680
Advances to employees 740
Cash shortage or overage 730
Cash in bank 3,150
After making the replenishment entry, the petty cash fund is brought to its ledger balance
of P5,000 (P1,850 +replenishment of P3,150).

Bank Reconciliation
Bank reconciliation is a form of internal control over cash. It is a schedule prepared that
accounts for the difference between the cash balance per books and per bank statement.
Bank reconciliations are prepared to:
a. Explain the difference between cash reported on the bank statement and cash balance
on the entity’s books.
b. Arrive at the adjusted (correct) cash balance to be shown in the financial statements.
c. Provide information for reconciling journal entries.
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Bank reconciliations are prepared on a monthly basis, immediately upon receipt of

monthly bank statements from banks.
Bank statements are monthly reports sent by banks to their depositors showing the
beginning and ending balances of cash together with the transactions that affected cash
during a specific month.
When an entity has more than one bank account, separate bank reconciliations shall be
made for each of the accounts held.
Bank reconciliations are normally required only for checking accounts. Theoretically, bank
reconciliation is not required for savings accounts because no checks can be drawn from
them. Deposits and withdrawals are updated immediately on both cash records and bank
passbook. Reconciling items for savings accounts are usually limited to interest income
earned and which are not accrued periodically due to their immateriality.
In practice though, there are cases when the balance per pass book and the balance per
records do not tally. In these rare cases, bank reconciliation is required for a savings
account in order to explain the difference. These differences are most often times caused by
unrecorded withdrawals. For the auditor, these may be treated as red flags for fraud or
weakness in internal control.
For the succeeding discussions and illustrations, it is presumed that differences between
records and bank statements are not caused by fraud.
Common Causes of Differences between Cash Balances Per Books and Per Bank
Statements
1. Deposits in transit – these are 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.
Deposits in transit often occur when deposits are mailed to the bank, placed in the
overnight depository, or deposits are made after the bank’s cut-off.
2. Outstanding checks – these are checks drawn and released to payees but are not yet
presented for encashment to the bank.
Certified checks should be excluded from outstanding checks. The bank, when certifying
checks, automatically debits (reduces) the entity’s account and assumes direct liability
on paying the certified checks to the payee. Certified checks are already deducted from
the account, thus, they are no longer outstanding.
Checks that remain outstanding for a relatively long period of time may be considered
stale and may appropriately be reverted back to the cash.
3. Credit memos – these are additions (bank credits) may by the bank to the entity’s bank
account but not yet recorded by the entity.
Examples of credit memos are:
a. Collections made by the bank on behalf of the entity
b. Proceeds from loan directly credited or added by the bank to the entity’s account.

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 c. Unrolled-over matured time deposits transferred by the bank to the entity’s
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 of debit memos are:
a. Bank service charges representing bank charges for checkbook, interest, collection,
accommodations, penalties and surcharges.
b. No sufficient funds checks (NSF) or drawn against insufficient fund checks (DAIF) –
these are checks deposited and already recorded by the bank but subsequently
returned to the entity because the drawer’s fund in insufficient to pay the check.
c. Automatic debits such as when the entity and the bank agree that the bank will
make automatic payments of bills on behalf of the entity.
d. Payment of loans – this represents payment of loan which the entity agreed to be
made out directly from its bank account.
5. Errors – errors committed by either the bank (bank error) or the entity (book error)
would cause differences between balances of cash per books and per bank statement.
Deposits in transit, outstanding checks and errors committed by the bank are bank
reconciling items. No reconciling entries are made by the depositor for these items.
Credit memos, debit memos and errors committed in the books are book reconciling items.
The depositor should make reconciling entries for these items.
Illustration: Reconciling items
To illustrate how the causes of differences listed above arise, let us analyze how both the
depositor (entity) and the bank record the transactions below.
1. An entity opens a checking account on December 27, 2018. The entity and the bank
makes the following entries:
Entity (depositor) Bank
Cash in bank 1,000 Cash on hand 1,000
Cash on hand 1,000 Deposit liability – depositor 1,000

Deposit in transit
2. The entity collects P200 from customers and places the amount collected in an
overnight depository on December 31, 2018. The entries are as follows:
Entity (depositor) Bank

Cash on hand 200

Accounts receivable 200
No entry yet. Deposit will be received in
Cash in bank 200
January 2019.
Cash on hand 200
Credit memo
3. The bank collects a P500 receivable on behalf of the entity in January 2019. The entry is
as follows:
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Entity (depositor) Bank

Cash on hand 500
No entry yet in January. The entity is
Deposit liability – depositor 500
not aware yet of the collection. It will
record the collection when it receives
the January bank statement on the first
week of February.

Book error
4. The entity makes payment of P1,000 but erroneously records it as P100 in February
2019. The check cleared the bank at the correct amount of P1,000. The entries are as
follows:
Entity (depositor) Bank
Accounts payable 1,000 Deposit liability - depositor 1,000
Cash in bank 1,000 Cash on hand 1,000

Outstanding checks
5. In March 2019, the entity writes check totaling P400. Only P100 of those checks were
encashed with the bank during March. The entries were as follows:
Entity (depositor) Bank
Accounts payable 400 Deposit liability - depositor 100
Cash in bank 400 Cash on hand 100

Scenarios similar to those illustrated above would give rise to differences due to debit
memos and bank errors.
Preparation of Bank Reconciliation
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

Illustration: Bank Reconciliation

JKL Co. is preparing its September 30, 2018 bank reconciliation. Relevant information is
shown below:

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 Balance per books 1,740
Balance per bank statement 2,000
Collection on note by bank (including P50 interest) 1,150
NSF check returned by bank 600
Bank service charges for December 20
Deposits in transit 780
Outstanding checks (including certified checks of P100) 1,000
 A P450 collection of accounts receivable was erroneously recorded in the books as
P540. The actual amount deposited to the bank is P450.
 A P300 loan amortization of Red Co. was erroneously debited by the bank to JKL Co.’s
account.
Requirement:
a. Prepare the bank reconciliation.
b. Prepare the month-end adjusting entry.
Solutions:
Requirement (a): Bank Reconciliation
The bank reconciliation is prepared as follows:
JKL Co.
Bank reconciliation - Bank XYZ (Checking account #10009087)
September 30, 2018
Balance per books, Sept. 30 P1,740 Bal. per bank statement, Sept. 30 P2,000
Credit memo: Deposits in transit 780
Collection on note by bank 1,150
Debit memos:
Outstanding checks (1,000 –
NSF check (600) 100)* (900)
Bank service charge (20)
Book error: Bank error:
Overstatement of Erroneous debit to ABC's
collection (90) account 300
Adjusted balance P2,180 Adjusted balance P2,180

Prepared by: xxxx (sgd.) Reviewed and approved by: zzzz (sgd.)
Date: 10/2/18 Date: 10/3/18
* The certified check is deducted from the total outstanding checks.
Requirement (b): Adjusting entry
The adjusting and correcting entries to be made in the books pertain only to the book
reconciling items (i.e., credit memos, debit memos and book errors).
The adjusting/correcting entries using simple entries are as follows:
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Oct 3, 2018 Cash in bank 1,150

Note receivable 1,100
Interest income 50
to record the collection of note receivable and
interest income
Oct. 3, 2018 Accounts receivable 600
Cash in bank 600
to revert back the NSF check to accounts
receivable
Oct. 3, 2018 Bank service charge 20
Cash in bank 20
to record the service charge expense
Oct. 3, 2018 Accounts receivable 90
Cash in bank 90
to record the correction for the overstated receipts

The adjusting/correcting entry is reconciled with the adjusted balance as follows:

Balance per books, Sept. 30 1,740
Net debit to "Cash in bank" 440
Adjusted balance 2,180

Bank to Book/Book to Bank

Some problems require the computation of the unadjusted cash balance per books or the
unadjusted cash balance per bank statement or any of the reconciling items. The
unadjusted balances or any reconciling item may be computed by placing relevant
information on the pro forma bank reconciliation and squeezing the amounts required by
the problem.

Illustration: Bank to Book

JKL Co. has the following information:
Balance per bank statement 400
Credit memos 210
Debit memos 150
Deposits in transit 130
Outstanding checks 80
Requirement: Compute for the cash balance per books.

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 Solution:
Balance per books (squueze) 390 Balance per bank 400
Credit memo 210 Deposits in transit 130
Debit memo (150) Outstanding checks (80)
Adjusted balance 450 Adjusted balance 450

Answer: P390
The reconciling items, i.e., deposits in transit, outstanding checks, credit memo and debit
memo, are placed first on the pro forma bank reconciliation.
Step 1 – the adjusted cash balance is computed from the bank side.
Step 2 – the adjusted balance is then extended to the book side.
Step 3 – the unadjusted cash balance per books is squeezed.
When squeezing amounts upwards, all additions downwads are changed to deductions and
all deductions downwards are changed to additions (i.e., 450 + 150 – 210 = 390). Just
change or reverse the plus or minus signs.
The same approach can be used if a problem requires the computation of the unadjusted
cash balance per bank statement (i.e., book to bank).

Proof of Cash
Proof of cash is an expanded bank reconciliation that includes proof of receipts and
disbursements. Proof of cash is useful in discovering possible discrepancies in handling
cash over a certain period of time.
Unlike the bank reconciliation which is prepared monthly, proof of cash is prepared only
when the need arises. Proof of cash is normally prepared in fraud investigations involving
cash.

Illustration: Proof of Cash

Data concerning the cash records of JKL Company for the months of November and
December 2018 are shown below:
Nov. 30 Dec. 31
Book balance 5,600 ?
Book debits 31,900
Book credits 28,200
Bank balance 15,000 20,400
Bank debits ?
Bank credits 27,300
Notes collected by bank 2,250 3,000
Bank service charge 20 100
NSF checks 880 1,400
Overstatement of check in payment of salaries 1,900 1,200
Deposit in transit 6,000 11,250
Outstanding checks 9,750 17,850
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Deposit of 123 Corp. erroneously credited to JKL Co.'s

account 2,400 1,800
Requirements:
Compute for the following by preparing a proof of cash:
a. Unadjusted book balance as of December 31.
b. Unadjusted bank disbursements in December.
c. Adjusted cash balance as of November 30.
d. Adjusted cash receipts in December.
e. Adjusted cash disbursements in December.
f. Adjusted cash balance as of December 31.
Solutions:
Per books:
Nov. 30 Receipts Disbursements Dec. 31
Balance per books 5,600 31,900 28,200 9,300
Note collected by bank:
November 2,250 (2,250)
December 3,000 3,000
Bank service charges
November (20) (20)
December 100 (100)
NSF checks:
November (880) (880)
December 1,400 (1,400)
Book errors:
November 1,900 (1,900)
December (1,200) 1,200
Adjusted balances 8,850 30,750 27,600 12,000

Per bank:
Nov. 30 Receipts Disbursements Dec. 31
Balance per
bank 15,000 27,300 21,900 20,400
Deposits in transit:
November 6,000 (6,000)
December 11,250 11,250
Outstanding checks:
November (9,750) (9,750)
December 17,850 (17,850)
Bank errors:
November (2,400) (2,400)
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 December (1,800) (1,800)
Adjusted balances 8,850 30,750 27,600 12,000

Answers to requirements: (amounts taken from the proof of cash)

a. Unadjusted book balance as of December 31. = 9,300
b. Unadjusted bank disbursements in December. = 21,900
c. Adjusted cash balance as of November 30. = 8,850
d. Adjusted cash receipts in December. = 30,750
e. Adjusted cash disbursements in December. = 27,600
f. Adjusted cash balance as of December 31. = 12,000
Observe the following:
The sum of amounts in the first two columns, i.e., Nov. 30 and Receipts, is equal to the sum
of amounts in the last two columns, i.e., Disbursements and December 31.
In a T-account form analysis, the first two columns would resemble one side of the T-
account and the last two columns would resemble the other side of the T-account. Notice
also that the adjusted balances, including receipts and disbursements, per books and per
banks are identical.
Answers to requirement (a) and (b) are simply squeezed after placing the given
information on the proof of cash.
The November 30 and December 31 adjusted balances columns follow the pro forma bank
reconciliation discussed earlier. Answers to requirements (c) and (d) are computed in the
same manner as in a regular bank reconciliation.
The proof of cash illustrated above is also called a “two-date bank reconciliation.” Notice
that the proof of cash consists of two monthly bank reconciliations merged into one
schedule showing proof of cash receipts and disbursements. A proof of cash covering more
than two months can also be prepared.
The Receipts and Disbursements columns pertain to the current month of December. Thus,
items pertaining to November’s (last month) receipts or disbursements that were recorded
only in December are excluded (deducted) from these columns.
On the other hand, those that represent receipts and disbursements during December that
are not yet recorded are included (added) in these columns.
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References and Supplementary Materials

Books and Journals
1. Valix, C.T., Peralta, J.F, & Valix, C.M. (2019), Intermediate Financial Accounting (2019
edition, Volume 1). Manila, Philippines: GIC Enterprises & Co., Inc.
2. Robles, N.S., & Empleo, P.M., The Intermediate Accounting Series Volume 1 (2016
edition). Manila, Philippines: GIC Enterprises & Co., Inc.
3. Milan, Z.V.B., Intermediate Financial Accounting 1A (2016 edition). Baguio City,
Philippines: Bandolin Enterprise

Online Supplementary Reading Materials

1. https://www.academia.edu/30991754/Cash_and_Cash_Equivalents_Sample_Problem
s
2. http://oer2go.org/mods/en-
boundless/www.boundless.com/accounting/definition/cash-equivalent/index.html
3. https://www.ifrsbox.com/007-restricted-cash-ifrs/

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