Cash and Cash

To be classified as cash, they should be unrestricted and

immediately available for use in the current operations.
This includes demand deposit or checking account and

Equivalents savings deposit.

Cash on Hand
Nature of Cash:
1. Recognition
a. Cash as financial instrument
a. Debit – receipts
b. Cash as medium of exchange
b. Credit – disbursements
c. Unrestricted
2. Measurement – face value
d. Acceptable by banks and other institution at face
3. Presentation
value
a. Classification – current
Cash items included in cash: assets
b. Line item – cash and cash
a. Cash on hand equivalents
- Undeposited cash collections
o Bills and coins
- Cash awaiting deposits Accounting treatment of other cash in bank related
o Customer’s checks, traveler’s and items
managers checks, bank drafts and
a. Foreign currency – translated to Philippine
money orders
pesos using current exchange rate
b. Cash in bank
b. Deposits in foreign countries – translated to
c. Cash fund
Philippine pesos using current exchange rate
Negotiable instruments included as cash: a. Cash – not subject to foreign exchange
restrictions
a. Ordinary check (customer’s check) – a b. Non-current financial assets – subject to
negotiable instrument that calls for a bank to pay foreign exchange restrictions
the amount shown from the maker’s account
b. Cashier’s check – an instrument of payment
Cash on Bank
generally considered the same as cash; it is
drawn on the bank’s own funds and signed by 1. Recognition
an officer of the bank (cashier) a. Debit – deposits/ net interest
c. Bank draft – refers to a bill of exchange drawn on deposit
by a bank on another bank; mode of payment b. Credit – withdrawals/
wherein the assurance bank guarantees the services charges
payment of the amount on behalf of the payer 2. Measurement
and guarantees that the payer has sufficient a. At face value or
balance in the account to cover the amount b. At estimated realizable value
d. Certified check – a check for which the issuing (if bank is in bankruptcy)
bank guarantees payment by certifying that 3. Presentation
there are sufficient funds available in the a. Classification – current
account from which the check is drawn to cover assets
it b. Line item – cash and cash
e. Traveler’s check – a check or draft issued by an equivalents
express company or bank bearing the signature
of the purchaser and to be cashed when
countersigned in the presence of a payee
- Operates like cash so a purchaser can use it Cash from closed banks
to buy goods or services when traveling
f. Money orders – an order granted upon payment - Part of receivables up to recoverable
of a sum and a small commission, by one post amount
office, bank or telegraph company, and payable Bank Overdraft
at another
- A certificate that is usually issued by a - Cash in bank account having a credit
government or banking institution that allows balance
the stated pay to receive cash on demand - Issuance of check in excess of the deposit
- It is classified as current liability
- It should not be offset against other bank
Cash in Bank accounts
- Exception of the rule of overdraft:
- If the cash items mentioned in cash on hand o When the company maintains two or
are already deposited in the bank, they are more account in one bank and one
called cash in bank account results in an overdraft such
a. Savings deposit overdraft may be offset
b. Checking/demand deposit o Overdraft may also be offset against
c. Current account – a bank account that keeps the other bank account if the amount
your money secure and helps you manage your is not material
finances; facilitate the making of payments
Quick Check Postdated Checks issued by the company

*postdated checks are not considered as cash as of the

period; pending*

a. Checks are drawn, recorded and already

given to the payee but it bears a date
subsequent to the end of the accounting
period/ balance sheet date

Dr. Cash xx

Cr. Accounts Payable xx

Postdated Checks received from customer

Compensating Balance
b. Treated as receivables
- Minimum checking or demand deposit
account balances that must be maintained in Dr. Accounts Receivable xx
connection to borrowing arrangement with Cr. Cash xx
the bank

Classification of Compensating Balance

Stale Checks
If legally restricted:
c. Checks are not yet encashed by the payees
- Cash held as compensating balance under within a relatively long period of time
current assets d. Within 6 months from the time of issuance; a
- If the related loan is short term matter of company policy
If the related loan is long-term:
o Long term investment is under non- Immaterial amount:
current asset
Dr. Cash xx
If not legally restricted:
Cr. Miscellaneous Income xx
- Part of cash

Material amount and liability is expected to

Problem: continue:

Dr. Cash xx

Cr. Accounts Payable xx

Accounting Treatment of other Cash Related items –

NSF/DAUD/DAIF Checks

NSF – No Sufficient Fund

DAUD – Drone Against Uncollected Deposits

*the account has sufficient funds but not yet available to

Accounting Treatment of other Cash Related items: the drawer because the deposit usually a check has not
Undelivered or Unreleased Check issued by the yet been cleared*
company DAIF – Drone Against Insufficient Funds
- Checks have been merely drawn and These are considered as Receivables
recorded but not given to the payees
- Payment is recorded on the books but the
checks are still in the hand of the company
- Payment is not yet recognized because
there is undelivered check and is still subject
to the entity’s control and may be cancelled
any time before delivery
- Requires an adjustment entry to restore
cash balance and set up liability

Dr. Cash xx
Cr. Accounts payable xx
 Cash Funds

e. These are segregated by the management

to finance a management to finance a
Summary of Accounting Treatment specific operating activity of the business
Items Related to Cash Accounting enterprise or for payment of obligation
Treatment
Foreign Currency CASH
Deposits in foreign countries CASH Classifications of Cash Funds
– not subject to restriction
Finance current
Deposits in foreign countries NON-CURRENT
Working Funds operations and payment
– subject to restriction FINANCIAL ASSET
of current obligation
Cash from closed banks RECEIVABLES
Bank overdraft CURRENT LIABILITY Part of cash
Bank overdraft (same bank CASH OFFSET Finance non-current
but of different account) Cash funds for non- operations and payment
Compensating balance – not CASH current purpose of long-term obligation
legally restricted
Compensating balance – CURRENT/NON- Part of long-term
legally restricted CURRENT investments
FINANCIAL ASSET
Undelivered or unreleased CASH Working Funds
checks issued by the
company a. Petty cash fund
Postdated checks issued by CASH b. Change fund
the company c. Payroll fund
Postdated checks received RECEIVABLES d. Dividend fund
from customer e. Tax fund
Stale checks – immaterial MISCELLANEOUS f. Interest fund
INCOME g. Travel fund
Stale checks – material CURRENT LIABILITY
NSF/DAUD/DAIF Checks RECEIVABLES
Cash Fund for Non-current Purpose
Problem: f. Cash set aside for long-term specific
purpose is part of non-current financial asset
g. It is shown as long-term investment under
non-current asset
a. Preference share redemption fund
b. Contingent fund
c. Insurance fund
d. Sinking fund
e. Fund for acquisition of property

They are NOT included as cash and cash

equivalents.

If a long-term liability becomes a current obligation, what

is the classification of its sinking fund?

a. Classification of a cash fund as current or non-

current should parallel the classification applied
to the related liability
b. For example, a sinking fund that is set aside to
pay a bond payable shall be classified as current
when the bond payable is already due within one
year after the balance sheet due

Cash Funds

1. Recognition
 a. Debit – upon establishment/increase of
fund
b. Credit – decrease of fund
2. Measurement – at face value
3. Presentation
a. Current assets at line item – cash and
cash equivalent
b. Non-current assets at line item – long
term investments
Definition of Cash Equivalents

c. Short-term and highly liquid investments that are

readily convertible into cash or acquired three
months before maturity date
d. Investment of excess cash may be invested in
time deposits, money market instruments, and
treasury bills for the purpose of earning interest
income

Nature of Cash Equivalents

a. Easily converted to cash

b. Highly liquidated financial instrument
c. May also be time deposited in banks with
interest

Items included as Cash Equivalents

1. Short term commercial paper and money market

instruments
a. Short-term trust funds held in banks
b. Philippine treasury bills
i. As of Dec. 31, must be 90 days
old or below from date of
acquisition Financial Statement Presentation

Examples of Cash Equivalents g. Caption “cash and cash equivalent” should be

a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased three
months before maturity date
c. Three-month time deposit
d. Three-month money market instrument
Cash Equivalents
shown as the first item among the current assets
h. This caption includes all cash items such as
cash on hand, cash in bank, cash funds, and
cash equivalents which are unrestricted in use
for current operations
i. Details comprising “cash and cash equivalents”
should be disclosed in the notes to financial
statements

e. Equity securities cannot qualify as cash

Cash Controls
equivalents because shares do not have
maturity date j. An entity must identify specifically the persons
f. Preferred stock with specified redemption date who are authorized to handle cash receipt
and acquired three months before redemption a. To establish accountability, so that in
date can qualify as cash equivalents case of loss, the persons who should be
held responsible can be identified
specifically

k. Handling and recording of cash must be

Investment of Excess Cash
Less than or equal to three
months
More than three months but
within one year
More than one year
separated
a. To prevent assignment of incompatible
functions to one person and thus to
minimize, if not eliminate, the possibility
of manipulation of records
l. Cash receipts must be deposited intact, if
Cash Equivalents
possible, daily
a. This internal control measure will
Short-term financial minimize the possibility of using daily
assets
cash receipt as a source of borrowings.
Long-term financial It will lessen the risk of loss and theft.
assets/non-current
investments m. An entity must adopt the voucher system to
prevent unauthorized disbursement
 a. Under the voucher system, Cr. Cash short or over
disbursements can be made only upon
approval of the voucher by the If cash shortage is immaterial, debit to miscellaneous
responsible officials of the company. In expense.
addition, payments are normally made
by issuance of checks

n. There must be an internal audit at irregular

Accounting for Cash Overage
intervals
a. Internal audit includes surprise cash Cash > balance per book = cash overage
counts to verify the cash on hand
balance Dr. Cash xx

Cr. Cash short or over xx

o. An entity must prepare a bank reconciliation
statement monthly to reconcile differences that Cash overage is treated as miscellaneous income if
may be noted between the records of the there is no claim on the same:
depositor and the records of the bank
a. The statement may cover a single data Dr. Cash short or over xx
or two dates (four-column bank
Cr. Miscellaneous Income xx
reconciliation)

If property found to be the money of the cashier:

Ways of Concealing Cash Shortage
a. Lapping
- It consists of misappropriating a collection
from one customer and concealing this
defalcation by applying a subsequent
collection made from another customer
- Can be detected by receivable confirmation
b. Kiting
- Made possible when a company maintains
current accounts in different banks
- It occurs when a check is drawn against a
first bank and depositing the same check in
a second bank to cover the shortage in the
latter bank
- Can be discovered by simultaneous
preparation of bank reconciliation
statements
Dr. Cash short or over xx
Cr. Payable to cashier xx
Imprest System
p. 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
a. May be subject to impracticality or
inconvenience such as when small
amounts are paid or things are hurriedly
bought by customers
q. Necessary to establish a petty cash fund
Petty Cash Fund

r. Money set aside to pay small expenses which

c. Window dressing
- When entities open their books even beyond
the end of the accounting period for the
purpose of showing a better picture of the
financial highlights and profit activities of the
business
cannot be paid conveniently by means of check
Two Methods of handling Petty Cash Fund:
1. Imprest fund system
a. To establish the fund:

Dr. Petty Cash Fund xx

Accounting for Cash Shortage Cr. Cash in Bank xx

Cash count: b. Payment of expenses:

Cash < Balance per book = cash shortage No formal entry
Dr. Cash short or over xx
c. To replenish the fund:
Cr. Cash xx
Dr. Expenses xx
The cash short or over is a temporary account. Cr. Cash in Bank xx

If the cashier or cash custodian is held responsible for *petty cash disbursements should be replenished only by
the cash shortage: means of check and not from undeposited collections*

Dr. Due from Cashier xx

d. To adjust the petty cash fund at the end of
Cr. Cash short or over xx the period:
Dr. Expense xx
If reasonable efforts fail to disclose the cause of the Cr. Petty Cash Fund xx
shortage:

Dr. Loss from Cash Shortage

*the entry is reversed at the beginning of the next
accounting period*

e. To increase the fund:

Dr. Petty Cash Fund xx
Cr. Cash in Bank xx
f. To decrease the fund:
Dr. Cash in Bank xx
Cr. Petty Cash Fund xx

2. Fluctuating fund system

a. To establish the fund:

Dr. Petty Cash Fund xx

Cr. Cash in Bank xx

b. Payment of expenses:

Dr. Expenses xx

Cr. Petty Cash Fund xx

c. To replenish or increase the fund:

Dr. Petty Cash Fund xx

Cr. Cash in Bank xx

d. To decrease the fund:

Dr. Cash in Bank xx

Cr. Petty Cash Fund xx

*no adjustment is necessary because the petty cash

expenses are recorded outright*

Summary Check
 - Accounting for petty cash involves an
Imprest Fund System that is more
commonly used due to its efficiency and
convenience rather than Fluctuating Fund
System that requires each disbursement to
be recorded

Cash Equivalents Imprest Fund System Fluctuating

System

from: ASSETS Tutorials

1. Time deposit (aka certificate of deposit) a. To establish Dr. Petty Cash Fund Dr. Petty Cash
2. Money market placement (aka commercial fund Cr. Cash in Bank Fund
paper) Cr. Cash in
Bank
o NSF - receivables
b. Payment of Memo entry in Petty Dr. Expenses
3. Treasury bills expenses Cash Journal Cr. Petty Cash
4. Treasury warrants Fund
5. Bankers’ acceptances c. Replenishmen Dr. Expenses Dr. Petty Cash
6. Investment in preference share with redemption t Cr. Cash in Bank Fund
Cr. Cash in
date
Bank
Within 3 months – included as cash equivalents d. Adjustment for Dr. Expenses No adjusting
unreplenished Cr. Petty Cash Fund entry
Beyond 3 months – excluded as cash equivalents expenses
e. Increase in Dr. Petty Cash Fund Dr. Petty Cash
a. Other current assets if from reporting fund Cr. Cash in Bank Fund
Cr. Cash in
date to maturity date is within 12 months
Bank
b. Other non-current assets if from f. Decrease in Dr. Cash in Bank Dr. Cash in
reporting date to maturity date is beyond fund Cr. Petty Cash Fund Bank
12 months Cr. Petty Cash
Fund
Silent – included Petty cash expenses Petty cash
– recorded upon expenses –
Three-month rule test: replenishment immediately
recorded
The counting of three months is from date of acquisition Replenishment Replenishment
of CE to the date of maturity of CE amount = petty cash amount = or >
disbursements or < Petty
Cash
Disbursements
Usual Distractions (items not considered as cash)

1. I Owe You (IOUs) – receivables “Cash short or over” account

2. Expense advances (e.g., travel advances,
postage stamps) – receivables or prepaid - Nominal or temporary account
expense
3. Postage stamps – treated as supplies
4. Credit memo from suppliers – treated as contra
purchase account; deduction from accounts
payable
5. Cash surrender value – treated as investment
6. Investment in shares (equity securities) – treated
as investments
7. Unused credit line – disclosed in notes (leftover
amount in credit card)
8. Escrow deposit – part of current/non-current Knowledge Check (Solving):
assets and reported as liability

Cash Management

Imprest Control System

- Implemented as a control system where all

cash receipt including checks collected are
to be deposited intact

Petty Cash Fund

- Money set aside to pay small and recurring

expenses where it will be inefficient to settle
such payments by issuing checks

If there is maturity date without acquisition date, the year
before the account title should be considered.
For foreign currencies, use the closing exchange rate in
exchanging currencies.
a. Deposited in the bank
b. Available or the redemption of preferred stock or
bonds
c. Unrestricted in use for current operations
d. Set aside for the purchase or construction of
fixed assets

Which of the following should be considered as cash in

the statement of financial position?

a. Postdated checks received

b. IOUs from officers to be deducted from their
salaries of the following month
c. Undelivered checks
d. NSF checks

Which of the following should not be considered cash?

a. Petty cash funds and change funds

b. Certified checks and personal checks
c. Coin, currency, and available funds
d. Postdated checks and IOUs

In which account are postage stamps

a. Cash
b. Office supplies
c. Receivables
d. Inventory

What is compensating balance?

a. Saving account balance

b. Margin account with broker
c. Temporary investment serving as collateral for
loan
d. Minimum deposit required to be maintained in
connection with borrowing arrangement

Which of the following is false concerning the valuation

of cash and cash equivalents?

a. Cash is valued at face value

b. Cash in foreign currency is valued at the
Knowledge Check (Theories): exchange rate at financial reporting date
c. Cash equivalents should be valued at maturity
Cash Equivalents are
value, meaning face value + interest
a. Short-term and highly liquid investments that are d. If a bank or financial institution holding the funds
readily convertible into cash of the company is in bankruptcy or financial
b. Short-term and highly liquid investments that are difficulty, cash should be written down to net
readily convertible into cash with remaining realizable value
maturity of three months
The following statements relate to cash. Which
c. Short-term and highly liquid investments that are
statement is false?
readily convertible into cash and so near their
maturity that they represent significant risk of a. The term cash refers to demand credit
changes in value instruments such as money order and bank
d. Short-term and highly liquid investments that are drafts
readily convertible into cash and so near their b. The purpose of establishing a petty cash fund is
maturity that that they represent insignificant risk to keep enough cash for small recurring
of changes in value because of changes in operating expenses for a period of time
interest rate c. Classification of a restricted cash balance as
current or noncurrent should not be parallel to
As contemplated in accounting, cash includes
the classification of the related obligation for
a. Money only which the cash was restricted
b. Money and negotiable instruments d. Legally restricted compensating balances
c. Any negotiable instruments including promissory required by a bank should always be included in
notes “cash and cash equivalent” if the loan will mature
d. Money and any negotiable instrument that is within 12 months from the balance sheet date
payable in money and acceptable by the bank
Choose the incorrect statement about compensating
for deposit and immediate credit
balance agreement
To be reported as “cash and cash equivalents”, the cash
equivalent must be
 a. It reduces the amount of cash available to the c. Is credited when the petty cash fund proves out
borrower short
b. It always involves the legal restriction on the d. Is a contra account to cash
compensating cash balance
c. It increases the effective interest rate to the
borrower
d. It should be disclosed in the notes to the
financial statements

Which will not be considered as cash equivalent?

a. Postal money order

b. Certificate of deposits
c. Three-year treasury bills purchased three
months before maturity
d. Redeemable preference shares acquired three
months before redemption

Written, recorded, and delivered postdated checks

a. Should be treated as outstanding checks

b. Should be restored to the cash balance
c. Should be treated as outstanding checks if the
date is shortly after statement of financial
position date
d. Should be treated as outstanding checks if they
are ultimately encashed

What is the adjusting entry for a customer NSF check?

a. Debit cash and credit accounts receivable

b. Debit accounts receivable and credit cash
c. Debit service charge and credit cash
d. No adjustment necessary

Bank overdraft, if material, should be

a. Reported as a deduction from the current asset

section
b. Reported as a deduction from cash
c. Netted against cash and a net cash amount
reported
d. Reported as a current liability

Entries to record the replenishment of petty cash fund

result in a debit to petty cash fund and a credit to cash in
bank. This accounting procedure typically exemplifies
the

a. Imprest petty cash system

b. Internal control
c. Fluctuating petty cash system
d. Administrative control

When a petty cash fund is used, which of the following is

true?

a. The balance of the petty cash fund should be

reported on the statement of financial position as
a long-term investment
b. The petty cashier’s summary of petty cash
payments serves as a journal entry that is
posted to the appropriate general ledger account
c. The reimbursement of the petty cash fund
should be credited to the cash account
d. Entries that include a credit to the cash account
should be recorded at the time the payments
from the petty cash fund are made

A cash short or over account

a. Is not generally accepted

b. Is credited when the petty cash fund proves out
over