Cash and Cash Equivalent:

Cash in layman terms = means money or physical money

Cash in accounting parlance:

= money and checks (but not all checks I will explain this further in next illustrations)
= must be unrestricted (GR)

If cash is immediately available for current operations = Cash /

ex. Payment of OPEX
ex. Payment of Liabilities
ex. Acquisition of Current Assets

If cash immediately available for non-current operations = non-current assets X

ex. Acquisition of PPE

Note: There is no specific standards for cash but only guided only PAS 1 (Presentation of Financial
Statements)

Composition of Cash (3):

1. Cash on Hand: (CUTCMoBa)
C – Customer cash awaiting for deposits
U – Undeposited cash collection
T – Traveler check
C – Cashier/Treasurer/Manager/Official checks
Mo – Money orders
Ba – Bank Drafts

2. Cash in Bank: (Generally non-interest bearing)

Demand deposit and Saving deposit
Certified/Current/Checking account (3C’s)

3. Cash Funds: (Current), (CP2RIntPeDiT2)

C – Change fund
P2 – Purchasing fund and Payroll fund
R – Revolving fund
Int – Interest fund
Pe – Petty cash fund (for small expense)
T2 – Tax fund and Traveling fund
3. Cash Funds: (non-current), (P2ACIS)
P2 – Pension fund and Preferred redemption fund (I will explain this further on Cash Equivalents)
A – Acquisition of PPE
C – Contingent fund (best ex. Warranties) Unknown time and Unknown amount
I – Insurance fund
S – Sinking fund
Note: The yellow highlight is that classification of cash fund as current or non-current should parallel to
related liability.
ex. Bonds maturing in <=1 year = current or cash /
Reason: because the current cash fund is included in the composition of the cash.
ex. Bonds maturing in > 1year = non-current or not included in the cash X
Meaning the A, C, and I regardless of the due date it will always be a non-current
Let us explain further why. Remember PAS1 the presentation of current asset is like this:
- Cash and Cash equivalents
- Financial Asset @ Fair value
- Trade and other receivables
- Inventories
- Prepaid expense
See the pattern? it is based on liquidity so why include the acquisition of PPE fund into cash if the nature
of PPE is noncurrent in the first place. We will violate the presentation of PAS 1 which is based on
liquidity

Cash Equivalents:
= short term and highly liquid investment
= 3 months maturity date

Composition of Cash Equivalents:

1. Time deposit
2. Money market instrument / commercial paper
3. T bills, T notes and T bonds
4. Preferred redeemable share
Meaning if these 4 has a maturity date at:
3 months = Cash equivalents
3 months to 1 year = current assets
1 year and above = non-current assets
Note: Remember these classifications because it will be crucial in computing the cash and cash
equivalents

Other terms:
- Cash = Face value but not all the time (you will find this out later)
- Cash in foreign currency = must be translated in to PESO to be included in cash
- Deposit in Foreign bank = Unrestricted / and if Restricted X = non-current assets
- Cash in closed bank or in bankruptcy = non-current asset and this time not measured @ Face value but
Estimated Realizable Value and if is recoverable is estimated to be lower than the Face value
- Compensating Balance = Not legally restricted / and if Legally restricted X (I will explain this)
- IOU = Receivables
DR Receivables
CR Cash
- No Sufficient Funds/Drawn Against Insufficient Funds/Drawn Against Insufficient Funds = Receivables
Ex.
Jan. 1 Company A sells merchandise on Rudolph account
DR AR 20k
CR Sales 20k
Jan. 2 Rudolph sends a check to pay and deposited immediately
DR Cash 20k
CR AR 20k
Jan.3 Rudolph check bounce it is shown as NSF in bank
DR AR 20k
CR Cash 20k
- Expense advance = Receivables/Prepaid expense
- Postage stamps = office supplies/Prepaid expense
- Equity share = Not included in cash or cash equivalents because there is no maturity value but with the
exemption of preferred redeemable share that is due on 3 months.
- Treasury warrants = part of cash
- Bank Overdrafts = General rule must be a current liability let see the exceptions to this rule with this
example
Ex.
Bank 1: 500,000 Bank 2: (250,000)
(200,000)
300,000
Answer: Cash in Bank: 300,000
Current Liability 250,000
Meaning: (3 scenarios you need to consider)
- If the overdrafts occurred in same bank and has positive balance it must be netted to get the cash
- If the overdraft is immaterial netted against other bank to get the cash
- If the overdrafts occurred in not same bank and no positive balance it will be measured at current
liability

3 more types of Checks: (SUP)

1. Stale Checks (Expired usually if not withdrawn in 6 months it will be stale)
DR Cash
CR Miscellaneous Income (if immaterial)
CR Accounts Payable (if material)
2. Undelivered Check / Unreleased Check (Company already issued the check, but the payee did not
receive the check) I will explain this further
DR Cash
CR Accounts Payable
3. Postdated Check (May simple definition for this one is GALIT SAYO YUNG TAO) I will explain this
further
For own company (Revert it back to cash)
DR Cash
CR Accounts Payable
If the company receive PDC (Revert it back to receivable)
DR Account Receivable
CR Cash
Petty Cash Fund:

Accounted Accountabilities

1. Coins and Currencies 1. Imprest Balance

2. Unreplenished Vouchers 2. Impurities except Employee Checks in
settlement of cash advance from PCF
3. Postdated Checks 3. payment of liabilities (utilities)
4. Checks for Deposits
5. Unclaimed Salaries Unclaimed Salaries
6. Stale Checks Stale Checks
7. Collection for AR/Sales Collection for AR/Sales
8. Unexpended Employee Contributions Unexpended Employee Contributions (Christmas
(Christmas Party) Party)
Note: 5-8 is included in the accounted if intact but in accountabilities regardless of whether is intact or
not intact
Note: Add the unused postage stamp in accounted if there is no postage stamp expense. If there is a
postage stamp expense add the postage stamp expense only in accounted.
Impurities: (3)
1. Bills and coins and customer cash collection from customer
2. Payment of utilities
3. Employee Checks in settlement of cash advance from PCF

Checks:
1. Employee Checks in settlement of cash advance from PCF whether good or NSF and PDC
2. Replenishment of petty cash fund
3. Check of the company payable to petty cash custodian representing his salary

Note if Payee to Cash (Silent) assume accommodated checks thus add to accounted

Formula:
Accounted xx
Accountabilities (xx)
PCF (shortage)overage xx

Formula:
Coins and Currencies (except 5,7 and 8) xx
Expense paid after reporting date xx
All checks but only good (3) xx
Adjusted PCF xx
Bank Reconciliation:

Book Reconciliation:
Credit Memo (Add): Collection made in the bank, proceed of bank loan and Interest income
Debit Memo (Deduct): Bank Service Charge, NSF/DAIF/DAUD, Payment of loan and final withholding tax

Bank Reconciliation:
Deposit it Transit (Add): Undeposited Cash collections and collection already forwarded to the bank
Outstanding Checks (Deduct): Certified Check must be deducted to total Outstanding Check.

Why is it credit memo is addable? The normal balance of cash is debit right? Let see this illustration
Book entry:
DR Cash in Bank 500k
CR Company A Capital 500k

Bank entry:
DR Cash 500k
CR Company A 500k

Unadjusted Book Balance Unadjusted Bank Balance

Credit Memo Deposit in Transit
(Debit Memo) (Outstanding Checks)
Error (ERROR MO AYOS MO) Error (ERROR MO AYOS MO)
Adjusted Book Balance Adjusted Bank Balance

Note: In case of shortage/overage the Adjusted Bank balance shall be the correct cash balance. Why
remember in Auditing Theory evidence is more reliable when obtain outside the entity and Evidence
generated internally is reliable only if the internal control is effective.
Note: Thus Overage if Bank > Book and Shortage if Bank < Book
Note: If there is no shortage in the question just reconcile the bank items because reconciling the book
will be a waste of time and most of the time the shortage occur only in the books

Example why the book balance and bank balance is not equal mostly because of the timing difference

Jan. 1 Book balance 500k

Jan. 25 Coll. from customer forwarded to the bank 150k
Jan. 27 Outstanding checks (25k)
Jan. 28 Coll. from customer record as 60k but original receipts 50k 60k
Jan. 31 Book balance 625k

Jan. 1 Bank balance 500k

Jan. 25 Coll. of NR with interest from customer 200k
Jan. 25 Bank Service charge for collecting NR (5k)
Jan. 29 Credit Memo of other Company included in Company A 70k
Jan. 31 Bank balance 765k
Proof of cash:
Sometimes called two date bank reconciliation or four-column bank reconciliation it is just the same
with the usual bank reconciliation but this time it includes receipts and disbursement. Also, one
reconciling items means you always need to put two amounts.
Note: If there is no shortage in the question just reconcile the bank items because reconciling the book
will be a waste of time and most of the time the shortage occur only in the books

Book Balance Cash Cash Book Balance

March 31 Receipts/Book Disbursement/ April 30
Debits Book Credits
CM March xx (xx)
CM April xx xx
DM March (xx) (xx)
DM April xx (xx)
Adjusted Balances Adjusted Book Adjusted Cash Adjusted Adjusted Book
Balance March 31 Receipts Disbursement Balance April 30

Bank Balance Cash Cash Bank Balance

March 31 Receipts/Bank Disbursement/ April 30
Credits Bank Debits
DIT March xx (xx)
DIT April xx xx
OC March (xx) (xx)
OC April xx (xx)
Adjusted Balances Adjusted Bank Adjusted Cash Adjusted Adjusted Bank
Balance March 31 Receipts Disbursement Balance April 30
Pattern:
1 (2)
24
(1) (3)
3 (4)

Errors: (Both on Books and Banks)

1. Error last month corrected this month:
Assume that your client audit company name is PASIG Company. The bank erroneously credited the
company 78k in March 25 for a collection of SIPAG company. The bank corrected the error in April 16.

Beginning Balance Receipts Disbursement Ending Balance

Overstatement of (xx) (xx)
Receipts
Understatement xx (xx)
of Receipts
Overstatement of xx (xx)
Disbursements
 Understatement (xx) (xx)
of Disbursements
Pattern:
(1) (3)
1 (2)
1 (2)
(1) (3)

2.Error last month not yet corrected:

Check dated January 18 was entered as 5k in payment of voucher for 50k.

Beginning Balance Receipts Disbursement Ending Balance

Overstatement of (xx) (xx)
Receipts
Understatement xx xx
of Receipts
Overstatement of xx xx
Disbursements
Understatement (xx) (xx)
of Disbursements
Pattern:
(1) (4)
14
14
(1) (4)

3. Error this month not yet corrected:

Check of 20k cleared by the bank but not been recorded in cash disbursement. It was for payment of
Accounts Payable.

Beginning Balance Receipts Disbursement Ending Balance

Overstatement of (xx) (xx)
Receipts
Understatement xx xx
of Receipts
Overstatement of (xx) xx
Disbursements
Understatement xx (xx)
of Disbursements
Pattern:
(2) (4)
24
(3) 4
3 (4)
The most common question in the proof of cash that is quite hard let analyze it:
Question: NSF check amounting to 20k returned this month and reported this month (no entry was
made in the books both on return and redeposited

First let visualize what happened without correcting the error:

Bank:

Beginning Balance Receipts Disbursement Ending Balance

Check Deposit 20k 20k
Check return 20k (20k)
because the check
became NSF
Redeposited 20k 20k
because now the
NSF check has a
positive balance
Balance 40k 20k 20k
Book: Base on the problem both NSF check and redeposited has no entry in books

Beginning Balance Receipts Disbursement Ending Balance

Check Deposit 20k 20k
Check return
because the check
became NSF
Redeposited
because now the
NSF check has a
positive balance
Balance 20k 20k
So how do we reconcile or solve it? There are two ways to reconcile it. First you can reconcile it in the
books or second one is to reconcile it in the bank. It is a matter of preference.

First alternative solution, reconcile it in the book but this alternative solution it overstate the receipts
and disbursement of the book

Beginning Balance Receipts Disbursement Ending Balance

Check Deposit 20k 20k
Check return
because the check
became NSF
Redeposited
because now the
NSF check has a
positive balance
Error Correction 20k 20k
Second alternative solution, reconcile it in the bank this is the most reasonable answer because it does
not overstate the receipts and disbursement of the book

Beginning Balance Receipts Disbursement Ending Balance

Check Deposit 20k 20k
Check return 20k (20k)
because the check
became NSF
Redeposited 20k 20k
because now the
NSF check has a
positive balance
Error Correction (20k) (20k)

In short: If you encounter this type of question check the multiple choices answer because the multiple
choices answer will depend on whether you will choose alternative solution 1 or 2 because it is matter
of preference for the examiner whether he/she will choice the alternative solution 1 or 2 because both
solution is correct. Also, if you encounter this type of question with supply the answer type of problems
and you chose either the alternative the alternative solution 1 or 2 and you got wrong it is better to ask
and explain this to your professor because for sure you and your professor just chose different
alternative solution, or it does not match.

Other Reconciling items in proof of cash that is quite hard will be explain in the problems while
answering it.