INTERMEDIATE ACCOUNTING 1A – MODULE #2

CHAPTER 1 – CASH & CASH EQUIVALENTS (PART 2)

ISSUES IN CASH

Window Dressing
Books of an entity should be closed at the end of every reporting period in order that financial statements will
show fairly the financial position and performance of the entity and to avoid window dressing.

Window dressing is a practice of opening the books of accounts beyond the close of the reporting period
which results to manipulation of the books to arrive for a better financial position and performance. It could
be increasing the assets and lowering the liabilities.

This method is usually accomplished by:

 By recording as of the last day of reporting period collections made subsequent to the close of the
period, thus increasing cash shown in the statement of financial position.
 By recording as of the last day of the reporting period payments of accounts made subsequent to the
close of the period, thus decreasing liabilities shown in the statement of financial position.

Such practices are unacceptable and undesirable. Thus, entries made to window dress must be reversed back
to correct the statements as these entries pertain to the subsequent period. This act causes misstatement of
the assets, liabilities, equity, income and expense.

ILLUSTRATION

The correct current position at the end of the current year is as follows:
Current assets 8,400,000
Current liabilities 4,000,000
Current ratio (CA/CL) 2.1

The books were kept open and two transactions which occurred in January of the following year were
recorded as of the end of the current year.

JOURNAL ENTRIES
A. Sale for P2,000,000 of merchandise costing P800,000: Consequently, the resulting balances would be:
Accounts Receivable 2,000,000 Current Assets 8,800,000
Sales 2,000,000 Current Liabilities 3,200,000
Cost of Sales 800,000 Current Ratio 2.75
Merchandise Inventory 800,000

B. Payment of accounts payable, P800,000:

Accounts Payable 800,000
Cash 800,000

The original current assets balance of P8,400,000 is increased by the accounts receivable of P2,000,000 but
decreased by the cost of the merchandise sold P800,000 and payment of accounts payable of P800,000.

The current liabilities balance of P4,000,000 is reduced by the payment of accounts payable of P800,000.
As a consequence of the window dressing, the effects are:
a. The current ratio increased from 2.1 to 2.75, an apparent improvement in the current financial
position
b. Sales are overstated by P2,000,000
Lapping
Another act which causes misstatement in the presentation of the financial statement is Lapping, which is
commonly used in concealing cash shortage.

This is done by misappropriating a collection from one customer and concealing this defalcation by applying a
subsequent collection made from another customer.

It involves series of postponements of the entries for the collection of the receivables. Poor internal control
may lead to this scenario especially when the bookkeeper and the cashier are one and the same person.

Kiting
This is another act of concealing a cash shortage. It is possible when an entity maintains current accounts in
different banks and commonly done at the end of the month.

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. No entry is made for both the drawing and deposit if the check.

This fraudulent device is made possible when the check is drawn against the first bank at the end of the
month, the bank statement for such month does not yet show the check drawn because the said check is yet
to be cleared or presented for payment to the first bank. Hence, the cash balance in the first bank at the end of
the month is not affected.

On the other hand, when the check is deposited in the second bank at the end of the month, the bank
statement for such month will already show the deposit thereby increasing the cash in said bank and covering
the cash shortage therein

Accounting for cash shortage

Where the cash count shows cash which is less than the balance per book, a cash shortage is to be recorded.

Cash short or over xx

Cash xx

The cash short or over account is only a temporary or suspense account. When financial statements are
prepared the same should be adjusted.

Hence, if he cashier or cash custodian is held responsible for the cash shortage, the adjustment should be:

Due from cashier xx

Cash short or over xx

However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is

Loss from cash shortage xx

Cash short or over xx

Accounting for cash overage

Where the cash count shows cash which is more than the balance per book, a cash overage is to be recorded.

Cash xx
Cash short or over xx
Note that whether it is a cash shortage or cash overage, the offsetting account is cash short or over account.
Such account should be adjusted when statements are made.

The cash overage is treated as miscellaneous income if there is no claim on the same.

Cash short or over xx

Miscellaneous Income xx

But where the cash overage is properly found to be the money of the cashier, the journal entry is:

Cash short or over xx

Payable to cashier xx

Imprest System

The 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.

While internal control ideally requires that all payments should be made by means of check, this is sometimes
impossible.

There are occasions when the issuance of checks becomes impractical or inconvenient such as when small
amounts are paid or things are hurriedly bought or customers are entertained.

Consequently, in such instances, it may be more economical and convenient to pay in cash rather than issue
checks.

Life Application:
Improving Cash Management
Even if a company is making a profit by making more revenue than it incurs in expenses, it will have to
manage its cash flow correctly to be successful. A company’s cash flow is tied to its operations or business
activities, to its investment activities (such as the purchase or the sale of capital equipment), and to its
financing activities (such as raising debt or equity funding or repaying such funding). The cash that a
company generates from its operations is tied to its core business activities and provides the best
opportunities for cash flow management.

Summary:
 Cash is the most liquid asset and can be used immediately to perform economic actions like buying,
selling, or paying debt, and meeting immediate wants and needs.
 Liquidity is the ability to meet obligations when they come due without incurring unacceptable
losses.
 money market: A market for trading short-term debt instruments, such as treasury bills,
commercial paper, bankers’ acceptances, and certificates of deposit
 liquidity: Availability of cash over short term: ability to service short-term debt.
Topic: IMPREST SYSTEM: Petty Cash Fund

How is Petty Cash Transaction Controlled and Reported?

As control measures of petty cash fund, the procedures are widely used:

 One person is usually given the responsibility of operating the petty cash fund
 Each time an expenditure is made, a source document (called a petty cash voucher) is prepared for
payment evidence. The voucher is signed by the person receiving the cash and by the person in
charge of the fund (petty cashier). The petty cash voucher includes the amount and purpose of the
expenditure.
 A record (usually multi columned) is kept to record each expenditure from the petty cash fund
 Each time the fund is almost depleted and also at the end of every accounting period, a check is
prepared for the amount spent and cashed to replenish the petty cash fund.

PETTY CASH RECEIPT

No. 121 Date August 1, 2001
Paid to Metropolitan Times Amount: 300

For Daily Newspaper

Charge to Miscellaneous Administrative Expense
Payment received:
S.O. Hall Approve by N.E.R

No Description Journal Entry

1 Petty Cash xxx  
An establishment of petty cash fund
Cash xxx
2 Payment expenses by the petty cash custodian No Entry    
3 Receiving disbursement evidences and replenished Kinds of Expenses xxx  
  petty cash Cash xxx
4 Petty cash funds are too small and needed to increase Petty Cash Xxx  
  petty cash fund balance Cash   xxx
5 Petty cash funds are too much and needed to decrease Cash xxx  
  petty cash fund balance Petty Cash xxx
 
5 At the end of period, to make an adjusting entry (If there Kinds of Expenses xxx  
  are unrecorded transactions) Petty Cash   xxx
6 At the beginning of next period, the reversing entries is Petty cash xxx  
  developed Kinds of Expenses   xxx
ILLUSTRATION:

Date Description Journal Entry

Airlangga, Corp established petty Petty Cash 10,000,000
March 1,2021
cash funds Rp. 10,000,000 Cash   10,000,000
The petty cash receipts indicate
expenditures for the following items:
  • Office supplies Rp.
  5,000,000
  • Postage expenses Rp.
No Entries
  500,000
  • Utility expenses Rp.
March 14, 2021 3,000,000
• Miscellaneous expenses Rp.
300,000
Office supplies 5,000,000  
 
Postage expenses 500,000  
 
  Utility expenses 3,000,000  
Replenished petty cash funds
 
  Miscellaneous expenses 300,000  
March 15, 2021
Cash   8,800,000
Petty cash funds are too small and Petty Cash 2,500,000
March 16, 2021 needed to increase petty cash fund
balance, Rp. 2,500,000 Cash 2,500,000
At the end of period, the Adjusting Entry
expenditures are unrecorded for the
following items: Postage expenses 300,000  
 Postage expenses Rp. Utility expenses 1,200,000  
300,000
 Utility expenses Rp. Miscellaneous expenses 100,000  
1,200,000
 Miscellaneous expenses Rp. Petty Cash   1,600,000
100,000
Reversing Entry
Petty Cash 1,600,000  
At the beginning of the next period,
April 1, 2021 Postage expenses 300,000
the reversing entries to be made
Utility expenses 1,200,000
Miscellaneous Exp.   100,000