CASH, CASH EQUIVALENTS, BANK

RECONCILIATION & PROOF OF CASH

Cash Includes money & any other negotiable instrument that is payable in money and
acceptable by the bank for deposit and immediate credit.
Cash Short-term highly and liquid investments that are readily convertible into cash
equivalents and so near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.

Financial Statement CASH & CASH EQUIVALENTS

Presentation
Classification CURRENT ASSET
The asset is current asset if such asset is cash or cash equivalent
Basis of Classification unless the asset is RESTRICTED to settle a liability for more than
12 months after the reporting period. (PAS 1 para.66).

Measurement:

Philippine currency: FACE VALUE

Foreign currency: CURRENT EXCHANGE RATE at the
reporting date

Cash & Cash

Equivalents

Cash
Cash
Equivalents

Cash on Cash in Cash

Hand Bank Fund

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CASH

CASH NOT CASH

CASH FUND
CASH ON HAND CASH IN BANK CURRENT NONCURRENT
OPERATIONS PURPOSES
Bills and Coins Demand deposit Petty Cash Fund Cash Sinking Fund
Undeposited cash collections -Current Account Revolving Fund Plant Expansion Fund
Cash Items Awaiting Deposit -Checking Account Payroll Fund PS Redemption Fund
Customer’s checks Savings deposit Change Fund Depreciation Fund
Traveler’s Check Dividend Fund Contingency Fund
Manager’s Check Tax Fund Insurance Fund
Bank Drafts Travel Fund
Interest Fund
Revolving Fund

CASH ON HAND

➢ Stale (normally 6-months or more ) & postdated checks

Status of Check Written Company Check Collected Customer Checks

Postdated Checks Add back to cash Deduct from collection
Stale Checks Add back to cash Deduct from collection

➢ NSF customer checks should not be part of cash

➢ Undelivered, written company checks should be added back to cash

CASH IN BANK

➢ Bank overdraft

When the cash in bank account has a credit balance, it is said to be bank overdraft. The
credit balance in the cash in bank account results from the issuance of checks in excess of
the deposits

o If company maintains more than one bank account under the same bank and
incurred bank overdraft, you should offset (minus) the overdraft account against
another bank account under the same bank.
o If there is single bank account and there is bank overdraft, treat it as current
liability (do not offset)

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➢ Time deposit is not part of cash but may be part of cash equivalent

➢ Bank accounts with compensating balances

The minimum checking or demand deposit account

COMPENSATING BALANCE balance that must be maintained in connection with a
borrowing arrangement with a bank.

o Not legally restricted as to withdrawal: part of cash

o Legal restricted as to withdrawal
▪ related loan is short-term : cash held as compensating balance but not
part of cash
▪ related loan is long-term: noncurrent investment

CASH FUND

➢ for current operations : part of cash

Petty Cash Fund It is money set aside to pay small expenses which cannot be paid
conveniently by means of check

Transactions Imprest Fund System Fluctuating Fund System

Establishment of petty cash Petty Cash Fund xx Petty Cash Fund xx
fund Cash in Bank xx Cash in Bank xx
Payment of expenses out of No entry Expenses xx
the fund Petty Cash Fund xx
Replenishment of fund Expenses xx Petty Cash Fund xx
Cash in Bank xx Cash in Bank xx
Unreplenishment at end of Expenses xx
reporting period Petty Cash Fund xx No entry
Increasing the fund Petty Cash Fund xx Petty Cash Fund xx
Cash in Bank xx Cash in Bank xx
Decreasing the fund Cash in Bank xx Cash in Bank xx
Petty Cash Fund xx Petty Cash Fund xx

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 ➢ for noncurrent purposes:
Cash fund for the payment of liability due within 1 year – current
Cash fund for the acquisition of noncurrent asset even if within 1 year – noncurrent

CASH EQUIVALENTS

Characteristics:

➢ debt investments such as BSP treasury bills, time deposit, money market
placement/instruments , and commercial papers
➢ purchased three months or less (90 days or less) before maturity

End of
Purchase Reporting Maturity

The gap between date of purchase &

date of maturity must be 3 months
or less

Note:
➢ equity investments shall not be considered as cash equivalents; redeemable preference
shares are , in substance, debt investments hence can be classified as cash equivalents

➢ debt investments purchased more than three months before maturity

- if at the end of reporting period, only 12 months or less remains before maturity, such
investment is considered as current investment ( but can no longer be considered as
cash equivalent in any case)
- if at the end of reporting period, more than 12 months still remain before maturity,
such investment is considered as noncurrent investment ; in no case shall it forms
part of cash but it may become part of current investment if 12 months of less
remains before maturity at end of reporting date

BANK RECONCILIATION
A statement which brings into agreement the cash balance per book and
Bank Reconciliation cash balance per bank. It is usually prepared monthly because the bank
provides the depositor with the bank statement at the end of every month.

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RECONCILING ITEMS:

Credit Memos These refer to items not representing deposits credited by the bank to the
account of the depositor but not yet recorded by the depositor as cash receipts
These refer to items not representing checks paid by bank which are charged or
Debit Memos debited by the bank to the account of the depositor but not yet recorded by the
depositor as cash disbursements.
These are collections already recorded by the depositor as cash receipts but not yet
Deposit in Transit reflected on the bank statement.
Outstanding Checks These are checks already recorded by the depositor as cash disbursements but
not yet reflected on the bank statement.
- Certified Checks: are checks where the bank has stamped on its face the
word accepted o certified indicating sufficiency of fund.
Book & Bank Errors

➢ forms of bank reconciliation

o adjusted balance method
o book to bank method
o bank to book method

ADJUSTED BALANCE METHOD:

Per Book Per Bank

Unadjusted Ending Balance xx Unadjusted Ending Balance xx
Add: Credit Memorandum (CM) xx Add: Deposit in Transit (DIT) xx
Less: Debit Memorandum (DM) xx Less: Outstanding Check (OC) xx
Add/Less: Book Errors xx Add/Less: Bank Errors xx
Adjusted Ending Balance xx Adjusted Ending Balance xx

Note:
➢ bank reconciliation should start at unadjusted ending balances and not at unadjusted
beginning balances.
o Unadjusted beginning balances + total receipts – total disbursements = Unadjusted
ending balances
➢ Certified checks are no longer considered as outstanding checks as they are already debited
(deducted) against the account of the company
➢ NSF checks are customer checks deposited by company but returned by bank because of
insufficiency of fund.

PROOF OF CASH

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 It is an expanded reconciliation in that it includes proof of cash receipts and
Proof of Cash disbursements.

ADJUSTED BALANCE METHOD

Current Month
Previous Month Current Month
Receipts Disbursements
Unadj. EB per Book xx xx xx xx
CM xx (xx)
xx xx CM
DM (xx) (xx)
xx (xx) DM
Adjusted Balances xx xx xx xx

Current Month
Previous Month Current Month
Receipts Disbursements
Unadj. EB per Bank xx xx xx xx
DIT xx (xx)
xx xx DIT
OC (xx) (xx)
xx (xx) OC
Adjusted Balances xx xx xx xx

CONCEPT OF NSF CHECKS:

➢ When the company receives customer’s check, “cash in bank” account increases & likewise the
total receipts of the company.
➢ The company deposits the check to the bank. The bank credits (increases) the account of the
company; hence increases the bank’s total receipts.
➢ Later, the bank finds out that there is no sufficient fund & so, the bank returns the NSF check to
the company. By the act of returning the check, the bank increases its total disbursements.
➢ The company receives the NSF check from the bank & returns back the check to the customer for
replacement. At this point, the company must decrease its “cash in bank” account; this would also
mean increasing company’s total disbursements.

NSF/DAIF checks are generally recorded as ADDITION TO CASH DISBURSEMENTS. However, there may
be cases that recording of NSF/DAIF checks are treated as reduction of cash receipts.

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 Current Month
Previous Month Current Month
Receipts Disbursements
Unadj. Ending Balances per Book xx xx xx xx
NSF check of previous month , recorded
(xx) (xx)
in the current month
NSF check of current month , recorded
xx (xx)
in the subsequent month
NSF check of current month , redeposited
in the same month. No entries made xx xx
to take up return & redeposit
Adjusted Balances xx xx xx xx

SUMMARY OF JOURNAL ENTRIES

1. To record adjustment for undelivered Cash xx
company check Accounts Payable/Appropriate Account xx
2. To record adjustment for postdated Cash xx
company check Accounts Payable/Appropriate Account xx
3. To record adjustment for stale Cash xx
company check Accounts Payable/Appropriate Account xx
4. To record entry if cash count is lesser Cash short or over xx
than balance per book Cash xx
5. Cashier is held accountable for Due from cashier xx
shortage Cash short or over xx

Reasonable efforts fail to disclose the Loss from cash shortage xx

cause of shortage Cash short or over xx
6. To record entry if cash count is more Cash xx
than the balance per book Cash short or over xx
7. Cash overage is properly found to be Cash short or over xx
the money of the cashier Payable to cashier xx

No claim of cash overage Cash short or over xx

Miscellaneous Income xx

DO NOT FORGET!
1. Certificate of deposit is a cash equivalent; If the problem is silent, treasury bills , money market
and time deposit are assumed to be cash equivalent.
2. Cash sinking fund is not part of cash and cash equivalent. However, if bonds payable ,for which
the sinking fund is established, becomes current , such sinking fund will be part of cash and
cash equivalents
3. Establishment of petty cash fund will not affect the total cash and cash equivalents
4. Bank drafts are cash ; bank overdraft is treated as current liability (or can be netted from other
bank account under the same bank)
5. Only debt investments can be considered as cash equivalents; redeemable preference shares
are, in substance, debt investments.

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Compilation by:

Jay Lourd De Veyra, CPA

Arleen Rocabo, CPA

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