Definition of Cash and Cash Equivalents

What comes into your mind when you hear about cash? I bet, you'll say money, coin or bills.
Does this have the same meaning with accounting? How do we really define cash and cash
equivalents? This document has no comments.

For cash:
Generally, when we say "cash" it means "money" and we actually interchangeably use the two
terms. However, in accounting, "cash" means that of a company's cash on hand or in
possession, those in banks, and cash funds. Cash also includes checks or cheques since they are
sometimes treated as good as cash, however, for some with certain exceptions.

For cash equivalents:

When we say "cash equivalents" these are items that are treated to be "nearly cash" already.
These are 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 which have short
maturity of, say, three months or less from the date of acquisition.

All cash and cash equivalents of a company here in the Philippines shall be denominated in
Philippine peso (piso).

Recognition of Cash and Cash Equivalents

For cash:
For "cash", in accounting, we will be provided with items to be considered as cash. However, to
be considered part of cash, an item must be:

1. unrestricted as to usage; or
2. readily available for use.

Otherwise, if an item of cash is restricted as to usage or not available for use then we will
consider it as part of other assets, either current or noncurrent, depending on its nature and
purpose.

Examples of items of cash: (but not limited)

1. cash on hand 7. payroll fund

2. cash deposited in banks
3. petty cash funds.
4. treasury warrants
5. money orders
6. customer's checks
8. interest fund
9. tax fund
10. travel fund
11. dividend fund
For cash equivalents:
From its very definition, an item of cash equivalent is characterized as follows:

1. short-term;
2. highly-liquid investment; and
3. with maturity date of three months or less from the acquisition date.

Otherwise, if an item of cash equivalent does not meet the very definition as provided by PAS 7,
then we may treat it as part of other assets, either current or noncurrent, depending on the
maturity date of the investment.

Examples of items of cash equivalents: (but not limited)

1. three months or less BSP treasury bills
2. three months or less government treasury bills
3. three months or less time deposits
4. three months or less money market placements or commercial papers
5. redeemable preference share investments acquired with three months or less from
redemption date

The important thing that we must consider is that from the date of acquisition or purchase, an
item must have three months or less before the intended maturity date to be considered as cash
equivalents.

However, if an item has remaining three months or less before maturity date but it was
purchased more than three months or how many years ago will not qualify as part of cash
equivalents. Therefore, the following shall not be qualified as cash equivalents:

1. equity investments; and/or

2. redeemable preference share investments acquired with more than three months
from redemption date, etc.

Measurement of Cash and Cash Equivalents

We may consider the following measurement bases when measuring items of cash and cash
equivalents:

1. Face value - this is generally the measurement for cash and cash equivalents. This
means the actual value of an item of cash and cash equivalents in peso. Example, the amount
written in a 1,000-peso bill is the actual value of the bill.

2. Current exchange rate - this is applicable specifically to those cash in foreign deposits.
This means the value of cash and cash equivalents in a current and orderly exchange
transaction.
Foreign deposits that are not under any foreign restrictions are considered part of cash and
cash equivalents. However, those that are under foreign restrictions are considered as other
assets, either current or noncurrent, depending on the use, purpose, or maturity of the deposit.

(generally as NONCURRENT)

3. Estimated realizable value - this is applicable to those that are in closed banks or
those that had undergone bankruptcy. This means the amount of cash estimated to be
recovered by a company from the closed bank.

Conceptually, items of cash and cash equivalents that are in closed banks are no longer
considered part of cash. Basically, it already violates the characteristic of cash of being readily
available for use.

The amount of cash and cash equivalents under a closed bank are generally treated as a
“receivable” from that closed bank.

Financial Statement Presentation of Cash and Cash Equivalents

When we prepare financial statements, items that meet the definition of cash and cash
equivalents are presented under one-line item "Cash and Cash Equivalents" as part of the
current assets within the statement of financial position (SOFPosition).

All items that composes the total of cash and cash equivalents account are presented disclosed
within the notes to financial statement including all other rules, principles and other accounting
policies adapted by a company in accounting for its cash and cash equivalents.
Sample Problem-solving 1: HIGH SPEED Company reported the following items of cash and cash
equivalents for the year ended December 31, 2019:

Cash on hand P 200,000

Cash in bank-BDO Savings account 1,500,000
Cash in bank-BDO Checking account #001 1,200,000
Petty cash fund 15,000
Treasury bills (purchased 2 months before December 31, 2019 maturity) 200,000
Treasury bills (with 3 months remaining maturity at December 31, 2019, purchased 2 years ago) 500,000
Time deposits (six months) 600,000
Time deposits (three months) 400,000
Money market instruments (two months) 150,000
Money market instruments (four months) 110,000
Treasury warrants 120,000
Treasury bonds, 2 years maturity 1,000,000
Money orders 220,000
Mortgage fund (for 4-year, 11% mortgage payable) 2,000,000
Plant acquisition fund (for acquisition of real estate) 1,300,000
Payroll fund 1,100,000
Bond sinking fund (for 5-year, 10% bonds payable) 1,600,000
Dividend fund 700,000
Interest fund 600,000
Tax fund 800,000
Redemption fund (for redeemable preference shares issued) 900,000
Insurance fund (5 years non life insurance) 950,000
Travel fund (for business purposes) 400,000

Requirements:
1.The amount to be presented as part of “cash”.
2. The amount to be presented as part of “Cash Equivalents”.
3. The amount to be presented as part of “total current asset”.
4. The amount to be presented as part of “total non-current asset”.

Solving 1

Cash Cash Equivalents Total Current Total Non-

Asset Current Asset
Cash on hand P200,000 P200,000
Cash in bank-BDO 1,500,000 1,500,000
Savings account
Cash in bank-BDO 1,200,000 1,200,000
Checking account #001
Petty cash fund 15,000 15,000
Treasury bills P200,000 200,000
(purchased 2 months
before December 31,
2019 maturity)
Treasury bills (with 3 500,000
months remaining
maturity at December
31, 2019, purchased 2
years ago)
Time deposits (six 600,000
months)
Time deposits (three 400,000 400,000
months)
Money market 150,000 150,000
instruments (two
months)
Money market 110,000
instruments (four
months)
Treasury warrants 120,000 120,000
Treasury bonds, 2 1,000,000
years maturity
Money orders 220,000 220,000
Mortgage fund (for 4- 2,000,000
year, 11% mortgage
payable)
Plant acquisition fund 1,300,000
(for acquisition of real
estate)
Payroll fund 1,100,000 1,100,000
Bond sinking fund (for 1,600,000
5-year, 10% bonds
payable)
Dividend fund 700,000 700,000
Interest fund 600,000 600,000
Tax fund 800,000 800,000
Redemption fund (for 900,000
redeemable
preference shares
issued)
Insurance fund (5 950,000
years non life
insurance)
Travel fund (for 400,000 400,000
business purposes)
TOTAL 6,855,000 750,000 8,815,000 7,750,000
Definition of Cash on Hand
Generally, when we say "cash on hand" it means the portion of a company's total cash that is
within the company's possession. It generally encompasses the following:

1. currency coins and bills;

2. undeposited cash collections; and
3. other customer checks awaiting for deposits

Accounting for Investments of Excess Cash on Hand

If we are the company, we usually maximize the use of cash, and generally any excess will be
invested to earn some returns as additional cash inflows. Excess cash on hand may be invested
on time deposits, commercial papers/money market placements or treasury bills.

The following may be observed based on the proper accounting treatment of this investments
for purposes of financial statements presentation and preparation:

Maturity of the Investment Accounting Treatment FS Presentation

Three months or less Cash and cash equivalents Current asset
More than three months but Other short-term investment Current asset
within one year
More than one year Other long-term investment Noncurrent asset

Accounting for Adjustments for Cash

For purposes of financial statements preparation, we usually look for certain adjustments in
relation to its total cash and account them properly to arrive with the proper accounting
balances. We will focus for the following adjustments:

1. undelivered checks;
2. post-dated checks; and
3. stale checks

In accounting for these adjustment, we should analyze carefully the "journal entry made" and
"adjusting journal entries".

Undelivered Checks
The scenario is that we are actually paying our obligations through issuance of checks or
cheques. These are checks that "have been drawn or written" and "have been recorded" but
"not been delivered" within the current reporting period.
Journal entry made:

Liability account XXX

Cash/Cash in bank XXX

Adjusting journal entry:

Cash/Cash in bank XXX

Liability account XXX

Note:
The reason for the adjusting journal entry is that there is no actual payment of the
obligation or liability since the check had not been delivered to the intended payee or recipient.
In effect, no actual cash outflow for the current reporting period, and since it has been recorded
as payment, it is only appropriate to adjust by reversing the journal entry made to nullify the
effect of payment in the records.

Post-dated Checks

These are checks that "have been drawn or written", "have been recorded" and "already been
delivered" within the current reporting period but "bears a date subsequent (or post-date)" to
the current reporting period end.

i. If we are (or the company is) the issuer of the check:

Journal entry made:

Liability account XXX

Cash/Cash in bank XXX

Adjusting journal entry:

Cash/Cash in bank XXX

Liability account XXX

Note:
The reason for the adjusting journal entry is that there is no actual payment of the
obligation or liability since the check bears a post-date. In effect, no actual cash outflow for the
current reporting period, and since it has been recorded as payment, it is only appropriate to
adjust by reversing the journal entry made to nullify the effect of payment in the records.
ii. If we are (the company is) the recipient of the check:

Journal entry made:

Cash/Cash in bank XXX
Receivable account XXX

Adjusting journal entry:

Receivable account XXX

Cash/Cash in bank XXX

Note:
The reason for the adjusting journal entry is that there is no actual collection or receipt
of the receivable since the check bears a post-date. In effect, no actual cash inflow for the
current reporting period, and since it has been recorded as receipt or collection, it is only
appropriate to adjust by reversing the journal entry made to nullify the effect of receipt or
collection in the records.

Stale Checks
These are checks that "have been drawn or written", "have been recorded" and "already been
delivered" by the company within the current reporting period but the payee "failed to encash
the check" with an encashment period.

Generally, in banking practices, six (6) months is a reasonable encashment period.

After analyzing properly for a stale check, the accounting problem will arise as to whether the
amount involved is immaterial or material because the required adjusting entry will depend on
such analysis. (Always MATERIAL)

i. If amount involved is immaterial:

Journal entry made:

Liability account XXX

Cash/Cash in bank XXX

Adjusting journal entry:

Cash/Cash in bank XXX

Liability account XXX

Liability account XXX

Other income XXX
Alternatively:

Cash/Cash in bank XXX

Other income XXX

Note:
The reason for the adjusting journal entry is that since there is no actual payment
happened due to non-encashment of check by the payee, there will be no cash outflow in the
current period. Since the amount is immaterial, the company may just record it as part of
"other income".

ii. If amount involved is material: (assume if the problem silent)

Journal entry made:

Liability account XXX

Cash/Cash in bank XXX

Adjusting journal entry:

Cash/Cash in bank XXX

Liability account XXX

Note:
The reason for the adjusting journal entry is that there is no actual payment of the
obligation or liability since the check became stale due to non-encashment by the payee. In
effect, no actual cash outflow for the current reporting period, and since it has been recorded
as payment and the amount involved is material, it is only appropriate to adjust by reversing
the journal entry made to nullify the effect of payment in the records.

Sample Problem-solving 2:

HIGH SPEED Company discovered and disclosed the following transaction for the year ended
December 31, 2019:

1. Draw and recorded a check in the amount of P22,000 as payment to a supplier for the goods
purchased on account on December 2, 2019. The check remained undelivered at the end of the
reporting period.

2. Issued a check drawn in the amount of P14,000 to a servicing company. The check was
delivered on November 28, the same day it was drawn but the check bears a date January 31,
2020. The intended post-dating was to secure sufficient fund in the bank.
3. Received a check as collection in the amount of P20,000 from an auditing company. The
check was received on November 30, but the check bears a date January 31, 2020. The
intended post-dating was to secure sufficient fund in the bank.

4. Issued a check drawn in the amount of P5,000 to a small supplier of spare parts. However,
the check became stale when the suppler failed to encash the check within the bank's
encashment period.

Requirements:
1. The required adjusting journal entry in number 1.
2. The required adjusting journal entry in number 2.
3. The required adjusting journal entry in number 3.
4. The required adjusting journal entry in number 4, assuming amount is immaterial.
5. The required adjusting journal entry in number 4, assuming amount is material.

Item 1. Entry made

Accounts payable 22,000

Cash in bank 22,000

Adjusted Entry:

Cash in bank 22,000

Accounts payable 22,000

Item 2. Entry Made

Accounts payable 14,000

Cash in bank 14,000

Adjusted Entry:

Cash in bank 14,000

Accounts payable 14,000

Item 3: Entry Made

Cash 20,000
Accounts receivable 20,000

Adjusted Entry

Accounts Receivable 20,000

Cash 20,000
Item 4: Entry Made

Accounts payable 5,000

Cash in bank 5,000

Adjusted Entry: Immaterial

Cash in bank 5,000

Accounts payable 5,000

Accounts payable 5,000

Other income 5,000

Adjusted Entry: Material

Cash in bank 5,000

Accounts payable 5,000

Sample Problem-solving 3:

HIGH SPEED Company reported the following items of cash and cash equivalents for the year
ended December 31, 2019:

Cash on hand P 200,000

Cash in bank-BDO Savings account 1,500,000
Cash in bank-BDO Checking account #001 1,200,000
Petty cash fund 15,000
Treasury bills (purchased 2 months before December 31, 2019 maturity) 200,000
Treasury bills (with 3 months remaining maturity at December 31, 2019 purchased 2 years ago) 500,000
Time deposits (six months) 600,000
Time deposits (three months) 400,000
Money market instruments (two months) 150,000
Money market instruments (four months) 110,000
Treasury warrants 120,000
Treasury bonds, 2 years maturity 1,000,000
Money orders 220,000

The company also discovered and disclosed the following transaction for the year ended
December 31, 2019:

1. Draw and recorded a check in the amount of P22,000 as payment to a supplier for the goods
purchased on account on December 2, 2019. The check remained undelivered at the end of the
reporting period.

2. Issued a check drawn in the amount of P14,000 to a servicing company. The check was
delivered on November 28, the same day it was drawn but the check bears a date January 31,
2020. The intended post-dating was to secure sufficient fund in the bank.
3. Received a check as collection in the amount of P20,000 from an auditing company. The
check was received on November 30, but the check bears a date January 31, 2020. The
intended post-dating was to secure sufficient fund in the bank.

4. Issued a check drawn in the amount of P5,000 to a small supplier of spare parts. However,
the check became stale when the supplier failed to encash the check within the bank's
encashment period.

Requirements:
1. The amount to be presented as part of "cash".
2. The amount to be presented as part of "cash equivalents".
3. The amount to be presented as part of "total current asset".
4. The amount to be presented as part of "total noncurrent asset".
5. The amount as adjustment to "accounts payable", assuming amount in number 4 transaction
is immaterial.
6. The amount as adjustment to "accounts payable", assuming amount in number 4 transaction
is material.

Cash Cash Total Total Non- Accounts Payable

Equivalents Current Current
Asset Asset
Cash on hand P200,000 P200,000 (Material) (Immaterial)
Cash in bank- 1,500,000 1,500,000 5,000 5,000
BDO Savings
account
Cash in bank- 1,200,000 1,200,000 (5,000)
BDO Checking
account #001
Petty cash fund 15,000 15,000
Treasury bills P200,000 200,000
(purchased 2
months before
December 31,
2019 maturity)
Treasury bills 500,000
(with 3 months
remaining
maturity at
December 31,
2019 purchased
2 years ago)
Time deposits 600,000
(six months)
Time deposits 400,000 400,000
(three months)
Money market 150,000 150,000
instruments
(two months)
Money market 110,000
instruments
(four months)
Treasury 120,00 120,000
warrants
Treasury bonds, 1,000,000
2 years maturity
Money orders 220,000 220,000
AJE 1 22,000 22,000
AJE 2 14,000 14,000
AJE 3 (20,000) (20,000)
AJE 4 5,000 5,000
TOTAL 3,276,000 750,000 5,236,000 1,000,000 5,000 0

Petty Cash Fund – Is a company’s working cash fund established for purposes of paying small
expenses that cannot be paid conveniently through issuance of checks or cheques.
- Is a under the responsibility of a cashier or custodian.
- A monthly report is prepared showing details of how the established fund was expended.

Petty cash fund may be accounted for either under of following:

1. Imprest fund system

2. Fluctuating fund system

The two fund systems differs when it comes to:

1. Payment of petty expenses

2. Replenishment of the fund
3. Adjustment of the fund in case no replenishment

IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM

ESTABLISHMENT OF THE FUND
PETTY CASH FUND XXX PETTY CASH FUND XXX
CASH/CASH IN BANK XXX CASH/CASH IN BANK XXX
PAYMENT OF PETTY EXPENSES
NO JOURNAL ENTRY EXPENSES XXX
(PREPARATION OF PETTY CASH VOUCHER PETTY CASH FUND XXX
ONLY)
REPLENISHMENT OF THE FUND
EXPENSES XXX PETTY CASH FUND XXX
CASH/CASH IN BANK XXX CASH/CASH IN BANK XXX
ADJUSTMENT OF THE FUND CASE NO REPLENISHMENT
EXPENSES XXX NO JOURNAL ENTRY
PETTY CASH FUND XXX (THE FUND IS AUTOMATICALLY ADJUSTED)
INCREASE IN THE BALANCE OF THE FUND
PETTY CASH FUND XXX PETTY CASH FUND XXX
CASH/CASH IN BANK XXX CASH/CASH IN BANK XXX
DECREASE IN THE BALANCE OF THE FUND
CASH/CASH IN BANK XXX CASH/CASH IN BANK XXX
PETTY CASH FUND XXX PETTY CASH FUND XXX

HIGH SPEED Company had the following transactions related to petty cash fund during the
current year 2019:

January 1 : Set aside an amount of P20,000 cash to set up petty cash fund.
January 15 : Incurred and paid P1,500 for postages and P2,000 for telephone bills.
January 31 : Issued check of P3,500 to replenish the fund.
February 14 : Incurred and paid P1,400 for water bills and P1,700 for electric bills.
February 28 : Increased the fund by P5,000. The fund was not replenished for the expenses
paid on February 14.
March 10 : Incurred and paid P1,900 for office supplies and P3,000 for internet bills.
March 15 : Decreased the fund by P5,000.
March 31 : The fund was not replenished for the expenses paid on March 10.

IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM

JANUARY 01, 2019 - ESTABLISHMENT OF THE FUND
PETTY CASH FUND 20,000 PETTY CASH FUND 20,000
CASH/CASH IN BANK 20,000 CASH/CASH IN BANK 20,000
JANUARY 15, 2019 - PAYMENT OF POSTAGES AND TELEPHONE BILLS
NO JOURNAL ENTRY POSTAGES 1,500
(PREPARATION OF PETTY CASH VOUCHER TELEPHONE BILLS 2,000
ONLY) PETTY CASH FUND 3,500
JANUARY 31, 2019 - REPLENISHMENT OF THE FUND
POSTAGES 1,500 PETTY CASH FUND 3,500
TELEPHONE BILLS 2,000 CASH/CASH IN BANK 3,500
PETTY CASH FUND 3,500
FEBRUARY 14, 2019 - PAYMENT OF WATER BILLS AND ELECTRIC BILLS
NO JOURNAL ENTRY WATER BILLS 1,400
(PREPARATION OF PETTY CASH VOUCHER ELECTRIC BILLS 1,700
ONLY) PETTY CASH FUND 3,100
FEBRUARY 28, 2019 - INCREASE IN THE BALANCE OF THE FUND
PETTY CASH FUND 5,000 PETTY CASH FUND 5,000
CASH/CASH IN BANK 5,000 CASH/CASH IN BANK 5,000
FEBRUARY 28, 2018 - ADJUSTMENT OF THE FUND DUE TO NON-REPLENISHMENT
WATER BILLS 1,400 NO JOURNAL ENTRY
ELECTRIC BILLS 1,700 (THE FUND IS AUTOMATICALLY ADJUSTED)
PETTY CASH FUND 3,100
MARCH 10, 2019 – PAYMENT OF OFFICE SUPPLIES AND INTERNET BILLS
 NO JOURNAL ENTRY OFFICE SUPPLIES 1,900
(PREPARATION OF PETTY CASH VOUCHER TELEPHONE BILLS 3,000
ONLY) PETTY CASH FUND 4,900
MARCH 15, 2019 - DECREASE IN THE BALANCE OF THE FUND
CASH/CASH IN BANK 5,000 CASH/CASH IN BANK 5,000
PETTY CASH FUND 5,000 PETTY CASH FUND 5,000
MARCH 31, 2019 - ADJUSTMENT OF THE FUND DUE TO NON-REPLENISHMENT
OFFICE SUPPLIES 1,900 NO JOURNAL ENTRY
TELEPHONE BILLS 3,000 (THE FUND IS AUTOMATICALLY ADJUSTED)
PETTY CASH FUND 4,900
“ACTUAL” BALANCE OF THE FUND AS OF MARCXH 31, 2019
PETTY CASH FUND 12,000 PETTY CASH FUND 12,000

Accounting for petty cash fund may involve uncovering or recognizing "shortages" or
"overages".

Shortages or overages are charged to temporary account: "cash short or over"

Rules when to DEBIT or CREDIT the "cash short or over" account:

- Cash short or over account is DEBITED if there is a SHORTAGE

- Cash short or over account is CREDITED if there is an OVERAGE

Petty cash shortage or overage is computed as follows:

PCF accountabilities XXX

PFC accounted for XXX
Shortage or overage XXX

Where:
"Accountabilities" is the established fund
"Accounted for" is the count for coins & bills remaining, unreplenished expense
vouchers, and employee IOUS, if any

Rules in determining cash shortage or overage:

- If "accountabilities” is GREATER THAN "accounted for", there is a SHORTAGE

- If "accountabilities" is LESS THAN "accounted for", there is an OVERAGE