CASH AND CASH EQUIVALENT
Chapter 1
DEFINITION OF CASH
Cash
 Includes money and other
negotiable instrument that is
payable in money and acceptable
by the bank for deposit and
Classification of investment of excess
immediate credit
 Checks, bank drafts and money
orders
 Postdated Check – Not cash
Unrestricted Cash
 No specific standards dealing with
cash
 Pas 1 par 66, which provides that
an entity shall classify an asset as
current when asset is cash or cash
equivalent unless it is restricted
to settle a liability for more than
twelve months after the end of
the reporting period.
Cash items included in cash
 Cash on hand – undeposited cash
collection and other cash items
awaiting deposit
 Cash in bank – demand deposit,
checking account and saving
account which are unrestricted as
to withdrawal
 Cash fund – set aside for current
purposes such as petty cash fund,
payroll fund and dividend fund
DEF. OF CASH EQUIVALENTS
Examples of Cash equivalents
- Three-month BSP treasury bill
- Three-year BSP treasury bill
purchased three months before
the date of maturity
- Three months time deposit
- Three month money market
instrument or commercial paper
cash
a. Three months or Less – cash and
cash equivalents
b. Three months with in 1 year –
short term financial asset (CA)
c. More than one year – long term
investment (NCA)
However, if investments
become due within one year the
end of reporting period,
reclassified as current or
temporary investment
Measurement of cash
- Face value
- Cash in foreign currency – current
exchange rate
- If bank or FI holding funds is in
bankruptcy – net Realizable value
if the amount recoverable is
estimated to be lower than the
face value
Financial Statement Presentation
 Cash and Cash equivalent – first
line item under current asset
 Details should be disclosed in the
notes to financial statements
 Cash fund for a certain purpose balance that must be maintained in
connection with a borrowing arrangement
 Long term Investment – Set
with a bank
aside for use in noncurrent
purposes or for payment of Classification of Compensation Balance
noncurrent obligation
- Deposit is not legally restricted as
 Examples- sinking fund,
to withdrawal – informal
preference share redemption
compensation balance agreement,
fund, contingent or construction
CASH
of property, plant and equipment
- Legally restricted- formal
Bank Overdraft compensating agreement – “Cash
held as compensating balance”
 Overdraft- cash in Bank that has
current assets if related loan is
a credit balance
short term
 Results from issuance of checks in
- If loan is long term – noncurrent
excess of deposits
investment
 Classified as current liability and
should not be offset against other Undelivered or unreleased check
bank accounts with debit balances.
- One that is merely drawn and
 Generally, Overdraft are not
recorded but not given to the
permitted in the Philippines
payee before the end of the
Exception to the rule om overdraft reporting period
- Unreleased checks drawn are
- When an entity maintains two or
included in cash
more accounts in one bank –
allowed to offset Postdated check delivered
- Overdraft can also be offset
- Check drawn, recorded and
against the other bank account if
already given to the payee but it
the amount is not material
bears a date subsequent to the
- Under IFRS, bank overdraft can
end of reporting period
be offset against other bank
- Postdated checks drawn are
account when payable on demand
included in cash
and often fluctuates from positive
- Postdated checks received from
to negative as an integral part of
customers are excluded from cash
cash management
Staled Check
Compensating Balance
- Check not encashed by the payee
Generally takes the form of minimum
within a relatively long period of
checking or demand deposit account
time
 BANK RECONCILIATION
Chapter 2
- Reasonable period of time after If no claim – miscellaneous income
issue – depends on entity policy Cash shortage or over 10,000
BANK DEPOSITS
- Staled checks drawn are included Miscellaneous income 10,000
1. Demand Deposits
in cash If found to be the money of cashier –
- current account or checking
- Staled checks received from Payable to cashier
account or commercial deposit
customers are excluded from cash Cash short or over 10,000
where deposits are covered by
Payable to cashier 10,000
Accounting for Cash Shortage deposit slips and where funds are
Petty Cash
withdrawable Fund by
on demand
Where the cash count < balance per book
drawing checks against the bank.
Cash short or over 10,000 - Is money set aside to pay small
- non-interest bearing
Cash 10,000 expenses which cannot paid
- some banks allow as interest
If cashier or cash custodian is held conveniently by means of check
bearing
responsible – due from cashier - Two methods
2. Saving Deposits
Due from cashier 10,000 o Imprest Fund system –
- Depositor is given a passbook upon
Cash short or over 10,000 usually followed
the initial deposit
If fail to disclose the cause of the o Fluctuating fund system –
- Passbook is required when making
shortage – Loss from cash shortage checks drawn to replenish
deposits and withdrawals.
Loss From Cash shortage 10,000 the fund do not necessarily
- Sometimes may require notice of
Cash short or over 10,000 equal the petty cash
withdrawal
disbursements
Accounting for Cash Overage - Interest bearing
3. Time Deposits
Where the cash count > balance per book
- Similar to saving deposits sense
Cash 10,000
that it is interest bearing
Cash short or over 10,000
- Evidenced, however by the formal
agreement embodied in an
instrument called certificate of
deposit
- Preterminated or withdrawn on
demand or after a certain period
of time agreed upon
BANK RECONCILATION
- Necessary only for a demand
deposit or checking account
- To show specimen signatures to be
used in the check
- So that any unfamiliar with a
depositor’s signature can test
authenticity
-

- If depositor is corporation, will
pass a resolution authorizing
certain officers
- It is a statement which brings
into agreement the cash per
balance per book and cash
balance per bank
- Prepared monthly
Bank statement
- Monthly report of the bank to the
depositor
- Attached there to the depositor’s
canceled checks
Canceled checks
- Issued by the depositor and paid
by the bank during the month
- Canceled by stamping or punching
to show that they have been paid
Reconciling items
Book reconciling items
a. Credit memos
- Items not representing deposits
- Credit by the bank to the dep. acc
- Not yet recorded by the
depositor as cash receipt
- Affect of increasing the balance
o Notes receivable
o Credited to depositors acc
o Bank loan
o Matured time deposits
b. Debit memos
- Not representing checks paid by
bank
- Charge or debited by the bank
- Not yet recorded by the
depositor as cash disbursement
- Decreasing bank balance
o NSF or no sufficient fund
checks / DAIF or drawn
against insufficient fund
o Bank service charges –
interest, collection,
checkbook, and penalty
o technically defective
checks – absence of sign,
erasures not
countersigned, mutilated
checks, conflict between
amount in words and figure
o reduction of loans – dep
owes to the bank and owes
to the bank and which has
already matured
Bank reconciling items
c. deposits in transit
– collections already recorded by
the depositor as cash receipts but
not yet reflected on the bank
statement
o collections already forwarded
to the bank for deposit but
too late to appear in the BS
o undeposited collections – cash
on hand
d. outstanding checks
- recorded by the depositor as cash
disbursement but not yet
reflected in bank statement
o checks drawn
o certified checks
Forms of bank reconciliation
1. adjusted balance method
- book and bank balance are brought
to a correct cash balance
- preferred over the other two
2. book to bank
 PROOF OF CASH
Chapter 3
- book is reconciled or adjusted to
equal the bank balance;
3. bank to book method
- bank balance is reconciled or
adjusted to equal the book
balance
Preforma reconciliation
Adjusted balance method
- BCD, BDO
- Errors are reconciling items which
committed them
- CM always added, DM always
deducted to/from book balance
- DIT always added, OC always
deducted to/from bank balance
- Book and bank are adjusted to
equal the correct cash balance
- CM already increased in bank but
no effect in book balance
(understated in relation to
correct cash balance)
- DM decreased in bank but no
effect in book balance
(overstated in relation to correct
cash balance)
- DIT increased the book but no
effect in bank
- OC decreased in book but no
effect in bank
Book to bank method
- B CO DD B
- Reversed in the adjusted bal. m
- Book balance is adjusted to equal
the bank
Bank to book method
- B DD OC B
- Reversed treatment
- Bank balance is adjusted to equal
the book
Two-date Bank Reconciliation
- Literally involves two date
- Becomes complicated only when
certain fact or data are omitted
Computation of book balance
- Bal per Book-beginning add book
debit. Less Book credits = BPB end
 Book debit
- Cash receipts or all items debited
to cash in bank acc
 Book credit
- Cash disbursement or all items
credited to the cash in bank acc
Computation of bank balance
- Bal per bank- beg add bank credit,
less bank debit = BPB-end om
 Bank credits
- All items credited to the acc of
depositor which include
acknowledge by bank Credit memo
- Deposits acknowledge by the bank
 Bank debits
- All items debited to the account
of the depositor which include
deposits acknowledge by the bank
- Checks paid by the bank
Computation of deposits in transit
DIT – beginning
Add: Cash receipts deposited
Total deposits to be acknowledge by bank
Less: Deposits acknowledge by bank
DIT – end of month
Computation of outstanding checks
OC- beginning
Add: checks drawn by the depositor
Total checks to be paid by bank
Less: checks paid by bank
OC-end of month
Computation of book and bank balance
Balance per book – January
Add: book debits during feb
Total
Less:book credits during feb
Balance per book – February

Balance per bank – January

Add: bank credits during feb
Total
Less: bank debits during feb
Balance per bank - February

Proof of Cash
- Expanded reconciliation in that it
includes proof of receipts and
disbursement