COLLEGE OF ACCOUNTANCY

m C-AE15, Module No._1 _

Second Semester | AY 2020-2021

Course : C-AE15: Intermediate Accounting 1

Module : Module No. _1_: Cash and Cash Equivalents

Time Frame : 6 hours

A. Overview

This learning material covers the topic, cash and cash equivalents.

This is relevant to Accountancy students because cash and cash equivalents is a major and
usual resource which an entity or individual may possess. As an accountant in any industry,
you will be exposed to this resource and how this affects the other resources. As they often
say, cash is king.

You will be able to achieve the desired learning outcomes by devoting time and effort in
studying this material, listening and participating actively in the online discussion, and
accomplishing the tasks assigned in the Classwork section of the Google Classroom for this
course.

B. Desired Learning Outcomes

After studying this module, you should be able to:

1. Define cash and cash equivalents.

2. Identify what composes cash and cash equivalents.
3. Account for petty cash fund.

C. Values Integration

In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Excellence
✓ Open Communication

D. Content/Discussion

Definitions
Cash is money and other negotiable instruments which the bank will accept for immediate
encashment or credit. Examples are money (paper or coins), checks, bank drafts and money
orders.

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 COLLEGE OF ACCOUNTANCY
m C-AE15, Module No._1 _
Second Semester | AY 2020-2021

Cash is considered a current asset and an asset to be considered as current must be

unrestricted. This means that the cash must be available to settle the entity’s current
obligations and must not be reserved to settle an obligation that is due for more than twelve
months from the reporting date.

Items included in cash are cash on hand, cash in bank and cash funds that have been set aside
for current purposes.

Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and that are subject to an insignificant risk of changes in value [IAS
7.6].

Only those investments acquired three months before their maturity can qualify as cash
equivalent. Regardless of the term, if the investment has been purchased three months prior
to its maturity, it can qualify.

Measurement of cash
Cash is measured at face value. If cash is in foreign currency, the same will be measured at
the current exchange rate.

What if the entity’s cash is held by a bank or other institution which is in a state of
bankruptcy? Cash should be measured at face value or estimated realizable value whichever
is lower.

Financial statement presentation

Cash and cash equivalents shall be presented as a first line item under current assets. The
details composing this line item will be detailed in the notes to financial statements.

Cash funds
The classification of cash funds will depend on the purpose they were established. If a fund
has been set aside for current purposes, it will be classified as current asset and this will be
included as part of cash and cash equivalents. If, however the fund has been set aside for
non-current purposes, it will be classified as noncurrent asset.

Example of cash funds that are classified as current are dividend fund, interest fund, payroll
fund, petty cash fund and tax fund.
Example of cash funds that are classified as noncurrent are contingent fund, fund for
acquisition of noncurrent asset, insurance fund, preference share redemption fund and
sinking fund.

Relevant items to consider

Postdated check – check which is dated at a future date meaning even if you have the
possession of this check you cannot present it to the bank for encashment or immediate
credit. The bank shall only honor this check on or after the date stipulated in the check.
Usually when checks are drawn, the entity records a reduction both in liability and cash.

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 COLLEGE OF ACCOUNTANCY
m C-AE15, Module No._1 _
Second Semester | AY 2020-2021

If at the end of the reporting period there are released but postdated checks, the entity will
need to adjust the books through the following entry:

Cash XXX
Accounts Payable or other account XXX

Bank overdraft – this occurs when the entity has drawn checks in excess of the account’s
balance (bank credits<bank debits).

Do note that drawing check amounts in excess of the bank balance is not allowed in the
Philippines.

Treatment of bank overdrafts

 Cash account with A Bank a debit balance; Account with B Bank a credit balance.
The balance with A bank shall be reported as part of cash and cash equivalents while
the balance with B bank shall be treated as a current liability. Offset of the asset and
liability will not be allowed in this case.
 Savings account with A Bank a debit balance; Checking account with A Bank a credit
balance. Since the accounts are maintained in one bank, offset can be allowed. The
result shall be presented as either cash, net of bank overdraft or bank overdraft, net
of other bank account.
 What if the overdraft is immaterial? The offset of asset and liability can be allowed.
 What if the bank overdraft from one account is payable upon demand and an integral
part of the entity’s cash management? Offset can be allowed.

Compensating balance – minimum checking account balance that must be maintained. This
restriction results from a borrowing arrangement which the depositor has with the bank.
The balance is in nature a partial payment to the amount owed by the depositor.

Classification of compensating balance

 Deposit is withdrawable by the depositor due to informal compensating balance
agreement – the compensating balance shall be treated as part of cash since it is not
restricted for use.
 Deposit is not withdrawable by the depositor due to a formal compensating balance
agreement – the compensating balance shall not be part of cash and cash equivalents
and will be classified as a current asset if the liability is short-term. If, however the
liability is long-term, it will be classified as noncurrent investment.

Undelivered or unreleased check – check which can be presented to the bank for
encashment or immediate credit however remains undelivered to the designated payee. This
check cannot form part of the payee’s cash and cash equivalents for the reason that it is still
not on the latter’s possession and as such the payor can cancel the check anytime prior to
the release to designated payee. Usually when checks are drawn, the entity records a
reduction both in liability and cash.

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 COLLEGE OF ACCOUNTANCY
m C-AE15, Module No._1 _
Second Semester | AY 2020-2021

If at the end of the reporting period the check remains unreleased, the entity will need to
adjust the books through the following entry:

Cash XXX
Accounts Payable or other account XXX

Stale check or check long outstanding – A check which used to be valid for the bank’s
immediate encashment or immediate credit however it has been outstanding for a long time
that the bank will refuse to accept the instrument.

When can we classify a check as stale or long outstanding? There is no fixed period indicated
by the law so the prevailing bank practice shall be followed. Per prevailing bank practice,
when the check has not been presented for encashment or immediate credit within six
months from the date of the check it shall be considered stale or long outstanding.

Adjustment of the issuing entity:

Cash XXX
Miscellaneous income XXX
If the amount indicated in the stale check is immaterial

Cash XXX
Accounts Payable or other account XXX
If the amount indicated in the stale check is material and the entity expects
that the debt will continue.

Accounting for cash imbalance

Cash shortage – this occurs when the recorded balance of cash is more than the actual cash
count. Adjustments will be as follow:

Cash short or over XXX

Cash XXX
To adjust the discrepancy to the temporary suspense account.

Due from cashier XXX

Cash short or over XXX
If at the reporting period it was known that the cashier is responsible for
the shortage, a receivable account shall be recognized.

Loss from cash shortage XXX

Cash short or over XXX
If at the reporting period the cause for the shortage was not discovered, the
shortage will be recognized as loss.

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 COLLEGE OF ACCOUNTANCY
m C-AE15, Module No._1 _
Second Semester | AY 2020-2021

Cash overage – this occurs when the recorded balance of cash is less than the actual cash
count.

Cash XXX
Cash short or over XXX
To adjust the discrepancy to the temporary suspense account.

Cash short or over XXX

Payable to cashier XXX
If at the reporting period it was known that the excess cash is accruing to
the cashier, a payable shall be recognized.

Cash short or over XXX

Miscellaneous income XXX
If at the reporting period the cause for the overage was not discovered or
there were no claims, the overage will be recognized as other income.

Imprest system
A system of control usually placed for accounting cash. This requires that all cash receipts
must be deposited and all cash disbursements should be made by way of check issuance.

This system may be ideal but not practical so the entity usually establishes a petty cash fund.
This fund is used to settle small obligations and urgent expenses which cannot be
conveniently paid through check.

Methods of handling petty cash:

 Imprest fund system – using this system the petty cash fund balance per books is
always at full amount and expenses disbursed through the fund will only be recorded
when the fund is replenished or it is the end of the reporting period and as such
adjustment for expenses needs to be made.

This system is usually used when accounting for petty cash.

 Fluctuating fund system – as the name implies, the petty cash fund balance always
changes. The fund decreases every time there are expenses and increases when the
fund is replenished or increased.

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 COLLEGE OF ACCOUNTANCY
m C-AE15, Module No._1 _
Second Semester | AY 2020-2021

Entries:

Transactions Imprest Fund Fluctauating Fund

a) Establishment of petty cash Petty cash fund XXX Petty cash fund XXX
fund Cash in bank XXX Cash in bank XXX

b) Payment of expenses through No entry Expenses or other accounts XXX

the fund Petty cash fund XXX

c) Replenishment of petty cash Expenses or other accounts XXX Petty cash fund XXX
fund Cash in bank XXX Cash in bank XXX

d) Adjustment at the end of the Expenses or other accounts XXX No entry

reporting period Petty cash fund XXX

Petty cash fund XXX Petty cash fund XXX

e) Increase of the petty cash fund
Cash in bank XXX Cash in bank XXX

Cash in bank XXX Cash in bank XXX

e) Decrease of the petty cash fund
Petty cash fund XXX Petty cash fund XXX

E. Assessment of Learning

For the self-regulated assessment of what you had learned from this module, please
accomplish the progress check/activity posted in our Google Classroom and submit it on or
before due date.

F. Reference

Valix, C. T., Peralta, J. F., & Valix, C. M. (2019). Intermediate accounting volume one. GIC
Enterprises & Co., Inc.

Congratulations for having completed this module!

See you in the next module!

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