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AUDITING CASH & CASH EQUIVALENTS PETTY CASH FUND

BY SIR ACE GARCIA
- Fund set aside for small disbursements.
- This should be treated as current asset
CASH ON HAND as per adjusted balance.
- There’s no certain amount because
CUSTOMER’S CHECK “small” amount is relative and depends
on how big or small the entity is.
Treatment for undeposited collection on - Because issuing checks for small
hand: expenses is impractical.

If the customer’s check is dated Why is there a need to issue checks for
December 30, 2022, then 31 st is the cut- every expenses?
off, you include it to your cash. But since
it is postdated and beyond the cut -off - Imprest System, every expense should
date, the treatment will be: be done through checks and every
collection should be deposited.
- Customer’s check on hand but not yet - It gives security to your money because
deposited should be classified as cash is highly susceptible to theft.
current asset.
- Excluded from Cash on hand because it Classifications:
is postdated.
- If the check is postdated or NSF, it Accountable Accounted
should be adjusted back to receivable if • should be the • actually on
it is already recorded. ones on hand hand
- Dr. A/R and Cr. Cash • petty cash fund • coins and
-
currencies
• replenishment
Note: Postdated checks on hand are not checks
readily available and cannot be
• accommodated
encashed for the meantime which checks
defeats the definition of a cash.
• non-cash items
(requires adj)
• disbursement
Note: check if the customer’s check is vouchers
already stale, that should be adjusted • accommodated
back in the receivable account as well. checks
Stale check is check not yet encashed for (DAUD/NSF)
at least 6 months. Treatment: Return(?) • IOUs
it back to the issuer to cancel it and re -
issue another one.
Situation: If you have 10k that should be on
hand (accountable) and actually have 12k
on hand (accounted), then there is cash
If you receive a check on March overage. If otherwise, then there is cash
2022 and also dated on March 2022, on shortage.
December 2022 (cut-off) it is excluded
and put it back on Receivable account, How can we identify the accountability of a
return it, cancel, and re-issue another custodian and is accounted?
check. - The beginning balance of the petty
cash balance is what is accountable to
the custodian because that’s the given
fund.

Elisah R.

Other information:
• Replenishment checks – replenish
means to return the amount of actual
cash in the petty cash box back to the
amount appearing in the general
ledger account Petty Cash. This is done
whenever the amount of actual cash in
the petty cash box is low and at the end
of each accounting period.
• Accommodated check - A check written
by a thrift institution on its account
with a bank, payable to a third party
named by a customer withdrawing
funds to cover the check from his or her
account at the thrift institution.
There are postdated checks so check
for its classification.
What is included only in the balance of
petty cash fund?
- Only the cash items.
• Disbursement vouchers (non -cash) –
expenses from postage, etc. The
treatment should be Dr. Expense and
Cr. Petty Cash.
- Set-up: In imprest system, there is no
journal entry for expenses. In
fluctuating: Dr. Expenses and Cr.
Petty cash.
- Replenishment: under imprest
system, you recognize the expenses.
Under fluctuating, you cannot enter
expense because it will be
overstated.
Elisah R.
2
- The difference is only on the
recognition on the payment of
disbursement through petty cash.
Cash in Bank
DISBURSEMENT CHECKS
- Disbursement Checks are deducted to
cash in bank in general.
- If it is postdated or unreleased, should
be adjusted back to payables if it is
already recorded.
- Once a check is issued, it is directly
deducted to cash in back ledger you
have.
Note: Check if the disbursement check is
already stale, should be adjusted back in
the payable account as well.
Situation: You have already written a check,
disbursed and gave to the supplier. But the
supplier noticed it is postdated. It should be
adjusted back to payables if already
recorded.
Situation: You are paying supplier A for 1M
and issued a check. On December 31, cut -
off, it is not yet delivered or received by
supplier. The check is not postdated. And it
is dated on December 31.
Treatment: It is an unreleased check,
so it is added back to cash and recognize
the payable again.
Restrictions:
- To be included in CIB – current asset,
they should not be restricted to be
used in current operations
- Compensating balance – if restricted,
excluded from CIB. A certain amount
that should be maintained. In banks,
there is what we call maintaining
balance that we cannot withdraw
because if you do, your bank account
will be closed.
- Legally restricted CB: Excluded from
CIB
- Not legally restricted CB: included in
CIB
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CASH EQUIVALENT BANK DRAFT VS. OVERDRAFT

- Purchased three months before BANK DRAFT
maturity
Bank Draft is a convenient way of
Situation: On Jan 1, 2022, you purchased
securing payment to a third party that is
CE and its maturity is 15 months (excluded
certified for being guaranteed by a
from CE). After 12 months, cut -off, should it
financial institution or a bank, without the
be included? No, not part of CE, because it
need to withdraw from your account. It
should be acquired three months from
should form part of your cash in bank
maturity.
because it is already certified by a financial
- If acquired more than three months,
institution.
they should be treated as either
financial asset at fair market value or
BANK OVERDRAFT
financial assets at amortized cost.
Bank Overdraft means you overdrawn your
CASH FUNDS bank account balance creating a liability
balance.
- If cash fund is set aside for current
use, then it is treated as current asset. Can we treat it as other than a current
- Ex. Travel, petty cash fund, payroll liability?
fund, tax fund, interest, and dividends
- If cash fund is set aside for non - Yes, from exceptions. If it has a right to
current operating use, then it is offset: different accounts on same bank
treated as non-current asset. only.
- Ex. Cash sinking fund, contingency
fund, long-term plant asset, future
expansion fund, etc.

Elisah R.
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SAMPLE PROBLEM #1
CASH & CASH EQUIVALENTS

INCLUDED
INCLUDED

INCLUDED

INCLUDED
INCLUDED
(4,0000 ONLY) Non-cash item
INCLUDED

Excluded Items:
#2 – Overdraft (Current Liability) #7 – Non-cash item
Money orders – certificate that
the payee or holder is entitled to #4 – Restricted #8 – Receivable
receive the amount written on it
#5 – Not a cash item #10 – Bouncing checks
once presented to the issuer
#6 – Postdated #14 – more than 3 months

Elisah R.
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SAMPLE PROBLEM #2
CASH & CASH EQUIVALENTS

Overdrawn: offset

Cash fund set aside for Non-Current Asset (Equipment)

Elisah R.
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SOLUTION TO SAMPLE PROB #2:

CASH ON HAND

PETTY CASH FUND

Cash Items

- Included in PCF balance

Non-Cash Items and Cash

Shortage/Overage:

- Included in the
adjustments or journal
entry

PCF Cash Shortage/Overage

PCF Checking Ending Balance

Journal Entry: Petty Cash Fund
Employee Advances/Receivables 1,600 10,000 4,000
Expenses 1,300
6,000
Cash Shortage 1,100

Petty Cash 4,000

Elisah R.
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BPI Current Account

Question #3
a. Unreleased Checks – was not delivered prior to the cut-off date so you still have the right
over the check so add it back to the balance because it was deducted on BPI current
account.
b. Postdated Check – it was deducted from the BPI current account so add it back because
the check was dated after the cut-off date.

CASH AND CASH EQUIVALENTS

deduct 80,000 because bank overdraft is a current liability

Elisah R.

BANK RECONCILIATION
BY SIR ACE GARCIA
- To reconcile bank balance and book
balance
BANK RECONCILING ITEMS
DEPOSIT IN TRANSIT ( + )
- Deposits not yet cleared by the bank
- On the entity’s end, it is already
recorded so the bank has to record to
reconcile.
- It is added to the bank balance.
OUTSTANDING CHECKS ( - )
- Checks that are issued and recorded
on the entity’s end but not yet
presented as payment (or cleared) by
the bank.
- It is deducted to bank balance.
ERRORS
Transposition Error
Ex. Recorded as P9,060 instead of P6,090
Transplacement/Sliding Error
Ex. Recorded as 92.120 instead of 921.20
BOOK RECONCILING ITEMS
CREDIT MEMO ( + )
- The reason why the bank issues a
credit memo to the business is
because the bank credits the entity’s
account (the normal balance of the
Elisah R.
8
business’ account on the bank is
credit)
- It is a memo (to notify the entity)
which implies that the company’S
balance has increased.
- If the bank credits the entity’s
account, then it also increases the
credit on the entity’s end.
(Dinadagdagan ng bank ang
utang/balance niya sa entity)
- Addition to the book
Examples:
- Interest earned
- Collection of notes
- Bank loan proceeds
DEBIT MEMO( - )
- It is called debit memo because the
company’s bank account is a credit
(liability) to the bank’s ledger. On
the entity’s end, the debit memo
will reduce its checking
account(asset) and will require to
credit its Cash account.
- It is a memo by the bank to notify
that the company’ account has
been deducted.
- Deduction to the book.
- For instance, auto-debit memos.
The bank automatically debits the
amount and the company should
adjust its book balance.
Examples:
- Bank service charge
- NSF check
Additional info:
A dishonored note is a promissory
note that has not been paid by a debtor
in a reasonable amount of time, causing
the creditor to write off the recorded
revenue as bad debt.
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SAMPLE PROBLEM #3
Bank Reconciliation

Elisah R.
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SAMPLE PROBLEM #4
Bank Reconciliation (Proof of Cash)

Beginning Ending
June 30 Receipts Disbursements July 31
Balance per bank statement 107,082 a. 249,108 218,373 137,817
Deposit in Transit:
June 30 8,201 (8,201)
July 31 12,880 12,880
Outstanding Checks:
June 30 (27,718) (27,718)
July 31 30,112 (30,112)
NSF Check redeposited (8,250) (8,250)
Adjusted bank balance 87,565 245,537 212,517 120,585

Balance per book statement 15,822 236,452 b. 212,529 39,745

Bank Service Charge:
June 30 (72) (72)
July 31 60 (60)
Collections of N/R:
June 30 71,815 (71,815)
July 31 80,900 80,900
Adjusted book balance 87,565 245,537 212,517 120,585

Additional information: Answers:

a. (P137,817 + P218,373 – P107,082)
b. (P15,822 + 236,452 – P39,745) 1. Adjusted cash balance as of June 30 = 87,565
2. Adjusted bank receipts for July = 245,537
3. Adjusted book disbursements for July = 212,517
4. Adjusted cash balance as of July 31 = 120,585
5. Cash shortage as of July 31 =0

Elisah R.