Chapter 1: CASH AND CASH EQUIVALENTS

Learning Outcomes:
1. Students will be able to understand the concept of cash and cash equivalents.
2. Students will be able to identify items considered cash and cash equivalents.
3. Students will understand the effects of cash transactions.
4. Students will be able to prepare journal entries and adjusting entries peculiar to the cash transactions.
5. Students will be able to account for the cash shortage and overage.
6. Students will be able to know the accounting for petty cash fund.

Methodology:
- Courseware/Limited face-to-face

Lecture/Discussion:
CASH
- Includes money or its equivalent that is readily available for unrestricted use.
- It includes other negotiable instruments such as checks, bank drafts and money orders.

Cash includes:
a. Cash on hand – undeposited collections awaiting deposit and other current funds held as of the
reporting date.
b. Cash in bank – deposits in banks that are available for immediate withdrawal and unrestricted use.

Examples:
Cash includes: Items excluded in cash:
1. Coins and currencies Postdated customer’s checks (receivables)
2. Demand deposits (current or checking accounts) and IOU’s or advances to employees (receivables)
savings accounts
3. Bank drafts Postage stamps (expense)
Unused postage stamps (current asset under
prepaid exp.)
4. Money orders Unused credit line (disclosed only)
5. Checks – cashier’s checks, personal checks,
manager’s check, traveler’s check, and Certified Cash in closed bank (receivable)
checks received from customers or other external
parties.
6. Compensating balances from bank borrowings that Compensating balances from bank borrowings
are not legally restricted (with disclosure) that are legally restricted (with disclosure)
7. Unreleased or undelivered company’s check/Post- Restricted deposits in foreign banks (receivable)
dated company’s check/Company’s stale checks
Bank overdraft in checking account (normally
considered as current liabilities)
8. Cash funds set aside for use in current operations, Cash funds not available for use in current
such as: operations, such as:
a. Petty cash fund – general cash account used to pay a. Sinking fund unless the related liability
small expenses (bonds) will be settled within 12 months
from the reporting date.
b. Revolving fund b. Plant expansion fund
c. Payroll fund c. Depreciation fund
d. Change fund d. Preference share redemption fund
e. Dividend fund e. Contingency fund
f. Tax fund f. Insurance fund
g. Interest fund
h. Travel fund
i. Other types of imprest bank accounts used in current
operations

To analyze the effects of cash transactions:

General rule: All check collections or payments are recorded as cash receipts or cash
disbursements. (Imprest System) Debit Credit
To record bank checks received from customer:
Post-dated customer checks
Journal entry:
Cash xxx
Accounts Receivable xxx

Adjusting entry:
Accounts receivable xxx
Cash xxx
To record bank checks paid to supplier:
Unreleased (undelivered checks) or Post-dated company’s checks or Stale
checks
Accounts Payable xxx
Cash xxx

Adjusting entries:
Cash xxx
Accounts Payable or appropriate account xxx

CASH EQUIVALENTS (PAS 7)

- 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.
- Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash
equivalents.

Cash equivalents includes: Items excluded in cash equivalents

a. Treasury bills, notes, or bonds acquired 3 months
before maturity date (government debt securities) Checks and bank drafts (considered as cash)
b. Money market instrument or commercial paper Equity securities (no maturity date) – either classified
acquired 3 months before maturity date (trading as short-term or long-term investments
debt securities)
Debt securities with maturity of more than three
months but within one year (classified as trading
securities); if more than one year (classified as long-
term investment)
c. 3-months’ time deposit
d. Redeemable preference shares acquired 3 months
or less before their specified redemption date.

Financial Presentation:
- Presented as current assets in the statement of financial position (SOFP) as single line item “cash and cash
equivalents”. The breakdown of the line item is disclosed in the notes to financial statements.
- Classification of cash fund as current or noncurrent should parallel the classification of the related liability.

Measurement:
- Cash  face amount (face value)
- If cash is denominated in foreign currency  current exchange rate (Philippine pesos) at the reporting
date
- If cash is maintained in a bank undergoing bankruptcy  realizable value

Internal controls over cash (cash management):

1. Segregation of incompatible duties – Normally, the duties of (a) authorization, (b) execution, (c)
recording, and (d) custody over cash should be segregated.
2. Imprest system - a system of internal control over cash adopted by the company which requires that all
cash receipts should be deposited intact and all cash disbursements should be made through checks.
Disbursement for small amounts are made through the petty cash fund.
3. Bank reconciliation – is prepared to reconcile the cash in bank per records and the cash balance per bank
statement.
4. Cash counts – it is done to check if actual cash counts tallies with the cash balance per records. Any
differences are accounted for as cash short or over.
5. Minimum cash balance – should be maintained to defray specific business requirements particularly
current funds set aside for current operations. Maintaining excessive cash balances may increase the risk
of embezzlement.
6. Lockbox accounts – to expedite cash collections and to ensure that cash collections are deposited intact.
7. Non-encashment of personal checks from petty cash fund – to discourage concealment of cash shortages.
8. Voucher system – is an internal control over all cash disbursements. Under this system, a voucher is
prepared for every cash disbursement in order to ensure that each disbursement is properly authorized,
made for a valid expenditure, and properly recorded.

Accounting for cash shortages and overages

Scenario 1: Cash counts < cash balance per records/ledger  will result to cash shortage
Scenario 2: Cash counts > cash balance per records/ledger  will result to cash overage

Accounting treatment:
The difference is initially accounted for using a suspense account called “Cash short or over” pending proper
investigation of the cause of shortage or overage. At the end of the reporting period, the “Cash shortage or
overage” account is closed either to a nominal or real account.

Debit Credit
Case 1: Cash counts < cash balance per records/ledger
Cash short or over xxx
Cash xxx

Adjusting entry:
Due to fraud of an employee:
Receivable from employee xxx
Cash short or over xxx

No one was held liable:

Loss on cash shortage xxx
Cash short or over xxx
Case 2: Cash counts > cash balance per records/ledger
Cash xxx
Cash short or over xxx

Adjusting entry:
Excess cash belonging to an employee cashier:
Cash short or over xxx
Payable to cashier xxx

Excess cash with no claimant:

Cash short or over xxx
Gain or miscellaneous income xxx

Concealment of cash shortages:

1. Lapping – occurs when collection of receivables from one customer is misappropriated and then concealed
by applying a subsequent collection from another customer.
Debit Credit
Dec. 28 – Cashier or bookkeeper collected cash from Customer A but no entry
was made

Dec. 31 – Collected cash from Customer B

Cash xxx
Accounts Receivable – Customer A xxx
2. Kitting – occurs when cash shortage is concealed by overstating the balance of cash. Kitting normally
occurs at month-end when a check is written to transfer funds from one bank account to another bank
account where the misappropriation was made.
Illustration 1: Debit Credit
Dec. 26 – Cashier or bookkeeper issued and encashed the check from BPI account
for herself but no entry was made.
Dec. 31 – Cashier or bookkeeper issued and deposited the check from PNB
account to BPI account. Entry was made to record the transfer but no entry was
made to record the issued check.
Cash xxx
Demand deposit - BPI xxx

Illustration 2:
Transfers Disbursement date Receipts date
Check # From To Per book Per bank Per book Per bank
100 Bank A Bank B Dec. 30 Jan. 4 Dec. 30 Jan. 3
200 Bank C Bank D Jan. 3 Jan. 2 Dec. 30 Dec. 31

3. Window dressing – is a form of fraudulent financial reporting and not primarily a method of concealing
cash shortages. It occurs when books are not closed at year-end and transactions in the subsequent period
are deliberately recorded in the current period in order to improve the entity’s financial performance or
financial ratios.
Year-end reporting – Dec. 31, 2022 Debit Credit
Dec. 31, 2022 – To record collection of customer’s account
Cash xxx
Accounts Receivable xxx
January 4, 2023 – To record sales on account
Accounts Receivable xxx
Sales xxx

Accounting for Petty Cash Fund

Petty cash fund – is a money set aside to defray relatively small amounts of cash disbursements.
Two methods of handling Petty Cash
IMPREST SYSTEM FLUCTUATING SYSTEM
1. Establishment of PCF (supported by Petty cash fund Petty cash fund
board reso) Cash in bank Cash in bank
2. Disbursement out of the PCF No journal entries (preparation of Expenses
petty cash vouchers) Petty cash fund
3. Replenishment of Petty Cash Expenses* Petty cash fund
Disbursements Cash in bank Cash in bank

*Normally equal to the petty cash

disbursements unless there is
shortage or overage.
4. Unreplenished petty cash Expenses No entries
disbursements (adj. entries) Petty cash fund
5. Increase in PCF balance (supported Petty cash fund Petty cash fund
by new board reso) Cash in bank Cash in bank
6. Decrease in PCF balance (supported Cash in bank Cash in bank
by new board reso) Petty cash balance Petty cash balance

Shortage or overage of Petty Cash Fund

- Generally, coins and currencies plus the total PCF vouchers should equal to the Petty Cash Fund being
established. If not equal, there is PCF shortage or overage. In such a case, the replenishment of PCF is
increased or decreased by the amount of cash shortage or overage.
Debit Credit
Replenishment of Petty Cash Disbursements and cash shortage
Expenses
Cash short or over xxx
 Cash in bank xxx
Replenishment of Petty Cash Disbursements and cash overage
Expenses
Cash short or over xxx
Cash in bank xxx

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PRACTICE EXERCISES:
1. ABC Co. reported the following accounts on December 31, 2022:
Cash on hand 2,000,000
Petty cash fund 100,000
Security Bank – current account 4,000,000
PNB – current account 3,000,000
BDO – current account (overdraft) (400,000)
BSP treasury bill – 120 days 6,000,000
BPI time deposit – 90 days 4,000,000
Bond sinking fund 5,000,000
 The cash on hand included a customer post-dated check of P300,000 and postal money order of
P100,000.
 The petty cash fund included unreplenished petty cash vouchers for P20,000 and an employee check
for P10,000 dated January 31, 2023.
 The BPI time deposit is set aside for acquisition of land to be made in early January 2023.
 The bond sinking fund is set aside for payment of bond payable due December 31, 2023.

Required:
a. Prepare adjusting entries on December 31, 2022.
b. Compute the total amount of cash and cash equivalents.

2. DEF Co. reported the following information on December 31, 2022:

Cash on hand 2,000,000
Petty cash fund 100,000
Cash in bank 8,000,000
Saving deposit 4,000,000
14,100,000

 Cash on hand included the following:

a. Customer check of P200,000 returned by bank December 26, 2022 due to insufficiency of fund
but subsequently redeposited and cleared by bank January 5, 2023.
b. Customer check for P300,000 dated January 15, 2023 received December 22, 2022.
c. Postal money orders received from customers, P400,000.
 The petty cash fund consisted of the following items:
Currency and coins 4,000
Employee’s IOUs 20,000
Currency in envelope marked collections for Christmas party 10,000
Checks drawn by DEF Co. payable to petty cashier 66,000
100,000
 Check written and dated December 22, 2022 and delivered to payee on January 5, 2023, P400,000.
 Check written December 26, 2022 and dated January 31, 2023 delivered to payee December 26, 2022,
P600,000.

Required:
a. Prepare adjusting entries on December 31, 2022.
b. Compute the total cash on December 31, 2022.

3. GHI Co. established a petty cash fund.

a. Established a petty cash fund of P10,000 on January 2.
 b. Petty cash expenses – January 2-31 are:
Postage 1,500
Supplies 5,500
Transportation 1,200
Miscellaneous expense 800
c. The fund is replenished on Feb. 1 and increased by P5,000.

Required: Prepare journal entries to record the transactions under imprest fund system and fluctuating fund
system.

4. JKL Co. provided the following transactions:

2022
Nov. 2 – The entity established an imprest petty cash fund of P10,000.
30 – An examination of the cash fund disclosed:
Currency and coin 3,000
Memoranda showing expenditures for:
Postage 2,000
Supplies 5,000

A check was drawn to replenish the fund and to increase its amount to P20,000.
Dec. 31 – The fund was not replenished.
Currency and coin 11,000
Memoranda showing expenditures for:
Postage 3,000
Supplies 4,000
Deposit for 20 cases of soft drinks 2,000

2023
Jan. 2 – The deposit for the 20 cases of soft drink is collected.
31 - A check was drawn to replenished the fund.
Currency and coin 1,000
Postage stamps 500

Memoranda showing expenditures since November 30, 2022 for:

Postage 5,000
Supplies 6,000
Payment of account 7,000

Required: Prepare journal entries to record the transactions.

5. The accountant of Baka Inc. established a petty cash fund of P2,800. During August, the fund was
depleted by the following disbursements:
Shipping expense P1,480
Travel expense 480
Postage expense 460
Miscellaneous supplies 340

In addition to receipts for the above items, the petty cash box contained P16 in coins and an IOU of P16
from the secretary handling the fund. The company uses a cash short or over expense account, as needed.
The company decided to decrease the petty cash fund to P2,000.

Required: Provide the necessary entries to record the transactions above.

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