CHAPTER 1

CASH AND CASH EQUIVALENTS

TOPIC OVERVIEW:
This chapter discusses the concept of cash and cash equivalents, its characteristics and
components, preparation of bank reconciliation and proof of cash.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Identify what items are included as cash and cash equivalents.
2. Account for the cash shortage or overage.
3. Calculate the correct balance of petty cash fund.
4. Determine bank and book reconciling items.
5. Prepare bank reconciliation and proof of cash.

DEFINITION OF CASH
Cash includes money and other negotiable instrument that is payable in money and acceptable by
the bank for deposit and immediate credit.

SUMMARY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR CASH

CASH ITEMS

Unrestricted and For use other than current

immediately available for operations
use in current operations

Other noncurrent financial

Cash in the current section
assets

The following cash items are included in cash:

1. Cash on Hand (CUTCPoBa)
C Customer’s checks awaiting deposit
U Undeposited cash collections (bills and coins)
T Traveler’s checks
C Cashier’s/Official/Treasurer’s/Manager’s checks
Po Postal money orders (a demand credit instrument issued and payable by a post office)
 Ba Bank drafts (a written order addressed to the bank to pay an amount of money to the
order of the maker)
2. Cash in Bank
a. Current account/checking account/demand deposit/commercial deposit
-generally non-interest bearing
-withdrawable by checks against bank

b. Savings deposit
-generally non-interest bearing
-depositor is issued an ATM card or passbook
-withdrawable in ATM station or within the bank

3. Cash fund for current operations (TPaPRIntPeCDiT)

T Travel fund
Pa Payroll fund
P Purchasing fund (for purchasing of inventories)
R Revolving fund
Int Interest fund
Pe Petty cash fund
C Change fund
Di Dividend fund
T Tax fund

FUND FOR NONCURRENT OPERATIONS

Fund for noncurrent operations are part of noncurrent assets and should not be included as part of
cash. Examples are as follows: (𝑷𝟐 ACIS)
P Pension fund Generally noncurrent investment but if the
related liability is current, the fund is included
as cash
P Preferred redemption fund Noncurrent investment unless the preferred
share has a mandatory redemption and if
redeemable
- Within one year from the reporting
period (part of current investment)
- Within three months from the reporting
period (part of current investment)
A Acquisition of property, plant and Always noncurrent even if expected to be
equipment disbursed next year
C Contingent fund Noncurrent investment
I Insurance fund Noncurrent investment
S Sinking fund Noncurrent investment, if the related bonds
payable is current, the fund is included as cash
Note: Classification of cash fund as current or noncurrent should be aligned to the classification
applied to related liability. Thus, an entity should reclassify such noncurrent asset if the related
liability becomes current.

CASH EQUIVALENTS
Cash equivalents are short-term and highly liquid investments that are readily convertible into cash
and so near their maturity that they present insignificant risk of changes in value because of
changes in interest rates. (PAS 7, paragraph 6)
Items that may qualify as cash equivalents include the following:
1. Time deposit
2. Money market instrument or commercial paper
3. Treasury bills, treasury notes and treasury bonds
4. Redeemable preference shares with mandatory redemption period

If the items stated are: Treatment

1. Originally invested/acquired for more than three months
before maturity date
a. Remaining term is three months or less from the Short-term investment
reporting date
b. Remaining term is more than three months but within Short-term investment
one year
c. Remaining term is more than one year Long-term investment
2. Originally invested/acquired for three months or less
before maturity date Cash equivalents
Note: If the problem is silent
1. Treasury note and bonds – assumed noncurrent investment
2. Cash in money market account – cash equivalent
3. Time deposit – cash equivalent

Some Measurement Issues and Frequent Encountered Tricks in Cash and Cash Equivalents
Computation

ITEMS REMARKS
Cash Measured at face value
Cash in foreign currency Should be translated to Philippine Peso using the
closing rate or spot rate at the reporting date
Deposits in foreign bank a. Unrestricted – part of cash
b. Restricted – if material, classified separately among
noncurrent assets as receivables
Cash in closed bank / banks in Measured at estimated realizable value and be included
bankruptcy among noncurrent assets if the amount recoverable is
lower than face value
Bank overdraft Definition: Negative balance in the cash in bank
account
Treatment: If the company is maintaining two
accounts in
a. Different banks
- current liability or may be netted against other bank if
immaterial
- netted against other account of it is part of cash
management
b. Same banks
- maybe netted against the account with positive amount
but cannot be offset against restricted account
Compensating balance Definition: Compensating balance is the minimum
checking account balance that must be maintained in
connection with a borrowing agreement with a bank
Treatment:
a. Not legally restricted – part of cash
b. Legally restricted – if the related loan is
1. Short-term – presented as “cash held as
compensating balance” (current receivable)
2. Long-term – presented as “cash held as
compensating balance” (noncurrent receivable)
Note: If silent, it is assumed as not legally restricted
Undelivered/Unreleased check Reverted back to cash (Dr. Cash, Cr. A/P)
Stale checks Definition: Checks not encashed with a relatively long
period of time. Under current banking practice, checks
 are considered stale if not encashed within six (6)
months from its date.
Treatment: Reverted to cash (Dr. Cash, Cr. A/P-if
material or Cr. Misc. Income-if not material)
Postdated checks Definition: Checks dated after the reporting period
Treatment:
a. For company’s PDC – reverted to cash (Dr. Cash, Cr.
A/P)
b. Customer’s check – will still remain as receivable
IOUs (I owe you) Included as part of receivable
Equity securities Generally cannot be classified as cash equivalents
because they do not have a maturity date except
redeemable preference shares
Redeemable preference shares Read the previous discussion
Callable preference shares Not classified as cash equivalents. It is part of
shareholders’ equity on the part of the issuer and part of
long-term investment of the holder.
NSF/DAUD/DAIF Definition:
NSF – no sufficient fund
DAUD – drawn against uncleared deposits
DAIF – drawn against insufficient funds
Treatment: Reverted back as part of receivables
Expense advances (travel advances) Receivable or prepaid expenses
Temporary investments in shares of Either FVTPL or FVTOCI but never to be included as
stocks part of cash and cash equivalents
Unused credit line Definition: Difference between the amount of line of
credit applied for and approved by a bank and the
amount actually borrowed
Treatment: Disclosed in the notes
Treasury warrants Definition: A warrant for the payment of money into or
from public treasury
Treatment: Included as part of cash
Escrow deposit Definition: Restricted amount held in trust for another
party (ex. Deposit required by a court of law for a
pending case)
Treatment: Part of other current/noncurrent asset and
reported as liability
Unrecorded cash disbursements Record the disbursements by Dr. A/P or other
appropriate account, Cr. Cash
Unrecorded cash collections/receipts Record the collection by Dr. Cash, Cr. A/R or other
appropriate account
Certificate of deposit (CD) for time Definition: A savings certificate entitling the bearer to
deposits receive interest. A CD bears a maturity date, a specified
fixed interest rate and can be issued by any
denomination. CDs are generally issued by commercial
banks and are insured by PDIC. The term of a CD
generally ranges from one month to five years.
Treatment: a. Invested three months before maturity –
cash equivalents
b. Invested for more than three months – investment
(short or long-term)
Postage stamps on hand Should be reported as office supplies or as a prepaid
expense
Bank overdraft netted from cash in Bank overdraft that was netted or deducted from cash in
bank bank but should be presented as current liability should
 be added back to compute for the correct balance of
cash in bank

Illustration 1: Cash Composition

On December 31, 2019, Hayahay Company’s cash and cash equivalents account balance per ledger
of P5,700,000 includes:

Manager’s check P 70,000

Traveler’s check 100,000
Treasury note 50,000
Treasury shares, purchased on 12/1/2019, to be reissued on 3/1/2020 150,000
Escrow deposit 200,000
Bank drafts 20,000
Postal money orders 20,000
Demand deposit 100,000
Treasury bills, purchased 12/16/2019, due 3/15/2020 50,000
160-day treasury bill 30,000
Time deposit, PCIB, one year, due 3/31/2020 180,000
Time deposit – PNB, 90 days 170,000
Time deposit – BPI, 120 days 45,000
Money market instrument, due 2/28/2020 40,000
Money market instrument, due 6/1/2020 70,000
Cash in bank –Metrobank, includes a compensating balance of P50,000 for short- 1,050,000
term borrowing arrangement. (not legally restricted)
Cash in bank, Metrobank (100,000)
Cash in bank - Firstbank, includes a compensating balance of P50,000 for long- 450,000
term borrowing arrangement (legally restricted)
Cash in bank – Secondbank (60,000)
Cash in bank – Seatbank, includes a compensating balance of P40,000 for short- 150,000
term borrowing arrangement (legally restricted)
Cash in bank – Seabank, includes a compensating balance of P40,000 for short- 250,000
term borrowing arrangement
Petty cash fund, includes an unreplenished voucher for P4,000 10,000
Payroll fund 100,000
Travel fund 20,000
Interest fund 40,000
Tax fund 30,000
Sinking fund 420,000
Preferred redemption fund 100,000
Contingent fund 200,000
Insurance fund 500,000
Fund for acquisition of PPE 800,000
IOU from officers 20,000
Customers’ post-dated checks 70,000
Customers’ checks returned by bank marked NSF 20,000
Redeemable preference shares – acquired three (3) months before maturity date 15,000
Unused credit line 200,000
Revolving fund 100,000
Visa card credit limit 20,000
Total P 5,700,000
Required: Compute the correct amount of cash and cash equivalents that should be shown in the
statement of financial position.
Solution:
Manager’s check P 70,000
Traveler’s check 100,000
Bank drafts 20,000
Postal money orders 20,000
Demand deposit 100,000
Treasury bills, purchased 12/16/2019, due 3/15/2020 50,000
Time deposit – PNB, 90 days 170,000
Money market instrument, due 2/28/2020 40,000
Cash in bank –Metrobank, includes a compensating balance of P50,000 for short- 1,050,000
term borrowing arrangement. (not legally restricted)
Cash in bank, Metrobank (100,000)
Cash in bank - Firstbank, net 400,000
Cash in bank – Seatbank, net 110,000
Cash in bank – Seabank, includes a compensating balance of P40,000 for short- 250,000
term borrowing arrangement
Petty cash fund, net 6,000
Payroll fund 100,000
Travel fund 20,000
Interest fund 40,000
Tax fund 30,000
Redeemable preference shares – acquired three (3) months before maturity date 15,000
Revolving fund 100,000
Total cash and cash equivalents P 2,591,000

WINDOW DRESSING
The books of an entity should be closed at the end of every reporting period in order that financial
statements will show fairly the financial position and performance of the entity.

Window dressing is a practice of opening the books of accounts beyond the close of the reporting
period for the purpose of showing a better financial position and performance. It is usually
accomplished as follows:

a. By recording as of the last day of the reporting period collections made subsequent to the close
the period.

b. By recording as of the last day of the reporting period payments of accounts made subsequent
to the close of the period.

The entries made to window dress must be reversed to correct the statements.

LAPPING
Lapping is a practice used for concealing a cash shortage. It consists of misappropriating a
collection from one customer and concealing this defalcation by applying a subsequent collection
made from another customer. It involves series of postponements of the entries for the collection
of receivables.

KITING
Kiting is another device used to conceal a cash shortage. It is possible when a company maintains
current accounts in different banks. Kiting is usually employed at the end of the month. It occurs
when a check is drawn against a first bank and depositing the same check in a second bank to cover
the shortage in the latter bank. No entry is made for both the drawing and deposit of a check.

ACCOUNTING FOR CASH SHORTAGE

If the cash count shows cash which is less than the balance per book, there is a cash shortage to be
recorded as follows:
Cash short or over xx
Cash xx

The cash short or over account is only a temporary or suspense account. When financial statements
are prepared, the same should be adjusted.

Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment
should be:
Due from cashier xx
Cash short or over xx

However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is
Loss from cash shortage xx
Cash short or over xx
If the amount of cash shortage is not material, it can be debited to miscellaneous expense.

ACCOUNTING FOR CASH OVERAGE

If the cash count shows cash which is more than the balance per book, there is a cash overage to
be recorded as follows:
Cash xx
Cash short or over xx

The cash overage is treated as miscellaneous income if there is no claim on the same. The journal
entry is
Cash short or over xx
Miscellaneous income xx

But if the cash overage is properly found to be the money of the cashier, the journal entry is
Cash short or over xx
Payable to cashier xx

PETTY CASH FUND

Imprest system is a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursements should be made by means of check. However, it is
impractical for the company to make all payments thru check. Therefore, a petty cash fund is
established to cover small and miscellaneous expenditures. Petty cash fund may be accounted for
using the following two methods:
1. Imprest fund system
2. Fluctuating fund system

COMPARISON OF JOURNAL ENTRIES:

Imprest Fund System Fluctuating System
a. To establish the fund
Dr. Petty Cash Fund Dr. Petty Cash Fund
Cr. Cash in Bank Cr. Cash in Bank
b. Payment of expenses
Memo entry in the petty cash journal Dr. Expenses
 Cr. Petty Cash Fund
c. Replenishment of petty cash payments
Dr. Expenses Dr. Petty Cash Fund
Cr. Cash in Bank Cr. Cash in Bank
d. To adjust the unreplenished expenses
Dr. Expenses No adjusting entry
Cr. Petty cash fund
e. Increase in the fund
Dr. Petty Cash Fund Dr. Petty Cash Fund
Cr. Cash in Bank Cr. Cash in Bank
f. Decrease in the fund
Dr. Cash in Bank Dr. Cash in Bank
Cr. Petty Cash Fund Cr. Petty Cash Fund

ILLUSTRATION: (Imprest Fund System)

Prepare the necessary journal entries for the following transactions:

2019
Nov 10 The entity established a fund of P10,000.
29 Replenished the fund. The petty cash items include the following:
Currency and coin – P2,000
Supplies – P5,000
Telephone – P1,800
Postage – P1,200
31 The fund was not replenished. The fund is composed of the following:
Currency and coin – P7,000
Supplies – P1,500
Postage – P500
Miscellaneous expense – P1,000

2020
Feb 1 Replenished the fund and increased to P15,000. The petty cash items include the
following:
Currency and coin – P1,000
Supplies – P4,500
Postage – P3,000
Miscellaneous expense – P1,500

Answers:
2019
Nov 10 Petty Cash Fund 10,000
Cash in Bank 10,000
29 Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in Bank 8,000
31 Supplies 1,500
Postage 500
Miscellaneous expense 1,000
Petty Cash Fund 3,000
2020
Jan 1 Petty Cash Fund 3,000
Supplies 1,500
Postage 500
Miscellaneous expense 1,000
Feb 1 Petty Cash Fund 5,000
 Supplies 4,500
Postage 3,000
Miscellaneous expense 1,500
Cash in Bank 14,000

ILLUSTRATION: (Fluctuating Fund System)

2019
Nov 10 The entity established a fund of P10,000.
11 Petty cash disbursements amounted to P8,000
29 Issued a check for P10,000 to replenish the fund
Dec 30 Petty cash expenses amounted to P9,000
31 Issued a check for P15,000 to replenish the fund

Journal entries:
Nov 10 Petty Cash Fund 10,000
Cash in Bank 10,000
11 Expenses 8,000
Petty Cash Fund 8,000
29 Petty Cash Fund 10,000
Cash in Bank 10,000
Dec 30 Expenses 9,000
Petty Cash Fund 9,000
31 Petty Cash Fund 15,000
Cash in Bank 15,000

BANK RECONCILIATION
Bank reconciliation is a schedule prepared to account for the differences between cash balances
per book and per bank statement. It is prepared only for checking account/demand deposit and is
prepared monthly because the bank provides the depositor with the bank statement at the beginning
of the following month.
Reconciling Items:
1. Book reconciling items
a. Credit Memos
b. Debit Memos
c. Errors

2. Bank reconciling items:

a. Deposits in transit
b. Outstanding checks
c. Errors

Credit Memos. These are collections or deposits made by the bank to the account of the company
but not yet recorded by the entity. Examples are:
a. Collections made by the bank on behalf of the entity
b. Proceeds of bank loan credited to the account of the entity
c. Matured time deposits transferred by the bank to the current account of the depositor.
d. Interest income credited to the account
Debit Memos. These are charges and deductions made by the bank to the account of the entity but
not yet recorded by the latter. Examples are:
a. Bank service charges. These include bank charges for interest, collection, checkbook, and
penalty.
b. NSF/DAIF/DAUD checks. These are checks deposited and already recorded by the bank but
subsequently returned by the bank to the entity because of insufficiency of fund.
c. Payment of loan. This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor owes to the bank and which has already matured.
d. Final withholding tax on interest income.

Deposits in Transit. These are deposits already recorded in the cash books in one period but were
taken up by the bank only in the next period. Examples are:
a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections awaiting delivery to the bank for deposit.

Outstanding Checks. These are checks written and released to payees and are already recorded in
the cash books but are not yet presented for encashment or deposit to the bank.

Certified Checks. These are checks that the bank already certified as having sufficiency of funds
and thus technically are no longer outstanding checks.

Errors. Errors made by the bank or the company that must be corrected for the reconciliation to
balance.

Forms of Bank Reconciliation

1. Adjusted balance method
2. Book to bank method
3. Bank to book method

Proforma Reconciliation
Adjusted Balance Method
Unadjusted balance per book xx
Add: Credit Memos xx
Total xx
Less: Debit Memos xx
Adjusted balance per book xx

Unadjusted balance per bank xx

Add: Deposits in Transit xx
Total xx
Less: Outstanding Checks xx
Adjusted balance per bank xx

The following are the rules for errors assuming the company is using the adjusted balance method
of presenting bank reconciliation:
Effect of the errors Treatment
1 Understatement of cash receipts Add on the unadjusted cash in bank balance
2 Overstatement of cash receipts Deduct from the unadjusted cash in bank
balance
3 Understatement of cash disbursements Deduct from the unadjusted cash in bank
balance
4 Overstatement of cash disbursements Add on the unadjusted cash in bank balance
Book to Bank Method
Balance per book xx
Add: Credit Memos xx
Outstanding checks xx
Total xx
Less: Debit Memos xx
Deposits in Transit xx
Balance per bank xx

Bank to Book Method

Balance per bank xx
Add: Deposits in Transit xx
Debit Memos xx
Total xx
Less: Outstanding checks xx
Credit Memos xx
Balance per book xx

ILLUSTRATION:
The cash records of Company A show the following for the month of January:
CASH RECEIPTS CASH DISBURSEMENTS
Jan 5 60,000 Jan 6 Check No. 721 5,000
13 20,000 7 Check No. 722 10,000
25 30,000 10 Check No. 723 18,000
31 40,000 14 Check No. 724 2,000
150,000 28 Check No. 725 37,000
31 Check No. 726 28,000
100,000
Bank Statement
Below is the bank statement of Company A for the month of January.
FIRST BANK
Manila, Philippines
Date Check No. Withdrawals Deposits Balance
Jan 6 60,000 60,000
8 721 5,000 55,000
11 722 10,000 45,000
12 723 18,000 27,000
14 20,000 47,000
17 724 2,000 45,000
26 30,000 75,000
26 15,000 CM 90,000
30 5,000 RT 85,000
30 1,000 SC 84,000
Code: CM – Credit Memo ; DM – Debit Memo ; RT – Returned Check ; SC – Service Charge

The following data are gathered in connection with the CM and DM appearing on the bank
statement:

a. The CM of P15,000 on January 26 represents proceeds of note collected by the bank on favor
of the company.

b. The RT of P5,000 represents check of customer deposited previously but returned by the bank
because of “no sufficient fund” or NSF.
ADJUSTED BALANCE METHOD
Unadjusted balance per book P 50,000
Add: Credit Memos 15,000
Total 65,000
Less: Debit Memos 6,000
Adjusted balance per book P 59,000

Unadjusted balance per bank P 84,000

Add: Deposits in Transit 40,000
Total 124,000
Less: Outstanding Checks 65,000
Adjusted balance per bank P 59,000

BOOK TO BANK METHOD

Balance per book P 50,000
Add: Credit Memos 15,000
Outstanding checks 65,000
Total 130,000
Less: Debit Memos 6,000
Deposits in Transit 40,000
Balance per bank P 84,000

BANK TO BOOK METHOD

Balance per bank P 84,000
Add: Deposits in Transit 40,000
Debit Memos 6,000
Total 130,000
Less: Outstanding checks 65,000
Credit Memos 15,000
Balance per book P 50,000

Preparation of Adjusting Entries

Only the book reconciling items require adjusting entries on the book of depositor.

a. To record the note collected by the bank

Cash in bank 15,000
Notes receivable 15,000

b. To record the return of NSF check

Notes receivable 5,000
Cash in bank 5,000

c. To record the bank service charge

Bank service charge 1,000
Cash in bank 1,000
PROOF OF CASH (Two-date Bank Reconciliation)
The bank reconciliation is so called two-date because it literally involves two dates.

Formulas:
Deposits in transit, beginning xx
Add: Deposits made by the company this month xx
Total deposits to be acknowledged by the bank xx
Less: Deposits acknowledged by the bank this month xx
Deposits in transit, ending xx

Outstanding checks, beginning xx

Add: Checks issued by the company this month xx
Total checks to be paid by the bank xx
Less: Checks paid by the bank this month xx
Outstanding checks, ending xx

Computation of Deposits Made by the Company and Deposits Acknowledged by the Bank

Book receipts (Debits) xx Bank receipts (Credits) xx

Less: Less:
Credit Memo last month xx Credit Memo this month xx
Book errors last month corrected this Bank errors last month corrected this
month month
Understatement of CR xx Understatement of CR xx
Overstatement of CD xx Overstatement of CD xx
Book errors this month Bank errors this month
Overstatement of CR xx Overstatement of CR xx
Add: Understatement of CR xx Add: Understatement of CR xx
Deposits made by the company this Deposits acknowledged by the bank
month xx this month xx

Computation of Checks Issued by Company and Checks paid by the bank

Book disbursements (Credits) xx Bank disbursements (Debits) xx

Less: Less:
Debit Memo last month xx Debit Memo this month xx
Book errors last month corrected this Bank errors last month corrected this
month month
Overstatement of CR xx Overstatement of CR xx
Understatement of CD xx Understatement of CD xx
Book errors this month Bank errors this month
Overstatement of CD xx Overstatement of CD xx
Add: Understatement of CD xx Add: Understatement of CD xx
Checks issued by the company this
month xx Checks paid by the bank this month xx
Computation of Book and Bank Balances
Balance per book, beg xx Balance per bank, beg xx
Add: Book debits xx Add: Bank credits xx
Total xx Total xx
Less: Book credits xx Less: Bank debits xx
Balance per book, end xx Balance per bank, end xx

Book debits. Cash receipts or all items debited to the cash in bank account
Book credits. Cash disbursements or all items credited to the cash in bank account
Bank credits. All items credited to the account of the depositor which include deposits
acknowledged by the bank and credit memos
Bank debits. All items debited to the account of the depositor which include checks paid by the
bank and debit memos.

ILLUSTRATION

Cash in bank per ledger

Balance, January 31 P 50,000
Book debits for February, including January CM of P15,000 200,000
Book credits for February including NSF check of P5,000 and 180,000
service charge of P1,000 for January

Bank Statement for February

Balance, January 31 P 84,000
Bank credits for February, including CM of P20,000 and 170,000
January DIT of P40,000
Bank debits for February including NSF check of P10,000 130,000
and January OC of P65,000

Required:
1. Prepare the bank reconciliation for the month of January using the adjusted balance method.
2. Compute the book and bank balances on February 28.
3. Calculate the deposits in transit and outstanding checks on February 28.
4. Prepare a proof of cash using adjusted balance method, book to bank method, and bank to book
method.

Solution:
1.
Company A
Bank Reconciliation
January 31

Unadjusted balance per book P 50,000

Add: Credit Memos 15,000
Total 65,000
Less: Debit Memos 6,000
Adjusted balance per book P 59,000

Unadjusted balance per bank P 84,000

Add: Deposits in Transit 40,000
Total 124,000
Less: Outstanding Checks 65,000
Adjusted balance per bank P 59,000
2.
Balance per book, Jan 31 P 50,000 Balance per bank, Jan 31 P 84,000
Add: Book debits 200,000 Add: Bank credits 170,000
Total 250,000 Total 254,000
Less: Book credits 180,000 Less: Bank debits 130,000
Balance per book, Feb 28 P 70,000 Balance per bank, Feb 28 P 124,000

3.
Book receipts (Debits) P 200,000 Bank receipts (Credits) P 170,000
Less: Less:
Credit Memo last month 15,000 Credit Memo this month 20,000
Deposits made by the company Deposits acknowledged by the
this month P 185,000 bank this month P 150,000

Book disbursements (Credits) P 180,000 Bank disbursements (Debits) P 130,000

Less: Less:
Debit Memo last month 6,000 Debit Memo this month 10,000
Checks issued by the company Checks paid by the bank this
this month P 174,000 month P 120,000

Deposits in transit, January 31 P 40,000

Add: Deposits made by the company this month 185,000
Total deposits to be acknowledged by the bank 225,000
Less: Deposits acknowledged by the bank this month 150,000
Deposits in transit, February 28 P 75,000

Outstanding checks, January 31 P 65,000

Add: Checks issued by the company this month 174,000
Total checks to be paid by the bank 239,000
Less: Checks paid by the bank this month 120,000
Outstanding checks, February 28 P 119,000

4. Adjusted Balance Method

COMPANY A
PROOF OF CASH
For the month of February

January 31 Receipts Disbursements February 28

Balance per book P 50,000 200,000 180,000 70,000
Note collected by bank
January 15,000 (15,000)
February 20,000 20,000
NSF check
January (5,000) (5,000)
February 10,000 (10,000)
Service charge
January (1,000) (1,000)
Adjusted book balance P 59,000 P 205,000 P 184,000 P 80,000
Balance per bank P 84,000 P 170,000 P 130,000 P 124,000
Deposits in Transit
January 40,000 (40,000)
February 75,000 75,000
Outstanding Checks
January (65,000) (65,000)
February 119,000 (119,000)
Adjusted bank balance P 59,000 P 205,000 P 184,000 P 80,000

Book to Bank Method

COMPANY A
PROOF OF CASH
For the month of February

January 31 Receipts Disbursements February 28

Balance per book P 50,000 200,000 180,000 70,000
Note collected by bank
January 15,000 (15,000)
February 20,000 20,000
NSF check
January (5,000) (5,000)
February 10,000 (10,000)
Service charge
January (1,000) (1,000)
Deposits in Transit
January (40,000) 40,000
February (75,000) (75,000)
Outstanding Checks
January 65,000 65,000
February (119,000) 119,000
Balance per bank P 84,000 P 170,000 P 130,000 P 124,000

Bank to Book Method

COMPANY A
PROOF OF CASH
For the month of February

January 31 Receipts Disbursements February 28

Balance per bank P 84,000 P 170,000 P 130,000 P 124,000
Deposits in Transit
January 40,000 (40,000)
February 75,000 75,000
Outstanding Checks
January (65,000) (65,000)
February 119,000 (119,000)
Note collected by bank
January (15,000) 15,000
February (20,000) (20,000)
NSF check
January 5,000 5,000
February (10,000) 10,000
Service charge
January 1,000 1,000
Balance per book P 50,000 200,000 180,000 70,000
References:

Asuncion, et. al. (2018). Applied Auditing Book 1 of 2, Baguio City: Real Excellence Publishing
Valix, et. al. (2016). Financial Accounting Volume 1, Manila Philippines

Assessments:
1. On December 31, 2018, GG Company’s cash and cash equivalents account balance per ledger
of P4,000,000 includes:
Demand deposit P 2,200,000
Undeposited collection 300,000
Time deposit – 30 days 500,000
NSF check of customer 20,000
35-day money market placement due 1/28/2019 300,000
45-day commercial papers due 2/4/2019 80,000
Savings deposit in closed bank 50,000
IOU from an employee 150,000
Preferred redemption fund 400,000
Total P 4,000,000

Additional information:
a) Included in the demand deposit of P2,200,000 was a customer check amounting to P50,000
dated January 25, 2019.
b) Also included in the demand deposit is a customer check amounting to P90,000 dated
December 31, 2017. GG neglected to encash the check. On December 31, 2018, the
customer was informed and he was willing to replace this with a new one. New check is
yet to be received from the customer.
c) Check of P60,000 dated January 31, 2019 in payment of accounts payable was recorded
and mailed December 31, 2018.
d) Check of P70,000 in payment of accounts payable was recorded on December 31, 2018
but mailed to creditors on January 15, 2019.
e) The company uses the calendar year. The cash receipts journal was held open until January
15, 2019, during which time P80,000 was collected and recorded on December 31, 2018.

Required:
1. Prepare the adjusting entries to correct the cash account.
2. Compute the cash and cash equivalents to be shown on December 31, 2018 statement of
financial position.

2. On October 31, 2018, the bank statement for the checking account of EZ Company shows a
balance of P126,300, while the company’s record shows a balance of P123,310. The data that
might be useful in preparing a bank reconciliation are as follows:
a) Outstanding checks are P14,300 which includes a certified check for P2,000.
b) The October 31 cash receipts of P7,850 are not deposited in the bank until November 2.
c) One check written in payment of utilities for P1,370 is correctly recorded by the bank but
is recorded by EZ as a disbursement of P1,730.
 d) In accordance with prior authorization, the bank debited P6,500 directly from the checking
account as payment of interest amounting to P500 and the principal amounting to P6,000.
EZ has not yet recorded the direct withdrawal.
e) Bank service charges of P240 are listed on the bank statement.
f) A deposit of P5,670 is recorded by the bank on October 31, but it did not belong to EZ.
The deposit should have been made to the checking account of EC Company.
g) The bank statement includes a charge of P750 for an NSF check. The check is returned
with the bank statement and the company will seek payment from the customer.
Required:
1) Prepare a bank reconciliation using the adjusted balance method for the month of October.
2) Prepare the necessary journal entries.

3. The following data are available for Cash in bank of QWERTY Company for the month of
February:
a) Deposit made by the company this February, P120,000
b) Deposit in transit, January 31, P200,000
c) Customer’s check representing receipts in January amounting to P21,000 was erroneously
recorded by the company as P12,000
d) Check of the company representing disbursements in January amounting to P2,000 was
erroneously recorded by the company as P20,000
e) Deposit acknowledged by the bank in February, P150,000
f) Erroneous bank charge in January, P13,000
g) Erroneous bank credit in February, P14,000
h) Customer’s note collected, January 31, P10,000
i) Customer’s note collected, February 28, P12,000

Required: Compute for the following:

1) Deposit in transit, February 28
2) Unadjusted book receipts in February
3) Unadjusted bank receipts in February

4. The following data are available for Cash in bank of ASDFG Company for the month of
February:

a) Checks issued by the company during February, P150,000

b) Outstanding checks, January 31, P52,000
c) Customer’s check representing receipts in January amounting to P12,000 was erroneously
recorded by the company as P21,000
d) Check of the company in January amounting to P20,000 was erroneously recorded by the
company as P2,000
e) Checks paid by the bank in February, P130,000
f) Erroneous bank credit in January, P10,000
g) Erroneous bank charge in February, P12,000
h) Bank service charge, January, P2,000
i) Bank service charge, February, P3,000
Required: Compute for the following:
1) Outstanding checks on February 28
2) Unadjusted book disbursements in February
3) Unadjusted bank disbursements in February

5. Data concerning the cash records of Lyndon Company for the months of September and October
2018:
a) Unadjusted book balance on September 30 amounted to P2,258,000
b) Total receipts per book in October, P1,400,000
c) Total disbursements per book in October, P2,400,000
d) Unadjusted bank balance on September 30 amounted to P2,100,000
e) Total credits per bank in October amounted to P1,200,000
f) Total debits per bank in October amounted to P2,500,000
g) NSF checks on September 30 amounted to P60,000 while on October 31 amounted to
P40,000
h) Collection of accounts receivable not recorded by the company on September 30, P30,000
and P50,000 on October 31
i) Erroneous bank charge on September 30, P10,000 and P18,000 on October 31
j) Erroneous bank credit on September 30, P7,000 and P9,000 on October 31
k) Understatement of check in payment of rent payable on September 30, P90,000 and
P120,000 on October 31
l) Deposit in transit on September 30, P130,000
m) Outstanding checks on October 31, P30,000

Required: Based on the above data, answer the following questions:

1) How much is the deposit in transit on October 31?
2) How much is the outstanding checks on September 30?
3) How much is the adjusted cash in bank balance on September 30?
4) How much is the adjusted cash receipts during October?
5) How much is the adjusted cash in bank balance on October 31?
6) Prepare the necessary adjusting journal entries.