Cash and Cash Equivalents

Cash items

- Always measured at face value

- Cash items must be generally unrestricted to quality as cash as a
current asset
1. Cash on hand
2. Cash in bank without restrictions on withdrawals
3. Working funds – set aside for small operations

Cash equivalents

- Short term highly liquid investments that are readily convertible into
cash
- Apply the three month rule where the duration is from the date of
purchase up to the date of maturity. (purchased three months before
maturity)

Temporary investments of cash

- If excess cash is invested to earn interest income, the actual cash

invested shall be classified as follows:
1. With a term of three months or less > cash equivalents
2. More than three months but less than a year > short term
investments as current assets but not as cash
3. More than one year > long term investments as noncurrent assets,
most certainly not as cash

Compensating balances

- No legal resitrictions to withdraw > cash

- With legal restrictions on withdrawal > cash held as compensating
balance or long term investment depending if loan is short term or
long term.

Postdated checks
 - Shall be reverted back to cash as at the end of the reporting period.
- If the entity issued the postdated check that is cash but if the
company received the postdated check, it should not be considered
cash

Cash short or over

- Cash count < recorded cash = cash shortage

- Cash count > recorded cash = cash overage
1. Cash shortages are debited to CSO account and credited to cash.
These shortages are then credited to the CSO account where the
amount of the shortage is debited to the reason for the shortage.
(Debit loss, credit cash shortage)
2. Cash overages are credited to CSO account and debited to cash.
These overage are debited to CSO aacount where the amount of the
overage is credited to the reason for the overage (Debit cash overage,
credit reason)

Internal control on cash: imprest system

- Cash receipts > deposited altogether

- Cash payments > made through checks

Petty cash fund

- Payments for small amount where check payments are seen

impractible
1. Imprest fund system
2. Fluctuating fund system

Cash, cash equivalent, current asset, noncurrent asset, current liability

1. Cash available for immediate use = cash

2. Three month BSP treasury bill = cash equivalent
3. Compensating balances related to short term borrowings which are
legally restricted = current asset
 4. Time deposits with maturities more than three months but less than
one year = current asset
5. Cash set aside for payment of dividends = cash
6. Cash set aside on Dec. 31 for the purchase of land expected to be
executed in the next two months = noncurrent asset
7. Bank overdraft = current liability
8. Investment in equity securities = noncurrent asset
9. Bank drafts and money orders = cash

Bank overdraft is generally a current liability but if there is account with

the same bank they will be subtracted to the CASH balance.

Cash and Cash equivalents

(Bank reconciliation statement and proof of cash)

Sourves of details about cash in bank

- Cash in bank ledger account of the entity

- Bank statement issued by the bank
1. Bank statement > increase in entity’s cash = credit
>decrease in entity’s cash = debit

2. Ledger > increase in cash = debit

> decrease in cash = credit

A bank reconciliation statement is prepared by an entity to reconcile the

cash in bank account balance in the entity’s books versus the balance as
reported by the bank in bank statement.

Bank balance reconciling items

1. Deposits in transit (+)

2. Outstanding checks (-)
3. Bank errors (+)(-)

Ledger balance reconciling items

 1. Credit memos (+)
2. Debit memos (NSF checks, bank service charges) (-)
3. Book errors (-)(+)

Adjusted balance method

Bank balance

+ Deposit in transit

- Outstanding checks

+- bank error

=adjusted balance

Ledger Balance

+ notes collected by bank

+interest earned

- Nsf checks

- Service charge

+- book error

= adjusted balance

Bank to Book method

Bank balance

+Deposit in transit

- outstanding checks

+- bank error

- collections by the bank

- interest earned
+service charge

+nsf checks

+- book error

=ledger balance

Book to Bank method

Ledger balance

+collections by the bank

+interest earned

- Nsf checks

- service charge

+- Book error

- deposit In transit

+ outstanding checks

+- bank error

= bank balance