CA S H A N D C A S H

EQUI V A L E NT S
A O , CP A , C TT , M R IT A X , M B A
ROMNICK B O N TIG
DEFINITION OF CASH
•Cash includes money and other negotiable instrument that is
payable in money and is acceptable by the bank for deposit
and immediate credit.
•Accordingly, it includes checks, bank drafts, and money
orders.
THE FOLLOWING CASH ITEMS ARE INCLUDED IN
“CASH”:
• CASH ON HAND
This includes undeposited cash collections and other cash items awaiting deposit
such as customers’ checks, cashier’s or managers’ checks, traveler’s checks, bank
drafts ands money orders.
• CASH IN BANK
This includes demand deposit or checking account and saving deposit which are
unrestricted as to withdrawal.
• CASH FUND set aside for current purposes such as petty cash fund, payroll fund, and
dividend fund. (sinking fund, insurance fund and other funds set aside for non-current
purposes are NOT included as cash but are included as part of non-current investments.
CASH EQUIVALENTS
• PAS 7, PARAGRAPH 6 DEFINES CASH EQUIVALENTS AS SHORT-TERM AND
HIGHLY LIQUID INVESTMENTS THAT ARE READILY CONVERTIBLE INTO CASH
AND SO NEAR THEIR MATURITY THAT THEY PRESENT INSIGNIFICANT RISK
OF CHANGE IN VALUE BECAUSE OF CHANGES IN INTEREST RATES.” THE
STANDARD FURTHER STATES THAT “ONLY HIGH LIQUID INVESTMENTS THAT
ARE ACQUIRED THREE MONTHS BEFORE MATURITY CAN QUALIFY AS CASH
EQUIVALENTS.
EXAMPLES OF CASH EQUIVALENTS
• THREE-MONTH BSP TREASURY BILL
• THREE-YEAR TREASURY BILL PURCHASED THREE MONTHS
BEFORE DATE OF MATURITY
• THREE-MONTH TIME DEPOSIT
• THREE-MONTH MONEY MARKET INSTRUMENT OR
COMMERCIAL PAPER
CASH AND CASH EQUIVALENTS
• EQUITY SHARES CANNOT QUALIFY AS CASH EQUIVALENTS BECAUSE SHARES DO NOT
HAVE A MATURITY DATE.

• PREFERENCE SHARES WITH SPECIFIED REDEMPTION DATE AND ACQUIRED THREE

MONTHS OR LESS BEFORE THE REDEMPTION DATE CAN QUALIFY AS CASH EQUIVALENTS.

• NOTE THAT WHAT IS IMPORTANT IS THE DATE OF PURCHASE WHICH SHOULD BE THREE
MONTHS OR LESS BEFORE MATURITY.
CASH EQUIVALENT OR NOT??
INVESTMENTS CASH
EQUIVALENT
NOT

Three-month BSP treasury bill

Three-year treasury bill

Three-year treasury bill purchased three months before date of maturity

Six-month time deposit

Preference shares with specified redemption date and acquired three months
or less before the redemption date

Equity shares
CASH EQUIVALENT OR NOT??
INVESTMENTS CASH
EQUIVALENT
NOT

Three-month BSP treasury bill ✔

Three-year treasury bill ✔

Three-year treasury bill purchased three months before date of maturity ✔

Six-month time deposit ✔

Preference shares with specified redemption date and acquired three months ✔
or less before the redemption date

Equity shares ✔
MEASUREMENT OF CASH
•CASH IS MEASURED AT FACE VALUE.
•CASH IN FOREIGN CURRENCY IS MEASURED AT THE CURRENT
EXCHANGE RATE.
•CASH CAN ALSO BE MEASURED AT ITS ESTIMATED REALIZABLE
VALUE.
FINANCIAL STATEMENT PRESENTATION
• THE CAPTION “ CASH AND CASH EQUIVALENTS” SHOULD BE KNOWN AS THE
FIRST ITEM AMONG THE CURRENT ASSETS IN THE STATEMENT OF
FINANCIAL POSITION. THIS ITEM SHALL INCLUDE ALL CASH ITEMS SUCH AS
CASH ON HAND, CASH IN BANK, PETTY CASH FUNDS, AND CASH
EQUIVALENTS WHICH ARE UNRESTRICTED IN USE FOR CURRENT
OPERATIONS.
 INVESTMENT OF EXCESS CASH
• INVESTMENT IN TIME DEPOSIT, MONEY MARKET INSTRUMENTS, AND TREASURY BILLS SHOULD BE
CLASSIFIED AS FOLLOWS:
• IF THE TERM IS THREE MONTHS OR LESS, SUCH INSTRUMENTS ARE CLASSIFIED AS CASH EQUIVALENTS
AND THEREFORE INCLUDED IN THE ACCOUNT TITLE “ CASH AND CASH EQUIVALENTS”
• IF THE TERM IS MORE THAN THREE MONTHS BUT WITHIN ONE YEAR, SUCH INVESTMENTS ARE
CLASSIFIED AS SHORT-TERM FINANCIAL ASSETS OR TEMPORARY INVESTMENTS AND PRESENTED
SEPARATELY AS CURRENT INVESTNMENTS.
• IF THE TERM IS MORE THAN ONE YEAR, SUCH INVESTMENTS ARE CLASSIFIED AS NON-CURRENT OR
LONG-TERM INVESTMENTS. IF THE INVESTMENTS CLASSIFIED AS LONG-TERM OR NON-CURRENT
INVESTMENTS BECOME DUE WITHIN ONE YEAR, IT MUST BE RECLASSIFIED AS CURRENT OR
TEMPORARY INVESTMENTS.
 BANK OVERDRAFT
• WHEN THE CASH IN BANK ACCOUNT HAS A CREDIT BALANCE, IT IS SAID TO BE AN OVERDRAFT .
IT RESULTED FROM ISSUANCE OF CHECKS IN EXCESS OF THE DEPOSITS.

• A BANK OVERDRAFT IS CLASSIFIED AS A CURRENT LIABILITY AND SHOULD NOT BE OFFSET

AGAINST THE BANK ACCOUNTS WITH DEBIT BALANCES. THIS RULE HOWEVER IS WITH
EXCEPTION. WHEN AN ENTITY MAINTAINS TWO OR MORE ACCOUNTS IN A BANK AND ONE OF
THESE BANK ACCOUNTS RESULTS IN AN OVERDRAFT, IT CAN BE OFFSET TO THE OTHER BANK
ACCOUNT IN THE SAME BANK. MOREOVER, AN OVERDRAFT CAN ALSO BE OFFSET AGAINST THE
OTHER BANK ACCOUNT IF THE AMOUNT IS NOT MATERIAL.

• IMPORTANT: GENERALLY, OVERDRAFTS ARE NOT PERMITTED IN THE PHILIPPINES.

 COMPENSATING BALANCE
• A COMPENSATING BALANCE GENERALLY TAKES THE FORM OF MINIMUM CHECKING OR DEMAND
DEPOSIT ACCOUNT BALANCE THAT MUST BE MAINTAINED IN CONNECTION WITH A BORROWING
AGREEMENT WITH A BANK.

• IF THE DEPOSIT IS NOT LEGALLY RESTRICTED AS TO WITHDRAWAL, THE COMPENSATING BALANCE

IS PART OF CASH.

• IF THE DEPOSIT IS LEGALLY RESTRICTED, THE COMPENSATING BALANCE IS CLASSIFIED AS A

SEPARATE LINE ITEM UNDER CURRENT ASSETS, IF THE RELATED LOAN IS SHORT-TERM. BUT IF THE
RELATED LOAN IS LONG-TERM, THE COMPENSATING BALANCE IS CLASSIFIED AS NON-CURRENT
INVESTMENT.
UNDELIVERED OR UNRELEASED CHECK
• AN UNDELIVERED OR UNRELEASED CHECK IS ONE THAT IS MERELY DRAWN AND RECORDED BUT NOT
GIVEN TO THE PAYEE BEFORE THE END OF THE REPORTING PERIOD. ACCORDINGLY, AN ADJUSTING ENTRY
IS REQUIRED TO RESTORE THE CASH BALANCE AND SET UP THE LIABILITY AS FOLLOWS:

• RECORDING OF THE CHECK (EXAMPLE: PAYMENT FOR ACCOUNTS PAYABLE)

ACCOUNTS PAYABLE XXX
CASH XXX

• ADJUSTING ENTRY FOR UNDELIVERED OR UNRELEASED CHECKS

CASH XXX
ACCOUNTS PAYABLE XXX
POSTDATED CHECKS DELIVERED
• A POSTDATED CHECK IS A CHECK DRAWN, RECORDED AND ALREADY GIVEN
TO THE PAYEE BUT IT BEARS A DATE SUBSEQUENT TO THE END OF THE
REPORTING PERIOD. A REVERSING ENTRY MUST ALSO BE MADE TO
RESTORE THE CASH BALANCE JUST LIKE THE PREVIOUS JOURNAL ENTRIES.
THE REASON IS THAT THERE IS NO PAYMENT UNTIL THE CHECK CAN BE
PRESENTED TO THE BANK FOR ENCASHMENT OR DEPOSIT.
STALE CHECK OR CHECK LONG OUTSTANDING
• A STALE CHECK IS A CHECK NOT ENCASHED BY THE PAYEE WITHIN A RELATIVELY LONG PERIOD OF TIME.
HOW LONG MUST TH CHECK REMAIN OUTSTANDING??

• THE NEGOTIABLE INSTRUMENT LAW PROVIDES THAT WHERE THE INSTRUMENT IS PAYABLE ON DEMAND
AND THIS INCLUDES CHECKS, PRESENTMENT MUST BE MADE WITHIN A “REASONABLE TIME” AFTER ITS
ISSUE. IN DETERMINING WHAT IS A “REASONABLE TIME”, CONSIDERATION SHOULD BE MADE REGARDING
THE NATURE OF THE INSTRUMENT, THE USAGE OF TRADE OR BUSINESS, AND THE FACTS OF THE
PARTICULAR CASE WITH RESPECT TO SUCH INSTRUMENT. CLEARLY, THE LAW DOES NOT SPECIFY A
DEFINITE PERIOD WITHIN WHICH CHECKS MUST BE PRESENTED FOR ENCASHMENT. IT IS A MATTER OF
ENTITY POLICY.
STALE CHECK OR CHECK LONG OUTSTANDING
• IF THE AMOUNT OF STALE CHECK IS IMMATERIAL, IT IS SIMPLY ACCOUNTED FOR A
MISCELLANEOUS INCOME AS FOLLOWS:
CASH XXX
MISCELLANEOUS INCOME XXX

• IF THE AMOUNT IS MATERIAL AND LIABILITY IS EXPECTED TO CONTINUE, THE CASH AND
THE LIABILITY ARE RESTORED. THE JOURNAL ENTRY IS AS FOLLOWS:
CASH XXX
ACCOUNTS PAYABLE XXX
WINDOW DRESSING
• 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 OF THE PERIOD.
B. BY RECORDING AS OF THE LAST DAY OR THE REPORTING PERIOD PAYMENTS OF ACCOUNTS MADE
SUBSEQUENT TO THE CLOSE OF THE PERIOD.

• WINDOW DRESSING IS ANY DELIBERATE MISSTATEMENT OF THE ASSETS, LIABILITIES, EQUITY, INCOME
AND EXPENSES. WINDOW DRESSED STATEMENTS CONTAIN UNTRUTH OR FALSIFY DATA. SUCH
PRACTICES ARE UNACCEPTABLE AND UNDESIRABLE. THE ENTRIES MADE TO WINDOW DRESS MUST BE
REVERSED TO CORRECT THE STATEMENTS.
 WINDOW DRESSING
• ILLUSTRATION:
• THE CORRECT CURRENT POSITION AT THE END OF THE CURRENT YEAR IS AS FOLLOWS:
CURRENT ASSETS 8,400,000
CURRENT LIABILITIES 4,000,000
CURRENT RATIO 2.1
THE BOOKS WERE KEPT OPEN AND TWO TRANSACTIONS WHICH OCCURRED IN JANUARY OF THE FOLLOWING YEAR WERE RECORDED AS OF THE END
OF THE CURRENT YEAR.

JOURNAL ENTRIES:
A. SALE FOR P2,000,000 OF MERCHANDISE COSTING P800,000.
ACCOUNTS RECEIVABLE 2,000,000
SALES 2,000,000
COST OF SALES 800,000
MERCHANDISE INVENTORY 800,000
WINDOW DRESSING
B. PAYMENT OF ACCOUNTS PAYABLE, P800,000.
ACCOUNTS PAYABLE 800,000
CASH 800,000
CONSEQUENTLY, THE RESULTING BALANCE WOULD BE:
CURRENT ASSETS 8,800,000
CURRENT LIABILITIES 3,200,000
CURRENT RATIO 2.75
LAPPING
• LAPPING IS A PRACTICE USED FOR CONCEALING A CASH SHORTAGE.
• LAPPING CONSISTS OF MISAPPROPRIATING A COLLECTION FROM ONE CUSTOMER AND
CONCEALING THE DEFALCATION BY APPLYING A SUBSEQUENT COLLECTION MADE FROM
ANOTHER CUSTOMER.

• LAPPING INVOLVES A SERIES OF POSTPONEMENTS OF THE ENTRIES FOR THE

COLLECTION OF RECEIVABLES.

• THIS IS POSSIBLE WHEN AN ENTITY HAS POOR INTERNAL CONTROL ESPECIALLY WHEN
THE BOOKKEEPER AND THE CASHIER ARE ONE AND THE SAME PERSON.
KITING
• KITING IS POSSIBLE WHEN AN ENTITY MAINTAINS CURRENT ACCOUNTS IN
DIFFERENT BANKS. KITING IS USUALLY EMPLOYED AT THE END OF THE
MONTH.
• KITING 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 THE CHECK.
 ACCOUNTING FOR CASH SHORTAGE
• WHERE THE CASH COUNT SHOWS CASH WHICH IS LESS THAN THE BALANCE PER BOOK, THERE IS A CASH SHORTAGE TO BE
RECORDED AS FOLLOWS:
CASH SHORTAGE OR OVER XX
CASH XX
• WHEN THE FINANCIAL STATEMENTS ARE PREPARED, THE “CASH SHORTAGE OR OVER” SHOULD BE ADJUSTED AS FOLLOWS:
• CASH SHORTAGE IS DUE TO THE ERROR OF THE CASHIER/CUSTODIAN
DUE FROM CASHIER (RECEIVABLE) XX
CASH SHORTAGE OR OVER XX
• UNKNOWN CAUSE
LOSS FROM CASH SHORTAGE XX
CASH SHORTAGE OR OVER XX
• AMOUNT IS IMMATERIAL
MISCELLANEOUS EXPENSE XX
CASH SHORTAGE OR OVER XX
 ACCOUNTING FOR CASH OVERAGE
• WHERE THE CASH COUNT SHOWS CASH WHICH IS MORE THAN THE BALANCE PER BOOK, THERE IS A CASH
SHORTAGE TO BE RECORDED AS FOLLOWS:
CASH XX
CASH SHORTAGE OR OVER XX
• WHEN THE FINANCIAL STATEMENTS ARE PREPARED, THE “CASH SHORTAGE OR OVER” SHOULD BE ADJUSTED AS
FOLLOWS:
• CASH OVERAGE IS MONEY OF THE CASHIER/CUSTODIAN
CASH SHORTAGE OR OVER XX
PAYABLE TO THE CASHIER XX
• NO CLAIM
CASH SHORTAGE OR OVER XX
MISCELLANEOUS INCOME XX
IMPREST SYSTEM

• THE 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.
PETTY CASH FUND

• THE CASH FUND IS MONEY SET ASIDE TO PAY SMALL EXPENSES WHICH CANNOT BE PAID
CONVENIENTLY BY MEANS OF CHECK.

• THERE ARE TWO METHODS OF HANDLING THE PETTY CASH, NAMELY:

a.IMPREST FUND SYSTEM
b.FLUCTUATING FUND SYSTEM
IMPREST FUND SYSTEM
• THE IMPREST FUND SYSTEM IS THE ONE USUALLY FOLLOWED IN HANDLING PETTY CASH TRANSACTIONS.
• ACCOUNTING PROCEDURES:
a. A CHECK IS DRAWN TO ESTABLISH THE FUND
PETTY CASH FUND XX
CASH IN BANK XX
b. PAYMENT EXPENSES OUT OF THE FUND
NO FORMAL JOURAL ENTRIES ARE MADE. THE PETTY CASHIER GENERALLY REQUIRES A SIGNED PETTY CASH
VOUCHER FOR EACH PAYMENTS AND SIMPLY PREPARES MEMORANDUM ENTRIES TO THE PETTY CASH JOURNAL.
c. REPLENISHMENT OF PETTY CASH PAYMENTS
EXPENSES XX
CASH IN BANK XX
IMPREST FUND SYSTEM
d. ADJUST THE UNREPLENISHED EXPENSES BALANCE AT THE END OF THE MONTH
EXPENSES XX
PETTY CASH BANK XX
e. TO RECORD INCREASE IN FUND
PETTY CASH FUND XX
CASH IN BANK XX
f. TO RECORD A DECREASE IN FUND
CASH IN BANK XX
PETTY CASH FUND XX
FLUCTUATING FUND SYSTEM
• THE SYSTEM IS CALLED “FLUCTUATING FUND SYSTEM” BECAUSE THE
AMOUNT OF THE CHECKS DRAWN TO REPLENISH THE FUND DO NOT
NECESSARILY EQUAL THE PETTY CASH DISBURSEMENTS.
• PETTY CASH DISBURSEMENTS ARE IMMEDIATELY RECORDED THUS
RESULTING IN A FLUCTUATING PETTY CASH BALANCE PER BOOK FROM
TIME TO TIME.
FLUCTUATING FUND SYSTEM
• ESTABLISHMENT OF THE FUND
PETTY CASH FUND XX
CASH IN BANK XXX
• PAYMENT OF EXPENSES OUT OF THE PETTY CASH FUND:
EXPENSES XX
PETTY CASH FUND XX
• REPLENISHMENT OR INCREASE OF THE FUND
PETTY CASH FUND XXX
CASH IN BANK XXX
• AT THE END OF THE REPORTING PERIOD, NO ADJUSTING ENTRY IS REQUIRED.
• DECREASE OF THE FUND
CASH IN BANK XXX
PETTY CASH FUND XXX
THANK YOU!