CHAPTER 1

CASH AND CASH EQUIVALENTS

Definition and Standards
Definition:

Cash includes money and any other negotiable instrument that is

payable in money and acceptable by the bank for deposit and
immediate credit (unrestricted in use for current operations)
PAS 1, Par. 66
An entity shall classify an asset as current when the asset is cash
or a cash equivalent unless it is unrestricted to settle a liability for
more than twelve months after then end of the reporting period.

Cash on hand – undeposited cash collections and other cash

items awaiting deposit
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.
PAS 7, Par. 6
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.

Short-term – must be acquired three months before maturity

can qualify as cash equivalents.

Note: What is important is the date of purchase

Classifications of Investments
TIME DEPOSIT, MONEY MARKET and TREASURY BILLS
Measurement and Presentation of
Cash
Cash is measured at FACE VALUE

The caption cash and cash equivalents should be shown as the first
line item under current assets

Cash in foreign currency is measured at the current exchange rate.

Deposit in foreign currencies which are not subject to any foreign

exchange restrictions are included in “Cash” (otherwise, noncurrent
assets)
Bank Overdrafts
When the cash in bank account has a credit balance, it is said to be
an overdraft.

General Rule: A bank overdraft is classified as a current liability and

should not be offset against other bank accounts with debit balances.

Exceptions:
(1)When an entity has two or more accounts in one bank
(2)If the amount is NOT material
(3)Under IFRS, bank overdraft can be offset against other bank
account when payable on demand and often fluctuates from positive
to negative as an integral part of cash management.
Compensating Balance
Minimum checking or demand deposit account balance that must
be maintained in connection with a borrowing arrangement with
a bank.
Undelivered or Unreleased Checks
Undelivered check is still subject to the entity’s control and may
thus be cancelled anytime before delivery at the discretion of the
entity.
Postdated Check and Stale Check
A postdated check is a check drawn, recorded and already given
to the payee but it bears a date subsequent to the end of
reporting period.

A stale check is a check not encashed by the payee within a

relatively long period of time. (reasonable time)

Adjusting entries will depend on materiality of the transaction

(amount).
Cash Shortage / Overage
Where the cash count shows cash which is less than the balance
per book, there is a cash shortage.

Where the cash count shows cash which is more than the
balance per book, there is a cash overage.

Cash short or over account is only a temporary or suspense

account.
• If shortage – either receivable or expense account
• If overage – either payable or income account
Imprest System and Petty Cash
Fund
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 is money set aside to pay small expenses

which cannot be paid conveniently by means of check.

Two methods:
1. Imprest fund system
2. Fluctuating fund system
Imprest Fund System
1. Establishment of an Imprest Fund

2. Payment of expenses

3. Replenishment of the fund

4. Adjusting entry for unreplenished expenses at the end of the year

5. Reversal entry

6. Increase or decrease in fund, if any

Imprest Fund System vs. Fluctuating
Fund System
Event Imprest Fluctuating
Establishment of the fund ✓ ✓
Payment of expense 🗴 ✓
Replenishment of expenses ✓ ✓
Increase/decrease in funds ✓ ✓
Adjusting at the end of the year ✓ 🗴
Reversal at the beginning of the year ✓ 🗴