Chapter 2

Cash and Cash

Equivalents
Roxanie C. Calixto, CPA, MSA

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation

 Learning Objectives
After this chapter, the student should be able to:
+ Understand the financial nature of cash and cash equivalents.
+ Differentiate between cash and cash equivalents.
+ Know and apply the principles guiding the initial recognition,
subsequent recognition, and derecognition of cash and cash
equivalents.
+ Understand the basic internal controls implemented by entities to
protect their cash and cash equivalents.
+ Prepare a bank reconciliation statement.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 2

 What is Cash?
+ The medium of exchange – either received or
given up in every cash transaction.
+ It is a financial asset.
+ Most liquid of all assets.
+ It should be readily available for use.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 3

 General Categories of Cash
+ Cash on hand – includes checks on
hand, manager’s checks, traveler’s
check, cashier’s check, and bank drafts.
+ Cash in bank – savings and checking
account
+ Cash set aside for current use – petty
cash fund, payroll fund, tax fund, etc.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 4

 Republic Act No. 6426 – Foreign Currency
Deposit Act of the Philippines (Apr. 4, 1974)
+ Any person, natural or juridical, may open foreign currency
deposit accounts with any Philippine Bank, provided the foreign
currencies to be deposited are acceptable as part of the
international reserve.
+ Deposit and withdrawal exclusively in foreign currency is
allowed.
+ To get the peso equivalent of the withdrawal, the bank buys
back the foreign currency based on the bank’s buying rate for
the day.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 5

 Reporting of Foreign Currencies on Hand
+ Foreign currencies are converted, totaled, and recorded
as part of cash on hand at their peso equivalent based on
the closing rate at year end.
+ The difference between the initial converted peso amount
of the foreign currencies and their year-end converted
peso amount is recorded on the financial statement as
either gain or loss (Statement of Comprehensive
Income).

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 6

 Cash Equivalents
+ Short-term, highly liquid investments that are readily convertible
to known amounts of cash which are subject to an insignificant
risk of changes in value.
+ Include certain investments that have very short terms, or those
that have been purchased so close to their maturity dates (90
days or less before maturity date).
+ Examples: 90-day time deposits, time deposits purchased 3
months prior to maturity date, treasury bills, commercial papers,
certificate of deposits, and money market placements.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 7

 Other Notes
+ Compensating balance – minimum balance that an
account holder should maintain in his bank at all times
(reported as cash or other assets).
+ Post dated checks – checks that bear future date on its
face (recorded as cash on the specified date on its face).
+ Stale checks – checks received but not yet negotiated
with bank within a significant period of time, usually after
6 months from the date written on its face (not cash).

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 8

 Other Notes (cont’d)
+ NSF check – the issuer does not have sufficient balance at
the time when the entity presents the check for negotiation
(not cash).
+ Cash set aside for acquisition of non-current assets –
since this is not readily available for use in the ordinary
course of business, it should be reclassified as a non-current
asset (not cash).
+ Bank overdraft – withdrawals made or checks issued that
would exceed the balance of the amount the entity currently
has with the bank is treated as a current liability (not cash).

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation 9

 Illustration (Exercise 2-1)
As of December 31, 2020, Grimmie Company’s general ledger reported a
total cash balance of ₱695,000. Breakdown of the amount is as follows:
Currencies and coins awaiting deposit ₱ 45,000
Checking account balance 185,000
NSF Check returned by the bank 40,000
Undeposited receipts, including a postdated check of ₱35,000 160,000
Savings account balance 250,000
IOUs signed by personnel 15,000
What amount should be reported as “cash” on Grimmie’s Statement of
Financial Position?

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation10

 Illustration (Exercise 2-1)
What amount should be reported as “cash” on Grimmie’s Statement of
Financial Position? Answer: ₱605,000

Total cash balance ₱ 695,000 Currencies & coins ₱ 45,000

Less: Checking account 185,000
NSF check 40,000 Undeposited receipts 125,000
Post dated Check 35,000 (₱160,000 - ₱35,000)

IOUs 15,000 Savings account 250,000

Correct cash ₱ 605,000 Correct cash balance ₱ 605,000
balance

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation11

 Internal Controls
 Separation of cash duties
- The employee in charge of receiving and depositing
cash should be separate from the employee preparing
the reconciliation.
- This prevents employee to have access to both cash
and accounting records.
 Limiting access to cash
- Cash receipts for the day should be deposited
immediately to the bank.
- Cash on hand must be kept in a lock box or vault.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation12

 Internal Controls (cont’d)
 Proper documentation of cash receipts
- Timely recording of cash receipts
- Issuance of official receipts to support cash inflow.
 Strict control of cash disbursements
- Disbursements with a significant amount should be done
through issuance of checks.
- Disbursements must be supported with documents and
it must be signed and approved by approving
authorities.
- For smaller disbursements, a petty cash fund should be
set up and controlled by petty cash custodians.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation13

 Voucher System
• A method of authorizing and controlling cash
disbursements.
• Prevents indiscriminate and unauthorized purchases and
incurrences of expense.
• Cash voucher – document that supports a cash
transaction. It is filled out to identify what is to be paid, the
amounts to be paid, and the accounts to be recorded.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation14

 Voucher System (Sample Process)
Procurement #1 Purchase Order Seller

#2 Sales Invoice
Receiving
clerk #3 Receiving Report

#4 Purchase Order,
Sales Invoice, and
Receiving Report

Accountant Payment Clerk

#5 Sales Invoice and
Cash/Check Voucher #6 Cash/Check

- Voucher Register (#4)

- Unpaid Vouchers File (#4)
- Check Register (#6)

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation15

 Imprest System
• Cash receipts are deposited intact daily to the bank and
all payments of assets, liabilities, and expenses should
be made by check except for small or petty expenditures.

• Cash receipts journal = Official Receipts = Bank’s

Machine Validated Deposit Slip

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation16

 Petty Cash Fund
• Purchase of small items like office supplies, fare of the
company’s messenger, and snack items for officers and
employees during staff meetings are usually paid out of the
petty cash fund.
• Under the responsibility of a petty cash custodian.
• Whenever a payment is to be made from the fund, the party
who needs the fund fills out a petty cash voucher and
thereafter signs the same upon receipt of the requested
amount.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation17

 Petty Cash Fund (cont’d)
• Receipt(s) or any proof of purchase is later given to the petty
cash custodian as supporting document.
• The petty cash custodian files the receipt together with the
petty cash voucher and records the expense in the petty
cash book.
• The specific expense accounts are individually recorded in
the entity’s cash payments journal (CPJ) upon
replenishment of the petty cash fund.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation18

 Petty Cash Fund (cont’d)
• When the petty cash fund is already depleted or reduced to
a very low balance, the petty cash custodian requests for
replenishment of the fund.
• By replenishment, the actual amount of cash is increased to
equal the original amount of the fund.
• This is done through issuance of check payable to the petty
cash custodian at an amount equal to the total of all the petty
cash vouchers issued as supported by receipts and other
documents.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation19

 Auditing Petty Cash Fund
• Cash count
• Verification of supporting receipts and petty cash
vouchers
• Petty Cash Fund – Total Amount of Vouchers Issued =
Remaining Cash
• Actual Cash > Calculated Cash Balance = Overage
• Actual Cash < Calculated Cash Balance = Shortage

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation20

 Bank Reconciliation
• Three major types of deposit accounts:
- Savings account
- Time deposit
- Checking account
• An entity opens a checking account with a particular bank
and records the same as Cash in Bank in its books.
• The bank records a liability account in its books to
recognize the initial amount deposited by the entity to its
checking account.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation21

 Bank Reconciliation (cont’d)
• At the end of the month, cash shown in the company’s
records is called balance per ledger or balance per books.
• The cash balance shown in the records of the bank is called
balance per bank.
• On a monthly basis, the bank issues a bank statement
which summarizes all increases and decreases in the
entity’s checking account.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation22

 Bank Reconciliation (cont’d)
• A bank reconciliation is being prepared by the accountants in
order to reconcile the balance per books and balance per
books.
• This is made to confirm that cash is not misappropriated in
any way and in order to account for the differences between
the balance per books and balance per banks.
• There are two types of reconciling items:
- Reconciling items due to timing difference
- Reconciling items due to error

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation23

 Types of Reconciling Items
• Reconciling items due to timing difference
1. Deposit in transit – deposit is already recorded by the entity
but is not yet recognized by the bank.
2. Outstanding check – check issued and recorded by the
entity but the payee has not yet negotiated it with the bank.
3. Bank debit memos - these are items deducted by the bank
from the entity’s account but not yet recorded by the entity
itself.
4. Bank credit memos - these are items added by the bank to
the entity’s account but not yet recorded by the entity.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation24

 Types of Reconciling Items
• Reconciling items due to errors
1. Determine who committed the error
2. Determine the type of error committed and its effect on
the cash balance.

Example:
If the accountant recorded a particular deposit twice, then
the error is committed by the depositor and the error should
be deducted from the cash balance per books.

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation25

 Format of Bank Reconciliation Statement
a) Book-to-bank balance method
Balance per books ₱ xxx
Add: Outstanding Checks xxx
Bank Credit Memos xxx
Book errors understating the book balance xxx
Sub-total xxx
Less: Deposit in transit (xxx)
Bank debit memos (xxx)
Book errors overstating the book balance (xxx)
Balance per bank xxx

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation26

 Format of Bank Reconciliation Statement
b) Bank-to-book balance method
Balance per bank ₱ xxx
Add: Deposit in transit xxx
Bank debit memos xxx
Bank errors understating the book balance xxx
Sub-total xxx
Less: Outstanding checks (xxx)
Bank credit memos (xxx)
Bank errors overstating the book balance (xxx)
Balance per book xxx

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation27

 Format of Bank Reconciliation Statement
c) Adjusted balances method

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation28

 Financial Statement Presentation
• Statement of Financial Position (PLDT)

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation29

 Financial Statement Presentation
• Notes to the Financial Statements (PLDT)

Cash Cash Equivalents Other Notes Internal Controls Bank Reconciliation30

 To do:
+ Analyze the financial statements assigned to you and
check the components and presentation of cash and
cash equivalents.

+ Answer book exercises 2-1 to 2-10.

31
Thanks!
Any questions?
Email me at:
roxanie.calixto@dlsu.edu.ph

32