CASH and CASH

EQUIVALENTS
 DEFINITION OF CASH

▶ CASH simply means money.

▶ Money is the standard medium of exchange in business transactions. It
refers to the currency and coins which are in circulation and in legal
tender.
▶ Cash includes money and any other negotiable instrument that is
payable in money and acceptable by the bank for deposit and
immediate credit.
▶ It includes checks, bank drafts and money orders for immediate
encashment or deposits.
UNRESTRICTED CASH

▶ As entity shall classify assets as current

when the asset is cash or a cash equivalent
unless it is restricted to settle a liability for
more than twelve months after the end of the
reporting period.
UNRESTRICTED CASH

▶ To be reported in cash, an item must be

“unrestricted” in use.
▶ This means that the cash must be readily available
in the payment of current obligations and not be
subject to any restrictions, contractual or
otherwise.
CASH ITEMS INCLUDED IN CASH

▶ Cash on hand – This includes undeposited cash collections and

other cash items awaiting deposits. Ex. Checks, bank drafts and
money orders.
▶ Cash in bank – This includes demand deposits or checking
account and saving deposits which are unrestricted as to
withdrawal.
▶ Cash fund – set aside for current purposes such as petty cash fund,
payroll fund and dividend fund.
CASH EQUIVALENTS

▶ PAS 7, 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.
▶ Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents.
CASH EQUIVALENTS

▶ Three-month BSP treasury bill

▶ Three year BSP treasury bill purchased three months
before date of maturity
▶ Three-month time deposit
▶ Three-month money market instrument or commercial
paper.
INVESTMENT OF CASH

▶ The control and proper use of cash is an important aspect of cash

management. Basically, the entity must maintain sufficient cash for use
in current operations.
▶ Any cash accumulated in excess of that needed for current operations
should be invested even temporarily in some type of revenue earning
investment.
▶ Ex. Time deposit, money market and treasury bill.
CLASSIFICATION OF INVESTMENT OF
EXCESS CASH

▶ A. If the term is three months or less – cash

equivalents
▶ B. More than three months but within one year –
short-term financial assets
▶ C. More than one year – noncurrent or long-term
investment
 MEASUREMENT OF CASH

▶ CASH is measured at face value.

▶ CASH in foreign currency is measured at the current
exchange rate.
▶ If a bank or financial institution holding the fund of the entity
is in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount recoverable
is estimated to be lower than the face value.
FINANCIAL STATEMENT
PRESENTATION

▶ Cash and cash equivalents should be shown as the first item

among the current assets.
▶ This caption includes all the cash items, such as cash on hand,
cash in bank, petty cash fund and cash equivalents which are
unrestricted in use for current operations.
▶ The details comprising cash and cash equivalents shall be
disclosed to financial statements.
FOREIGN CURRENCY

▶ Cash in foreign currency should be translated to Philippine pesos

using the current exchange rate.
▶ Deposits in foreign countries which are not subject to any foreign
exchange restriction are included in cash.
▶ Deposits in foreign bank which are subject to foreign exchange
restriction, if material, should be classified separately among
noncurrent assets and the restriction clearly indicated.
 CASH FUND FOR A CERTAIN PURPOSE

▶ If the cash fund is set aside for use in current operations or for the payment of
current obligation, it is a current asset. It is included as part of cash and cash
equivalents. Examples: Petty cash fund, payroll fund, travel fund, interest fund,
dividend fund and tax fund.
▶ If the cash fund is set aside for non-current purpose or payment of non-current
obligation, it is shown as long-term investment. Examples: sinking fund,
contingency fund, insurance fund, funds for acquisition of property, plant and
equipment, preference share redemption fund.
 BANK OVERDRAFT

▶ It is classified as a current liability and should not be offset

against other bank accounts with debit balances but with
exception.
▶ When the cash account has a credit balance, it is said to be an
overdraft. The credit balance in the cash in bank accounts
results from the issuance of checks in excess of the deposits.
▶ Overdrafts are not permitted in the Philippines.
 BANK OVERDRAFT

▶ For example, an entity maintains two bank accounts:

A. Cash in bank – First Bank, which is overdrawn by P10,000
B. Cash in bank – Second bank, with a debit balance of P 100,000
The net cash balance is P90,000.
The proper classification statement of the two accounts is as follows:
Current asset:
Cash in bank – Second bank 100,000
Current liability:
Bank overdraft – First Bank 10,000
 BANK OVERDRAFT

▶ It is not necessary to adjust and open a bank overdraft account in the

ledger. In other words, the Cash in bank – First Bank account is
maintained in the ledger with a credit balance.
▶ When an entity maintains two or more account in one bank and one
account results in an overdraft, such overdraft can be offset the other
bank account with a debit balance in order to show cash net of bank
overdraft, net of other bank account.
 COMPENSATING BALANCE

▶ It takes the form of minimum checking or demand deposit account balance

that must be maintained in connection with a borrowing arrangement with a
bank.
▶ Example: An entity borrows P5,000,000 from a bank and agrees to maintain
a 10%, or P 500,000 minimum compensating balance in a demand deposit
account.
▶ In effect, this arrangement results in the reduction of the amount borrowed
because the compensating balance provides a source of fund to the bank as
partial compensation for the loan extended.
 CLASSIFICATION OF COMPENSATING BALANCE

▶ If the deposit is not legally restricted as to withdrawal by the borrower because of

an informal compensating balance agreement, the compensating balance is a part
of cash.
▶ If the deposit is legally restricted because of a formal compensating balance
agreement, the compensating balance is classified separately as “cash held as
compensating balance” under current assets if the related loan is short-term.
▶ If the related loan is long-term, the compensating balance is classified as
noncurrent investment.
UNDELIVERED OR UNRELEASED
CHECK

▶ It is one that is merely drawn and recorded but not given to the
payee before the end of reporting period.
▶ There is no payment when the check is pending delivery to the
payee at the end of the accounting period.
▶ Undelivered check is still subject to entity’s control and may be
cancelled anytime.
POSTDATED CHECK DELIVERED

▶ It is a check drawn, recorded and already

given to the payee but it bears a date
subsequent to the end of reporting period.
 ENTRY FOR POSTDATED CHECK,
UNRELEASED CHECK, & STALE CHECK

Dr. Cash
Cr. Accounts Payable or
appropriate account
STALE CHECK

▶ A check not encashed for a long period of

time.
▶ In banking practice, the check becomes stale
if not encashed within six months from the
time of issuance.
ACCOUNTING FOR CASH SHORTAGE

▶ The cash short or over account is just a temporary or suspense account to be adjusted
when financial statements are prepared.
CASH SHORT OR OVER XX
CASH XX
➢ If the cashier is held responsible
Due from Cashier
Cash short or over
ACCOUNTING FOR CASH SHORTAGE

▶ If reasonable efforts fail to disclose the cause of

the shortage, the adjustment is:
LOSS FROM CASH SHORTAGE XX
CASH SHORT OR OVER XX
ACCOUNTING FOR CASH OVERAGE

▶ Where the cash shows cash more than the balance per book, there is a cash overage to be
recorded as follows:
CASH
CASH SHORT OR OVER
➢ The cash overage is treated as miscellaneous income if there is no claim
CASH
Miscellaneous income
ACCOUNTING FOR CASH OVERAGE

▶ But when the cash overage is found to be the

money of the cashier, the journal entry is:
CASH SHORT OR OVER XX
PAYABLE TO CASHIER XX
 IMPREST SYSTEM

▶ 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.
▶ There are instances when issuance of checks becomes impractical or
inconvenient such as when small amounts are paid or things are
hurriedly bought or consumers are entertained.
▶ It is more economical and convenience to pay in cash rather than issue
checks.
PETTY CASH FUND

▶ It is a money set aside to pay small expenses which

cannot be paid conveniently by means of check.
There are two methods of handling petty cash:
A. IMPREST FUND SYSTEM
B. FLUCTUATING FUND SYSTEM
IMPREST FUND SYSTEM

▶ A check drawn to establish the fund:

Petty cash fund XX
Cash in bank XX
➢ Payment for expenses
No formal entries are made.
IMPREST FUND SYSTEM

▶ Replenishment of Petty Cash fund

Expenses XX
Cash in bank XX
➢ Adjusting Unreplenished expenses
Expenses XX
Petty cash fund
IMPREST FUND SYSTEM

▶ An increase in the fund recorded as follows:

Petty cash fund XX
Cash in bank XX
➢ A decrease in the fund
Cash in bank XX
Petty cash fund XX
 FLUCTUATING FUND SYSTEM

▶ Establishment of the fund:

Petty cash fund XXX
Cash in bank XXX
➢ Payment of expenses out of petty cash fund
Expenses XXX
Petty cash fund XXX
FLUCTUATING FUND SYSTEM

➢ Replenishment or increase of the fund:

Petty cash fund XXX
Cash in bank XXX
➢ Decrease of the fund
Cash in bank XXX
Petty cash fund XXX
 CASH & CASH EQUIVALENTS

▶ Pygmalion Company had the following account balances on December 31, 2018:
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank- restricted account for building
construction expected to be disbursed in 2019 3,000,000
Treasury bills, purchased December 15, 2018
and due March 15, 2019 2,000,000
 CASH & CASH EQUIVALENTS

▶ The cash on hand includes a P200,000 check payable to Pygmalion, dated

January 15, 2019, what should be reported as cash and cash equivalents on
December 31, 2018?

Solution:
Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand (500,000-200,000) 300,000
Treasury bills 2,000,000
Total cash & cash equivalents 8,300,000
CASH & CASH EQUIVALENTS

▶ The following data pertain to Thor Company on December 31,2018:

Checkbook balance 4,000,000
Bank statement balance 5,000,000
Check drawn on Thor’s account, payable to supplier
Dated and recorded on December 31, 2008,
but not mailed until January 15, 2019 500,000
Cash in sinking fund 2,000,000
CASH & CASH EQUIVALENTS

▶ On December 31, 2018, how much should be reported as cash?

Solution:
Checkbook balance 4,000,000
Undelivered check drawn on Thor’s account 500,000
Adjusted cash balance 4,500,000
CASH & CASH EQUIVALENTS

▶ On Dec. 31, 2018, West Company had the ff. cash balances:
Cash in bank 1,800,000
Petty cash fund (all funds were reimbursed on 12/31/18) 50,000
Time deposit due on 02/01/19 250,000
Cash in bank includes the compensating balance of 600,000 against short-term
borrowing which is legally restricted as arranged on 12/31/18. What should be
reported as cash and cash equivalents on 12/31/18?
CASH & CASH EQUIVALENTS

▶ The cash in the current assets of the statement of financial position of Tawiran Co. consists of:
Bond sinking fund cash 1,500,000
Checking account in PNB
(a P320,000 Check is still outstanding per bank statement) 3,155,000
Currency and coins awaiting deposit 1,135,000
Deposit in a bank closed by BSP 500,000
Petty cash fund(P10,000 is paid vouchers) 50,000
Receivables from officers and employees 175,000

What is the correct cash balance?

CASH & CASH EQUIVALENTS

▶ Account of the Petty cash fund of Timex Co. showed the composition as follows:
Coins and currency 3,300
Paid vouchers: transportation, gasoline, office supplies, postage stamps,
2,000
Due from employees 3,000
Manager’s check marked “NSF” 1,000
Check drawn by company to the order of petty cash custodian 2,700
What is the correct amount of petty cash fund?
SOLUTIONS:

▶ West Company
Cash in bank (1,800,000 - 600,000) 1,200,000
Petty cash fund 50,000
Time deposit 250,000
Total cash 1,500,000
SOLUTIONS:

▶ Tawiran Company
PNB 3,155,000
Currency and coins 1,135,000
Petty cash fund (50,000-10,000) 40,000
Total cash 4,330,000
SOLUTIONS:

▶ Timex Company
Coins and currency 3,300
Check drawn by company
to the order of petty cash custodian 2,700
Total Petty cash fund 6,000