Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Course Learning Outcome
Prepare the current asset section of the statement of financial position
Student Learning Outcomes
1. Identify items considered as cash
2. Identify items considered as cash equivalents
3. Compute the correct balance for cash and cash equivalents
4. Prepare journal entries to account for petty cash fund
Learning Content
CASH AND CASH EQUIVALENTS
Introduction
Welcome to the first lesson in Intermediate Accounting focuses on the accounting for cash and cash equivalents. In this
lesson, you will learn the items to be included in cash and cash equivalents and compute the correct cash and cash
equivalent balances.
Lesson Content
Definition of Cash
Cash – simply means money
Money – a standard of medium of exchange in business transactions
In accounting, cash includes money and any other negotiable instrument that is payable in money andacceptable
by the bank for deposit and immediate credit.
To be included as cash, it must be unrestricted in use.
1. Cash on hand
a) Undeposited cash collections
b) Undeposited dated customer’s checks (customer’s checks awaiting deposit)
c) Traveler’s check – a certified bank draft that travelers may use the same way they use regular paper
currency.1
d) Cashier’s check – a type of official check that banks issue and sign. When you purchase a cashier’s check,
the bank takes the money from your checking or savings account and puts it in its own account. The bank
then writes out a check to the person or business you need to pay. You’ll typically pay a fee for a cashier’s
check to the bank.2
e) Manager’s check – is a check issued by the bank’s manager upon the bank itself promising to pay to the
payee or its order an amount certain in money at a certain date.3
f) Money orders – a certificate, usually issued by a government or banking institution, that allows the
stated payee to receive cash on demand. A money order functions much like a check, in that the person
who purchased the money order may stop payment.4
g) Bank drafts – a written order addressed to the bank to pay an amount of money to the order of themaker.
It is a check that is drawn on a bank’s funds and guaranteed by the bank that issues it. To get a banker’s
draft, a bank customer must have funds (or cash) available. The bank will freeze theamount needed or
move those funds into the bank’s accounts to complete the payment.
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
2. Cash in bank
a) Demand deposit/commercial deposit/current account/checking account
b) Savings deposit (savings account)
3. Cash fund (current operations)
a) Petty cash fund (for small and miscellaneous disbursements)
b) Change fund
c) Payroll fund
d) Purchasing fund (for purchasing of inventories)
e) Revolving fund (fund that is used for limited or specific purpose set by management)
f) Interest fund
g) Dividend fund
h) Travel fund
i) Tax fund
Other Funds
Fund for Non-current Operations
Pension fund
Preferred redemption fund
Acquisition of property, plant, and
equipment
Contingent fund
Insurance fund
Sinking fund
Classification
if related liability is current, then pension fund is current, thus partof
cash
noncurrent investment (unless the preferred share capital has a
mandatory redemption, and the redemption is already within oneyear
from the reporting period in which case this fund is already part of ash
equivalent)
always noncurrent even if expected to be disbursed next year
Non-current investment
Non-current investment
Always noncurrent even if expected to be disbursed next year
Classification of cash fund as current or non-current should parallel the classification applied to therelated
liability. Thus, an entity should classify such non-current asset if the related liability becomes current.
Definition of 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
Examples:
• Time deposit – acquired within three months from maturity date
• Three-month treasury bill
• Three-year treasury bills purchased three months before date of maturity
• Three-month money market instrument and commercial paper
• Redeemable preference shares with mandatory redemption period and acquired three
months before maturity
▪
Investment of excess cash
Term
≤ Three months
1 year ≥ x > three months
>1 year
Classification
cash equivalents
short-term financial assets/temporary
investments
long-term investments
Simplified Notes in Intermediate Accounting 1 | 2023
Presentation
“Cash and cash equivalents”
Current assets
Non-current assets
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Measurement and Classification of Cash, Cash Equivalents and other items
1. Cash
2. Cash in foreign currency
3. Deposit in foreign bank
4. Cash in closed bank/banks in bankruptcy
5. Bank overdraft – when cash in bank accounthas a
credit balance which results from the issuance of
checks in excess of the deposits
6. Compensating balance – the minimum checking or
demand deposit account balance that must be
maintained in connection with a borrowing
agreement with a bank)
7. Undelivered/unreleased check
8. Stale checks – checks outstanding for morethan
six months from the date of check
9. Postdated checks – checks dated after the
reporting period
10. IOUs (I owe you)
11. Equity securities
12. Redeemable preference shares
13. Callable preference shares
14. Expenses advances
15. Temporary investments in shares of stocks
16. Unused credit line
17. Treasury warrants – a warrant for the
payment of money into or from public
treasury
18. Escrow deposit – restricted amount held in trust for
another party, i.e. deposit requiredby court of law for
a pending case
19. Unrecorded cash disbursements
20. Unrecorded cash collections
21. Certificate of deposits
22. Postage stamps on hand
Measured at face value
Translated to Philippine Peso
included as cash (if unrestricted deposit)
classified separately among noncurrent assets as
receivables (if restricted and material)
Estimated realizable value
(if Recoverable amount < face value; Non-current asset)
Different banks - current liabilities
Same bank - netted against the account with positive
balance but cannot be offset against restricted account
not legally restricted as to withdrawal – part of cash
legally restricted because of formal compensating
balance agreement
• Related loan is short-term - presented as “cash held
as compensating balance” under current assets
• Related loan is long-term – non-current investment
Reverted back to cash
Reverted back to cash
Company’s check issued – reverted back to cash
Customer’s check received – not yet cash (A/R)
Part of receivable
cannot be classified as cash equivalents because shares
do not have maturity date (except redeemable
preference shares)
specified redemption date and acquired three months
before maturity date are classified as cash equivalents
Reverted back as part of receivables.
Receivable or prepaid expenses
either FVTPL or FVTOCI
Disclosed in the notes
Included as part of cash
Other current or noncurrent
increase recording of disbursements
increase recording of receipts
invested 3 months before maturity - cash equivalents
Invested for more than three months – investment
(short or long term)
Office supplies
Undelivered/unreleased check
▪
▪
Check merely drawn and recorded but not given to the payee before the end of the reporting period
No payment is made since check is pending delivery to the payee at the end of reporting period
Adjusting Entry:
Cash
Accounts payable
xx
xx
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Postdated check delivered
Check drawn, recorded and already given to the payee but it bears a date subsequent to the end of
the reporting period
Adjusting Entry: Cash xx
Accounts payable
xx
▪
Stale check
▪ A check not encashed by the payee within a relatively long period of time
In banking practice, a check becomes stale if not encashed within six months from the time of issuance.
a. If the amount of stale check is immaterial, it is simply accounted for a miscellaneous income as follows:
Cash
xx
Miscellaneous income
xx
b. If the amount is material and liability is expected to continue, the cash is restored, and the liability is again set
up.
Cash
xx
Accounts payable or appropriate account
xx
Cash shortage and overage
SHORTAGE = Cash count shows: cash < balance per book
AJE:
Cash short or over
xx
Cash
xx
a) If cashier or cash custodian is held responsible for the shortage:
Due from cashier
xx
Cash short or over
xx
b) If reasonable efforts fail to disclose the cause of shortage:
Loss from cash shortage xx
Cash short or over xx
OVERAGE = Cash count shows: cash > balance per book
AJE:
Cash
a)
xx
Cash short or over
xx
If there is no claim on the overage:
Cash short or over
xx
Miscellaneous income
xx
b) If the overage belongs to the cashier or cash custodian
Cash short or over
xx
Payable to cashier
xx
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Illustration 1 – Computation of cash balance
The data from the books of ABC Co. as of December 31, 20x1 are shown below:
Cash on hand
P 100,000
Cash in bank – current account
P 350,000
Cash in bank – peso savings deposit
2,000,000
Cash in bank – dollar deposit $ 100,000
(unrestricted)
Cash in bank
(restricted)
–
dollar
deposit
Cash in money-market account
6-month time deposit
20,000
P 250,000
$
60,000
Treasury bill, purchased 12/1/20x1,
maturing 2/28/20x2
Treasury note
Unused credit line
Redeemable preference shares,
purchased 12/1/20x1, due on
3/1/20x2
Treasury shares, purchased
12/15/20x1, to be reissued on
3/5/20x2
Sinking fund
P 800,000
200,000
2,000,000
370,000
50,000
200,000
Additional information:
a) Cash on hand includes a P20,000 check payable to ABC Co.dated January 10, 20x2.
b) During December 20x1, checks amounting to P60,000 and P40,000 were drawn against the Cash in bank –
current account in payment of accounts payable. The P60,000 check is dated January 15, 20x2.The P40,000 check
is dated December 31, 20x1, but was delivered to the payee only on January 18, 20x2.
c) The cash in bank-peso savings deposit includes a deposit in escrow in the amount of P340,000 and a
compensating balance amounting to P250,000 which is legally restricted.
d) The cash in bank – dollar deposit (unrestricted) account includes interest of $2,000, net of tax, directly credited
to ABC Co.’s account. Year-end exchange rate is $1 to P40.
Question: What is the total cash and cash equivalent?
Solution:
Cash on hand (100,000 – 200,000 PDC)
80,000
Cash in bank – current account (350,000 + 60,000 PDC + 40,000 UC)
450,000
Cash in bank – peso savings deposit (2,000,000 – 340,000 deposit in escrow – 250,000
1,410,000
restricted compensating balance)
Cash in bank – dollar deposit (100,000 x P40)
4,000,000
Cash in money-market account
250,000
Treasury bill, purchased 12/1/20x1, maturing 2/28/20x2
800,000
Redeemable preference shares, purchased 12/1/20x1, due on 3/1/20x2
370,000
Total
7,360,000
Illustration 2 – Bank overdraft
The cash balance of ABC Co. comprises the following:
Cash on hand
100,000
Cash in bank – Savings – BPI
200,000
Cash in bank – current – BPI
(80,000)
Cash in bank – deposit in escrow – Metrobank
100,000
Cash in bank – current – Metrobank
(20,000)
Cash in bank – current – BDO
(30,000)
Total
270,000
Additional information:
• Cash on hand includes undeposited collections of P20,000.
• The cash in bank – savings maintained at BPI includes a P50,000 compensating balance which is not
restricted.
Required: Compute for cash to be reported in the financial statements.
Solution:
Cash on hand
Cash in bank – Savings – BPI
Cash in bank – current – BPI
Total
100,000
200,000
(80,000)
220,000
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
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. However, it is sometimes impossible to issue check for all
payments especially for small amounts.
Petty cash fund
▪ Money set aside to pay small expenses which cannot be paid conveniently by means of check
▪
Journal entries - Imprest fund system
a
Check drawn to establish the fund
Petty cash fund
b
Payment of expenses out of the fund
Cash in bank
No journal entry however the petty cashier prepares
memorandum entries in the pettycash journal.
c
Replenishment of petty cash payments
▪ Whenever the petty cash fund runs
Expenses
xx
low, a check is drawn to replenish the
xx
Cash in bank
fund. Thereplenishment check is
usually equal to the petty cash
disbursements.
Petty cash disbursements should be replenished only by means of check and not fromundeposited receipts
Expense
xx
Adjust unreplenished expenses to state the
correct petty cash balance.
Petty cash fund
xx
▪ The adjustment is to be reversed at the beginning of the next accounting period in order that the normal
replenishment procedures may be followed by simply debiting expenses and crediting cash in bank
whether the expenses pertain to the current period or prior period.
d
e
xx
Petty cash fund
Increase in fund
xx
Cash in bank
f
xx
Cash in bank
Decrease in fund
xx
xx
Petty cash fund
xx
Illustration 2.1. Imprest Fund System
2019
Nov 10
Nov 29
The entity established an imprest fund of
P10,000.
JE:
Petty cash fund
10,000
Cash in bank
Replenished the fund. The petty cash items include the following:
Currency and coins
2,000
Supplies
5,000
Telephone
1,800
Postage
1,200
JE:
Dec. 31
Supplies
Telephone
Postage
10,000
5,000
1,800
1,200
Cash in bank
8,000
The fund was not replenished. The fund was composed of the following:
Currency and coins
7,000
Supplies
1,500
Postage
500
Miscellaneous expense
1,000
JE:
Supplies
Postage
Miscellaneous expense
Petty cash fund
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1,500
500
1,000
3,000
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College of Accountancy, Business and Management - Business Department
2020
January 1
February 1
The adjustment made on December 31, 2019 was reversed.
JE:
Petty cash fund
3,000
Supplies
1,500
Postage
500
Miscellaneous expense
1,000
The fund was replenished and increased to P15,000. The composition
of thefund are as follows:
Currency and coins
1,000
Supplies
4,500
Postage
3,000
Miscellaneous expense
1,500
Total
10,000
JE:
Petty cash fund
Supplies
Postage
Miscellaneous expense
Cash in bank
5,000
4,500
3,000
1,500
14,000
Review Questions
Recall the lesson and try to answer the following review questions:
1. Differentiate cash from cash equivalents.
2. What are examples of cash items?
3. What are examples of cash equivalents?
4. What is the purpose of a petty cash fund?
Exercises
Instruction: Try to answer the following problems on your own.
PROBLEM 1.1
On December 31, 2020, Albania Company provided the following data:
Cash in bank
3,000,000
Time deposit – 30 days
1,000,000
Money market placement due on June 30, 2021
2,000,000
Saving deposit in closed bank
100,000
Sinking fund for bond payable due June 30, 2022
1,500,000
Petty cash fund
20,000
▪ The cash in bank included customer check of P200,000 outstanding for 18 months.
▪ Check of P250,000 in payment of accounts payable was dated and recorded on December 31, 2020, but mailed
to creditors on January 15, 2021.
▪ Check of P100,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed December
31, 2020.
▪ The reporting period is the calendar year.
The cash receipts journal was held open until January 15, 2021 during which time an amount of P450,000 was
collected and recorded on December 31, 2020.
Required:
1) Prepare adjusting entries on December 31, 2020.
2) Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020.
3) Explain the presentation of the items excluded from cash and cash equivalents.
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
PROBLEM 1.2
Argentina Company reported the following accounts on December 31, 2020:
Cash on hand
Petty cash fund
Security bank – current account
PNB current account
BDO current account (overdraft)
BSP Treasury bill – 120 days
BPI time deposit – 90 days
Bond sinking fund
▪
▪
▪
▪
1,000,000
50,000
2,000,000
1,500,000
(200,000)
3,000,000
2,000,000
2,500,000
The cash on hand included a customer post-dated check of P150,000 and postal money order of
P50,000.
The petty cash fund included unreplenished petty cash vouchers for P10,000 and an employee check
for P5,000 dated January 31, 2021.
The BPI time deposit is set aside for acquisition of land to be made in early January 2021.
The bond sinking fund is set aside for payment of bond payable due December 31, 2021.
Required:
1. Prepare the adjusting entries on December 31, 2020.
2. Compute the total amount of cash and cash equivalents.
3. Explain the presentation of the items excluded from cash and cash equivalents.
Problem 1.3
Armenia Company reported the following information on December 31, 2020:
Cash on hand
1,000,000
Petty cash fund
50,000
Cash in bank
4,000,000
Savings deposit
2,000,000
▪ Cash on hand included the following:
a. Customer check of P100,000 returned by bank December 26, 2020 due to insufficient fund but
subsequently redeposited and cleared by bank January 5, 2021.
b. Customer check for P150,000 dated January 15, 2021 received December 22, 2020.
c. Postal money orders received from customers, P200,000.
▪ The petty cash fund consisted of the following items:
Currency and coins
2,000
Employees’ IOUs
10,000
Currency in envelope marked collections for Christmas
5,000
party
Check drawn by Armenia payable to petty cashier
33,000
▪ Check written and dated December 22, 2020 and delivered to payee on January 5, 2021, P200,000.
▪ Check written December 26, 2020 and dated January 31, 2021, delivered to payee on December 26,
2020, P300,000.
Required:
1. Prepare adjusting entries on December 31, 2020.
2. Compute the total cash on December 31, 2020.
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Problem 1.4
Callous Company reported the following accounts on December 31, 2020:
Cash on hand
200,000
Petty cash fund
20,000
Philippine Bank – current account
5,000,000
City Bank – current account no. 1
4,000,000
City bank – current account no. 2 (overdraft)
(100,000)
Asian Bank Saving account
250,000
Asian Bank time deposit, 90 days
2,000,000
▪ Cash on hand included the following items:
Customer check for P35,000 returned by bank December 26, 2020 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 10, 2021.
Customer check for P15,000 dated January 10, 2021, received December 23, 2020.
▪ The petty cash fund consisted of the following items:
Currency and coins
5,000
IOUs from officers
2,000
Unreplenished petty cash vouchers
12,000
▪ Included among the checks drawn by Callous Company against the Philippine Bank current account
and recorded in December 2020 were the following:
▪ Check written an dated December 23, 2020 and delivered to payee on January 31, 2021, P25,000.
▪ Check written December 26, 2020, dated January 30, 2021, delivered to payee on December 28, 2020,
P45,000.
Required: 1. Compute the total cash and cash equivalents.
2. Prepare adjusting entries on December 31, 2020.
Problem 1.5
Laborious Company closed the accounts on June 30. The entity provided the following transactions:
May
2
29
June
30
July
15
The entity established an imprest fund of P10,000
The fund was replenished. The petty cash items include:
Currency and coin
2,000
Postage
1,000
Supplies
3,000
Transportation
2,500
Miscellaneous expense
1,500
The fund was not replenished. The fund is composed of the following:
Currency and coin
6,000
Supplies
2,000
Postage
1,000
Transportation
1,000
The fund is replenished and increased to P15,000.
Currency and coin
3,000
Postage
3,500
Supplies
1,500
Transportation
1,500
Miscellaneous expense
500
Required: Prepare the journal entries to record the transactions under imprest fund system.
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Mater Dei College | Tubigon, Bohol | (038)508-8106
College of Accountancy, Business and Management - Business Department
Problem 1.6
Tacit Company provided the following transactions;
2020
Nov
Dec
2021
Jan
2
30
31
2
31
The entity established an imprest petty cash fund of P10,000.
An examination of the cash fund disclosed
Currency and coin
3,000
Memoranda showing expenditures for:
Postage
2,000
Supplies
5,000
A check written drawn to replenish the fund and to increase its amount to
P20,000.
The fund was not replenished.
Currency and coin
11,000
Memoranda showing expenditures for:
Postage
3,000
Supplies
4,000
Deposit for 20 cases of softdrinks
2,000
The deposit for the 20 cases of softdrinks is collected.
A check was drawn to replenish the fund.
Currency and coin
Postage stamps
Memoranda showing expenditures since November 30, 2020 for:
Postage
Supplies
Payment of account
1,000
500
5,000
6,000
7,000
Required: Prepare journal entries to record the transactions.
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