Cash and Cash Equivalents
Cash – includes money or its equivalent that is readily
available for unrestricted use
Money – standard medium of exchange and the basis of
accounting measurements.
a. Cash on Hand – undeposited collections and other
current funds held as of reporting date.
b. Cash in Bank – deposits in bank that are unrestricted and
readily available for withdrawal.
 Revolving Funds – same as petty cash fund but is limited
and used for specific purpose set by management. (inc)
 Postdated Check and IOU or advances to employees –
treated as receivables.
 Depreciation Fund – a form of asset replacement fund
wherein cash payments to the fund are equal to the
periodic depreciation charges on the related asset.
 Unused postage stamps are treated as prepaid supplies.
 Unused Credit Line – not included in cash but disclosed in
the notes; it is the difference between the amount of line of
credit and the amount that was actually borrowed.
 Stale Checks – checks not encashed within a long time
(time depends on company policy) (inc)
Cash Equivalent – short-term, highly-liquidated investments
that are readily convertible to cash which are subject to
insignificant risk of changes in value; only 3 months or less
before their maturity date is qualified
 Treasury Bill – short-term obligation issued by the gov’t at
a discount.
 Treasury Notes / Treasure Bonds – long-term; TN (1yr10yrs maturity); TB (10yrs or more maturity)
 Money Market Instrument – investments in portfolios of
short-term securities.
 Commercial Papers – consists short-term, unsecured,
notes payable issued in large denominations by large
companies with high credit ratings to other companies and
institutional investors.
 Time Deposit – bank deposit made in fixed denomination,
bears higher interest than of regular deposits, and has a
pre-agreed maturity.
Internal Control over Cash
Internal Control – any action or process affected by
management that is designed to help an entity achieve its
objective.
Examples:
1. Segregation of Incompatible Duties
2. Imprest System – requires all cash receipts to be
deposited altogether and cash disbursements must be
made through checks.
3. Bank Reconciliation – presented to reconcile on a timely
basis the difference between the cash balance per books
and the cash balance per bank statement.
4. Cash Counts – performed to provide reasonable
assurance that actual cash tallies with the balance per
records.
5. Minimum Cash Balance – should be maintained to defrat
specific business requirements.
6. Lockbox Accounts – utilized to expedite cash collections
and ensure that cash collections are deposited intact.
7. Non-encashment of Personal Checks from Petty Cash
Fund – this is to discourage concealment of cash
shortages.
8. Voucher System - an internal control over all cash
disbursements; to ensure that CD is properly authorized,
made for a valid expenditure, and properly recorded.
Measurement of Cash
Cash is measured at face amount (face value). Cash
maintained in a bank undergoing bankruptcy is excluded from
cash and presented as receivable measured at realizable
value.
 Realizable Value – the amount expected to be recovered
from the deposit and is determined by reference to the
insured amount of the deposit.
Restricted Deposits in Foreign Banks are presented as
receivable subject to appropriate allowances for uncollectability
and impairment.
Compensating Balance – minimum amount that must be
maintained in an entity’s bank account as support for funds
borrowed from the bank.
 Cash Overage = Cash Count > Recorded Cash
Initial Entry
Cash
xx
CS/O
xx
Final Entry
Cash Shortage or Overage
xx
Reason of Overage
xx
 Bank Overdraft – negative (credit) balance in the bank
account resulting from overpayment of checks in excess
of the amount of deposit; occur only in checking accts;
presented as current liabilities. Remember the rule: if two
accounts are in the same bank, one with positive balance
can offset the other negative bank account as long as it is
not restricted.
Offsetting assets and liabilities are only permitted if the entity
has both a legal right to setoff and intention to settle the
amounts on a net basis simultaneously.
Voucher System
Voucher (Check Disbursements Voucher) – a document or
written authorization supporting every disbursement.
Accounting for Cash Shortage and Overages
 Cash Shortage = Cash Count < Recorded Cash
Initial Entry:
Cash Shortage or Overage
xx
Cash
xx
Final Entry
Reason of Shortage
xx
CS/O
xx
Shortage may be receivable or loss.
Overage may be payable or gain.
Concealment of Cash Shortage
1. Lapping – when collection of receivable from one
customer is misappropriated and then concealed by
applying a subsequent collection from another customer;
records only the receipt portion, not the disbursement.
2. Kiting – when cash shortage is concealed by overstating
the balance of cash; may be deducted by:
 Bank Transfer Schedule – shows date of all transfers of
cash
 Cut-off Bank Statement - to help verify reconciling items
on the year-end bank reconciliation
 Proof of Cash
3. Window Dressing (Cooking the Books)- when books are
not closed at year-end and transaction in the subsequent
period are recorded in the current period to improve the
entity’s financial performance or financial ratios.
Petty Cash Fund
Petty Cash Fund – money set aside to defray small amounts of
disbursements.
Accounting for Petty Cash Fund
a. Petty Cash Fund is established – PCF is established by
means of a check in conformance with the imprest system
of internal control over cash.
Entry:
Petty Cash Fund
xx
Cash in Bank
xx
b. Disbursements out of the PCF – petty cash payments are
initially recorded in a petty cash register and supported by
signed petty cash vouchers; no journal entry.
c. Replenishment of Petty Cash Disbursements – occurs
when its balance becomes low; journal entry is made for
the disbursements during the period that were initially
recorded in the petty cash register.
Entry:
Various Expense Accounts
xx
Cash in Bank
xx
d. Adjustment for Unreplenished Fund at reporting date –
unreplenished PFC are adjusted in order not to overstate
cash and not to understate expenses.
Entry:
Various Expense Accounts
xx
PCF
xx
e. Subsequent changes in ledger balance of PCF – if a
board resolution is made to change the ledger balance of
the PCF, entries would be:
Entry to Increase balance:
Petty Cash Fund
xx
Cash in Bank
xx
Entry to Decrease balance:
Cash in Bank
xx
Petty Cash Fund
xx
PCF balance should stay fixed in the absence of a board
resolution authorizing a change in its original balance.
 Shortage in PCF
When there is PC shortage, the amount of replenishment is
increased by the cash shortage to maintain the fixed balance
of the fund.
Entry:
Various Expense Accounts
xx
Cash Shortage or Overage
xx
Cash in Bank
xx
 Overage in PCF
When there is a PC overage, the amount of replenishment is
decreased by the cash shortage to maintain the fixed balance
of the fund.
Entry
Various Expense Accounts
xx
Cash Short or Over
xx
Cash in Bank
xx