MODULE 1
CASH & CASH EQUIVALENTS
•Once you have completed this module you
should be able to :
• Define cash and cash equivalents.
• Know the measurement of the cash & cash
equivalents.
LEARNING
OBJECTIVES
• Explain the meaning of “unrestricted cash”
• Give examples that are considered cash for
accounting purposes.
• Explain the line item “cash & cash equivalents”
• Explain what is petty cash fund and can explain
two accounting methods of handling petty cash
fund.
• To determine the adequate disclosures to be
made
OVERVIEW
Major topics covered
in this module include:
Overview cash and
cash equivalents
Petty cash fund and its
two accounting
methods.
Journal entry
describing the
adjustment pertaining
to cash.
Example of cash &
cash equivalents and
its measurements.
INTRODUCTION
From point view of layman, “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 legal tender.
Cash
� Cash- includes unrestricted money and any other negotiable instrument
that is payable in money and acceptable by the bank for deposit and
immediate credit.
What does it
includes?
It includes cash on
hand, cash in
bank and cash
fund
• PAS 1, paragraph 66, which provides that
Unrestricted
cash
“an entity shall classify an asset a current
when the asset is cash or cash equivalent
unless it is restricted from being
exchanged or used to settle a liability for
at least twelve months after the end of the
reporting period.”
Cash
items:
Cash on handincludes
undeposited
cash collections
and other cash
items awaiting
deposits.
Cash in bankincludes
demand deposit
or checking
account and
saving deposit
which are
unrestricted as
to withdrawal.
Cash fundfund set aside
for current
purposes such
as petty cash
fund, payroll
fund and
dividend fund.
15-7
• PAS 7, paragraph 6, “cash & cash
Cash
Equivalents
equivalents” as a 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.”
Examples of cash equivalent:
Three-month BSP
treasury bill.
Three-month time
deposit.
Three-year BSP
treasury bill purchased
three months before
the date of maturity
Three-month money
market instrument or
commercial paper.
15-9
Measurement
Initially measured at face value. Cash in foreign currency is measured
at current exchange rate
If the fund of the entity in the bank is in bankruptcy or financial
difficulty, cash should be written down to estimated realizable value if
the amount of recoverable is estimated to be lower than the face value
Financial
Statement
Presentaion
• Cash and Cash Equivalents shown as the first
item among the current assets, as one line
item but the detail of which should be
disclose in the notes to the financial
statements.
If yes
part of
cash
If no, either
current asset or
not current
asset
Cash items:
Cash on hand
Ascertain to as part of
cash?
Cash fund
Use in current operation?
Cash in bank
Local deposit
deposit
3 month time deposit?
Saving deposit?
Demand deposit?
Compensating
balance
Not legally restricted?
Cash in foreign
currency
Not subject to
restriction?
Cash
equivalent
3 month or less before
maturity on upon
acquisition?
Y
E
S
Presented as
cash and cash
equivalent:
Measured at
face value for
cash in hand,
realizable value
which ever is
lower between
face value and
recoverable for
cash in bank and
current
exchange rate
for cash in
foreign bank.
Other consideration:
 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.
 Bank overdraft – is a cash in bank with a credit balance (overdraft)0
 Compensating balance – a minimum checking or demand balance that must be maintained in
connection with a borrowing arrangement with a bank.
 Undelivered or unreleased check – is one that merely drawn and recorded but not given to the
payee before the end of the reporting period.
 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.
 Stale check – is a check not encased by the payee within a relatively long period of time.
 Petty cash fund – is a money set aside to pay small expenses which cannot be paid conveniently by
the means of check.
Accounting for Petty Cash fund
Two methods of handling the petty
cash
• Imprest System
• Fluctuating fund system
Impress fund system
A. A check drawn to established the fund.
Petty Cash fund
XX
Cash in Bank
XX
B. Payment of expenses.
C. Replenishment of petty cash.
Expenses
XX
Cash in Bank
XX
D.At the end of the reporting period, if no replenishment of petty cash fund was made.
Expenses
XX
Petty Cash fund
XX
E. Increase and decrease in petty cash fund.
Petty Cash fund
Cash in Bank
XX
XX
Fluctuating fund system
A. A check drawn to established the fund.
Petty Cash fund
Cash in Bank
XX
XX
B. Payment of expenses.
Expenses
XX
Petty Cash fund
XX
C. Replenishment or increase of the petty cash fund.
Expenses
XX
Cash in Bank
XX
D.At the end of the reporting period, no adjustment is necessary.
E. Decrease in petty cash fund.
Cash in Bank
Petty Cash fund
XX
XX
Accounting for cash short or over
Cash accounted
Pxxx
Less: Cash accountability
xxx
Cash (short) over
Pxxx
Cash accounted- actual cash ascertain during the conduct of
audit
Cash accountability- the amount of cash that supposedly
reflect in ledger and to be disclose in the financial position
Adjustment for cash short or over
Where cash count shows cash which is less than the balance per book,
there is cash shortage to be recorded as follows:
Cash short or over
PXXX
Cash
PXXX
The cash shortage account is a temporary account. Hence if the cashier or
cash custodian is held liable, the adjustment should be
Due from cashier
PXXX
cash short or over
PXXX
However, if reasonable effort fail to ascertain the cause of shortage, the
adjustment is
Loss from cash shortage
PXXX
cash short or over
PXXX
Adjustment for cash overage
Where the cash count shows cash which is more than the balance per
book, there is a cash overage to be recorded as follow:
Cash
PXXX
Cash short or over
PXXX
If there is no claim, the overage is treated as miscellaneous income
Cash short or over
PXXX
Miscellaneous income
PXXX
But if the money is properly found to be money of cashier
Cash short or over
PXXX
Payable to cashier
PXXX
Others:
• Window dressing – is a practice of opening the books of accounts beyond the close of the
reporting period for the purpose of showing a better financial position and performance. It
is accomplished usually as follows:
 By recording as of the last of the last day of the reporting period collections made subsequent to the close of the period.
 By recording as of the last year of the reporting period payments of accounts made subsequent to the close of the period.
• Lapping – consist of misappropriating a collection from one customer and concealing this
defalcation by applying a subsequent collection made from another customer.
• Kiting – it occurs when a check drawn against first bank and depositing the same check in a
second bank to cover the shortage in the latter bank. No entry is made both the drawing and
deposit of the check.