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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
Quarter: First (1st)
Module 2.2 Lesson # 2
Inclusive Dates: September 4-11, 2021
Name: _________________________________
Grade Level and Section: 12-Nathaniel
I.
Learning Objectives/s:
a. Prepare an SFP using the report form and the account form with proper classification of
items as current and noncurrent
b. Describe the nature of a bank reconciliation statements
c. Analyze the effects of the identified reconciling items
d. Prepare a bank reconciliation system
II.
Topic: Statement of Financial Position: Cash; Bank Reconciliation
III.
Learning Resources:
The Intermediate Accounting Series 1, Nenita S. Robles, Patricia M. Empleo
IV.
Procedures
a. Introduction
Recap:
See exercise at the last page of this module
“Money isn’t everything but everything requires money.” - Anonymous
b. Learning Development
Read the given pdf file: (please see the pdf file at Edmodo)
NATURE AND COMPOSITION OF CASH
Cash belongs to a broad category of assets called financial assets. A financial asset is defined as cash or a
contractual right to receive cash or another financial instrument in the future. Other examples of financial assets are
receivables and investments in debt and equity securities.
A cash item is any item that is used as a standard medium of exchange. From a limited viewpoint, cash
refers to currency and coins that are in circulation. For accounting purposes, an item is considered as cash if it is
acceptable by bank or other financial institution for deposit at face value. Thus, cash items include bills and
coins on hand, demand credit instruments, such as checks, bank drafts, postal money orders and currency
demand deposits with banks.
Not all cash items, however, qualify for reporting as part of the account title “Cash” or “Cash on Hand and
in Banks” on the statement of financial position. To qualify for presentation as part of Cash on the Statement of
financial position, the cash item must be unrestricted and must be immediately available for use in current
operations.
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
Presentation in a Statement of Financial Position That Classifies Assets and Liabilities into Current and
Noncurrent
Cash items are unrestricted if they are on hand, or in the case of deposits with banks, they could be
withdrawn immediately. Cash items are immediately available for use in current operations, if they are available
for payment of current obligations or current operating expenses or for acquisition of current assets.
The presentation of the cash item must parallel the intention of the management for which cash is held.
Cash funds that are intended for current operations qualify to be reported as Cash in the current assets section
of the statement of financial position. Examples of these items are payroll fund, working fund, change fund, petty
cash fund, interest fund and dividend fund.
Cash funds that are intended for settlement of long-term obligations in the future or for acquisition of
non-current assets do not qualify to be reported as part of current assets on the statement of financial position.
The expected timing of disbursement of these cash funds is not a consideration in classifying them into current or
non-current. They are presented under a non-current asset heading using some other descriptive account titles,
such as sinking fund cash or plant expansion fund.
Cash deposits with banks that have been restricted because of an unforeseen circumstance, are excluded
from “Cash”. These deposits must be reclassified as receivable under current assets or non-current assets,
depending on the expected timing of settlement.
To summarize, “Cash” on the statement of financial position, includes the following:
1. Cash on hand.
a. undeposited cash collections - currencies such as bills and coins, customers’ checks, traveler’s
checks, manager’s checks, cashier’s checks, bank drafts, money orders.
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
b. Working funds — cash funds segregated for current use in the ordinary conduct of business.
i.
petty cash fund
iv.
dividend fund
ii.
change fund
v.
tax fund
iii.
payroll fund
vi.
interest fund
2. Cash in bank - includes demand deposits. There are unrestricted funds deposited in a bank that can be
withdrawn upon demand such as amounts in checking and savings accounts.
PRESENTATION AND MEASUREMENT OF CASH IN THE STATEMENT OF FINANCIAL POSITION
On the statement of financial position, Cash is generally measured at face value, which is its fair value.
The following summarizes several noteworthy considerations in reporting cash balance in the statement of
financial position:
1. Foreign currency
a. Unrestricted - should be translated to Philippine currency using the exchange rate at the end of the
reporting period and reported as current assets
b. Restricted - should be reported separately, preferably, as non-current assets
2. Cash in closed banks or in banks having financial difficulty or in bankruptcy
-
should be reclassified as receivable and should be written down to its recoverable amount.
3. Customers’ post-dated checks, NSF checks (no sufficient fund checks are those that cannot be covered by
funds in the debtor’s bank account), and IOUs (“I owe you” notes)
-
should be reported as receivables rather than cash. NSF checks, in the Philippines, are oftentimes
described as DAIF checks of or DAUD checks. DAIF means “drawn against insufficient funds,”
while DAUD literally means “drawn against uncleared deposits.”
4. Postage stamps and expense advances, such as advances for employees’ travel, are not cash, but are reported
as prepaid expenses.
5. A bank overdraft that cannot be offset against another account is reported as a liability. A bank overdraft
occurs when a depositor has written checks for a sum greater than the amount in the depositor's bank
account, resulting in a credit balance in that cash account. A bank overdraft may be offset against a positive
balance in another bank account with the same bank if a right of offset exists between the bank and the
depositor. In such a case, the depositor reports the net positive amount as “Cash”.
6. Undelivered or unreleased checks are the company’s checks drawn and recorded as disbursed but are not
actually issued or delivered to the payees as of the reporting date.
-
should not be deducted from the company’s cash balance until they have been mailed or
otherwise delivered; should be reverted to the cash balance
-
liabilities that the checks are intended to liquidate still exist and should be reported as current
payables.
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
7. Company’s postdated check, which has been recorded as issued and delivered to payee before or at the end
of the reporting period
- should be reverted to cash
- liability shall continue to be recognized, because there is no actual payment yet, as of that date.
Such a check cannot possibly be cleared with the bank until the date indicated in the check.
8. Compensating balances are minimum amounts that a company agrees to maintain in a bank checking
account as support or collateral for a loan by the depositor.
a. Legally restricted - should be classified separately either as a current asset or non-current asset
depending on the nature of the loan for which the compensating balance is set up
b. Not legally restricted - reported as part of Cash. The nature of the arrangement is disclosed in the
notes to financial statements
9. Cash set aside for long term specific purpose or for acquisition of a non-current asset, such as bond sinking
fund and plant expansion fund is reported as non-current financial asset.
Reconciliation of Bank Balances
A business keeps most of its cash in one or more checking accounts. The checking account gives the
depositor company a double record of its cash transactions, i.e., the accounting records maintained by the
depositor and the records provided by the bank.
A bank statement is a monthly report provided by the bank to the depositor which shows the following
information:
a. beginning-of-month cash balance,
b. total deposits made by the depositor and other bank credits during the month,
c. total checks paid by the bank and other bank charges during the month, and
d. end of month cash balance
The depositor records the transactions affecting the checking account using the account Cash in Bank,
while the bank maintains a record for the depositors account. The bank treats the depositor’s account as a liability.
Thus, the Cash in Bank account maintained by the depositor as an asset and the depositors account
maintained by the bank as a liability are reciprocal accounts.
Ideally, any debit balance in the Cash in Bank account maintained by the depositor should equal the credit
balance of the depositor's account maintained by the bank. However, because of time lapse differences and
possible errors existing in the records of either the bank or the depositor, these reciprocal accounts may not
be in agreement at month-end. A bank reconciliation is, therefore, prepared to explain any differences
between a company’s book balance of cash and the bank statement balance for the depositor company. Items
that may cause the difference are any of combination of the following:
Deposit in transit or undeposited collection. This is a cash receipt that has been added to the company’s
cash balance but has not been added to the balance reported on the bank statement, either because it is not yet
received by the bank as of cut off time (deposit in transit or it has not yet been deposited as of the end of the
month (undeposited collection). The amount of the deposit in transit or undeposited collection are usually the
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
receipts towards the end of the month. Deposits in transit or undeposited collections understate the bank
balance.
To correct this understatement, the collections awaiting deposit or are in transit should be added to the
bank balance in arriving at the correct cash balance.
Outstanding checks. These are checks that were written by the company, issued to the payees, and
deducted from the company’s cash balance but they have not yet been reflected in the bank statement since
they have not been presented yet to the bank for payment. The amounts of the checks issued (as reflected in the
check register or cash disbursements journal) but have not been presented for payment (as reported in the bank
statement) are then totaled and referred to as outstanding checks. Outstanding checks at month-end result in an
overstatement of the bank balance.
In order to correct the overstatement, the amount of the outstanding checks should be deducted from
the bank balance.
Debit memos. Debit memos are charges to the depositor’s account made directly by the bank.
a. No sufficient fund (NSF) checks (otherwise known as DAIF or DAUD)
- previously credited by the bank as deposits, technically defective checks (e.g., checks that
lack authorized signatures, checks with alterations)
- overstates book balance
b. Bank service charge, charge for the cost of check booklets and payment of bank loans
- direct deductions from the depositor’s account balance
- overstates book balance if deductions have not yet been recorded by the depositor at
month-end
Debit memos charged directly by the bank should be deducted from the balance per books in
determining the correct cash balance.
Credit memos. These are deposits made directly by the bank to the company’s account.
a. notes or drafts collected by bank in favor of the depositor; proceeds of bank loan credited directly
to the account of the depositor
- bank often acts as a collecting agent for its depositors on items such as notes receivable
- understates book balance if the collection of notes receivable is not reflected
b. interest earned on the company’s checking account.
- interest earned unknown to depositor until receives the bank statement
- understates book balance if not recorded
These credits made by the bank increased the bank statement balance and, therefore, should be added to
the cash balance per books in order to obtain the correct cash balance.
Errors. Despite the internal control procedures established by the bank and the company, errors may still
arise in either the bank’s records or the company’s records. These errors may not be detected until the bank
reconciliation is prepared.
Deposits in Transit and Outstanding Checks
The determination of deposits in transit and outstanding checks were described earlier and this is done in
an actual scenario by comparing the company’s accounting records with the data provided in the bank statement. If
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
there were no errors existing in the records of both the depositor and the bank, the computations for deposits in
transit and outstanding checks, respectively, may be summarized as follows:
*the amount does not necessarily represent debits (charges) in the company's records. If the total of charges to the cash account is given,
any credit memo in the previous month should be excluded.
**the amount does not necessarily represent credits in the
bank statement. If the total of credits in the bank statement is
given, any credit memo for the current month should be
excluded.
*the amount does not necessarily represent credits in the
company’s records. If the total of credits to the cash
account is given, any debit memo in the previous month
should be excluded.
**the amount does not necessarily represent debits
(charges) in the bank statement. If the total of charges in the bank statement is given, any debit memo for the current month
should be excluded.
Types of Bank Reconciliation Statement
Bank reconciliation may be prepared in either of these types:
1. Reconciliation of ending balances, where the balance per bank and the balance per company’s records
are reconciled as of the end of a period. This is otherwise known as single date bank reconciliation.
2. Reconciliation of beginning cash balances, of receipts and disbursements during the period and of
ending cash balances. This is more popularly known as proof of cash or four-column reconciliation
or reconciliation of receipts, disbursements and bank balances.
Forms of Bank Reconciliation Statement
A bank reconciliation statement may be prepared using any of the following forms:
1. Both bank and book balances are reconciled to a correct balance. This form is prepared in two
sections: the bank statement balance being adjusted to the correct cash balance in the first section, and the
book balance being adjusted to the same corrected cash balance in the second section. The first section (bank
section) reflects items not yet recognized by the bank (e.g. deposits in transit or outstanding checks) as well as
corrections for any errors made by the bank.
The second section (book section) contains items that the depositor has not yet recognized (e.g. debit
and credit memos by bank for direct deposits, NSF, bank service charges, notes and drafts collected by bank in
behalf of the depositor and repayment of loans) and any corrections for errors made on the depositor’s books.
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
This form has the advantage of clearly identifying items requiring adjustments in the depositor’s
accounting records. In addition, it develops a corrected cash balance that is reported in the statement of
financial position.
2. Bank balance reconciled with book balance. This form reconciles the bank balance to the
unadjusted balance of the depositor’s cash account in the general ledger. This is the form frequently used by
many auditors to trace the accounting entries taken up by the company’s bookkeeper.
3. Book balance reconciled with bank balance. This form starts with the cash balance per ledger and
reconciles to the balance per bank statement.
c. Learning Engagement (10 pts)
1. What are financial assets? Give and describe 3 examples other than cash.
2. What are the components of cash?
3. What is a bank overdraft? How is a bank overdraft reported in the financial statements?
4. What is a bank statement? What is a bank reconciliation?
5. What are the 3 forms of bank reconciliation?
d. Learning Assimilation
Fundamentals of Accountancy, Business and Management 2
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GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
V.
Home Based Activities
Important:
For Online class, attend your online class on September 4, 2021, Saturday at 1:15 PM - 2:45 PM
For Modular class, please request the video from the adviser and watch the recording of the online class
Activities should be submitted at Edmodo on or before September 10, 2021, Friday
Exercise:
Fundamentals of Accountancy, Business and Management 2
Page 9 of 9
GUARDIAN ANGEL ACADEMY
Senior High School Department
School Year 2021-2022 (1st Quarter)
Fundamentals of Accountancy, Business and Management 2
(Learning Area)
Fundamentals of Accountancy, Business and Management 2