CASH
Nature of Cash Account
1.
2.
3.
4.
A financial asset
Can be used as a medium of exchange and provide a basis for accounting
measurement.
Must be readily available and not restricted for use in the payment of current obligations.
Must be acceptable for deposit at face value by a bank or other financial institutions.
Composition
Cash will include the following
1. Cash on hand includes cash collections and other cash items awaiting deposit.
This may be in the form of
 Coins and currencies
 Customers’ or personal check
 Cashier’s check
 Manager’s check
 Traveler’s check
 Bank drafts
 Money order
2.
Cash in bank include deposits in a bank which are unrestricted as to withdrawal
 Demand deposit or checking account
 Savings deposit
3. Cash fund set aside for current use such as
 Petty cash fund
 Payroll fund
 Travel fund
 Interest fund
 Dividend fund
 Tax fund
Valuation in the Statement of Financial Position (Balance Sheet)
1. Cash is valued at face value.
2. Cash in foreign currency is valued at current exchange rate.
3. Cash being held by a financing institution that is in bankruptcy or other financial
difficulty is written down to estimated realizable value if the amount recoverable is
estimated to be lower than the face amount.
 If the bank is a member of PDIC, deposits are insured up to P500,000 per
depositor. (R.A. 9576, signed by President Arroyo April 29, 2009)
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Statement of Financial Position Classification
Cash is presented under the caption Cash and Cash Equivalents and is shown as the
first item among the current assets on the statement of financial position.
 It is not necessary to classify cash to distinguish between currencies on hand,
undeposited checks, cash in banks, or deposits at various locations.
 The details comprising the “cash and cash equivalents” should be disclosed in
the notes to financial statements.
Other Concerns
1.
Cash overdrafts are credit balances in bank accounts resulting from issuance of
checks in excess of the amount on deposit.
 Generally not permitted
 Can be offset against other accounts in the same bank with debit balances
but not against deposit balances in other banks.

Reported as a current liability if cannot be offset.
 Can be offset against other bank accounts if the amount is not material.
2. Cash that is required to be maintained with a bank as a support for existing borrowing
arrangements is known as compensating balance. It generally takes the form of
minimum checking or demand deposit account balance. It is accounted for as
follows:
 If there is no legal restriction, it is normally reported as cash but with proper
disclosure.
 If there is legal restriction and the compensating balance is a result of a short
term financing arrangement, it is reported separately as a current asset.
 If the compensating balance is in connection with a long-term financing
agreement, it should be classified as non-current assets.
 In many instances, compensating balance is not legally restricted.
 The amount and nature of compensating balance agreements should be fully
disclosed in the notes to financial statements.
3. Short term or temporary placements
 Term is 3 months or less (acquired 3 months or less before maturity)
 Examples: Bankers acceptance, commercial papers, money market
funds, certificates of deposits, BSP treasury bills, time deposits.
Certificates of Deposits (CDs) – represent formal evidence of
indebtedness, issued by a bank, subject to withdrawal under the specific
terms of the instrument.
Money-market funds – a variation of the mutual fund, the mix of Treasury
bills and commercial paper making up the fund’s portfolio determines the
yield. Many allow withdrawal by check or wire transfer.
Treasury bills – a short – term debt obligation backed by the Philippine
government with a maturity of less than one year.
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Commercial paper – is a short-term note issued by corporations with
good credit ratings. These notes generally yield a higher rate than
Treasury bills
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These placements are short-term and highly liquid investments;
These placements are readily convertible into cash.
These placements are so near their maturity that they present insignificant
risks of changes in value because of changes in interest rates.
It is shown as Cash Equivalents.
Equity securities cannot qualify as cash equivalents because shares of
stocks do not have maturity dates.
Preferred shares with specified redemption date and acquired three
months before redemption date can qualify as cash equivalents.
It should be noted that the date of purchase should be 3 months or less
before maturity.
 Term is more than 3 months up to 12 months
 This is shown as temporary investments and presented separately as
current assets.
Example:
Money market savings certificates – Issued by banks and savings loan
associations for 6-month periods (6 to 48 months). The interest rate is tied
to the 26-week Treasury bill rate.
 Term is more than one year
 This is shown as long-term investments.
 Money market funds with checking account
 This is classified as cash
4.
Cash not available for current operations
 Should be excluded from current assets and shown under non-current assets.
 Examples are bond sinking fund, property acquisition fund, contingent
fund, preferred redemption fund, contingent fund and insurance fund.
5.
Unreleased checks
 These are checks drawn before the balance sheet but held for later delivery
to creditors.
 These are not treated as outstanding checks.
 These are restored to the cash balance.
6.
Postdated checks received
 These are checks drawn, recorded and already given to the payees but they
bear a date subsequent to the balance sheet date.
 These are classified as receivables.
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7.
Postdated checks issued and delivered
 These are restored as part of the cash account.
8.
Stale checks issued
 These are checks that are not encashed by the payees within 6 months from
the date of the issuance.
 These should be restored as part of the cash account.
9.
Advances to employees (IOUs), returned checks (NSF checks), travel advances
 These are classified as receivables.
10.
Postage stamps
 These are classified as office supplies.
Petty Cash Fund
Imprest System
1. Cash receipts are deposited intact daily.
2. All significant disbursements shall be made through the issuance of checks.
3. Small payments shall be made through the petty cash fund.
Petty Cash Fund
1. It is a small amount of currency from which to make small payments.
2. A petty cash custodian is designated to handle the petty cash fund.
3. There are two methods of handling petty cash:
 Imprest fund system
 Petty cash fund is maintained at a fixed amount.
 Payments are supported by petty cash vouchers and recorded through
memo entries in the petty cash book.
 The fund is replenished when it is exhausted or when the remaining
balance is not enough to meet the average requirements for the day.
 At the end of the accounting period, either the fund is replenished or an
adjusting entry is prepared to record the unreplenished expenses.
 The amount of petty cash fund may be increased or decreased.
 Fluctuating fund system
 The checks drawn to replenish the fund do not necessarily equal the petty
disbursements
 Replenishments checks are prepared upon request of the petty cashier.
 Petty cash disbursements are immediately recorded thus resulting in a
fluctuating cash balance.
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Cash Over and Short Account
1. This is the account used when the petty cash fund fails to prove out.
2. This is debited when there is a cash shortage.
 There is a cash shortage when the cash count shows cash which is less than the
balance per book.
 (Petty cash receipts + Remaining petty cash on hand) < Imprest amount
 This account may be closed to a receivable or loss account.
3. This is credited when there is a cash overage.
 There is a cash overage when the cash count shows cash which is more than the
balance per book.
 (Petty cash receipts + Remaining petty cash on hand) > Imprest amount
 This account may be closed to a liability or miscellaneous income account.
Pro-forma Entries – Imprest System
Establishment of
fund
Petty cash fund
Cash in bank
xxx
Replenishment of
fund
Expenses
Cash in bank
xxx
Adjusting entry at the
end of accounting
period
Reversing entry at
the start of
accounting period
Expenses
Petty cash fund
xxx
Petty cash fund
Expenses
xxx
Increase in fund
Petty cash fund
Cash in bank
xxx
Decrease in fund
Cash in Bank
Petty cash fund
xxx
Expenses
Cash over and short
Petty cash fund/Cash in bank
xxx
xxx
Receivable from petty cashier/
Loss from cash shortage
Cash over and short
xxx
Expenses
Cash over and short
Petty cash fund/Cash in bank
xxx
Cash over and short
Accounts payable – Petty cashier/
Miscellaneous income
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Cash shortage
xxx
xxx
xxx
Cash overage
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xxx
Bank Reconciliation
Three Kinds of Bank Deposit Accounts
1. Demand deposit – current account or checking account where deposits are covered by
deposit slips and withdrawals are done through the issuance of checks. Generally, this
bank account does not earn interest.
2. Savings deposit – deposits and withdrawals in this account require the presentation of
a passbook. This bank account earns interest.
3. Time deposit – same as savings account. It is evidenced by a certificate of deposit.
Time deposit may be withdrawn after a certain period of time. This bank account earns
interest. Generally, this account may be pre-terminated.
Bank Statement
1. A bank statement is a report prepared by the bank which shows the deposits made,
checks paid and other charges and credits recorded by the bank for the month as well
as the cash balance per bank records.
2. A bank statement is prepared only for demand or checking accounts.
3. A bank statement is prepared once a month.
Bank Reconciliation
1. A bank reconciliation is a schedule prepared by the business explaining the difference
between the bank’s and the company’s record of cash.
2. This is prepared once a month upon receipt of the bank statement.
3. There are three methods of preparing bank reconciliation.
 Book to bank method
 Bank to book method
 Adjusted balances method
Reconciling Items
Reconciling Item
Definition
Treatment under the
Adjusted Balances Method
Add to balance per bank
Deposits in transit or
undeposited receipts
Cash receipts recorded by the
depositor but which reached the
bank too late to be included in the
bank statement for the current
month
Outstanding checks
Checks issued by the depositor but
are not yet presented to the bank
for payment.
Subtract from balance per
bank
*Checks where the bank immediately
debits the account of the depositor to
ensure or certify eventual payment.
*Deduct from outstanding
checks if these are no longer
outstanding.
*Certified Checks
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Unrecorded bank
charges
(debit memo/bank
debits)
Items which are charged or debited
by the bank to the account of the
depositor aside from checks paid.
These are evidenced by debit
memos.
Subtract from balance per
book
Examples: bank service charges,
NSF checks, technically defective
checks, payment of loan. The
depositor learns of these only upon
receipt of bank statement.
Unrecorded bank
credits
(credit memo)
Items which are credited by the
bank to the account of the
depositor aside from deposits
received. These are evidenced by
credit memos.
Add to balance per book.
Examples: collection of notes
receivable, proceeds of bank loan,
interest earned. The depositor
learns of these only upon receipt of
the bank statement.
Bank or depositor
errors
Errors made by the bank or
depositor which makes the records
disagree.
Common Errors
Error made by
Nature of Error
Depositor
Understatement of cash receipts
Overstatement of cash receipts
Understatement of checks drawn
Overstatement of checks drawn
Bank
Deposit of another company is
credited by the bank to the account
of the business
Check drawn by another company
charged by the bank to the account
of the business
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Treatment of Error under the
Adjusted Balances Method
Add to book balance
Subtract from book balance
Subtract from book balance
Add to book balance
Subtract from bank balance
Add to bank balance
Adjusting Entries
1. Adjusting entries for book reconciling items and errors of depositor should be prepared
in the books of the business.
2. This is necessary to bring the cash in bank balance to its correct balance for balance
sheet presentation.
Pro-forma Bank Reconciliation under the Adjusted Balances Method
ABC Company
Bank Reconciliation
December 31, 20xx
Balance per book
Add: Bank credits
Book errors
Total
Less: Bank charges
Book errors
Adjusted cash balance
P xxx
Pxxx
xxx
xxx
xxx
Balance per bank
Add: Deposits in transit
Bank errors
Total
Less: Outstanding checks
Bank errors
Adjusted cash balance
xxx
xxx
xxx
Pxxx
P xxx
Pxxx
xxx
xxx
xxx
xxx
xxx
xxx
Pxxx
Pro-forma Entries – Adjusting Entries
NSF check
Accounts receivable
Cash in bank
xxx
Bank service fees
Miscellaneous expenses
Cash in bank
xxx
Payment of bank loan
with interest expense
Notes/Loans Payable
Interest expense
Cash in bank
xxx
xxx
Collection of notes
receivable
Cash in bank
Notes receivable
Interest income
xxx
Cash in bank
Notes/Loans Payable
xxx
Proceeds of bank loan
xxx
xxx
xxx
xxx
xxx
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xxx
Proof of Cash
1. Proof of cash is an expanded version of the bank reconciliation.
2. It is frequently used by auditors.
3. There are three methods of preparing proof of cash
 Book to bank method
 Bank to book method
 Adjusted balances method
4. It is actually a reconciliation of bank records and book records of 4 items:
 Beginning of the period cash balance
 Current period cash receipts
 Current period cash disbursements
 End of the period cash balances
Pro-forma Proof of Cash under the Adjusted Balances Method
ABC Company
Proof of Cash
For the Month of December, 20xx
December 1
Receipts
Disbursements
December 31
Balance per book
Bank credits
Bank debits
Book errors
Adjusted balances
Balance per bank
Deposits in transit
Outstanding checks
Bank errors
Adjusted balances
Some controls to protect cash from loss through theft or fraud:
1. Segregation of duties for handling cash and recording cash transactions.
 This prevents simultaneous misappropriations and manipulations of accounting
records to cover up stolen cash.
2. Imprest system
 This system prevents the presence of significant amount of cash within the
business vicinity.
3. Voucher system
 All potential payments are recorded first in the voucher register actual payments
are recorded in the check register.
4. Internal audits at irregular intervals
 It prevents connivance among employees and manipulating of cash records.
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5. Periodic reconciliation of bank statement and cash balance per books
 Regular reconciliation of bank balance and book balance for cash uncovers
immediately any error or irregularities in recording cash transactions. Any error or
irregularity is therefore, immediately rectified.
Some examples of fraud:
1. Window dressing
a. By recording as of the last day of the accounting period collections made subsequent
to the close of the period.
b. By recording as of the last day of the accounting period payments of accounts made
subsequent to the close of the period.
2. Lapping
Misappropriating a collection from one customer and concealing this defalcation by
applying a subsequent collection made from another customer
3. Kiting
When a check is drawn against a first bank and depositing the same check in a second
bank to cover the shortage in the latter bank. No entry is made for both the drawing and
deposit of the check.
May 2019
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