CASH AND CASH EQUIVALENTS
"cash" simply means money.
Money is the standard medium of exchange in business
transactions.
Money refers to the currency and coins which are in
circulation and legal tender. However, in the accounting
parlance, the term "cash" has a special and broader
meaning and connotes more than money.
As contemplated in accounting, cash includes money and
any other negotiable instrument that is payable in money
and acceptable by the bank for deposit and immediate
credit.
Accordingly, cash includes checks, bank drafts and money
orders because these are acceptable by the bank for
deposit or immediate encashment.
Examples of cash equivalents are:
✓ Three-month BSP treasury bill
✓ Three-year BSP treasury bill purchased three
months before date of maturity
✓ Three-month time deposit
✓ Three-month money market instrument or
commercial paper
Equity securities cannot qualify as cash equivalents
because shares do not have a maturity date.
However, preference shares with specified redemption
date and acquired three months before redemption date
can qualify as cash equivalents.
Note that what is important is the date of purchase which
should be three months or less before maturity.
For example, when checks are received in full settlement
of an account receivable, cash is immediately debited.
Thus, a BSP treasury bill that was purchased one year
ago cannot qualify as cash equivalent even if the
remaining maturity is three months or less from the end
of reporting period.
But postdated checks received cannot be considered as
cash yet because the postdated checks are unacceptable
by the bank for deposit and immediate credit or outright
encashment.
Investment of excess cash
The control and proper use of cash is an important aspect
of cash management. Basically, the entity must maintain
sufficient cash for use in current operations.
Unrestricted cash
There is no specific standard dealing with "cash".
Any cash accumulated in excess of that needed for
current operations should be invested even temporarily in
some type of revenue earning investment.
The only guidance is found in PAS 1, paragraph 66, which
provides that an entity shall classify an asset as current
when the asset is cash or a cash equivalent unless it is
restricted to settle a liability for more than twelve months
after the end of the reporting period.
Accordingly, to be reported as "cash", an item must be
unrestricted in use.
This means that the cash must be readily available in the
payment of current obligations and not be subject to any
restrictions, contractual or otherwise.
CASH ITEMS INCLUDED IN CASH
a. Cash on hand includes undeposited cash
collections and other cash items awaiting deposit
such as customers' checks, cashier's or manager's
checks, traveler's checks, bank drafts and money
orders.
b. Cash in bank includes demand deposit or
checking account and saving deposit which are
unrestricted as to withdrawal.
c. Cash fund set aside for current purposes such as
petty cash fund, payroll fund and dividend fund.
CASH EQUIVALENTS
PAS 7, paragraph 6, defines cash equivalents as shortterm 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 rate.
The standard further states that only highly liquid
investments acquired three months before maturity can
qualify as cash equivalents.
Accordingly, excess cash may be invested in time
deposits, money market instruments and treasury bills for
the purpose of earning interest income.
Classifications of investment of excess cash
— Investments in time deposit, money market
instruments and treasury bills should be properly
classified.
a.
b.
c.
If the term is three months or less, such
instruments are classified as cash equivalents and
therefore included in the caption "cash and cash
equivalents"
If the term is more than three months but within
one year, such investments are classified as shortterm financial assets or temporary investments
and presented separately as current assets.
If the term is more than one year, such
investments are classified as noncurrent or longterm investments.
✓ However, such investments that become due
within one year from the end of the
reporting period are reclassified as current
or temporary investments.
MEASUREMENT OF CASH
❖ Cash is measured at face value.
❖ Cash in foreign currency is measured at the
current exchange rate.
❖ If a bank or financial institution holding the funds
of an entity is in bankruptcy or financial
difficulty, cash should be written down to
estimated realizable value if the amount
recoverable is estimated to be lower than the face
value.
Financial statement presentation
The caption cash and cash equivalents should be shown
as the first line item under current assets.
This caption includes all cash items, such as cash on
hand, cash in bank, petty cash fund and cash equivalents
which are unrestricted in use for current operations.
However, the details comprising the cash and cash
equivalents should be disclosed in the notes to financial
statements.
For example, an entity maintains two bank accounts:
a. Cash in bank - First Bank, which is overdrawn
by P10,000.
b. Cash in bank - Second Bank, with a debit
balance of P100,000.
The net cash balance is P90,000.
The proper statement classification of the two accounts is:
Current asset:
Cash in bank - Second Bank
100,000
Foreign currency
Cash in foreign currency should be translated to
Philippine pesos using the current exchange rate.
Current liability:
Bank overdraft - First Bank
10.000
Note that it is not necessary to adjust and open a bank
overdraft account in the ledger.
Deposits in foreign countries which are not subject to any
foreign exchange restriction are included in "cash"
In other words, the Cash in Bank - First Bank account is
maintained in the ledger with a credit balance.
Deposits in foreign bank which are subject to foreign
exchange restriction should be classified separately
among noncurrent assets and the restriction clearly
indicated.
Generally, overdrafts are not permitted in the Philippines.
Cash fund for a certain purpose
If the cash fund is set aside for use in current operations
or for the payment of current obligation, it is a current
asset.
The cash fund is included as part of cash and cash
equivalents.
Examples of this fund are petty cash fund, payroll fund,
travel fund, interest fund, dividend fund and tax fund.
On the other hand, if the cash fund is set aside for
noncurrent purpose or payment of noncurrent obligation,
it is shown as long-term investment.
Examples of this fund are sinking fund, preference share
redemption fund, contingent fund, insurance fund and
fund for acquisition or construction of property, plant and
equipment.
Classification of cash fund
The classification of a cash fund as current or noncurrent
should parallel the classification of the related liability.
For example, a sinking fund that is set aside to pay a bond
payable shall be classified as current asset when the bond
payable is already due within one year after the end of
reporting period.
However, a cash fund set aside for the acquisition of a
noncurrent asset should be classified as noncurrent
regardless of the year of disbursement.
Bank overdraft
When the cash in bank account has a credit balance, it is
said to be an overdraft. The credit balance in the cash in
bank account results from the issuance of checks in
excess of the deposits.
A bank overdraft is classified as a current liability and
should not be offset against other bank accounts with
debit balances.
Exception to the rule on overdraft
✓ When an entity maintains two or more accounts in
one bank and one account results in an overdraft,
such overdraft can be offset against the other bank
account with a debit balance in order to show cash,
net of bank overdraft or bank overdraft, net of
other bank account.
✓ An overdraft can also be offset against the other
bank account if the amount is not material.
✓ Under IFS, bank overdraft can be offset against
other bank account when payable on demand and
often fluctuates from positive to negative as an
integral part of cash management.
Compensating balance
A compensating balance generally takes the form of
minimum checking or demand deposit account balance
that must be maintained in connection with a borrowing
arrangement with a bank.
For example, an entity borrows P5,000,000 from a bank
and agrees to maintain a 10% or P500,000 minimum
compensating balance in a demand deposit account.
In effect, this arrangement results in the reduction of the
amount borrowed because the compensating balance
provides a source of fund to the bank as partial
compensation for the loan extended.
Classification of compensating balance
If the deposit is not legally restricted as to withdrawal by
the borrower because of an informal compensating
balance agreement, the compensating balance is part of
cash.
If the deposit is legally restricted because of a formal
compensating balance agreement, the compensating
balance is classified separately as "cash held as
compensating balance" under current assets if the related
loan is short-term.
If the related loan is long-term, the compensating balance
is classified as noncurrent investment.
Undelivered or unreleased check
An undelivered or unreleased check is one that is merely
drawn and recorded but not given to the payee before the
end of reporting period.
There is no payment when the check is pending delivery
to the payee at the end of reporting period.
The reason is that undelivered check is still subject to the
entity's control and may thus be canceled anytime before
delivery at the discretion of the entity.
Accordingly, an adjusting entry is required to restore the
cash balance and set up the liability.
Cash
XX
Accounts payable or appropriate account
XX
In practice, the foregoing adjustment is sometimes
ignored because the amount is not very substantial and
there is no evidence of actual cancelation of the check in
the subsequent period.
Postdated check delivered
A postdated check delivered is a check drawn, recorded
and already given to the payee but it bears a date
subsequent to the end of reporting period.
The original entry recording a delivered postdated check
shall also be reversed and therefore restored to the cash
balance.
Cash
XX
Accounts payable or appropriate account
XX
The reason is that there is no payment until the check can
be presented to the bank for encashment or deposit.
Stale check or check long outstanding
A stale check is a check not encashed by the payee within
a relatively long period of time.
The question is how long a time must the check remain
outstanding?
The Negotiable Instruments Law provides that where the
instrument is payable on demand, presentment must be
made within a reasonable time after issue.
In determining what is a reasonable time, consideration
should be made regarding the nature of the instrument,
the usage of trade or business, if any, with respect to such
instrument and the facts of the particular case.
Clearly, the law does not specify a definite period within
which checks must be presented for encashment.
Reference is made I to usage of trade or business practice.
In banking practice, a check becomes stale if not encashed
within six months from the time of issuance. Of course,
this is a matter of entity policy.
Thus, even after three months only, the entity may issue a
stop payment order to the bank for the cancelation of a
previously issued check.
If the amount of stale check is immaterial, it is simply
accounted for as miscellaneous income.
Cash
Miscellaneous income
XX
XX
However, 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
Accounting for cash shortage
Where the cash count shows cash which is less than the
balance per book, a cash shortage is to be recorded.
Cash short or over
Cash
XX
XX
The cash short or over account is only a temporary or
suspense account. When financial statements are
prepared the same should be adjusted.
Hence, if the cashier or cash custodian is held responsible
for the cash shortage, the adjustment should be:
Due from cashier
Cash short or over
XX
XX
However, if reasonable efforts fail to disclose the cause of
the shortage, the adjustment is
Loss from cash shortage
Cash short or over
XX
XX
Accounting for cash overage
Where the cash count shows cash which is more than the
balance per book, a cash overage is to be recorded.
Cash
XX
Cash short or over
XX
Note that whether it is a cash shortage or cash overage,
the offsetting account is cash short or over account. Such
account should be adjusted when statements are made.
The cash overage is treated as miscellaneous income if
there is no claim on the same.
Cash short or over
Miscellaneous income
XX
XX
But where the cash overage is properly found to be the
money of the cashier, the journal entry is:
Cash short or over
Payable to cashier
XX
XX
Imprest system
The imprest system is 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.
While internal control ideally requires that all payments
should be made by means of check, this is sometimes
impossible.
There are occasions when the issuance of checks becomes
impractical or inconvenient such as when small amounts
are paid or things are hurriedly bought or customers are
entertained.
Consequently, in such instances, it may be more
economical and convenient to pay in cash rather than
issue checks.
Petty cash fund
The petty cash fund is money set aside to pay small
expenses which cannot be paid conveniently by means of
check.
The reversal is made in order that the normal
replenishment procedures may be followed by
simply debiting expenses and crediting cash in
bank without distinguishing whether the expenses
pertain to the current period or prior period.
e.
Petty cash fund
Cash in bank
f.
Accounting procedures
a. A check is drawn to establish the fund.
Petty cash fund
Cash in bank
b.
XX
XX
A decrease in the fund is recorded normally.
Cash in bank
XX
Petty cash fund
There are two methods of handling the petty cash,
namely:
a. Imprest fund system
b. Fluctuating fund system
Imprest fund system
The imprest fund system is the one usually followed in
handling petty cash transactions.
An increase in the fund is recorded normally.
XX
Illustration
2021
Nov. 10 The entity established an imprest fund of
P10,000.
XX
Petty cash fund
Cash in bank
XX
Payment of expenses out of the fund.
10,000
10,000
29 Replenished the fund. The petty cash items
include the following:
No formal journal entries are made.
Currency and coin
Supplies
Telephone
Postage
The petty cashier generally requires a signed
petty cash voucher for such payments and simply
prepares memorandum entries in the petty cash
journal.
2,000
5,000
1,800
1,200
Nov. 29 The journal entry to record the replenishment is:
c.
Replenishment of petty cash payments.
Supplies
Telephone
Postage
Cash in bank
Whenever the petty cash fund runs low, a check is
drawn to replenish the fund.
The replenishment check is usually equal to the
petty cash disbursements.
It is at this time that the petty cash
disbursements are recorded.
Expenses
Cash in bank
XX
XX
It is to be pointed out that the petty cash
disbursements should be replenished only by
means of check and not from undeposited
collections.
d.
At the end of the accounting period, it is
necessary to adjust the unreplenished expenses in
order to state the correct petty cash balance.
Expenses
XX
Petty cash fund
XX
The adjustment is to be reversed at the beginning
of the next accounting period.
5,000
1,800
1,200
8,000
Dec. 31 The fund was not replenished. An adjustment is
necessary to record the unreplenished expenses.
The fund is composed of the following: currency and coin
P7,000, supplies P1,500, postage P500, miscellaneous
expense P1,000.
Supplies
1,500
Telephone
500
Postage
1,000
Cash in bank
3,000
2022
Jan. 1
The adjustment made on December 31, 2021 is
reversed.
Petty cash fund
3,000
Supplies
Postage
Miscellaneous expense
500
1,000
1,000
Feb. 1 The fund is replenished and increased to P15,000.
The composition of the fund:
Currency and coin
1,000
Supplies
Postage
Miscellaneous expense
Total
4,500
3,000
1,500
10,000
Illustration
Nov. 10 The entity established a petty cash fund of
P10,000.
Petty cash fund
10,000
Cash in bank
10,000
Journal entry
Petty cash fund
Supplies
Postage
Miscellaneous expense
Cash in bank
Nov. 11-28 Petty cash disbursements amounted to P8,000.
5,000
4,500
3,000
1,500
Expenses
8,000
Petty cash fund
14,000
8,000
Nov. 29 Issued a check for P10,000 to replenish the fund.
Petty cash fund
Cash in bank
The total amount of the check drawn is P14,000
representing the petty cash disbursements of
P9,000 and the fund increase of P5,000.
10,000
10,000
At this point, the petty cash balance per book is
P12,000.
Fluctuating fund system
The system is called "fluctuating fund system" because
the checks drawn to replenish the fund do not necessarily
equal the petty cash disbursements.
Dec. 1-30 Petty cash expenses amounted to P9,000.
Expenses
9,000
Petty cash fund
9,000
31
Issued a check for P15,000 to replenish the fund.
The replenishment checks are simply drawn upon the
request of the petty cashier.
Petty cash fund
Cash in bank
Moreover, petty cash disbursements are immediately
recorded thus resulting in a fluctuating petty cash balance
per book from time to time:
At this point, the petty cash balance is P18,000.
a.
Establishment of the fund:
Petty cash fund
Cash in bank
b.
xx
xx
Payment of expenses out of the petty cash fund:
Expenses
xx
Petty cash fund
xx
Under this system, the disbursements from the
petty cash fund are immediately recorded in
contradistinction with the imprest fund system
where the disbursements are recorded upon the
replenishment of the fund.
c.
Replenishment or increase of the fund:
Petty cash fund
Cash in bank
xx
xx
The replenishment check may or may not be the
same as the petty cash disbursements.
d.
At the end of the reporting period, no adjustment
is necessary because the petty cash expenses are
recorded outright.
e.
Decrease of the fund is reverted to the general
cash.
Cash in bank
Petty cash fund
xx
xx
15,000
15,000