FINANCIAL ACCOUNTING AND REPORTING
TOPIC 3: CASH AND CASH EQUIVALENTS
CASH
Definition
Recognition
Cash includes money and
any
other
negotiable
instrument that is payable
in money and acceptable
by the bank for deposit and
immediate credit.
Since there is no specific standard governing cash and cash equivalents, the related
standard is". The only guidance is found in PAS 1, paragraph 66, which provides that "an
entity shall classify an asset as current when it is cash or a cash equivalent unless
it is restricted from being exchanged or used to settle a liability for at least twelve
months after the end of reporting period." In conclusion, to report an item as part of
cash, it should be UNRESTRICTED IN USE.
Measurement of CASH
ITEM
Cash in local currency
Cash in foreign currency
Cash in closed bank or banks in bankruptcy
MEASUREMENT
At face value
At face value but translated to Philippine Peso
Estimated realizable value
Composition
CATEGORY
Coins and
Currencies
Checks
CASH ON
HAND
Other
instruments
Demand Deposit
Savings Deposit
Escrow Deposit
Time Deposit
CASH IN
BANK
PART OF
CASH?
ITEMS

Normal Customer
Checks
Cashiers’, Managers’
& Travelers’ Check
Undelivered &
Postdated Check
Stale Checks
For asset
Drawn by the entity
Drawn by other person
Drawn by the entity

X
Drawn by other person
X




X
X
GR & Silent
EXP:
1. 2 or more accounts
with the same bank
2. Immaterial
Current asset
Non-current asset
Current Liability
For settlement of
liabilities

Unrestricted/ informal *if
silent
Restricted/formal
For use in
operations
CASH FUND

Money Order
Bank Drafts
(Non-interest bearing)
(Interest bearing)
(Interest bearing)
(Interest bearing)
Compensating
Balance
Bank Overdraft
CLASSIFICATIONS
Non-current Liability
EX: Change, payroll
fund, revolving fund,
petty cash fund, travel
fund
EX: Interest fund,
Dividend fund, tax fund
EX: Pension fund,
Contingent fund,
Insurance fund, Bond
sinking fund

Revert to payable
Receivable
Revert to payable / other
income
Receivable
Long-term investment
Cash equivalents

X
X
Current liability

Offset from other bank
accounts


X
Offset from cash accounts
Long-term investment


X
Long-term investment
ADDITIONAL INFORMATION
The following rules shall be observed regarding post-dated checks, stale checks, and unreleased checks.
CHECK ITEMS
POINT-OF-VIEW
TREATMENT
Payee (e,g,. an entity receiving post- Shall be excluded from cash balance, and shall
POST-DATED CHECKS
dated customer’s checks)
not decrease the accounts receivable balance
Payor (e,g,. an entity writing a post- Shall still form part of cash and shall not decrease
dated checks for suppliers)
the accounts payable balance
1
STALE CHECKS
UNRELEASED CHECKS
Payee (e,g,. an entity did not encash a
customer check for more than six (6)
months after the date of check)
Payor (e,g,. a check written was not
encashed by the supplier for more than
six (6) months after the date of check)
Payee (N/A)
Payor (e,g,. an entity has written a check
but was not given to the payee)
Shall form part of accounts receivable and shall
not form part of cash balance
FROM THE CUSTOMERS
WRITTEN BY THE ENTITY
Shall form part of accounts payable and part of
cash balance
N/A
Shall still form part of cash balance and accounts
payable
POST-DATED CHECKS
POV
Dr. Accounts Receivable
Cr. Cash in Bank
Dr. Cash in Bank
Cr. Accounts Payable
STALE CHECKS
POV
Dr. Accounts Receivable
Cr. Cash
UNRELEASED CHECKS
POV
N/A
Dr. Cash
Cr. Accounts Payable
The following rules shall be observed regarding post-dated checks, stale checks, and unreleased checks.
CHECK ITEMS
POINT-OF-VIEW
TREATMENT
Payee (e,g,. an entity receiving post- Shall be excluded from cash balance, and shall
POST-DATED CHECKS
dated customer’s checks)
not decrease the accounts receivable balance
Payor (e,g,. an entity writing a post- Shall still form part of cash and shall not decrease
dated checks for suppliers)
the accounts payable balance
Payee (e,g,. an entity did not encash a Shall form part of accounts receivable and shall
STALE CHECKS
customer check for more than six (6) not form part of cash balance
months after the date of check)
Payor (e,g,. a check written was not Shall form part of accounts payable and part of
encashed by the supplier for more than cash balance
six (6) months after the date of check)
UNRELEASED CHECKS
Payee (N/A)
N/A
Payor (e,g,. an entity has written a check Shall still form part of cash balance and accounts
but was not given to the payee)
payable
ADDITIONAL INFORMATION:
FROM THE CUSTOMERS
WRITTEN BY THE ENTITY
POST-DATED CHECKS
POV
Dr. Accounts Receivable
Cr. Cash in Bank
Dr. Cash in Bank
Cr. Accounts Payable
STALE CHECKS
POV
Dr. Accounts Receivable
Cr. Cash
UNRELEASED CHECKS
POV
N/A
Dr. Cash
Cr. Accounts Payable
Other Topics
Fraudulent activities in cash
a. Lapping - consists of misappropriating a collection from one customer and concealing this defalcation when
collection is made from another customer.
b.
Window dressing - is a practice of opening the books of accounts beyond the close of the accounting period
for the purpose of showing a better financial position and performance.
c.
Kiting - is a transfer of cash from one bank to another bank. Kiting is usually employed at the end of the month.
Kiting occurs 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.
2
Accounting for Petty Cash Fund
Petty cash fund – is the money set aside to defray relatively small amount of cash disbursement.
A. Establishment
B. Payment of Expense
C. Replenishment
D. A.E.
for
Unreplenished Fund
E. Increase in Fund
F. Decrease in Fund
SUMMARY OF JOURNAL ENTRIES
IMPREST FUND SYSTEM
FLUCTUATING FUND SYSTEM
Petty Cash Fund
XX
Petty Cash Fund
XX
Cash in Bank
XX
Cash in Bank
Expenses
XX
Memo Entry Only
Petty Cash Fund
Expenses
XX
Petty Cash Fund
XX
Petty Cash Fund
XX
Cash in Bank
Expenses
XX
NO ENTRY
Petty Cash Fund
XX
Petty Cash Fund
XX
Petty Cash Fund
XX
Cash in Bank
XX
Cash in Bank
Cash in Bank
XX
Cash in Bank
XX
Petty Cash Bank
XX
Petty Cash Bank
XX
XX
XX
XX
XX
Accounting for Cash Shortage and Cash Overage
SUMMARY OF JOURNAL ENTRIES
UPON DISCOVERY
UPON INVESTIGATION
(cashier is accountable)
UPON INVESTIGATION
(cannot trace anymore)
CASH SHORTAGE
Cash short / over
XX
Cash on Hand
Due from cashier
XX
Cash short / over
Loss from shortage
XX
Cash short/ over
XX
XX
XX
CASH OVERAGE
Cash on Hand
Cash short / over
Cash short / over
Due to Cashier
Cash short / over
Other Income
XX
XX
XX
XX
XX
XX
CASH EQUIVALENTS
Definition
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 rates.
Recognition
Only debt instruments acquired within 3 months
or less before their maturity date can qualify as
cash equivalents.
Composition
A. Time Deposit
B. Money Market Placement
and Commercial Paper
C. Treasury Bills
Note: Equity securities cannot qualify as cash
equivalents since they do not have maturity date,
except redeemable preference shares (with
mandatory redemption) that are acquired 3
months before their redemption date can qualify
as cash equivalents.
Classification of investments in TIME DEPOSIT, MONEY MARKET PLACEMENTS/INTRUMENT, and TREASURY BILLS
a. If the term is three months or less, such instrument are classified as cash equivalents and therefore included in the
caption “cash and cash equivalents”.
b. If the term is more than three months but within one year, such investments are classified as short-term or
temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as long-term investments.
BANK RECONCILIATION
Bank reconciliation is accounting for the sources or reasons for the difference between the cash in bank per books and cash
in bank per bank. In practice, bank reconciliations are made on a per bank account basis and normally made at the end of each
month.
The aforementioned sources or reasons of the difference are classified into “book-reconciling” items and “bank-reconciling”
items. Book-reconciling items are those which will bring the unadjusted cash in bank per books to correct (i.e., adjusted)
amount of cash in bank. Bank-reconciling items are those who will bring the unadjusted cash in bank per bank to correct (i.e.,
adjusted) amount of cash in bank.
Bank reconciliation format to get the adjusted cash in bank balance starting with unadjusted cash in bank balance per books
(or “balance per ledger”, “balance per ledger”, etc.
3
Unadjusted cash in bank balance per book
Additions:
Credit Memos:
Net proceeds from accounts/notes receivable collected by the bank on behalf of the entity
Bank loan proceeds directly credited to the entity’s bank account
Proceeds of matured investments managed by the bank on behalf of the entity that were directly credited to the
entity’s bank account
Direct wire transfers from another bank
Pxx
xx
xx
xx
xx
Errors:
Non-recording of cash receipts
Understatement in the recording of cash receipts
Overstatement in the recording of check made
xx
xx
xx
Deductions:
Debit Memos
No-sufficient fund (NSF) check
Bank service charge
Matured loan payable to the bank directly charged to bank account
Other expenses directly debited by the bank from the entity’s account (i.e., auto-debit arrangements)
xx
xx
xx
xx
Errors:
Non-recording of check made
Overstatement in the recording of cash receipts
Understatement in the recording of check made
Adjusted Cash in Bank Balance
xx
xx
xx
xx
ADDITIONAL INFORMATION: (BOOK)

Credit Memos – refer to items not representing deposits credited by the bank to the account of the depositor but not
yet recorded by the depositor as cash receipts. The credit memos have the effect of increasing the bank balance.
Typical example of credit memos are:
a. Notes receivable collected by the bank in favor of the depositor and credited to the account of the depositor.
b. Proceeds of bank loan credited to the account of the depositor.
c. Matured time deposits transferred by the bank to the current account of the depositor.


Debit Memos – refer to items not representing checks paid by bank which are charged or debited by the bank to the
account of the depositor but not yet recorded by the depositor as cash disbursements. The debit memos have the
effect of decreasing the bank balance.
a. NSF or No Sufficient Fund Checks – These are checks deposited but returned by the bank because of
insufficiency of fund. The other name for NSF is DAIF or “drawn against insufficient fund”
b. Technically Defective Checks – These are checks deposited but returned by the bank because of
technical defects such as absence of signature or countersignature, erasures not countersigned, mutilated
checks, conflict between amount in words and amount in figures.
c. Bank Service Charge – These include bank charges for interest, collection, checkbook and penalty.
d. Reduction of Loan – This pertains to amount deducted from the current account of the depositor in
payment for loan which the depositor in payment for loan which the depositor owes to the bank and which
has already matured.
Errors
Bank reconciliation format to get the adjusted cash in bank starting with unadjusted cash in bank per bank (or “balance per
bank statement”, “balance per bank records”, etc.):
4
Unadjusted cash in bank balance per bank
Pxx
Additions:
Deposit in Transit
xx
Errors:
Non-recording of cash deposit of the depositor
Recording of check made by the another depositor
xx
xx
Understatement in the recording of cash deposit of the depositor
Overstatement in the recording of check made by the depositor
xx
xx
Deductions:
Outstanding checks
Errors:
Non-recording of check made by the depositor
xx
xx
Recording of cash deposit made by another depositor
Overstatement in the recording of cash deposit of the depositor
Understatement in the recording of check made by the depositor
Adjusted Cash in Bank Balance
xx
xx
xx
ADDITIONAL INFORMATION: (BANK)

Deposit in Transit – are collections already recorded by the depositor as cash receipts but not yet reflected on the
bank statements.
a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement.
b. Undeposited collections or those still in the hands of the depositor. In effect, these are cash on hand
awaiting delivery to the bank for deposit.

Outstanding Checks – are checks already recorded by the depositor as cash disbursement but not yet reflected on
the bank statement.
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified Checks – A certified check is one where the bank has stamped on its face the word “accepted”
or “certified” indicating sufficiency of fund.

Errors
PROFORMA RECONCILIATION
ADJUSTED BALANCE METHOD
Book Balance
xx
Add: Credit Memos
xx
Total
xx
Less: Debit Memos
xx
Adjusted Book Balance
xx
Bank Balance
Add: Deposit in Transit
Total
Less: Outstanding Checks
Adjusted Bank Balance
xx
xx
xx
xx
xx
BOOK TO BANK METHOD
Book Balance
Add:
Credit Memos
xx
Outstanding Checks
xx
Total
Less:
Debit Memos
xx
Deposit in Transit
xx
Bank Balance
BANK TO BOOK METHOD
Book Balance
Add:
Deposit in Transit
xx
Debit Memos
xx
Total
Less:
Outstanding Checks
xx
Credit Memos
xx
Bank Balance
xx
xx
xx
xx
xx
xx
xx
xx
5
PROOF OF CASH
Concepts
Proof of cash is a two-date bank reconciliation showing the total amounts of receipts and disbursements during a
particular period. The two dates in proof of cash include the beginning cash in bank balance and the ending cash in bank
balance.
From the beginning unadjusted cash in bank balances, the ending unadjusted cash in bank balance can be computed as
follows:
Proof of cash general format when using the unadjusted book balances:
PRIOR
RECEIPTS
MONTH
Unadjusted book balances
Pxx
Pxx
Add:
Credit Memos – Prior Month
Credit Memos – Current Month
xx
Less:
Debit Memos – Prior Month
Debit Memos – Current Month
(xx)
ERRORS:
Under Receipt – Prior Month
Under Receipt – Current Month
xx
DISBURSEMENTS
Pxx
(xx)
xx
xx
(xx)
xx
(xx)
xx
Over Receipt – Prior Month
Over Receipt – Current Month
(xx)
Under Disbursement – Prior Month
Under Disbursement – Current Month
(xx)
Over Disbursement – Prior Month
Over Disbursement – Current Month
ADJUSTED BALANCES
xx
(xx)
xx
Add:
Deposit in Transit – Prior Month
Deposit in Transit – Current Month
xx
Less:
Outstanding Checks – Prior Month
Outstanding Checks – Current Month
(xx)
ERRORS:
Under Receipt – Prior Month
Under Receipt – Current Month
xx
(xx)
Xx
(xx)
(xx)
Proof of cash general format when using unadjusted bank balances:
PRIOR
MONTH
Unadjusted book balances
Pxx
CURRENT
MONTH
Pxx
(xx)
(xx)
xx
(xx)
xx
(xx)
xx
xx
xx
RECEIPTS
DISBURSEMENTS
Pxx
Pxx
(xx)
xx
xx
(xx)
xx
(xx)
xx
Over Receipt – Prior Month
Over Receipt – Current Month
(xx)
Under Disbursement – Prior Month
Under Disbursement – Current Month
(xx)
Over Disbursement – Prior Month
Over Disbursement – Current Month
ADJUSTED BALANCES
xx
(xx)
xx
xx
CURRENT
MONTH
Pxx
(xx)
xx
(xx)
(xx)
(xx)
(xx)
xx
(xx)
(xx)
xx
xx
xx
6
The effects of the errors shall be assessed in a case-by-case basis.
The amount of deposits in transit and outstanding checks at the end of each period can be computed as:
Deposits in Transit, beginning
Pxx
Outstanding checks, beginning
Add: Deposits made by the depositor
xx
Add: Checks made by the depositor
Total deposits to be acknowledged by the bank
xx
Total checks to be paid by the bank
Less: Deposits recorded by the bank
xx
Less: Checks paid by the bank
Deposits in Transit, ending
xx
Outstanding Checks, Ending
Pxx
xx
xx
xx
xx
Computation of the deposits made by the company and the deposits acknowledge by the bank
Book Receipts (Debits)
Less: Credit Memo – PM
Book errors last month corrected this month
Understatement of CR – PM
Overstatement of CD – PM
Book errors this month:
Overstatement of CR – CM
Add: Understatement of CR – CM
DEPOSITS MADE BY THE COMPANY
XX
XX
XX
XX
XX
XX
XX
Bank Receipts (CREDITS)
Less: Credit Memo – CM
Bank errors last month corrected this month:
Understatement of CR – PM
Overstatement of CD – PM
Book errors this month:
Overstatement of CR – CM
Add: Understatement of CR – CM
DEPOSITS ACKNOWLEDGE BY THE BANK
XX
XX
XX
XX
XX
XX
XX
Computation of the checks issued by the company and the checks paid by the bank
Book Disbursement (Credits)
Less: Debit Memos – PM
Book errors last month corrected this month
Overstatement of CR – PM
Understatement of CD – PM
Book errors this month
Overstatement of CD – CM
Add: Understatement of CD – CM
CHECKS ISSUED BY THE BANK
XX
XX
XX
XX
XX
XX
XX
Book Disbursement (Debits)
Less: Debit Memos – CM
Bank errors last month corrected this month
Overstatement of CR – PM
Understatement of CD – PM
Bank errors this month
Overstatement of CD – CM
Add: Understatement of CD – CM
CHECKS PAID BY THE BANK
XX
XX
XX
XX
XX
XX
XX
7