CASH AND CASH EQUIVALENTS
Cash includes money and any negotiable instrument that is payable in money and acceptable by bank for
the deposit and immediate credit.
Cash is measured at face value.
Foreign currency – current exchange rate
Cash is composed of:
Cash on hand:
Bills, coins, and currencies –
Undeposited collections – Collections from operations that are yet to be deposited.
Manager’s/Traveler’s/Cashier’s check – Bank issued check on its own account.
Bank draft – Bank issued check with account owner’s fund transfer to a reserve account.
Money order – From remittances
Cash in bank:
Savings deposit – ATM
Demand deposit – Passbook and Check
Cash fund – Set aside for current purposes such as petty cash fund, payroll fund, and dividend
fund.
Note: Always take emphasis on the purpose of the fund.
For operational and current purposes: Cash
Others: Long term investment
Cash fund for a certain purpose
 It is classified as cash if the fund set aside for a purpose is for a current operations or
payment of current obligation. (ex. Payroll fund, travel fund, petty cash fund, etc.)
 If it is for non-current purpose or payment of non-current obligation, it is classified as longterm investment. (ex. Sinking fund, contingent fund, fund for acquisition or construction of
PPE)
 Classification of cash fund should parallel the classification of the related liability.
 For non-current asset acquisition, it should be classified as non-current regardless of the
year of disbursement.
Bank overdraft
A credit balance in an account is called a Bank overdraft. This results in issuance of checks in excess of
the deposits.
A bank overdraft is classified separately as current liability and should not be offset against other bank
accounts with debit balances.
Except when an entity maintains a more than one account with the same bank and another account
shows a debit balance. The credit balance can be offset against each other.
Compensating balance
A bank’s minimum requirement to be maintained in an account in connection with a borrowing
arrangement.
Classification of compensating balance would depend if the amount is legally restricted or not.
Informal compensating balance arrangement – cash
Formal compensating balance arrangement – “cash held as compensating balance” either in current or
non-current depending on the term of the liability.
Undelivered or unreleased check – drawn check and recorded but remains undelivered as of reporting
date
Postdated check – A check drawn, recorded, and delivered to the payee but the check bears a date
subsequent
Stale check – Check long outstanding
Accounting for cash shortage or overage
Maintain a temporary account “cash short or over”
Record appropriate entry for shortage or overage
Investigate for any cause of the shortage or overage and record appropriate entry to eliminate the
temporary account
Imprest system – All cash is deposited and all disbursements are made through issuance of checks.
Petty cash fund
Imprest fund system
Expenses are not recorded until replenishment.
Expenses equals the amount of replenishment.
Fluctuating fund system
Expenses are recorded when incurred.
Replenishment does not necessarily equal to expenses.
Cash Equivalents
Short-term and highly liquid investments with maturity of 90-days (three months) or less.
Examples of cash equivalents:
BSP treasury bills
Time deposits
Money market funds
Commercial papers
Problem 1-1
Adjusting entries:
1. Accounts receivable
Cash in bank
2. Cash in bank
Accounts payable
3. Cash in bank
Accounts payable
4. Accounts receivable/Sales
Cash in bank
200,000
200,000
250,000
250,000
100,000
100,000
450,000
450,000
Cash and cash equivalents
Cash in bank
3,000,000
(200,000)
250,000
100,000
(450,000)
Time deposit
Money Market Placement
Savings deposit in closed bank
Sinking fund for bond payable 2023
Petty cash fund
2,700,000
1,000,000
20,000
3,720,000
Money market placement – Short term investment
Savings in closed bank – a long term claim
Sinking fund – long term purpose
Bank Reconciliation
What is a bank reconciliation?
A bank reconciliation is the process of reconciling items recorded in your books and those that are
shown by the bank as your balance.
Coincidentally only demand deposits or checking account requires bank reconciliation.
Different accounting entries are made with banks in comparison with the Company as follows:
To record collection:
Company X
Cash in bank
Accounts receivable
xxx
xxx
Bank
Cash
xxx
Company X
xxx
Bank statement is exact copy of the depositor’s ledger
Reconciling items:
Book reconciling items:
1. Credit memos – Not representing deposit, unrecorded in depositor’s books
Ex. Proceeds of bank loans, Note collected on behalf of depositor, TD transferred
2. Debit memos – Not representing checks paid by bank, not yet recorded
Ex. NSF check, Defective checks, bank service charge, Reduction of loan
3. Errors
Bank reconciling items
1. Deposit in transit – collected and recorded already by books but not in bank statement
Ex. Given already to banks but too late to appear in bank statement
2. Outstanding checks – Checks already recorded but not yet in the bank statements
Ex. Given to payee but not yet presented
3. Errors
Forms of bank reconciliation
Adjusted balance method – Book and bank brought to a correct cash balance
Book to bank method – Book is adjusted to equal bank balance
Bank to book method – Bank is adjusted to equal book balance
Adjusted balance method:
Book balance
Add:
Credit memos
Errors
Less:
Debit memos
Error
Adjusted book balance
Bank balance
Add:
Deposits in transits
Errors
Less:
Outstanding checks
Error
Adjusted bank balance
xxx
xxx
xxx
(xxx)
(xxx)
xxx
xxx
xxx
xxx
(xxx)
(xxx)
xxx
Problem 2-14
Modified
In preparing the bank reconciliation for the month of December, Ahjin Guild Corporation provided the
following data:
Balance per bank statement
Balance per books
Deposit in transit
Notes Collected by bank on behalf of Ahjin Guild
3,800,000
?
520,000
150,000
NSF Check
Erroneous recording of collection from customers in the books, the correct amount
should be 50,000
Amount erroneously credited by the bank to Ahjin Guild’s account
Bank service charge December
Outstanding checks
1.
2.
3.
4.
Reconcile using Adjusted balance method
Reconcile using Book to bank method
Reconcile using Bank to book method
What is the unadjusted amount per books?
Adjusted balance:
Book to bank:
50,000
500,000
40,000
5,000
675,000