Cash and Cash Equivalents
Cash
This includes money and other negotiable instrument that is payable in money and acceptable by the
bank for deposit and immediate credit. Examples are bills and coins, checks, bank drafts and money
orders.
To be included or considered as cash, it must be unrestricted as to use, meaning, it must be readily
available for use or payment of current obligations, thus, not subject to contractual or legal restrictions.
The following items are included in “cash”:
 Cash on Hand
 Cash in Bank
 Cash Fund
Cash Equivalents
According to PAS 7, cash equivalents are short-term highly liquid investments that are readily
convertible into cash so near their maturity that they present insignificant risk of changes in value
because of changes in interest rates. In addition, the standard also states that only highly liquid
investments acquired three months before maturity can qualify as cash equivalents. Examples are:
 Three-month BSP Treasury Bill
 Three month time deposit
 Three-month money market instruments
 BSP Instruments purchased three months prior to maturity
 Redeemable preference shares purchased three months prior to maturity
Valuation of Cash
 Face value
 Current exchange rate if foreign currency
 Net realizable value if cash is in bank that is under bankruptcy proceeding
Investment of Excess Cash
 If invested with terms of 3 months or less, treated as “cash and cash equivalents”
 If invested with terms more than 3 months but not more than 1 year, treated as short term
investments classified as other current assets
 If invested with terms of more than 1 year, treated as long term investment under non-current
assets, however, reclassified as current asset if maturity is within 1 year.
Cash Fund
 The classification of a certain cash fund follows the nature of the liability it is created for.
 Cash funds created for current obligations are treated as current assets. Examples of such are:
o Petty cash fund
o Payroll fund
o Travel fund
o Interest fund
o Dividend fund
o Tax fund
Bank Overdraft
 If problem is silent, treated as current liability
 If two or more banks accounts exist in one bank and at least one has an overdraft, the overdraft
may be offset with the other bank accounts in order to get “cash net of overdraft” or “bank
overdraft, net of other bank accounts”.
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Compensating balance
 If problem is silent, ignore the compensating balance and treat it as part of cash.
 If compensating balance is legally restricted, treat such as “cash held as compensating
balance” reported as either current or non-current asset depending on the term of the loan or
borrowing.
Treatment of Entity Checks
 Undelivered or unreleased checks are treated as cash
 Postdated checks are treated as cash
 Stale checks are reverted back to cash and treated a miscellaneous income if immaterial and
treated as reversal of previous entry if material.
Window Dressing
It pertains to any deliberate misstatement of financial statement elements or presenting false
statements. It is often accomplished by:
 Recording as of the last day of an accounting period collections made subsequent to the close
of the period
 Recording as of the last day of an accounting period payments of accounts made subsequent
to the close of the period
Lapping
It is a practice used to conceal cash shortage. It consists of misappropriating a collection from one
customer and concealing this defalcation by applying a subsequent collection made from another
customer.
It involves a series of postponements of the entries for the collection of receivables. This is possible when
an entity has poor internal control and especially when the bookkeeper and cashier is one and the
same person.
Kiting
This device used to conceal cash shortage may be utilized if an entity maintains current accounts in
different banks. This is usually employed at the end of the month.
This method is simple. The amount of cash shortage is drawn from one bank and subsequently
deposited to the other bank.
This can be discovered by the simultaneous preparation of bank reconciliation.
Accounting for Cash Shortage
 It is initially recorded by debiting “cash short or over” and crediting cash
 The cash shortage is closed to “due from cashier” account if the shortage is the responsibility of
the cashier
 The cash shortage is closed to “loss from cash shortage” account if reasonable efforts fail to
disclose the cause of the shortage
Accounting for Cash Overage
 It is initially recorded by debiting cash and crediting “cash short of over”
 The cash overage is closed to “miscellaneous income” account if there is no claim to such
 The cash overage is closed to “payable to cashier” account if the overage was the money of
the cashier
The Imprest System
This is a system of controlling cash which requires all cash receipts to be deposited intact and all cash
disbursements made through checks. This system suggests the use of petty cash fund since it is
impractical to always use check in paying expenditures especially for small expenses.
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Petty Cash Fund
This cash fund is managed using two methods namely:
 Imprest Fund System
 Fluctuating Fund System
The main difference between the two systems is the timing of the recognition of the expenses and the
cash account that is credited when the petty cash fund is used or replenished.
Bank Reconciliation
It is a statement which brings into agreement the cash balance per book (general ledger) and the cash
balance per bank (bank statement). It is usually prepared on a monthly basis.
There are three methods of doing bank reconciliation, namely:
 Adjusted balance method
 Bank to book method
 Book to bank method
In doing bank reconciliation, there are certain items that are considered.
Reconciliation items for books balance are as follows:
 Credit memos
 Debit memos
 Errors
As a rule, all credit memos will increase the cash balance per books while all debit memos will decrease
cash balance per books. Effects of errors to the cash balance per books vary depending on the nature
of the error committed.
Reconciliation items for cash balance per bank statement are as follows:
 Deposit in Transit
 Outstanding Checks
 Errors
As a rule, deposits in transit will increase the cash balance per books while outstanding checks will
decrease cash balance per books. Effects of errors to the cash balance per books vary depending on
the nature of the error committed. It is to be noted, however, that certain types of outstanding checks
will not be a reconciling item such as certified checks.
After all reconciling items are correctly reflected, the adjusted balance per book and the adjusted
balance per bank should already be in agreement. However, there are instances when this does not
happen. For cases like this, there is a logical reason to believe that a cash shortage or a cash overage
exists. Treatment of such is the same as the previous discussion in this text.
It should be noted that in doing bank reconciliations, adjusting entries for book reconciling items are
necessary to reflect the correct cash balance in the book of the entity.
Two-Date Bank Reconciliation
It is basically a bank reconciliation that involves two dates, the first date represents the beginning cash
balance and the second date represents the ending cash balance. In order to prepare this kind of
reconciliation, a proof of cash is needed.
Proof of Cash
A proof of cash is a bank reconciliation tool that provides proof for receipts and disbursements. In using
this tool, it must be emphasized that at the end of the reconciliation process, the balances of beginning
and ending cash as well as the balances of receipts and disbursements in the books and in the bank
should be the same.
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There are three methods of doing this bank reconciliation, namely:
 Adjusted balance method
 Bank to book method
 Book to bank method
However, the adjusted balance method is the method that is commonly used.
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