Cash and Cash

Equivalent
Definition of Cash

 Current asset
 Money is the standard medium of exchange, refers to the currency and coins
 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
o Includes checks, bank drafts and money orders (negotiable instrument)
 Postdated checks – not considered as cash yet because theses checks are unacceptable by the
bank for deposit and immediate credit or outright encashment
o Postdated checks is a check on which the issuer has stated a later date than the current
date
 Represents a risk to the check recipient, since the passage of time may result in
there being no cash left in the issuer’s bank account to be used to pay the
amount listed on the check when it is eventually presented to the bank for
payment
 Perspective of the issuer – no journal entry to record the reduction of cash until
the date listed on the check
 Perspective of the recipient – no entry to record the increase in cash until the
date listed on the check

Unrestricted Cash

 According to ias1 – an entity shall classify an asset as current when the asset is cash or cash
equivalent unless it is restricted to settle a liability for more than twelve months after the end of
the reporting period
 To be reported as “cash”, an item must be unrestricted in use
o Cash must be readily available in the payment of current obligations
o May pera sa bank tas pwedeng iwithdraw anytime = considered as cash
o If di pwedeng iwithdraw or gamitin – not considered as cash

Cash items included in Cash

1. Cash on hand – undeposited cash collections and other cash items such as customer’s checks,
cashier’s or manager’s checks, traveler’s checks, bank drafts and money orders, undeposited
cash collections
2. Cash in bank – includes demand deposit or checking account and saving deposit
3. Cash fund – petty cash fund (pay for minor expenditures), payroll fund (salaries), dividend fund
(pang bayad ng dividend)
Cash Equivalent

 Short-term and highly liquid investments that are readily convertible into cash
 Highly liquid – acquired three months before maturity
o 3 month BSP treasury bill, money marking instrument, time deposit & 3 year treasury
bill purchased three months before date of maturity
 Equity securities - not cash equivalent because shares do not have maturity
 Preference shares – can be qualified as cash equivalents

Investment of excess cash

 Entity must maintain sufficient cash for use in current operations – excess should be invested
even temporarily in some type of revenue earning investment (time deposit, money market
instruments and treasury bills)
 If yung excess invested sa three month time deposit – di pwedeng iwithdraw for 3 months since
cash equivalent
o After three months makukuha yung invested money + interest

Classification of investment of excess cash – to earn interest

1. Term is three months or less – “cash and cash equivalents”

2. Term is more than three months but within one year = short term investments / temporary
investments – presented separately as current assets
3. Term is more than one year = noncurrent or long term investments (However if such become
due within one year from the end of the reporting period, they are classified as current assets)

Measurement of Cash

 Measured @ face value

 In foreign currency – measure at the current exchange rate
 If the bank holding the funds of an entity is in bankruptcy = cash should be written down to
estimate realizable value if the amount recoverable is estimated to be lower than the face value
o Example may 2M yung entity sa bank & yung bank possible na mag shut down. So
possible na di mo buong makuha yung 2M. for example 500,000 na lang yung
makukuha. Estimated realizable value = 500,000

Financial Statement Presentation

 Cash and cash equivalents – first line item under current assets
 Includes all cash items – cash on hand, cash in bank, petty cash fund and cash equivalent which
are unrestricted in use
 Details of cash and cash equivalents – should be disclose in the notes to financial statements

Treatment of Foreign Currency

 Cash in foreign currency – should be translated to Philippine pesos using the current exchange
rate
Cash fund for certain purposes

 Use in current operations of for payment of current obligations = current asset

o Petty cash fund, payroll fund, travel fund, dividend fund, tax fund
 For noncurrent purpose of payment of noncurrent obligation = long term investment
o Sinking fund, preference share, insurance fund, plant and equipment

Classification of Cash Fund

 Cash fund as current or noncurrent should be parallel the classification of the related liability
 Cash fund – current asset or long term investment

Bank Overdraft

 When an individual’s bank account balance goes down to below zero, resulting in a negative
balance
 Normal balance of cash in bank = debit [ if credit balance = bank overdraft]
 Outflow > inflow

 Mary went to a retail outlet and purchased cosmetics amounting to $2,000 and wrote a check
for the purchase. However, when the merchant deposited the check in the bank, Mary’s account
only contained $1,500, which means that she is $500 short of what is due for the check.
 Two outcomes are possible – either the merchant’s bank will pay him the full amount, or they
will let the check “bounce” to Mary’s bank and stamp it with “NSF” or non-sufficient funds. In
case the first outcome happens, Mary will be charged for the overdraft. ( $500)
 Bank overdraft = current liability
 Exception – two or more accounts in one bank ; one bank results in an overdraft = pwedeng
ioffset against the other bank account with a debit balance

Example #1

Ph bank current account – 5M

Manila Bank current account – 4M

City bank current account (overdraft) (100k)

Cash in bank? = 9M

100k = current liability since wala naming another account from city bank so di pwedeng ioffset
sa different bank accounts

Example #2

Security bank current account – 1M

PNB Current account 1 400K

 PNB Current Account 2 (overdraft) - (50K) – pwedeng ioffset since dalawang pnb account

Cash in bank? = 1,350,000 [ 1M + 400K -50K)

Compensating Balance

 Entity nanghiram ng pera sa bank meron compensating balance which is si entity dapat mag
keep ng certain cash balance sa kanyang bank account – dapat imaintain sa checking account =
compensating balance
 Borrow 1M sa bank – borrowing arrangement may compensating balance na 100,000 -> dapat
imaintain sa kanyang checking or demand deposit account
 Compensating balance is part of the cash if yung compensating balance ay pwedeng iwithdraw
o Compentaing balance = not legally restricted – compensating balance is part ng cash
o If the problem if silent – considered at not legally restricted
 If di pwedeng iwithdraw or legally restricted yung compensating balance, compensating balance
is classified as:
o Current asset : “ cash held as compensating balance” if the loan term is short term (1
year or less)
o Noncurrent asset : if the related loan term is long term

Undelivered or unreleased checks

 Checks is undelivered kapag naprepare na yung check pero di pa nabibigay dun sa payee –
adjusted entries required since wala pa naming actual payment na nangyayari

Cash xx

Accounts Payable or appropriate account xx

Postdated checks delivered

 Check is ginawa ng July 29,2019 pero naka date pa ng Sept 25,2019 = postdated
 Ibibigay ng July 29,2019 = di parin considered as payment kasi considered siya as payment ng
Sept 25,2019

Upon preparation ng check may entry na:

Accounts payable xx

Cash xx

Kailangan ireverse kasi wala pa namang payment

Cash xx
 Accounts Payable xx

Stale Checks

 If not encashed nung recipient within six months from the time of issuance

 If the amount is immaterial (wala ng liability na mag ccontinue) – considered as paid yung
liability

Cash xxx

Miscellaneous Income xxx

 If material and a liability is expected to continue

Cash

Accounts Payable xxx

Accounting for Cash shortage

 Cash count shows cash which is less than the balance per book = cash shortage

Example: shoes for sale = $100 ; cashier receives 99$ instead of $100.

Cash $99

Cash short or over $1

Sales = $100

Accounting for Cash overage

 Cash count shows which is more than the balance per book = cash overage

Example: shoes for sale = $100, cashier receives $101

Cash $101

Sales $100

Cash short or over $1

Imprest System

 All cash receipts should be deposited intact and all cash disbursements should be made by
means of check
 It may be more economical and convenient to pay in cash rather than issue checks

Petty Cash fund

 money set aside to pay small expenses which cannot be paid conveniently by means of check
 Two methods of handling the petty cash – (a) imprest fund system (b) fluctuating fund system

a. Imprest fund system

b. Fluctuating fund system

Imprest fund System

A. Check is drawn to establish the fund – mag iissue ka ng check (entity) para mapaencash mo sa
bank para magkaron ka ng petty cash fund

Petty cash fund xxx

Cash in bank xxx

B. Payment of expenses out of the fund – no entries. Prepare memorandum entries in the petty
cash journal
C. Replenishment (act of filling something up again) of petty cash payment
 If kulang na yung petty cash fund – check is drawn to replenish the fund
 Replenishment check = petty cash disbursements
 If paubos na yung fund dun pa lang irrecord yung payment of expenses out of the fund

Expenses xxx

Cash in Bank xxx

D. End of accounting period – meron pang unreplenished expenses (di pa narrecord) – need
irecord to state the correct petty cash fund

Expenses xxx

Petty Cash fund xxx

The Adjustment is to be reversed at the beginning of the next accounting period

 E. Increase in the fund :

Petty Cash fund

Cash in Bank

F. Decrease in the fund – ddeposit mo yung petty cash dun sa bank account

Cash in Bank

Petty cash fund

Fluctuating System

 Checks drawn to replenish the fund ≠ petty cash disbursements

A. Establishment of the fund

Petty cash fund xxx

Cash in bank xxx

B.