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 noncurrent 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.

Compensating balance
If problem is silent, ignore the compensating balance and treat it as part of cash.

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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.

Petty Cash Fund

This cash fund is managed using two methods namely:
Imprest Fund System
Fluctuating Fund System

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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.

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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