CASH AND CASH EQUIVALENT

1. Cash – Money  currency and coins in circulation (legal tender)

+
Any other negotiable  includes: checks, bank drafts and money orders
Instrument that is payable excludes: postage stamps and IOU’s
in money and acceptable
by the bank for deposit
and immediate credit
a. Checks – an order of a depositor to his bank to pay a sum certain in money to a third person or himself in
demand
 Personal check
 Cashier’s/Manager’s/Treasurer’s check
 Traveller’s check
 Customer check
 Certified check
b. Bank drafts – order of a bank to another bank or that of the depositor to his bank a definite sum of money
either on demand or at a future determinable time; guaranteed by the bank
c. Money orders – drawn by a bank on another bank or its branch or an order from one post office to another
to pay a specified payee
 Postal money order
 Bank money order
2. General Classification of Cash
a. Cash on Hand – those that are within the entity’s premises and is not set aside for a specific purpose
b. Cash in Bank – those that are in a custody of the entity’s bank and is not set aside for a specific purpose
c. Cash Fund – those that are not for general use, thus, are for a specific purpose ( could be COH or CIB )
3. Cash equivalents - are short-term 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
 treasury bills, time deposits, money market instruments or placements and commercial papers
 are held for meeting short-term cash commitment
Equity Securities – cannot qualify as cash equivalents because shares do not have maturity dates
 except: preference shares with a specified redemption date
4. Rules on Cash and Cash Equivalents
a. Cash on Hand and Cash in Bank – must be unrestricted in use ( it is readily available for the payment of
current obligations and not be subject to any restrictions, contractual or otherwise )

 demand deposit 
 Cash in Bank  savings deposit 
 unused credit line 
 escrow account 
b. Cash Fund – must be set aside for use in current operations or for the payment of current obligations
 for current purpose a – part of cash and CE
 Cash Fund
 for non-current purpose b – long term investments
a
– petty cash fund, payroll fund, travel fund, interest fund, dividend fund, tax fund, revolving fund and
change fund
b
– bond sinking fund, PPE funds, preference share redemption fund, contingent fund and insurance
fund, pension fund
 Bond sinking fund  due within 1 year  part of cash and CE
or any fund for related liability
the payment of  due beyond 1 year  part of long-term
liability investments

Rule: The classification of the fund should parallel the classification of related liability
 PPE funds – always part of long-term investments regardless of when to be used or disbursed
 c. Cash Equivalents – observe the following rules:

term is at most 3 months part of cash and CE

 CE
not acquired 3 months before maturity part of cash and
CE
not matures within 12 months  short-term
investments
not  long-term investments
d. Foreign Currency Deposits – should not be subject to any foreign exchange restrictions to qualify as a cash
and CE item; otherwise, presented separately as part of NCA
5. Measurement of Cash and CE
a. Cash in local currency – reported at face amount
b. Cash in foreign currency – translated at the current exchange rate ( exchange rate at the end of reporting
period )
c. Cash equivalents – reported at face amount
d. Cash held by a bank in financial difficulty or bankruptcy – reported at realizable value (not applicable if bank
is already dosed – presented as a receivable )

6. Presentation in the FS
a. Statement of Financial Position – presented as one line item, “cash and cash equivalents”, included are all
those item that qualified under the rules discussed
b. Notes to Financial Position – the disaggregation or details of the line item “cash and cash equivalents”
7. Bank Overdrafts – occur when there is a credit balance in the cash in bank account ( on the side of the bank, the
company’s account has a debit balance )
 generally not permitted in the Philippines
Treatment: Genera Rule: presented as part of current liabilities; not allowed to be offset with other cash in bank
accounts with debit balance; Specific Rule
a. Entity has other accounts with the same bank  offsetting is allowed unless item is material
b. Has other accounts but with different banks  offsetting is not allowed unless item is immaterial
8. Compensating Balances – takes the form of a minimum deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank; disclosed in the NFTS regardless of the arrangement
Treatment: the rules below must be followed

Not legally restricted or is informal  part of Cash and CE

 CB related loan is ST  not part of cash but is part of
Legally restricted or is formal CE
related loan is LT  not part of cash but is under
NCA
Computation of Effective Rate when CB exist
 EIR = Net Interest / Net Proceeds from Loan
9. Special Cases on Checks
a. Undelivered Checks – those that is merely drawn but not yet given to the payee
Payee                                  Drawer             
Cash Item?  
*no adjusting entry *Cash xx
AP xx
b. Postdated Checks Delivered – drawn, recorded and already given to the payee but bear a date subsequent
to the end of the reporting period
Payee                                  Drawer             
Cash Item?  
*AR xx *Cash xx
Cash xx AP xx
 c. Stale Checks – those that are not encashed by the payee within “a relatively long period of time”
 the Negotiable Instruments Law is silent as to this matter; follow the entity’s policy; if still
silent, follow the normal banking practice of 6 months
Payee                                  Drawer             
*material *AR xx *Cash xx
Cash xx AP xx
*immaterial *Loss xx *Cash xx
Cash xx Misc. Income
xx
d. NSF/DAUD/DAIF Checks – those checks that are drawn against accounts that are either unfunded or with
insufficient funds
 excluded from the cash balance of the payee
*AR xx
Cash xx
10. Fraudulent Acts Relating to Cash
a. Window Dressing – any deliberate misstatement of the assets, liabilities, equity, income and expenses;
specifically, this is often accomplished by keeping open the books even beyond the end of the accounting
period for the purpose of showing a better picture of the financial highlights and profit activities of the
business
 entries made to window dress must be REVERSED to correct the financial statements
b. Lapping – a practice used for concealing cash shortage. It consist of misappropriating a collection from one
customer and concealing this defalcation b applying a subsequent collection made from another customer
 it involves a series of postponement of the entries for the collection of receivables
c. Kiting – another practice used to conceal cash shortage and is possible when correct accounts are
maintained with different banks; this is normally done on month end by:
a) Draw a check against Bank A. Do not record the drawing.
b) Deposit the check at Bank B. Do not deposit the deposit.
c) Bank B will record the deposit whereas Bank A will not be able to record the withdrawal until
presentment of the check by Bank B.
 can be discovered by simultaneous preparation of bank reconciliation statements
11. Accounting for Cash Shortage/Overage
Shortage                                    Overage              
a. Shortage/Overage Cash Short or over xx Cash xx
is determined Cash xx Cash Short or over xx
b. Someone is held Due from Cashier xx Cash Short or Over xx
responsible Cash Short or Over xx Due from Cashier xx
c. No claims is made Loss from Cash Shortage xx Cash Short or Over xx
Cash Short or Over xx Miscellaneous Income xx
12. Imprest System – a system of control of cash which requires that all cash receipts should be deposited intactand
all cash disbursement should be made by n=means of check
 however, there are occasions when the issuance of checks becomes impractical or inconvenient;
therefore, it becomes necessary to establish a petty cash fund
Petty Cash Fund – designed to promote control over small cash disbursements which would be awkward to
pay by check
a) A petty cash custodian is given a small amount of currency from which to make small
payments
b) Each time a disbursement is made, the petty cashier obtains a signed receipt for the
payment
c) When cash in the fund runs low, the petty cashier submits the signed receipts to the general
cashier and a CHECK is prepares to replenish the petty cash fund
 Petty cash disbursement should be replenished only by means of a check and NOT from
collections
 PCF is handled using either the imprest fund system or the fluctuating fund system.
13. Pro-forma Entries
Imprest Fund                                 Fluctuating Fund              
a. Establishment PCF xx PCF xx
of the fund Cash in Bank xx Cash in Bank xx
b. Payment of Expenses xx
expenses out None PCF xx
of the fund
c. Replenishment Expenses xxa PCF xxb
of the fund Cash in bank xx Cash in Bank xx

a
– the amount of replenishment should equal the total of disbursement so as to maintain the PCF balance at
all times
b
– the amount of replenishment do not necessarily equal the amount of disbursement; thus, the PCF
balance may fluctuate
d. At year-end Expenses xx
assuming no PCF xx None
replenishment
was made
e. To increase(decrease) PCF xx PCF xx
the fund balance Cash in Bank xx Cash in Bank xx

Cash in Bank xx Cash in Bank xx

PCF xx PCF xx

Computations: Coins and Currencies xx PCF, adjusted xx

+ Accomodation Check + Petty Cash Vouchers xx
(Replenishment) xx + IOU’s (receivables) xx
PCF, adjusted xx PCF, as accounted xx
PCF, imprest balance xx
Shortage/Overage xx