ACCOUTING FOR CASH AND CASH EQUIVALENTS
CASH includes
a. Cash on Hand. This pertains to undeposited coin, currency, cash collections and other
cash items awaiting deposits such as customer’s check, cashier’s or manager’s check,
bank drafts and money orders;
b. Cash in Bank. This includes demand or bank deposits including checking and savings
accounts which are unrestricted as to withdrawal; and
c. Cash Funds set aside for current purposes such as petty cash funds, change funds,
sinking fund set aside to pay currently maturing (within one year after the reporting
date) bonds payable.
CASH EQUIVALENTS include items that are both
a. readily convertible to known amounts of cash; and
b. so near their maturity that they present insignificant risk of changes in interest rates
(generally 3 months or less).
Examples of cash equivalents are:
1. Three-month BSP Treasury Bill
2. Three -year BSP Treasury bill purchased three months before date of maturity
3. Three-month time deposit
4. Three-month money market instrument or commercial paper
MEASUREMENT OF CASH
Cash is measured at face value.
In Philippine setting, cash in foreign currency should be translated to Philippine Peso using
the current exchange rate.
In a bank or financial institution holding the funds of an entity is in bankruptcy or financial
difficulty, cash should be written down to estimated realizable value if the amount recoverable
is estimated to be lower than the face value.
FINANCIAL STATEMENT PRESENTATION
The caption “Cash and Cash Equivalent” should be shown as the first item among current
assets. However, the details comprising the “Cash and Cash Equivalents” should be disclosed
in the notes to financial statements.
BANK OVERDRAFTS
Bank overdrafts should be reported as current liabilities. They are not offset against the cash
account unless there is available cash in another account at the same bank.
COMPENSATING BALANCE
Compensating Balance generally takes the form of minimum checking or demand deposit
account balance that must be maintained in connection with a borrowing arrangement with a
bank. In effect, this arrangement results in the reduction of the amount borrowed because the
compensating balance provides a source of fund to the bank as partial compensation for the
loan extended.
If the deposit is not legally restricted as to withdrawal by the borrower because of an
informal compensating balance agreement, the compensating balance is part of cash.
If the deposit is legally restricted because of a formal compensating balance arrangement,
the compensating balance is classified separately as “cash held as compensating
balance” under current assets in the related loan is short term, otherwise, noncurrent
investment.
UNDELIVERED OR UNRELEASED CHECKS
An undelivered check or unreleased check is one that is merely drawn and recorded but not
given to the payee before the end of the reporting date. Such should be restored in the books,
and must form part of cash.
POSTDATED CHECK DELIVERED
A postdated check delivered is a check drawn, recorded and already given to the payee but it
bears a date of subsequent to the end of the reporting date. Such is also restored to form part
of cash.
STALE CHECK OR CHECK LONG OUTSTANDING
In banking practice, a check become stale if not encashed within six months from the time of
issuance. Stale check issued by an entity should be restored and shall form part of cash.
COMMONLY MISCLASSIFIED AS CASH AND CASH EQUIVALENTS
a. Postdated checks and I.O.U.s should be reported as receivables.
b. Travel advances to employees should be reported as receivables or as prepaid
expenses.
c. Postage stamps on hand should be reported as office supplies or as prepaid expenses.
d. Restricted cash.
1. Cash restricted for some special purpose (such as the retirement of bonds) is
reported separately in either the current asset section or the noncurrent asset
section of the balance sheet, depending on the date of availability or
disbursement.
2. The SEC recommends that legally restricted deposits held as compensating
balances against borrowing arrangements be reported separately in either the
current asset section or the noncurrent asset section, depending on whether
the borrowing arrangement is short-term or long-term.
e. Money market funds, money market savings certificates, certificates of deposit, and
similar types of deposits are nearly "equivalent to cash" in terms of liquidity. However,
these securities usually contain restrictions or penalties on their conversion to cash. In
general, these items should be reported as temporary investments. However, such
investments with explicit term of three months or less are classified as cash
equivalents.
f. Cash fund set aside for the acquisition of noncurrent asset should be classified as
noncurrent regardless of the year of disbursement.
CASH SHORTAGE/OVERAGE
Where the cash account shows cash which is less than the balance per book, there is cash
shortage. Where the cash account shows cash which is more than the balance per book, there
is cash overage.
The cash short or over account is only a temporary or a suspense account. When the financial
statements are prepared the same should be adjusted.
PETTY CASH FUND
Petty cash is a small reserve of cash kept on-site at company premises for incidental minor
cash needs. There are two types of managing petty cash, namely imprest system and
fluctuating system.
a. Imprest System. The imprest system is a control system of cash which requires
that all cash receipts should be deposited intact and all cash disbursements
should be made by means of check. Under this system, a petty cash fund is
replenished, with check usually equal to the petty cash disbursements, when the
fund balance runs low.
b. Fluctuating System. The system is called “fluctuating fund system” because the
checks drawn to replenish the fund do not necessarily equal to petty cash
disbursements.
Petty Cash Management (Imprest System vs. Fluctuating System)
PARTICULARS IMPREST SYSTEM FLUCTUATING SYSTEM
As to petty cash The petty cash funds balance is The petty cash funds balance is
balance. fixed. fluctuating. It depends on the amount
of receipts and disbursements in petty
cash funds.
As to timing of The expenditures of petty cash Each expenditure are recorded
recording. funds just recorded at immediately.
replenished petty cash funds.
As to function of The function of petty cash The function of petty cash recording is
petty cash recording is as a tool of control as a journal. It is used to be a source
recording. and it cannot be posted to of posting to each account in general
general ledger. ledger.
As to It is necessary to make No adjustment is necessary because
adjustment at adjusting entries for unrecorded the petty cash expenses are recorded
the end of the transaction at the end of period. outright.
reporting The beginning of the next
period. period must be made reversing
entries.
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Sources:
1. Financial Accounting Vol.I, First Part, 2016 Edition Valix, Conrado T., Peralta, Jose F.
and Valix, Christian Aris M.
2. Financial Accounting, 9th Ed. Weygandt, Kimmel, Kieso
3. Chapter 7, Cash and Receivables, www.wiley.com/college/kieso/outline/out7.pdf
