Catherine P.
Gongora
Intermediate Accounting 1 (2ND Term)
Cash and Cash Equivalents
Cash
In layman’s terms it simply means “money”. Money is the standard medium of exchange in business
transactions. Money refers to the currency and coins that is circulating and is legal tender (tinatanggap ng
batas).
In accounting, cash includes money and any other negotiable instruments that are payable in money and
accepted by the bank for deposit and immediate credit.
Cash Presentation
It is presented as current asset.
Note: cash can’t be a current asset if there is a restriction for at least 12 months after the end of reporting
period.
Unrestricted cash – readily available in the payment of current obligations. (current asset)
Restricted cash – more than 12 months of restriction. (noncurrent asset)
Cash Measurement
It is measured at its face value.
We measure cash initially at its face value.
We measure cash subsequently at its face value.
Foreign currency – measured on its current exchange rate. Therefore, when recording, we need to
convert it based on its current exchange rate.
2 Measurement Period
1. Initially – current value/ value sa ngayon.
2. Subsequently – value over time/ value sa paglipas ng panahon.
Estimated Realizable Value
If the 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.
Cash Items
Cash on Hand – this includes undeposited cash collections, customer’s checks, manager’s checks,
cashier’s checks, traveler’s checks, bank draft, and money order.
Cash in Bank – this includes demand deposit/ checking account, and saving deposit which are unrestricted
as to withdrawal.
Cash Fund – set aside for current purposes such as petty cash fund, payroll fund, and dividend fund.
Cash Equivalents
Highly liquid investments.
The standard further states that only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents.
Examples:
A. Three-month BSP treasury bill.
B. Three-year BSP treasury bill purchases three months before date of maturity.
C. Three-month time deposit
Catherine P. Gongora
Intermediate Accounting 1 (2ND Term)
D. Three-month money market instrument or commercial paper.
Checks
Undelivered Checks – checks already prepared but not yet delivered.
Postdated Checks – a check with a future date written on it, which means that funds cannot be withdrawn
from the account until that date.
Stale Checks – a check that is more than six months old from the date it was issued. Banks are not
required to honor stale checks because the funds may no longer be available, the check may have been lost
or stolen, or the check writer may have closed their account.
Cash fund for a certain purpose
If the cash fund is set aside for the use in current operations or for the payment of current obligations, it is
a current asset. The cash fund is included as part of the cash and cash equivalents.
Examples: petty cash fund, payroll fund, travel fund, interest fund, dividend fund, and tax fund.
On the other hand, if the cash funds are set aside for noncurrent purposes or payment of noncurrent
obligations, it is shown as long-term investment.
Examples: sinking fund, preference share, redemption fund, contingent fund, insurance fund and fund for
acquisition or construction of property, plant and equipment.
Bank Overdraft
Occurs when a bank account balance goes below zero due to a transaction that exceeds the available
funds in the account. The bank may lend the difference to the account holder, who then incurs a debt that
must be returned, plus any applicable fees.
Current liability (if bank will lend money).
Scenario: Company A has 1M deposited money to bank A and to pay their account to Company B, Company A
issued a check worth 1.2M including the accumulated interest. (there is a bank overdraft because Company A
only has 1M deposited in his bank account) However, the bank called Company A and informed that they only
have a balance of 1M, due to the good relationship Company A and Bank A have, Bank A decided to lend money
to Company A amounting to 200K to cover the difference. (since Bank A covered the difference, Company A
now must pay to Bank A which amounts to 200K)
Note: Offsetting is allowed if the same bank.
Example 1
Bank A (200,000) (bank overdraft)
Bank B 1,000,000
Bank C 2,000,000
Total Cash 3,000,000 (reported as cash in financial statement
Example 2
Bank A (200,000) (bank overdraft)
800,000 (deposited cash)
Bank B 1,000,000
Bank C 2,000,000
Total Cash 3,600,000 (reported as cash in financial statement
Compensating Balance
Catherine P. Gongora
Intermediate Accounting 1 (2ND Term)
Is a set amount of money a borrower must keep in a bank account as part of a loan agreement. It acts as
collateral for the lender, protecting them from the risk of the borrower defaulting to loan.
For example, an entity borrows 5,000,000 from a bank and agrees to maintain a 10% for 500,000 minimum
compensating balance in a demand deposit account.
If the deposit or compensating balance is not legally restricted/ informal, it can be considered part of cash
and can be withdrawn.
On the other hand, if the deposit is legally restricted/ formal, it can’t be part of the cash.
