MODULE 1

CASH AND CASH EQUIVALENTS

OVERVIEW

This material discusses the first item reported in the statement of financial
position – cash and cash equivalents. The discussion is based on IFRS 9 Financial
Instruments and IFRS 7 Financial Instruments – Disclosures, that defines financial
instrument as any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity (par. 11, IFRS 9). Therefore,
from the standpoint of the holder, the instrument is a financial asset. A financial asset
includes cash and cash equivalents, equity instruments of another entity (investment
in equity shares of another entity), contractual right to receive from another entity cash
and other financial assets (receivables and loans) and investments in debt instruments
of another entity (investment in bonds and commercial papers).

INTENDED LEARNING OUTCOMES

After reading this module, the related topic in the textbook, and the related
materials and links, the student is expected to

1. Explain the nature of cash and cash equivalents;

2. Determine how and at what amount should cash and cash equivalents be
presented in the statement of financial position.
3. Identify and explain the basic features of the internal control to safeguard cash;
4. Perform accounting procedures for maintenance of a petty cash fund;
5. Prepare bank reconciliation statements;
6. Formulate adjusting entries to bring cash and cash equivalents to its correct
balance;
7. Present cash and cash equivalents in the statement of financial position; and
8. Identify the required disclosures in the notes to financial statements relating to
cash and cash equivalents.

COURSE MATERIAL

NATURE OF CASH AND CASH EQUIVALENTS

Cash is any items used as a standard medium of exchange. It could be related

to currencies and coins that are in circulation. An item is considered as cash if it is
acceptable by banks or other financial institutions at face value. In a broader sense,
it cash on hand (bills, coins, checks, drafts, and postal money orders) as well as cash
in banks (savings and checking accounts with banks).

Cash equivalents are highly liquid instruments that are so near their maturity
and that there is insignificant risk of change in value due to fluctuation of interest rates.
Depending on the accounting policy set by the entity, a financial instrument qualifies
as cash equivalent if it matures within a short period of time (usually three months or
less from the date of acquisition.

PRESENTATION AND MEASUREMENT OF CASH AND CASH EQUIVALENTS IN

THE STATEMENT OF FINANCIAL POSITION

Cash is generally measured at face value, which is its fair value. Demand
deposits in foreign currency are measured using the exchange rate in effect at the end
of the reporting period. Unless the statement of financial position is prepared for a
special purpose, cash and cash equivalents are normally reported as a single-line
item, the details of which (currencies on hand, cash in banks at different locations) are
disclosed in the notes to financial statements.

NOTEWORTHY CONSIDERATIONS IN REPORTING CASH BALANCE IN THE

STATEMENT OF FINANCIAL POSITION

1. Foreign currency. Cash in foreign banks are translated at the exchange rate
at the reporting date and included in cash and cash equivalents if there is no
restrictions on its withdrawal and available for use in current operations.
Otherwise, the cash in foreign bank is reported among the non-current assets.

2. Cash in closed banks. Cash in closed banks or banks facing bankruptcy is

excluded in the cash and cash equivalents category. Instead, this is reported
as a receivable item, either current or non-current, depending on the expected
timing of recovery of the amount from the bank. Since there is usually a limit
that can be claimed from the bank, as insured by the Philippine Deposit
Insurance Company (PDIC), any amount that cannot be claimed is reported as
a loss and the receivable is reported at the expected realizable value.

3. Customers’ post-dated checks. These are checks received by the entity from
its customers as of the reporting date, but are dated subsequent to the
reporting date. Since these checks are not acceptable by bank for deposit,
these checks should be excluded from the cash balance, and instead reported
as receivables. If an entry was made upon receipt of the check by debiting

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 Cash and crediting Accounts Receivable, the entry should be reversed and the
amount is restored back to cash.

4. Postage stamps and expense advances. Postage stamps not yet used at the
reporting date are classified as prepaid expenses. These items may not be
very common nowadays since many entities do not make use of the snail mail
anymore but instead send correspondences through the electronic mails.
Expense advances, on the other hand, are amounts that are given to
employees or officers for legitimate expenses that they are incurring. They are
reported as prepaid expenses, until a liquidation report has been submitted by
the responsible employee or officer, after which the amounts are treated as
expenses.

5. Bank overdraft. A bank overdraft occurs when an entity issues checks for
amount in excess of its deposits with the bank, simply seen as a negative
balance in cash in bank account. This amount is properly reported as a current
liability. If the entity, however, has another account with the same bank with a
positive balance, the overdraft is generally allowed to be offset against the
positive balance. Offsetting, however, is not allowed if the cash balances are
in different banks.

6. Undelivered or unreleased checks. These are the company’s own checks

properly dated on or before the reporting date. The checks, however, are not
yet delivered or released to the payees. In other words, the checks are still in
the possession of the issuing company. When the issuance of the checks has
been recorded already by debiting Accounts Payable or Vouchers Payable or
the particular expense accounts and crediting Cash in Bank, the entry should
be reversed and the amount of checks is restored back to cash.

7. Company’s post-dated check. These are the company’s own checks usually
issued to the payee and recorded in the books as a disbursement (credited to
Cash in Bank account). The checks, however, are dated after the reporting
date. Apparently, said checks cannot yet be deposited by the payees as of the
reporting date and technically, restored back to cash.

8. Compensating balances. These are minimum amounts required to be

maintained with a bank as may be required of a loan transaction with the bank.
If the agreement with the bank does not contain a restriction to withdraw such
amount, it is considered as part of cash and cash equivalents. If the
compensating balance is restricted as to withdrawal, the amount is excluded in
the cash and cash equivalents total and reported separately either as current
or noncurrent, depending on the nature of the liability it is restricted for.

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9. Cash set aside for long-term specific purpose or for acquisition of non-current
assets. These are cash items that are also in control by the entity. The
amount, however, is earmarked for a certain long-term purpose or for the
acquisition of noncurrent assets. These amounts are reported as noncurrent
assets regardless of the timing of its disbursement. Typical examples are cash
fund for plant expansion and sinking fund cash.

CHARACTERISTICS OF A SYSTEM OF CASH CONTROL

Because of the nature and characteristics of cash – it is of small bulk and is

without identity - it is usually very prone to misappropriation, mishandling and even,
theft. A system of cash control is therefore, required to lessen, if not eliminate these
possibilities.

1. Segregation of duties for handling cash and recording cash transactions. The
cash custodial function and cash recording functions should always be
separate and no one individual should handle both functions. Not even related
persons, say spouses, cousins or best friends, should handle these functions
so as to eliminate possible connivance in committing fraud and misappropriate
cash.

2. Use of imprest system. The entity should adopt a system whereby all daily
receipts are deposited intact to the bank. Not any amount should be used and
deducted from the daily receipts.

3. Use of voucher system. This is a system that controls cash disbursements of

the entity where all disbursements are made by checks. The check is
prepared only after a voucher has been duly approved by designated officers.
Said voucher is accompanied by documents, invoices and other evidences that
would validate the legitimate payment. The use of the voucher system
necessitates the maintenance of a petty cash fund from which petty and
immediate payments are made and would not require issuance of checks.

4. Internal audit at irregular interval. The persons in custody of cash (both

cashier/treasurer and petty cash custodian) should be audited at irregular
intervals. No specific or regular date of audit should be established by them
so that anomalous transaction, if any, would not be patched or covered up.

5. Periodic reconciliation of bank statement balance and cash balance in the

accounting records. There is a double record of cash under this system of
cash control - one, in the company books and the other, in the bank. Balances
of cash in bank per ledger and the depositor’s account per bank records
normally would not agree at the end of the month due to time lags, or difference

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 in the recording time. Thus, it is important to prepare a reconciliation of both
bank and book balances every month end.

TYPES OF BANK RECONCILIATION

1. Single-date bank reconciliation. This is a type that reconciles the bank and
book balances at a single date, usually at month end.

2. Proof of cash or Four-column reconciliation. This is a type that reconciles bank

and book balances on two dates, say at end of last month and at end of current
month. It also brings the receipts (or deposits) and disbursements (or
withdrawals) of both bank and book to be in agreement. An illustration is
shown below:
Sample Company
Proof of Cash
November 30, 2021
Beginning Ending
Reconciliation Deposits/ Withdrawals/ Reconciliation
October 31 Receipts Disbursements November 30
Balance per bank P58,954.20 P213,124.00 P242,281.00 P29,797.20
Deposit in transit
Oct. 31 4,254.00 (4,254.00)
Nov. 30 6,585.00 6,585.00
Outstanding checks
Oct. 31 (8,105.00) (8,105.00)
Nov. 30 7,038.30 (7,038.30)
NSF check redep. in
Nov; no entry made
for return or
redeposit (1,000.00) (1,000.00)
Erroneous bank
charge (125.00) 125.00
Corrected balances P55,103.20 P214,455.00 P240,089.30 P29,468.90

Balance per books P54,062.20 P214,570.00 P239,107.30 P29,524.90

Bank service
charges
Oct. 31 (59.00) (59.00)
Nov. 30 31.60 (31.60)
Interest earned
Oct. 1,100.00 (1,100.00)
Nov. 985.00 985.00
NSF check returned
by bank 1,189.40 (1,189.40)
Check No. 112 for
P460 recorded in
the books as P640 (180.00) 180.00
Corrected balances P55,103.20 P214,455.00 P240,089.30 P29,468.90

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1. Deposit in transit at the end of the previous month is added to the balance per
bank statement on that date and deducted from the deposits reported during
the current month since this deposit was received and recorded by the bank
during the current month.

2. Deposit in transit at the end of the current month had not been received yet by
the bank during the month and is, therefore, an addition to current month’s
deposits and balance per bank statement at the end of the current month.

3. Outstanding checks at the end of the previous month are deducted from the
balance per bank statement on that date. This is also deducted from the
disbursements of the current month since it is presumed that these checks
cleared the bank during the current month.

4. Outstanding checks at the end of the current month is an addition to the current
month’s disbursements per bank and a deduction from the bank’s current
month’s ending balance.

5. Bank service charges of the previous month are presumed to have been
reflected in the books in the current month; hence, the amount is deducted
from both beginning balance and disbursements of current month. The
explanation holds true for NSF checks.

6. Bank service charges and NSF checks at the end of the current month have
not yet been reflected in the books; thus, these are shown as additions to the
disbursements per books of the current month and deductions from the ending
balance.

7. Credits made by the bank that are not yet reflected in the books such as
interest credits and note collected by bank in behalf of the depositor are
accounted similarly. The amounts at the end of the previous month are added
to the balance per books on that date but are deducted from receipts of the
current month since these are presumed to have been recorded in the books
in the current month. The amounts at the end of the month, on the other hand,
are added to both receipts and ending balances.

FORMS OF BANK RECONCILIATION STATEMENT

1. Both bank and book balances are reconciled to a correct balance. This form
of bank reconciliation brings both the balance per ledger (per books) and the
balance per bank statement (per bank) to corrected figures. This form has the
advantage of clearly showing the adjustments required in the books.

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2. Bank balance reconciled with book balance. This form starts with the balance
as reported in the bank statement and adjustments are made to reconcile it
with the book balance. A good observation would show that normal bank
adjustments are taken in the usual manner while book adjustments are made
in the reverse order.

3. Book balance reconciled with book balance. This form starts with the balance
per ledger and adjustments are made to reconcile it with the bank balance.
Similarly, a good observation would show that the normal book adjustments
are accounted for in the usual manner but the normal bank adjustments are
accounted for in the reverse order.

ACCOUNTING FOR PETTY CASH FUND

When the imprest system and the voucher system are in place, it is necessary
for an entity to set up a petty cash fund. This fund will be used for making payments
that are immediate and petty and will not require issuance of checks.

1. Establishment of the fund. An amount to be established as petty cash fund is

decided by management. The amount will depend on the extent of petty
payments being made by the entity for some weeks. The amount of the fund
should not be too low that will require frequent replenishment of the fund, nor
should it be too high, that there is always a significant amount in the custody
of the petty cash custodian who could be tempted to use the fund for purposes
other than its real intent. The entry to record the establishment of the fund is
a debit to Petty Cash Fund and a credit to Cash in Bank. The check then is
changed to bills and coins and turned in the custody of the of the petty cashier.

2. Payment from the fund. A petty cash voucher is approved that authorizes the
petty cashier to make payment from the fund. No journal entry is made for this
payment. The petty cashier may simply note this in his petty cash book as a
control of his fund. At any time, the total of the petty cash vouchers and the
amount remaining in the fund should be the total fund that was originally set
up.

3. Replenishment of the fund. When the fund runs low, the petty cashier
accumulates all the petty cash vouchers and submit them for replenishment of
the fund. An entry is made to record the replenishment by debiting the various
expense accounts and crediting Cash in Bank. This, then, will bring the total
amount of bills and coins in the fund equal to the original amount established.

4. Adjusting entry at the end of the reporting period. When preparing financial
statements at the end of the reporting period, the amount of petty cash fund

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 reported should be equal to the actual amount on hand. Thus, if between the
most recent replenishment and the end of the reporting period, payments were
made from the fund, an adjusting entry is made to recognize these expenses
and bring the petty cash fund to the correct amount. This entry debits the
various expense accounts and credits Petty Cash fund.

ITEMS CONSIDERED IN THE RECONCILIATION OF BANK BALANCES

1. Deposit in transit. This is a collection that has not yet been deposited
with the bank. This is sometimes called undeposited collections.
Because the collection has already been recorded in the books, the
amount is taken as an addition to the bank balance to arrive at the
correct cash balance.

2. Outstanding check. This is a check issued by the company (depositor)

but has not been presented yet to the bank for payment. In other words,
the amount in this check is already shown as a disbursement in the
books (deduction from its cash balance), but has not been accounted
yet in the bank records. To reconcile and bring the bank balance to a
correct amount, the amount of the outstanding check is deducted from
the bank balance.

3. Debit memos. Debit memos are evidences of transactions between the

depositor and the bank. These transactions originate from the bank
that debited the depositor’s account. Examples of debit memos are
debits for bank service charges, for NSF check returned by bank, and
automatic payment of loan from the bank. This means that the bank
debited (charged) and deducted the amount from the depositor’s
balance. Thus, in order that the bank and book balance would reconcile,
the amount is deducted from the book balance.

4. Credit memos. Credit memos are exact reverse of debit memos.

Originating from the bank, this memo indicates that the bank credited
(or increased) the depositor’s account for an amount represented by any
of the following: Interest credit earned by the depositor, note collected
by the bank in behalf of the depositor, and proceeds of loan from the
bank.

5. Errors. Errors may be committed by either the bank or the books, either
overstating or understating the cash balance. Therefore, it is important
to determine who made the error and the effect of such error in order to
make the appropriate adjustment in either of the two books.

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ASSESSMENT PROBLEMS

1. The books of Covid Company disclosed a cash balance of P691,720 on June

30. The bank statement as of June 30 showed a balance of P556,800.
Additional information that might be useful in reconciling the two balances
follows:

1. Check No. 128 for P13,000 was erroneously recorded in the check
register as P30,000.
2. A customer’s note dated March 31 was discounted on April 12. The note
was dishonored on June 29 (maturity date). The bank charged Coach’s
account for P142,650, which includes a protest fee of P420.
3. The deposit of June 24 was recorded on the books as P28,950 but it was
actually a deposit of P29,850.
4. Outstanding checks totaled P98,850 as of June 30.
5. There were bank service charges for June of P2,100 not yet recorded on
the books.
6. Covid’s account had been charged on June 26 for a customer’s NSF
check for P12,960.
7. Covid properly deposited P6,000 on June 30 that was not recorded by
the bank.
8. Receipts of June 30 for P134,250 were recorded by the bank on July 2.
9. A bank memo stated that a customer’s note for P45,000 and interest of
P1,650 had been collected on June 27 and the bank charged a P360
collection fee.

a. How much is the correct cash balance at June 30?

b. How much is the net adjustment to the cash account?

2. Veerus Limited keeps all of its cash in a checking account. Presented on the
next page are the bank reconciliation prepared at the end of May, a summary
of the company’s bank statement for June, and the company’s general ledger
account for cash.

Veerus Limited
Bank Reconciliation Statement
May 31, 2020

Balance per bank statement P 625,000

Add deposits in transit __22,500
Total P 647,500
Deduct outstanding checks __41,800
Correct cash balance P 605,700
Balance per books P 607,200
Deduct bank service charge 1,500
Correct cash balance P 605,700

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 A summary of Veerus’s bank statement for June follows:

Balance, June 1 P 625,000

Deposits shown for June 2,569,200
Note and interest collected during June less collection fee 156,500
Checks that cleared during June (2,570,700)
June service charge (1,700)
Balance, June 30 P 778,300

The ledger account for Cash in Bank follows:

Cash in Bank
Balance, June 1 607,200 Service charge for May 1,500
June receipts 2,618,200 June disbursements 2,566,400

Additional information:

a. During June,Veerus Company incorrectly recorded two checks. Check

No. 123567 was drawn for P23,300 but recorded as P32,300; Check
No. 123572 was drawn for P18,000 but recorded as P1,800. Both
checks were issued in payment of accounts payable and cleared the
bank in June.

b. During June, the bank erroneously charged a P21,000 check of Virus

Company to Veerus Company’s account.

c. A note for P150,000 and interest of P7,500 was collected by the bank
during June. All of the interest was earned during the current year. The
bank deducted a collection fee of P1,000. The company has not yet
recorded the collection.

a. What is the amount of deposits in transit at June 30, 2020?

b. What is the amount of outstanding checks at June 30, 2020?
c. How much is the correct cash balance at June 30, 2020?

3. The trial balance of Masque Company at December 31, 2020 includes the
following accounts:

Petty cash fund – P15,000; Cash on hand – P190,700; Metrobank current

account – P310,200; Allied Bank current account #1 – P320,000; Allied Bank
current account #2 – P40,000 credit; Security Bank savings account –
P150,000.

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Additional information:

1. The petty cash fund consisted of the following items as of December 31,
2020:
• Currency and coins, P8,500
• Employees’ advances, P1,800
• Currency in an envelope marked “collections for charity” with
employees’ names attached, P2,000
• Unreplenished petty cash vouchers, P2,240
• Replenishment check drawn by Masque Company payable to the
petty cashier, P2,320

2. Cash on hand includes the following items:

• Customer’s check for P30,000 returned by bank on December 26,
2020 due to insufficient funds, but subsequently redeposited and
cleared by the bank on January 10, 2021.
• Postal money orders received from customers, P18,000
• Customer’s check for P15,000 dated January 10, 2021 received on
December 23, 2020.

3. Included among the checks drawn by Msque Company against the

Metrobank current account and recorded in December 2020 are the
following:
• Check No. 1214 written and dated December 22, 2020 and delivered
to payee on January 3, 2021, P25,000
• Check No. 1219 written December 26, 2020 dated January 30, 2021,
and delivered to payee on December 28, 2020, P43,000.

4. The credit balance in Allied Bank current account #2 represents checks

drawn in excess of the deposit balance that are still outstanding at
December 31, 2020. A right of offset exists in the agreement between
Allied Bank and its depositors.

5. The savings account deposit in Security Bank was set aside by the Board
of Directors for the acquisition of new equipment. This amount is
expected to be disbursed in the next three months from December 31,
2020.

a. What is the correct petty cash balance reported in December 31, 2020
statement of financial position?
b. What is the total amount reported in Masque Company’s December 31,
2020 statement of financial position as cash on hand and in banks?

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READING MATERIALS

1. Chapter 1, Robles and Empleo, The Intermediate Accounting Series, Volume

1, 2019 ed
2. IAS 1: Presentation of Financial Statements, https://www.ifrs.org/issued-
standards/list-of-standards/ias-1-presentation-of-financial-statements/
3. IFRS 9: Financial Instruments, https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-9-financial-instruments/
4. Chapter 1, Binaluyo, Jonathan P., Dela Pena, Elvira V. and Lascano, Lyra,
Villareal V., Financial Accounting and Reporting 1(Workbook)
5. CIRC HF 5635 W37 2014, Warren, Carl S., Financial Accounting, 13th ed.,
2014
6. CIRC HF 5635 F56 2013, William, Jan R., Financial & Managerial Accounting:
The basis for business decisions, 16th ed., 2013
7. CIRC HF 5635 F5313 2013, William, Jan R., Financial Accounting, 15th 3d.
2013
8. REF HF 5626 1594 W55 2013, Wiley 2012 Interpretation and application of
international financial reporting standards, Bruce Mackenzie, 2013

ASSESSMENTS

1. Solve the problems at the end of Module 1.

2. Answer the discussion questions, problems and multiple-choice questions at
the end of Chapter 1, Textbook, Volume 1
3. Answer the exercises and problems in Chapter 1 of the workbook.
4. Quiz on the topic of Module 1 will be announced.

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