Prepared by: HAZEL JADE E.

VILLAMAR__
E-mail Address: _hazeljade.villamar@clsu2.edu.ph________

Central Luzon State University

Science City of Muñoz 3120
Nueva Ecija, Philippines

Instructional Module for the Course

ACCTG 2105 / Intermediate Accounting 1

Module 1
Topic 1 (Cash and Cash Equivalents)

Overview

This course covers the detailed discussion, appreciation, and

application of the Philippine Financial Reporting Standards (PFRS) on the
assets, financial and non-financial of a business enterprise. Emphasis is
given on the interpretation and application of the accounting standards on
Financial Assets and their required disclosures. The related internal control,
ethical issues and management of assets are also covered. Exposure to
computerized system in receivables, inventory and lapsing schedules is a
requirement.

I. Objectives
At the end of the module, the following are expected:

a. To understand the concept of cash.

b. To understand the concept of cash equivalents.

c. To identify items considered cash.

d. To identify items considered as cash equivalents.

e. To know the accounting for petty cash fund.

 ACCTG 2105 / Intermediate Accounting 1

II. Learning Activities

Cash

In layman’s term cash is simply defined as money. It is the

currency and coins and the standard medium of exchange in many
business transactions. However, in terms of accounting, cash is not just
money that people usually use in making business transactions. Cash
comprise of money and any other negotiable instrument that is payable
in money and acceptable by the bank for deposit and immediate
encashment such as checks, bank drafts, and money orders.

According to Philippine Accounting Standards (PAS) 1: Presentation of

Financial Statements, an entity shall classify an asset as current when the asset is
cash or a cash equivalent unless it is restricted to settle a liability for more than
twelve months after the end of the reporting period. It means that for an item to
classify as cash, it must be unrestricted in use or it must be readily available in
paying short-term obligations.

Cash items included in cash

a. Cash on hand – undeposited cash collections of an entity and other cash items
awaiting deposit.
b. Cash in bank – includes demand deposits or checking account or saving
account which are unrestricted in use.
c. Cash fund – this pertains to cash set aside for current purposes.

Cash Equivalent

As defined by PAS 7, cash equivalent is a short-term, highly liquid

investments that are readily convertible in cash and acquired three
months before maturity. Examples of cash equivalents are three-month BSP
treasury bill, three-month time deposit, three-month money market instrument or
commercial paper, and three-year treasury bill purchased three months before
maturity.

On cash equivalent, the date of purchase is really important in

determining whether an item is to be considered as cash equivalent.

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Normally, businesses must maintain sufficient amount of cash to fund or for

use in their current operations and any excess cash must be invested in any type
of revenue earning investment. It can be in a time deposits, money market
instruments, and treasury bills. An investment with term of three months or less
shall be classified as cash equivalents. If the term is more than three months but
within one year, the investment is classified as short-term investments, and if the
term is more than one year, such investments are classified as long term
investment.

Measurement of cash

Cash is measured at face value. Cash in foreign currency should be

translated to Philippine pesos and to be measured at the current exchange rate.
Deposits in foreign countries, if not subject to any foreign exchange restrictions is
classified as cash and should be classified separately if subject to any foreign
exchange restrictions and if the deposit is material. Cash should be written down
to its estimated realizable value if the bank or financial institution holding the funds
is in bankruptcy or in financial difficulty.

Cash fund that is set aside for use in current operations is classified as
current asset and to be part of cash and cash equivalent. Examples are, petty cash
fund, payroll fund, travel fund, interest fund and tax fund. However, if the fund is
set aside for noncurrent purposes, the fund is to be classified as noncurrent asset
to be part of long-term investments. Examples of this are, sinking fund, preference
shares, redemption share, contingent fund and the likes.

Bank overdraft

Bank overdraft is the case when an entity issue check in excess of the
deposit and results for the bank account to have a credit balance. It is classified
as a current liability and should not be offset within other bank accounts with debit
balances in other financial entity. Except when an entity maintains two bank
account in one bank. It can also be offset with other bank account if the amount
is immaterial. Bank overdraft is not permitted in the Philippines and it will normally
lead to the issuance of a bouncing check.

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Compensating balance

A compensating balance is a minimum checking or deposit account balance

that must be maintained in depending on the agreed amount or percentage of
compensating balance between the business entity and the bank.

For example, an entity borrows P1,000,000 from a bank and agrees to

maintain a 5% compensating balance in a demand deposit. The agreement results
in the 5% reduction on the amount borrowed, and provide source of fund to the
bank as partial compensation for the loan.

Classification of compensating balance

The compensating balance is part of the cash if the deposit is not legally
restricted because of the informal compensating balance agreement. And should
be classified separately as cash held as compensating balance under current asset
if the related loan is short-term if the deposit is legally restricted because of the
formal compensating balance agreement, and classified as noncurrent if the loan
is long-term.

Undelivered or unreleased check

Undelivered check is checks merely drawn or recorded but not given to the
payee before the reporting period ends. Since undelivered, there is not actual
payment made, therefore, the check is still subject to the control of the entity. To
restore the cash balance and still recognize the liability, adjusting entry is required
and as follows:
Cash xx
Accounts payable or appropriate account xx

Postdated check delivered

A postdated check delivered is a check drawn, recorded and already given

to the payee but bears a date subsequent to the end of the reporting period. Cash
balance at the end of reporting period is then understated and to restore the cash
balance, the original entry must be reversed and will be:

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 ACCTG 2105 / Intermediate Accounting 1

Cash xx
Accounts payable or appropriate account xx

Stale check or check long outstanding

Stale checks are check not encashed by the payee within a relative long
period of time. The law does not specify a definite period within a check must be
presented for encashment but normally, in banking practice, that “relative long
period of time” is six months. In effect, a check will be considered as stale check
if it is not encashed within six months. If the amount of the stale check is
immaterial, the amount is simply considered as miscellaneous income and to be
recorded as:

Cash xx
Miscellaneous income xx

However, if the amount is material, the liability is expected to continue as

shall be recorded as follows:

Cash xx
Accounts payable or appropriate account xx

Accounting for cash shortage

There is a cash shortage if the cash count is less than the balance per book,
and shall record:

Cash short or over xx

Cash xx

If the cashier is held responsible for the cash shortage, the entry would be:

Due from cashier xx

Cash short or over xx

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However, if the cause of the shortage cannot be found, the entry is:

Loss on cash shortage xx

Cash short or over xx

Imprest system

Imprest system is a kind of system to control cash which requires that all
cash receipts should be deposited intact and all of the cash disbursement
should be made by means of check. However, paying by means of check is
not always possible especially in making small payments, in that case paying in
cash is more ideal and convenient than paying in check.

Petty cash fund

Petty cash fund is fund set aside by the company to pay small expenses
which cannot be paid using checks.

Two methods of handling petty cash fund:

1. Imprest fund system
2. Fluctuating fund system

Imprest fund system

One that is usually followed and used in handling petty cash fund.

Accounting procedures

a. A check is drawn to establish the fund.

Petty cash fund xx

Cash in bank xx

b. Payment of expenses out of the petty cash fund.

No formal journal entry is made.

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c. Replenishment of petty cash payments.

A check is drawn whenever the petty cash fund runs low. The replenishment check
is usually equal to the expenses or the petty cash disbursements and it is the time
that the petty cash disbursement is recorded.

Expense xx
Cash in bank xx

d. At the end of the accounting period, it is necessary to adjust the unreplenished

expenses in order to state the correct petty cash balance.

Expenses xx
Petty cash fund xx

e. Increase in petty cash fund is recorded as:

Petty cash fund xx

Cash in bank xx

f. Decrease in petty cash fund is recorded as:

Cash in bank xx
Petty cash fund xx

ILLUSTRATION 1
2019
Oct. 25 The entity established an imprest fund of P22,000.

Petty cash fund 22,000

Cash in bank 22,000

Nov. 11 Replenished the fund. The petty cash items include the following:
Currency and coins 12,000
Supplies 5,000
Postage 3,000
Telephone 2,000

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The journal entry to record the replenishment is:

Supplies 5,000
Postage 3,000
Telephone 2,000
Cash in bank 10,000

Dec. 31 The fund was not replenished.

The fund is composed of the following: currency and coins P15,000, supplies
P3,000, postage P3,000, miscellaneous expense P1,000.

Supplies 3,000
Postage 3,000
Miscellaneous expense 1,000
Petty cash fund 7,000

2020
Jan. 1 The adjustment made on Dec. 31, 2019 is reversed.

Petty cash fund 7,000

Supplies 3,000
Postage 3,000
Miscellaneous expense 1,000

Jan. 30 The fund is replenished and increased to P25,000.

The composition of the fund is: currency and coins P10,000, supplies P8,000,
postage P2,000, miscellaneous expense P2,000.

Petty cash fund 3,000

Supplies 8,000
Postage 2,000
Miscellaneous expense 2,000
Cash in bank 15,000

Fluctuating fund system

The checks drawn to replenish the fund do not necessarily equal to the
petty cash disbursements. Petty cash disbursements are immediately recorded and
results in a fluctuating petty cash balance per book from time to time.

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 ACCTG 2105 / Intermediate Accounting 1

a. Establish petty cash fund

Petty cash fund xx

Cash in bank xx

b. Payment of expense out of the petty cash fund.

Expense xx
Petty cash fund xx

c. Replenishment or increase of the fund.

Petty cash fund xx

Cash in bank xx

d. Decrease of the fund is recorded as follows.

Cash in bank xx
Petty cash fund xx

ILLUSTRATION 2
Nov. 11 The entity established a petty cash fund of P15,000
Petty cash fund 15,000
Cash in bank 15,000

Nov. 12-25 Petty cash disbursement amounted to P7,000

Expenses 7,000
Petty cash fund 7,000

Nov. 29 Issued check for P2,000 replenishment of the fund.

Petty cash fund 2,000
Cash in bank 2,000
The balance of the petty cash fund is now P10,000

Dec. 1-28 Petty cash expenses amounted to P5,000.

Expenses 5,000
Petty cash fund 5,000

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Dec. 31 Issued check for P10,000 to replenish the fund.

Petty cash fund 10,000
Cash in bank 10,000
At this point, the petty cash balance is now 15,000.

References

Intermediate Accounting Volume 1, 2019 by Valiz, Peralta & Valix

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