Chapter 2

CASH AND
CASH EQUIVALENTS
 WHAT IS CASH?
Cash includes money or its equivalent that is readily
available for unrestricted use.
Money is the standard medium of exchange and
the basis of accounting measurements.
CASH ON HAND CASH ON BANK
Refers to undeposited Refers to deposits in
collections awaiting Banks that are
deposit and other available for
current funds held at immediate withdrawal
the reporting date. and unrestricted use.
 EXAMPLES OF CASH
C oin s an d
De man d de pos it s Bank Drafts
C u rre n c ie s
an d s avin gs Ac c ou n t

Money orders Checks

 EXAMPLES OF CASH
cash fun d se t asi de for
use i n cur r e n t
op e r ati on s, such as:
petty cash fund revolving fund
change fund

payroll fund dividen d fund

Travel fund

tax fund ot h e r t ype s of impe re s t Interest fund

ban k ac c ou n 6t s u s e d in
c u rre n t ope rat ion s
EXAMPLES OF ITEMS NOT INCLUDED AS CASH
:
• Postdated Checks
• IOUs or advances to employees
• Cash Fund not available for use in current operations
,such as sinking fund, Plant expansion fund,
Depreciation fund, Preference share redemption fund,
Contingency fund, and insurance fund.
• Postage Stamps
 Checks dated at a future date.
Postdated
CHECKS
GRAPHIC DESIGNER
 Unused
are treated as prepaid
POSTAGE supplies.
STAMPS GRAPHIC DESIGNER
‘Yung money cake po ba is under Cash?
 POSTDATED CHECK RECEIVED
Postdated checks received by an entity do not
qualify as cash because postdated checks are not
presently available for immediate use. They will only
be available for use at a future date.
 UNRELEASED CHECKS DRAWN AND
POSTDATED CHECKS DRAWN
Entities normally record checks drawn by debiting "
Accounts Payable" and Crediting "Cash." However, when
the checks drawn are either (a) unreleased or
undelivered to the payee or (b) Postdated, no payment
has actually been made. therefore, an adjusting entry is
needed to revert back the unreleased check or
postdated check to cash and accounts payable.
 STALE CHECKS
when checks delivered to payees are not encashed
within a relatively long period of time, normally 6
months or more, the checks are referred to as
"Stale ."
REMEMBER THE FOLLOWING CONCEPTS
• Cash includes money or its equivalent that is readily available for
unrestricted use.

• Postdated check received exclude from cash

from customer

• Undelivered check drawn Include in cash

• Postdated check drawn Include in cash

• Stale Checks Include in cash

 CASH EQUIVALENTS
Cash equivalents are "short term, highly liquid
investments that are readily convertible to known
amounts of cash and which are subject to an
insignificant risk of changes in value." (PAS 7.6)
 EXAMPLES OF CASH EQUIVALENT
Treasury bill is a short term
Treasury bills, notes
obligation issued by the
or bonds
government at discounts. Normally,
have maturity of 90 days to less
than a year.

Treasury notes and Treasury bonds are long-term obligations issued

also by the government . Treasury notes have a maturity of 1 year to
less than 10 years. Treasury bonds have a maturity of 10 years or more.
 EXAMPLES OF CASH EQUIVALENT
Money market instruments are
money market
investments in portfolios of
instrument or
commercial paper short-term securities.

Commercial paper consist of short-term, unsecured, notes

payable issued in large denominations by a large companies
with high credit ratings to other companies and institutional
investors.
 EXAMPLES OF CASH EQUIVALENT
3-month time deposit

Time Deposit is a form of a bank deposit normally

made in fixed denomination, bears interest higher
than that of regular deposits, and has a pre-agreed
maturity. A time deposit is evidence by a certificate of
deposit.
 CHECK AND EQUITY SECURITIES
When Checks and bank drafts are available for unrestricted
and immediate use, they are included as cash but not as
cash equivalents.
FINANCIAL STATEMENT PRESENTATION
Cash and Cash Equivalents are normally presented as
current assets unless they are restricted from being
exchanged or used to settle a liability for at least twelve
months after the reporting period.
 MEASUREMENTS OF CASH
Cash is measured at the face amount(face value). Cash
denominated in foreign currency is translated at the
current exchange rate at the reporting date.
 DEPOSIT IN FOREIGN BANKS
Unrestricted deposits in foreign banks that are available for
immediate withdrawal are included as cash at face amount
translated at the current exchange rate as of reporting date.

Restricted deposits in foreign banks that are not available for

immediate withdrawal are excluded from cash and
presented as receivable subject to appropriate allowances
for uncollectability and impairment.
 COMPENSATING BALANCE
Compensating Balance is a minimum amount that must be
maintained in an entity's bank account as supports for funds borrowed
from the bank.
• Compensating balances that are legally restricted as to withdrawal
by the borrower are excluded and shown as part of other current
assets or other non current assets depending on the nature of the
restriction.
• Compensating Balances that are not legally restricted as to
withdrawal are included in cash.
Bank
BANK OVERDRAFT
overdraft (Cash Overdraft) is a negative (credit)
balance in the cash in bank account resulting from
overpayment of checks in excess of the amount of deposit.
Overdrafts occur only in checking accounts; not in savings
and time deposits.
Overdrafts are payable on demand; thus, they are presented
as current liabilities, except in case where offsetting is
permitted.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
Segregation on incompatible duties

The duties of (a) Authorization, (b) execution, (c)

recording, and (d) custody over cash should be
segregated.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
imprest system

The imprest system requires that all cash receipts

should be deposited intact and all cash
disbursement should be made through check.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
bank reconciliation

Bank reconciliation should be prepared regularly,

immediate upon the receipt of the monthly bank
statement, to reconcile on a timely basis the
differences between the cash balance per books and
the cash balance per bank statement.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
Cash counts

Periodic cash counts should be performed to provide

reasonable assurance that actual cash tallies with
the balance per records.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
Minimum Cash Balance

Minimum cash balance should be maintained,

especially for cash funds, sufficient only to defray
specific business requirements.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
Lockbox account

entities often utilize lockbox accounts to expedite

cash collections and to ensure that cash collections
are deposited intact.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
NON -ENCASHM E NT OF PERSONAL CHECKS FROM PETTY CASH FUND

Encashment of Personal checks from the petty cash

fund should be prohibited to discourage
concealment of cash shortages.
 EXAMPLES OF INTERNAL CONTROLS OVER CASH
voucher system

The voucher system is an internal control over all cash

disbursement. Under this system, a voucher is prepared
for every cash disbursement in order to ensure that each
disbursement is properly authorized, made for a valid
expenditure, and properly recorded.
ACCOUNTING FOR CASH SHORTAGES AND OVERAGES
• When the cash count results to an amount less
than the balance per record, there is cash
shortage. Cash shortage is initially debited to a
suspense account called " Cash shortage or
overage" pending proper investigation of the
cause of shortage.
ACCOUNTING FOR CASH SHORTAGES AND OVERAGES
• When financial statements are prepared the
"Cash shortage or overage" account is closed to
either a nominal or real account. Suspense
accounts should not appear in the financial
statements.
ACCOUNTING FOR CASH SHORTAGES AND OVERAGES
• Depending on the result of investigation, the
shortages may be:
• closed to a "receivable" account if the shortage
was due to the fault of an employee; or
• charged to "loss" if the investigation was without
merit.
ACCOUNTING FOR CASH SHORTAGES AND OVERAGES
When the cash count results to an amount more than the balance per
records, there is cash overage. Cash Overage is initially credited to
"Cash shortage or overage" account pending proper investigation to the
cause of overage.

Depending on the result of investigation, the overage may be closed to:

➢ "payable" account if the overage was due to cash belonging to an

employee that was commingled with the entity's cash; or
➢ "gain" if the investigation was without merit.
 CONCEALMENT OF CASH SHORTAGES
lapping

Occurs when collection of receivable from one customer

is misappropriated and then concealed by applying a
subsequent collection from another customer. Lapping is
made possible when the incompatible duties of recording
and cash custody are combined.
 CONCEALMENT OF CASH SHORTAGES
kitting
Occurs when cash shortage is concealed by overstating
the balance of cash. Kitting is made possible by exploiting
the float period.
It normally occurs at month-end when a check is written
to transfer funds from one bank to another bank account
where the misappropriation was made.
 CONCEALMENT OF CASH SHORTAGES
window dressing
In a broad sense, window dressing is a form of fraudulent
financial reporting and not primarily a method of concealing
cash shortages. Window dressing occurs when books are not
closed at year-end and transactions in the subsequent period
are deliberately recorded in the current period in order to
improve the entity's financial performance or financial ratios.
 CONCEALMENT OF CASH SHORTAGES
petty cash fund
Petty cash fund (PCF) is money set aside to defray relatively
small amounts of cash disbursements. What a "small" amount
is a matter of company policy.
 ACCOUNTING FOR PETTY CASH FUND
A. Petty cash fund is established

XX
Petty Cash Fund
Date Cash in bank xx

B. Disbursement out of the petty cash disbursements

No journal entries
 ACCOUNTING FOR PETTY CASH FUND
C. Replenishment of petty cash disbursement

Various Expense Accounts

Date Cash in Banks xx
xx

D. Adjustment for unreplenished fund at reporting date

Various Expense Accounts

Date Petty Cash Fund xx
xx
 ACCOUNTING FOR PETTY CASH FUND
E. Subsequent changes in ledger balance of petty cash fund
• to increase the petty cash fund

Petty Cash Fund

Date Cash in bank xx
xx

• to decreases the petty cash fund balance:

Cash in bank
Date Petty cash fund xx
xx