Cash and

Cash Equ.ivalents
, I, r I ••

• !f•llf'

Learning Objectives
After studying this chapter, the student should be able to:
Unders.tand the financial nature of cash and cash equivalents.
Differentiate between cash and cash equivalents.
Know and apply the principles guiding the initial recognition, subsequent
recognition, and dere<;:ognition of cash and cash equivalents.
Understand the basic internal controls implemented by entities to protect
their cash and cash equivalents.
Prepare a bank reconciliatiqn statement.

What is-Cash?
·:.
Cash in financial accounting is broader in scope
than the basic notion of cash in layman's terms. Cash
'I
is described in various ways and its definition largely
depends on the point of view of the individual or
business entity. For individuals, cash could mean the
f •
money in one's wallet or purse, in an account kept
with a bank, or those bills stored for safekeeping inside
cash boxes or vaults. Business owners, on the other
':i_ l ., 1/0fl'f .11 ,., ; •,:! . hand, ha,ve ,a deeper understanding of this most liquid
;1~1 r,-r,~, ~1 1;.kr11 '·> of all assets,- since cash is the medium of exchange that
facilitates the smooth flow of their daily operations. To
properly account and recognize cash in the books of
accounts, accountants need to be guided by standards to
correctly report this asset on the financial statements.
Cash is a financial asset. Technically speaking, a
financial asset as defined by Philippine Accounting
standard 32 (PAS 32) Financial Instrum ents:
Presentation, is a contractual right to receive cash or another financial asset from
another entity, or to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the entity. In other wordS,
a financial asset allows us to receive cash or another financial asset of another
company. A more thorough discussion of other financial assets is found in Chapter~·
As mentioned earlier, cash is a medium of exchange. This means that cash IS
exchanged-either received or given up-in every cash transaction.
However, for cash to be considered as such, certain conditions must be met.
Firstly, it should be readily available-meaning one can use it anytime and anywhere
as the need arises (so long as it is within the context or reason), such as for payment
of current obligations or for use in current operations. That is why time deposits,
because they have maturity dates that disqualify the·m for immediate use, are not
considered cash. Portions of cash in bank accounts that are legally restricted as to
withdrawal are not considered cash either.
As a general rule, any instrument that is acceptable for deposit at face value to
a bank or other financial institutions is considered cash. Simply put, if one makes a
deposit of Pl00,000 at a bank whether in bank notes or check, his account should
increase by the same amount, no more no less.

General Categories of Cash

Cash is generally categorized into three: cash on hand, cash in bank, and cash
set aside for current use. In some cases, a particular cash item may fall under two or
more categories; the categories are not mutually exclusive from each other.
Cash on hand, as the term suggests, is cash inside one's wallet and/or
coins inside one's pocket or purse. Other examples would be checks on hand,
manager's checks, traveler's check, cashier's check, and bank drafts.
Cash in bank is comprised by savings and checking accounts.
Cash set aside for current use include, but not limited to, petty cash fund,
payroll fund, travel fund, interest fund, dividend fund, and tax fund.
For financial reporting purposes, cash is shown as the first item at the current
assets section of the statement of financial position. Cash in local currency is
reported at face value. Foreign currencies and deposits are covered by RA 6426.

Republic net No. 61126 - foreign Currency Deposit net of the Philippines
With the passage of the above law on April 4, 197 4, any person, natural or
juridical, may open foreign currency deposit accounts with any Philippine bank in
good standing, provided the foreign currencies to be deposited are acceptable as
part of the international reserve (Section 2 of the above Act) . Once the account is
opened, the usual deposit and withdrawal exclusively in foreign currencies is allowed

Chapter 2 • Cash and Ca sh Equivalents

 Should the depositor wish to get the peso equivalent of his w·1 h
therea ft e r:· . b , t dr
buy s back the foreign currency ased on the bank s buying rate , aYf~
the ban k ior the ~
Banks allow any person, partnership, or c~rporation to open a foreign de ·
However: most local banks allow foreign currency deposit accou Pos~
accoun t • ' . nts t OL
. ated in us dollar and Euro currencies only. One reason given is th
denomm . . . at the
two foreign currencies are most actively traded m the foreign currency market F~
.., •aJ statement purposes, all foreign currencies still on hand of the entity at yeOi
fimauCI
end (US dollar, euro, won, yuan, yen, etc.) are converted, totaled, and recorded ~
part of cash on hand at their peso equivalent based on the closing rate at year end:
each individual foreign currency versus the peso . .
The difference_ between the initial converted peso amount ~f the fotei~
currencies and their year-end converted (translated) , . peso amount 1s recorded 01
the financial statement as either gain or loss on ,ore1gn currency translation. Th
gain or Joss is presented as part of profit or loss on the Statement of Comprehensiv
Income.

Cash fquivalent
cash equivalents, as described by Philippine Accounting Standard No. ,
(PAS 7) Statement of Cash Flows, are short-term, highly liquid investments tha
are readily convertible to known amounts of cash and which are subject to a1
insignificant risk of changes in value. These include certain investments tµat hav
very short terms, or, those that have been purchased so close to tJ?.eir maturity date
that they present insignificant risk to the holder.
As a general rule, PAS 7 allows investments purchased 90 days or less befor
maturity date to be classified as cash equivalents. Examples of cash equivalent
are 90-day time dep<?sits, time deposits purchased three months prior to maturi~
treasury bills, commercial papers, certificate of deposits and money marke
placements. For an instrument to be classified as cash equivalent, it should b
purchased by the entity three months or 90 days prior to maturity, regardless of it
original term.
Investments whose maturity dates are over ninety days but do not exceed on
year are classified as short-term investment, and those with maturities beyond on
year are long-term investments.

' 16 Basic Approach to Financial Accounting

Illustration:
Assume the following accounts of Pioneer Corporation at the end of 2020:

Account Amount
Undeposited collections 1'200,000
Cash in bank - checking account 2,500,000
Cash in bank - payroll account 3,200,000
Cash in bank - savings account 3,000,000
Dividend fund 1,500,000
Manager's check 300,000
Cash in foreign currency ($125,000) 6,000,000
Commercial papers, purchased December 1, 2020 due March 1, 2,800,000
2021
BSP T-bill, purchased January 1, 2020 due January 1, 2021 3,000,000
Bond sinking fund 2,300,000
IOUs from officers 100,000

Other information :
a. Cash in checking account is restricted for plant expansion to be implemented in
2021.
b. Cash in foreign currency is in US dollars. Upon receipt, the exchange rate was
P48:$1. On December 31, 2020, it was PS2:$1.
The amount of cash and cash equivalents to be reported at the current assets
section of the statement of financial position as of December 31, 2020 should be
Pl 7,500,000, broken down as follows :

Undeposited collections P200,000

Cash in bank - payroll account 3,200,000
Cash in bank - savings account 3,000,000
Dividend fund 1,500,000
Manager's check 300,000
Cash in foreign currency (125,000 x PS2) 6,500,000
Commercial papers 2,800,000
Total cash and cash equivalents · P 17,500,000

Chapter 2 • Cash and Cash Equivalents

 . hecking account is not considered cash, because it is set .
Cash c
in . . aside
t use although it is expected to be disbursed m 2021. Cash in r. fo 1
non-curren , .. . . h . 10l'e;
. translated into Ph1hppme peso usmg t e c1osmg US dollar ex h 9~
currencyD is mber 31 2020. The BSP T-bill (Treasury bill) is not considered c ange
rate on ece , . . . as cash
. 1 t because it was purchased one year prior to its maturity. Bond sinkin
equrva en . . .. B/iJnd
. h t asi'de for the settlement of a bond, a long-term hab1hty; thus it do
1s cas se . • es no
qualify as cash equivalent. Lastly, /OUs from officers are classified as receivables. t

Other Notes
Compensating balance
Compensating balance is the minimum balance that an account holder should
maintain in his bank account at all times. Other terms for it are minimum balance or
maintaining balance. Compensating balances are included in an entity's cash balance
if they could be withdrawn by the depositor without dire penalties. In other words,
compensating balance is still considered as cash if there is no legal restriction as to
its withdrawal. Otherwise, they should be treated as other assets.

Postdated cheeks
Postdated checks are checks that bear a future date on its face. It has become the
practice of some business entities to issue postdated checks as payment of liabilities
and to receive postdated checks as collection from customers. A postdated check
should be recorded as payment or collection only on the specified date on its face,
and not before. The date on the postdated check signifies the time when it can finally
be negotiated with the bank.
If there is a postdated check still on hand at the end of the year, the previous
entry recording the payment of a payable or the collection of a receivable would
result to an incorrect cash balance at the end of the year. For financial statement
purposes, the cash balance should be correct~d by reversing the previous payment
or collection entry.

Stale checks
Checks received by an entity but are not yet negotiated with the bank within a
significant period of time after the date of issue are called stale checks. In practice, if
th
e check is not negotiated with the bank after six months from the date written on its
face, it is considered stale check and the bank would no longer accept it. Stale checks
should not form part of the cash balance of the holder. Unless the issuer replaces th e
sta1
e check wi th a new one within the current accounting period, the entity should
deduct th e amount from its cash account for financial statement purposes.
NSF check

~his is a check previously received by an entity from its customer as collection

,
t e latter's account. If the customer's bank account does not have sufficient
Basic Approach to Financial Accounting .

-
balance at the time when the entity presents the check for negotiation, the check
will not be honored by the bank and subsequently returned to the entity-depositor
with a notation of 'NSF' or 'no sufficient fund.' In this case, the check should not be
considered part of the cash balance of the entity. The previous entry recording the
collection from the customer should be reversed to reduce the cash balance.

Cash set aside for acquisition ol non-current assets

When an entity sets aside cash for the acquisition of noncurrent assets, such
fund should not be part of the entity's cash and cash equivalents. The reas~m is that
the fund does not meet the requirement of cash being readily available either for use
in the ordinary course of business, or for settlement of a short-term obligation. It
should instead be reclassified as a non-current asset.

Bank overdraft
When an entity makes withdrawals or writes checks that would exceed the
balance of the amount it currently has with the bank, the resulting negative balance
is called an overdraft. Generally speaking, such an occurrence is not accepted by
the banks here in the Philippines. However, should this occur, an overdraft should
be recognized as a current liability, and not as a negative balance in an entity's cash
account.

Internal Control
Cash is one of the most significant resources of a company. However, it is also the
asset most vulnerable to theft or misappropriation. This high vulnerability of cash
to irregularities should compel an entity 'to closely monitor its cash transactions.
A company must implement effective internal control measures to minimize, if not
totally eliminate, employee fraud and accounting errors involving cash.
The need to safeguard cash from internal and external wrongdoers prompts
companies to create a group of employees who would dedicate themselves to
installing and monitoring internal controls. This group usually works under the
entity's internal audit office or department and closely collaborates with the
controller or accountant for the smooth conduct of operations and proper handling
of books of accounts. Enumerated below are basic internal control measures
normally observed by business entities:

1. Separation of cash duties. Separating cash duties makes it difficult for

dishonest employees to conceal their fraudulent transactions. The one in
charge of receiving and depositing cash receipts should be separate from
the one preparing the recon_ciliation. This prevents one employee to have
access to both cash and the accounting records. Furthermore, error in cash
depos its may be discovered and fraud uncovered in the course of preparing
the bank reconciliation statement. In companies with few employees, the
segregation of duties may still be implemented, and should involve the active

Chapter 2 • Cash and Cash Equivalents

 t
participation of supervisors like the cashier and accountant. Neve
it is the manager who should check all transactions daily, as surnrna~ei~.
the accountant. e1J ~
2. Limiting access to cash. Total. cash receipts for the day should bed epos-
immediately to the bank on the same day to prevent the cash custod · 1te.j
1an ft0
using the cash for personal purpose. Any cash received frorn cu ~
. storn
after the ban~'s cut-o~ time should be placed temporarily inside lock el\
the combination of wh1ch should be known only to the cash custodian. hot,
3 _ Proper documentation of cash receipts. For cash receipts, the cash
processing clerk_should immediately r~cord ~e receip~ in logbook. Cash
receipts are easily recorded and monitored 1f the entity 1s using spe .
journals like the cash receipts journal. Official receipts should be prepa CJa]
for ~very cash inflow as supporti~g docu~ent in posting the collection~
specific customer accounts. Official receipts are accountable forms and
their issuance shoul~ be carefully monitored. ~dentity of persons making
payments to the entity should be properly venfied to prevent issuance of
official receipts to wrong customers.
4. Strict control of cash disbursements. A company should ensure that all
disbursements with a significant amount should be done through issuance
of checks and the identity of the creditor's representative receiving the
check payment is verified and confirmed. This is to ensure that the check
is received by the authorized representative only and that the payment is
a legitimate transaction based on supporting documents, properly signed/
countersigned by approving authorities, and verified as to availability of
funds.- For smaller disbursements, a petty cash fund should be set up and
controlled by a petty cash custodian.

Voucher System
A voucher system is a method for authorizing and controlling . cash
disbursements. A cash voucher is a document that supports a cash transaction. It
is filled out to identify what is to be paid, the amount to be paid, and the accounts
to be recorded. Once the voucher is approved, the authorized disbursing employee
prepares the payment check. Basically, the voucher system prevents indiscriminate
and unauthorized purchases and incurrences of expense because the whole cycle of
purchasing, verifying/checking, paying, and recording requires the involvement of
various employees and departments.
The significant feature of the voucher system as a control measure for cash
disbursement is that cash or check is NOT immediately paid upon purchase of goods
or incurrence of expense. The accounting processes involved · under the voucher
system are as follows:

1. Purchase order is prepared, approved by an officer, and sent to the supplier

(seller).

r 20 Basic Approach to Financ ia l Accoun ting

d
 2. Supplier prepares a sales invoice and ships out to the entity the goods
ordered together with a copy of the sales invoice.
3. Receiving clerk of the entity prepares a receiving report, which is a document
acknowledging receipt of goods. This is sent to the seller.
4. The sales. invoice of the seller, a copy of the purchase order, and a copy of the
receiving report are given to the accountant for final verification.
5. If the accountant finds no error or mismatch in the documents, he instructs
his bookkeeper to record the transaction as a purchase on account in the
voucher register. Since a check is not immediately issued for the transaction,
the entity is given ample time to schedule check payments for previous
account purchases in such a way that cash discounts offered by the seller
are regularly availed of. This also ensures that the entity has enough cash
balance in its bank account to chronologically pay its payables based on the
agreed credit terms. For every creditor, the bookkeeper prepares an unpaid
vouchers file which replaces the accounts payable ledger account normally
used under the non-voucher system.
6. On the scheduled date of payment, check is prepared by the payment clerk
for approval by a duly authorized officer. Once the check is signed, the
payment is recorded in the check register.

Imprest system
Imprest system is a control measure for both cash receipts . and cash
disbursements. Under this internal control measure, cash receipts are deposited
intact daily to the bank and all payments of assets, liabilities, and expenses should be
made by check except for small or petty expenditures.
The control of cash receipts becomes more effective if a merchandising concern
Jusiness is using special journals, particularly the cash receipts journal (CRJ) as -
nentioned earlier. Total cash receipts for the day are summarized in this journal,
lv'h ich essentially serves as the basis for the total cash to be deposited daily to the
>ank The word intact means that no portion of the total cash collections for the ·
lay should be used for payment of assets, liabilities, or expenses. This is to prevent
he cash custodian from using the readily available cash for personal purposes. To
nsure that this process is strictly followed, the auditor or accountant should see to
: that the total for the day of the CRJ, and the combined total for the day of official
f!ceipts and/or cash sales invoices all match up with the bank's machine validation
n the deposit slip for the day.
The control of cash disbursement, which requires that disbursements should be
1ade by check instead of outright payment in cash, i:, taken care of by the voucher
rstem. To ensure the legitimacy of a particular check payment, both the accountant
1d th e aud itor should verify the information recorded in the voucher register and
teck register.

Chapter 2 • Cash and Cash Equivalents

 PetfY cash Fund
·mprest system also provides an alternative method for recorct·
The l . l d . . , 1ng s
·t res Since it is impract1ca an mconvement 1or small expenditu
expen d I u · . b h . res t
aid by check, a petty cash fund 1s set up y t e entity, out of which petty e o~
p b pai'd Purchase of small items like office supplies, fare of the c XJ>e~
are to e · ornp
et and snack items for officers and employees during staff meeti any1
messen g , ngs
id out of the petty cash fund. The petty cash fund is an essential pa ~t,
usua IIY Pa rt of !ht
imprest system.
The petty cash fund is under the responsibility of a petty cashier or petty
custodian. Whenever a payment is to be made from the fund, the party who
the fund fills out a petty cash voucher and thereafter signs the same upon receiptq
n::
the requested amount. Receipt( s) or any proof of purchase is later given to the e
cash custodian as supporting document. The petty cash custodia_n files the re~e:
together with the petty cash voucher and records the expense m the petty CaJA
book. If the firm is using special journals, the petty cash book serves as a schedu1
for small expenses. The specific expense accounts are individually recorded in th:
entity's cash payments journal (CPJ) upon replenishment of the petty cash fund.
I

When the petty cash fund is already depleted or reduced to a very low balanc~
the petty cash custodian requests for replenishment of the fund. By replenishmen~
the actual amount of cash is increased to equal the original amount of the fund. This
is done through issuance of check payable to the petty cash custodian at an amount
equal to the total of all the petty cash vouchers issued as supported by receipts and
other documents. ·
As an internal control measure, the cashier, accountant, auditor, or any
supervisor may undertake a surprise audit of the fund, as follows:
1. Cash count is made of the remaining coins and bills in the cash box of the
fund custodian.
2. Supporting receipts are verified and the total amount of all petty cash
vouchers is taken. The supervisor should take note of any questionable
markings or erasures on the ·v ouchers and receipts. Since petty cash
vouchers are printed forms bearing serial numbers, the custodian should
J be made to explain for any missing or cancelled voucher number.
3. The total amount of all the vouchers issued is deducted from the origin~
amount of the petty cash fund. The re~ulting difference should be the total
amount of the remaining bills and coins.
4· If the total amount of the actual bills and coins is less that the "should be'
balance, the difference is a shortage; otherwise, there is an overage.
S. :he shortage is paid by the petty cash custodian. Any overage, howe:~
is usually refunded to the petty cash custodian if it can be proven th at
excess ~ash is his/her own money. If the cause of the overage cannot be
asce rta ined, th e amount is recorded as miscellaneous income.

Basic Approach to Financial Accounting

Bank Reconciliation
Banks offer three major types of deposit accounts to the public. A savings
account earns in terest and may either be a passbook savings account or an ATM
savings account. Deposits and withdrawals are transacted by the depositor either at
the bank's counter or through the automated teller's machine.
Time deposit or certificate of time deposit account earns a higher interest than a
savi ngs account. This type has a maturity date and withdrawal is allowed only upon
its matu rity. Depending, however, on the policies of the bank, depositors may be
allowed to withdraw before maturity date or preterminate their time deposit. Since
the pretermination would constitute non-compliance of the condition for a held-to-
maturity type of deposit, banks impose a penalty charge called pretermination fee.
Interest to be paid on preterminated time deposits is computed at a reduced interest
rate.
The third type of deposit is the checking account. It is also known as current
account or demand depos it account. Traditional checking accounts do not earn
interest; however, the current practice of banks is to allow.a minimal rate of interest
to encourage depositors to put in more funds to their.checking accounts. Deposits to
this account are made by filling out the usual bank deposit slips while withdrawals
are effected either by issuance of checks or through the ATM. Checking account is
the focus of the topic on bank reconciliation.
An entity opens a checking account with a particular bank and records the same
as Cash in Bank in its books. Cash shown in the company's records is called balance
per ledger or balance per books. The cash in bank account is a current asset and any
deposit made with the bank increases its balance while any check issued reduces its
balance.
On the other hand, the bank records a liability account in its books to recognize
the initial amount deposited by the entity to its checking account. Every time the
entity makes a deposit, the liability account increases while checks issued by the
depositor decrease the balance of the liability. At the end of the month, this account
shown in the records of the bank is called balance per bank. All increases and
decreases in the entity's checking account are summarized in a bank statement
which is normally issued by the bank to the depositor on a monthly basis.
To confi rm that cash is not misappropriated in any way, the accountant normally
undertakes a detailed comparison of all transactions recorded by the entity against
those recorded in the bank statement. It seldom happens that the cash balance
per books and .cash balance per bank would be equal. As part of internal control,
the accountant prepares a bank reconciliation, a process that shows the items or
. fa ctors which caused the two cash balances to be unequal. These factors are called
reconciling items.
Recon cili ng items are of two types: (!) Reconciling items due to timing difference;
an d (11 ) recon ciling items due to error.

Chapter 2 • Cash and Cash Equivalents

 I. Reconciling items due to timing _difference. This arises when only one
h re corded a particular transaction as of the end of the month E Pilh.
as type are as follows:
this · Xal'llpI~q·1

~t-
1. Deposit in transit - this deposit is already recorded by the entity b
not yet recognized by the bank. This transaction increased the bai
per books but has no effect yet in the balance per bank; thus, the bai:n~
per books is great~r than the balance per bank. In preparing the nei
reconciliation, this reconciling item is added to the balance per bank. ballt
2_ Outstanding check - check issued and recorded by the depositor but !ht
payee has not yet negotiated it with the bank. This transaction decreas
the balance per books but has no effect yet in the balance per bank- thu ed
' s,itelll
balance per books is less than the balance per bank. This reconciling !hi
is deducted from the balance per bank in preparing the bank reconciliatio1t
3. Bank debit memos- these are items d~d~cted by the bank from the entity's
accountbutnotyetrecorded by the entity itself. These transactions decrease
the balance per bank but have no effect yet in the balance per books; thUs,
the balance per books is greater than the balance per bank Examples
of debit memos are NSF check, cost of check ·books, service and penalty
charges, and reduction ofloans. In preparing the bank reconciliation, these
reconciling items are deducted from b~lance per books.
4. Bank credit memos - these are items added by the bank to the entity's
account but not yet recorded by the entity. These transactions increased the
cash balance per bank but have no effect yet in the cash balance per books;
thus, the cash balance per books is less than the cash balance per bank.
Examples of credit memos are collections of the entity that are directly
made to the bank, inte~est earned on the entity's account, and proceeds of
loan granted by the bank to the entity. In preparing the bank reconciliation,
these reconciling items are added to the cash balance per books.
· II. Reconciling items due to errors. Errors may be committed by either the
depositor or the bank. The general guidelines in the treatment of errors are as
'I follows:
t A. Determine who committed the error:

1. If the depositor committed the error, the balance per books should be
corrected.

2. If the bank committed the error, the balance per bank should be
corrected.
8
- Determine the type·of error committed and its effect on the cash balance.
The error is corrected as follows:
h
1. If t e error is an overstatement of deposit, the error is deducted from
the cash balance.

Basic Approach to Financial Accounting

 2. If the error is an understatement of deposit, the error is added to the
cash balance.
3. If the error is an overstatement of check issued, the error is added to
the cash balance.
4. If the error is an understatement of check issued, the error is deducted
from the cash balance.
S. Posting to the wrong depositor's account is an error that can only be
committed by the bank. Apply A2, then analyze the type of error and
its effect on the cash balance per bank and correct accordingly.

format of Bank Reconciliation Statement [Udjusted Balances Method]

There are three formats used by accountants in the process of reconciling the
cash balance per bank with the cash balance per books (depositor's cash ledger).
I
These are: (1) Book-to-bank balance method, (2) Bank-to-book balance method,
and (3) Adjusted balances method. The adjusted balances method is the preferred
method as this would present the cash balance that should be presented on the
statement of financial position of the entity. This method facilitates the preparation
of adjusting entries in the entity's books. The reconciliation format for the
traditional adjusted balances method is presented below.

·' J

FORMAT COMPANY .
Bank Reconciliation Statement
·December 31, 2020

Balance per bank Pxxx

Add: Deposit in transit Pxxx
Bank errors that understated the bank balance XXX XXX
Sub-total Pxxx
Less: Outstanding checks Pxxx
Bank errors that overstated the bank balance XXX XXX
Adjusted bank balance Pxxx

Balance per books Pxxx

Add: Bank credits · Pxxx
Book errors that understated the book balance XXX XXX
Sub-total Pxxx
Less: Bank debits Pxxx
Book errors that overstated the.book balance XXX XXX

Adjusted balance per books

Chapter 2 • Cash and Cash Equivalents -

 . problem on Bank Reconciliation:
J))ustratt\~e
. Ila Company's books at the .e nd of October 2020 reports c h
Launce as b
before any c\djustments. Its bank statement shows a b a1a¾
of p1' 4 66' 000 " 11 owmg
on the same date. Th e 10 . pieces
. o f m1ormation
. " are av alan
. ce q
,1,3 40 ' 000 ·1· . . . a11able
the prepar.1tion of the bank reconc1 If\tIOn: r~
1. Total deposits by Lauricella that did not rea<;h the bank's cut-off ti
amounted to P250,000. ll'ii
2. Total ~mount of outstanding checks was PlS0,0_00.
3. Lauricella's account was debited for the following items:
a. PSOO bank service ~barge
b. Interest on an outstanding loan of P3,SOO
c. Returned check marked 'NSF~ amounting to PS0,000
d, Partial loan payment of Pl00,000
.4. The bank coll.ected Lauricella's notes receivable of P200;000. An interest of
PS,000 was also credited to Lauricella's account in the bank.
s. Cash receipts of Pl 73;000 we're erro'n eotlsly recorded as P137,000 in
Lauricella's books.
I

6. A check drawn by Lauricella amounting to P70,000 was erroneously recorded

·by the bookkeeper as Pl 7,000 .
.'
7. A check payable to Lauricella, amounting to PB0,000, was erroneously
credited or added by the bank to Lauricello Co.
8. A payment by Lauricella to a customer of Pl 0,000 was inadvertently credited
by the bank to the firm's account.
Required: Prepare a bank reconciliation statement

h 26 Basic Approach to Financial Accounting

Solution:
Traditional presentation

LAURICELLA CO.
Bank Reconciliation Statement
October 31, 2020

Balance per bank JI

P 1,340,000
Add: Deposit in tr~nsit P 250,000
Check deposit of firm credited by bank to
r
another account 80,000
1
330,00'o
Sub-total
P 1,670,000
Less: Outstanding checks p 150,000
..... 1
· Check issued erroneously credited by
· bank(Pl0,000 x 2) 20,000 ' 170,000
Adjusted bank balance
P 1,500,000

Balance per books

P 1,466,000
Bank collection in favor of the firm
Add: (P200,000 + PS,000) . '
P 205,000
., )
Understatement of cash receipts
(Pl 73,000 - P137,000) 36,000 241,000
Sub-total
. P 1,707,000
Less: Service Charge p 500
Interest on loan 3,500
NSF Check 50,000
Partial payment of loans 100,000
Understatement of check issued
(P70,000 - Pl 7,000) 53,000 207,000
Adjusted balance per books P 1,500,000

Chapter 2 Cash and Cash Equivalents -

 Alternative presentation:

LAURICELLA CO.
Bank Reconciliation Statement
October 31, 2020

Bank Book
Unadjusted balances P 1,340,000 P 1,466,ooo
Deposit in transit 250,000
Outstanding checks (150,000)
Bank service charge I (500)
Interest on -outstanding loan (3,500)
NSF check (50,000)
Partial loan payment (100,000)
Note collected by bank plus interest in favor
of depositor 205,000
Depositor's error in recording cash receipt
(understatement) 36,000
Depositor's error in recording check
(understatement) (53,000)
Bank error in posting check deposit of firm to
wrong account 80,000
Ba~k error in posting check issued as deposit
(double effect) (20,000)
Adjusted balances Pt,500,000 P. 1,500,000

Financial statement presentation

As mentioned earlier, cash and cash equivalents are presented on the statement
of financial position under the current assets section. Below is an example of th e
presentation of cash and cash equivalents (in million pesos) of PLOT, a publicly-
listed company

2017 2016
(Unaudited) (AuditedL
Current Assets
Cash and cash equivalents (Note 16) 32,905 38,722
Short-term investments (Note 28) 2,738
1,074
Trade and other receivables (Note 17) 24,436
33,761
j I
' 28 Basic Approach to Financial Accounting

1111111
 Inventories and supplies (Note 18) 3,933 3,744
Current portion of derivative financial 171 242
assets (Note 28)
Current portion of investment in debt 100 326
securities and other long-term
investments (Note 12)
Current portion of prepayments (Note 10,673 7,505
19)
Current portion of advances and other 8,087 8,251
noncurrent assets (Notes 20 and
28)
Total Current Assets 90,704 85,964
TOTAL ASSETS 459;262 475.119

This is the note accompanying the account:

Note 16 - Cash and cash equivalents
As at December 31, 2017 and 2016, this account consists of:

2017 2016
(Unaudited) (Audited)
(In million pesos)
Cash on hand and in banks (Note 28) 6,351 6,384
Temporary cash investments (Note 28) 26,554 32,338
32,905 38,722

Cash in banks earn interest at prevailing bank deposit rates. Temporary cash
investments are made for varying periods up to three months depending on our
immediate cash requirements, and earn interest at the prevailing temporary cash
investment rates. Due to the short-term nature of such transactions, the carrying
value approximates the fair value of our temporary cash investments. See Note 28 -
Financial Assets and Liabilities.
Interest income earned from cash in banks and temporary cash investments
amounted to Php612 million. Php582 million and Php579 million for the years
ended December 31, 2017, 2016 and 2015, respectively.

Chapter 2 • Cash and Cash Equivalents -

 1. Briefly define cash.
2. Differentiate cash and cash equivalents.
3. What are the basic characteristics of cash?
4. Define a compensating balance. How s_h ould it be reported?
5. Discuss bank reconciliation. What purpose does it serve?

Multiple Choice
1. Cash includes
a. Money only
b. Money and negotiable instruments
c. Any negotiable instrument including promissory notes.
d. Money and any instrument that is immediately payable in money
acceptable by the bank for deposit and immediate credit alld
2. To be reported as "cash and cash equi_valents", the cash equivalent must be
a. Deposited in a financial institution, particularly a bank
b. Available for the redemption of preference shares or bonds
c. Can be freely used in current operations
d. Set aside for acquisition of construction of items of property, plant and
equipment

3. Which of the following should be presented as cash in the statement offinandal

position?
a. Postdated checks received

I b. IOUs from officers to be deducted from their salaries of the following

month
c. Undelivered checks
d. NSF checks

4. Which of the following cannot be shown as part of cash in the current assets
section of the statement of financial position?
a. Cash in special checking account for payroll
b. Compensating balances
c. Cash deposited with utility company
d. Customer's checks

f: ' · 30
-
Basic Ap_proach to Rnancia l Accounting
5. Unreleased checks
a. Are outstanding checks
b. Are treated as certified checks
c. Are part of the payor's cash balance
d. Should be a book-reconciling item since the bank has deducted this atnount
at arriving at the cash balance in the bank statement.
6. Which of the following should not be considered cash?
a. Petty cash fund
b. Money orders
c. Coin, currency and funds awaiting deposits
d. Postdated checks
7. Which of the following is incorrect with regard to the valuation of cash and cash
equivalents?
a. Cash is valued at face value
b. Cash denominated in foreign currency is translated using the closing rate
c. Cash equivalents include interest that is to be received
d. Cash deposited in a bank that has filed for bankruptcy should be written
down to its net realizable value.
8. Deposits in foreign countries that are also· sub)ei::t to certain foreign exchange
restrictions should be
a. Valued at current exchange rates and shown as current assets
b. Valued at historical exchange rates and presented as noncurrent assets
c. Valued at current exchange rates and presented as noncurrent assets
d. Valued at historical exchange rates and presented as current assets
9. Which of the following should be considered cash equivalents?
a. Certificates of deposit
b. Money market with checking account privileges
c. Legally restricted.compensating balances
d. Postdated checks
10. Travel advances should be reported as
a. Supplies.
b. Cash because they represent the equivalent of money.
c. Investments.
d. None of these.

Chapter 2 • Cash and Cash Equivalents -

 Problem Solving

EXERCISE 2-1

As of December 31, 2020, Grimmie Company's general ledger reported at

I cash balance of P695,000. Breakdown of the amount is as follows: 0
ta!
I Currencies and coins awaiting deposit
Checking account balance
NSF Check returned by the bank
-----
P 4S,oo0
1ss,ooo
40,000
Undeposited receipts, including a postdated check of 'P35,000 160,00Q
Savings account balance 250,000
IO Us signed by personnel 15,000

What amount should be reported as "cash" on Grimmie's Statement of Financial

Position as of December 31, 2020?

EXERCISE 2 -2

Hatch Company shows the following account balances in its financial records as
of December 31, 2020:
I
) r Cashier's check P46,000
IOU from the president's sister 65,000
Bank draft 40,000
Traveler's check 40,000
Undeposited checks (includes a 'Pl00,000 check not accepted by the
bank due to lack of countersignature) 220,00Q_
Money order 50,00Q_
Petty cash fund (bills and coins of 'P4,000) 12,ooQ_
Checking account - Unibank 450,0Q.Q.
Checking account " Tribank (85,0_QQl_
Savings account - Unibank 32~
Postage stamps 6,500

What is the cash balance to be reported on the statement offinancial position?

Basic Approach to Financial Accounting

 EXERCISE 2-3

Striker Company has the following balances at fiscal year ended September 30,
2020 : ·

Cash in checking account per bank statement (P26,000 check is still

not presented ·t o the bank by the payee) Pl00,000
Cash in money market account - 120 days 200,000
Treasury bill, purchased August 1, 2020 maturing October 30, 2020 600,000
Treasury note, purchased September 1, 2020 maturing December
15, 2020 -
800,000 _

What amount should Striker Company report as cash and cash equivalents in its
September 30, 2020 statement offinancial position?

EXERCISE 2-4

Aguas Company reported total cash and cash equivalents of PS,465,000 on

December 31, 2020, which includes the following:

Two 180-day certificates of deposit, totaling P650,000

Check dated January 6, 2021 amounting to 225,000
Cash accumulated in special fund that will be used for plant 1,200,000
expansion
Commercial paper due in 100 days 1,000,000
Currency and coins in petty cash fund (including unreplenished
vouchers of P2,S00) 16,000

Aguas Company has agreed to maintain a cash balance of P450,000 which will
not be available for withdrawal to ensure future credit availability. The said amount
was incl uded in the balance above.
What is the total amount that Aguas Company should report as "cash and cash
equivalents" in the current assets section of the statement of financial position on
December 31, 2020?

· Chapter 2 Cash and C ash Equivale nts

 EXERCISE 2-5

Th e statement of financial position of Mandela Company as of

. 0 ecenib
2020 shows cash balance of P900,000. It was found to include the folloWj . eqt
. ng1tellls!
Currencies and coins on hand ·
Notes receivable in the possession of a collection agency ·
Customer's check, dated February 1, 2021, not yet presented to the
~ 00
~C::.: :u::s.:::
to:..m
:.::.:.:e:.:.r--=
's-=c_h:--
ec_k_s_re:--t_u_rn_e_d_b-=-y_'b_a_n_k_m
_a_r_k_e_d _"N
_ SF_'_' - - - - - - 1 -_ _ , ,
60 000
~P
:_:o::s:.:ta=l...::m:.:.o:::.::n::.::e:!...y_o_rd_e_r_s_fr_o_m_ cl_ie_n_ts_ _ _:-----::::---:--------jf--~
70,0ooi
Petty cash fund (includes vouchers worth P2,SOO for tra~sportation
expenses)
10,000
Mandela drew a check for P145,000 against its checking account last December
28, 2020 representing payment for a subscription contract. The said checkwas onJy
delivered January 2 of the following year. What is the correct cash balance of Mandela
Company as of December 31, 2020?

EXERCISE 2-6

David Company's checkbook balance on December 31, 2020 was Pl,200,000. ln

addition, David Company supplied the following information as of December 31:
-
Check drawn o.n David Co.'s account in payment of a transaction f' 300,000
with a vendor, dated and recorded December 31 but not mailed
until January 6.
Check payable to David Co., deposited December 23, excluded from
-
50,000
the December'31 checkbook balance because it was returned
by bank on December 28, stamped "NSF". The check was I
redeposited on the same day and cleared on December 29, 2020.
Check payable to David Co. for goods sold to a client, dated January ---
1so,ooo
4, 2021 still on hand. The said check was included in the
checkbook balance above.

W.h at is· the proper amount to be shown as cash on David Co. ,s 5tatement ef
financial position on December 31, 2020?

Basic Approach to Financial Accounting

EXERCISE 2-7

The cash balance of Mendoza Company consists of the following on December

31, 2020:

Cash on hand, including stale check of P60,000 and postdated check

of P30,000 ¥650,000
Cash in bank, net of bank overdraft of P40,000 in a checking account
with another bank 450,000
Petty cash, including unreplenished receipts of P12,S00 18,000
Savings deposits, earmarked for plant expansion 550,000

What is the correct cash balance?

EXERCISE 2-8 ,

Wimbledon Company provided the following ·information regarding the

composition of its cash account oh December 31, 2020: r. -

Checking account- BPI Pl,200,000

Savings account- BPI 1,500,000
Cash on hand 10,000
Travel advances of employee to be paid through salary deduction 120,000
Separate cash fund, restricted for the retirement of long-term · 1,000,000
assets

Savings account includes P200,000 holdout against short-term borrowing

arrangements. In the current assets section of Wimbledon Co.'s December 31, 2019
statement offinancial position, how much should be reported as cash?

EXERCISE 2-9

Hechter Company's checkbook balance as of December 31, 2020 was

Pl,750,000. On the same date, Hechter had the following items on its safe, together
with 18 blank checks:
a. A P70,000 check payable to Hechter Co., dated January 2, 2021 that was
included in the December 31 checkbook balance.

Chapter 2 • Cash and Cash Equivalents -

 b. A, 3oo,ooo check payable to a supplier and drawn on Hechter Co·
that was dated and recorded December 31 but not mailed Until ·sac~
2021. lanu~l)1
•
What amount of cash should Hechter Co. report on its Decemb
er 31 2
statement offinancial position? · °21

EXERCISE 2-10

- The cash account of Pistachio Co. showed a ledger balance of,158 ,794 onJ1i..
30. The bank statement on the sa_me date showed a balance of P166,lOO. u;
comparing the bank statement with the cash records, the following facts Wei!
determined:
a. June bank service charge was Pl!O00.
b. Abank memo stated that a note having a face value of P48,000 and interest
of Pl,440 had been collected on June 29, and the bank had made a charge cl
P220 on the collection. No entry had been made on Pistachio's books when
the note was collected.
c. Receipts for June 30 for P135,600 were not deposited until July 2.
d. Checks outstanding on June 30 totaled PBS,442.
e. The bank had charged Pistachio's account for a customer's uncollectible
check amounting to Pl0,128.
f. Acustomer's check for,3,600 had been entered as P2,400 in the cash receipts
journal by Pistachio on June 15.
g. Check No. 742 in the amount of Pl 9,640 had been entered in the cashjourn~
as P16,760, and Check No. 747 in the amount of P2,328 had been entered as
P23,380. Both checks had been issued to pay for purchases of equipment.
Prepare bank reconciliation statement.

Basic Approach to Financial Accounting