CASH & CASH EQUIVALENTS

Intermediate Accounting 1 & 2 (BAFACR12X)

 FINANCIAL INSTRUMENT

• Any contract that gives rise to a FINANCIAL ASSET of one entity and a FINANCIAL LIABILITY or
EQUITY INSTRUMENT of another entity.

FINANCIAL INSTRUMENT

HOLDER
ISSUER
(financial liability or equity) (financial asset)
Financial assets are recognized only in its statement of financial position when and only when
the entity becomes a party to contractual provisions of instrument.
Example:
PROMISSORY NOTE SHARE CERTIFICATE

ISSUER HOLDER ISSUER HOLDER

Notes payable Notes receivable Ordinary share capital and or Investment in
share premium Equity securities
 ABC Corporation
Statement of Financial Position
As of December 31,2020
LIABILITIES
ASSETS
Current liabilities
Current Assets
Accounts payable P XXX
Cash and cash equivalents P XXX
Interest payable XXX
Accounts receivable XXX
Income tax payable XXX
Short term notes receivable XXX
Short term notes payable XXX
Equity investments at fair value through profit or loss XXX
Total current liabilities P XXX
Debt investment at fair value through profit or loss XXX
Inventories XXX
Non-current liabilities
Non-current asset held for sale XXX
Long-term bonds payable P XXX
Total current assets P XXX
Bonds payable XXX
Total non-current liabilities P XXX
Non- Current Assets
Long term notes receivable P XXX
TOTAL LIABILITIES P XXX
Equity investments at fair value through other comprehensive income XXX
Debt investment at amortized cost XXX
SHAREHOLDER’S EQUITY
Building construction Fund XXX
Property, plant and equipment XXX
Ordinary Share Capital P XXX
Intangible assets XXX
Share premium XXX
Investment Property XXX
Unrealized gains/losses -FVOCI XXX
Total non-current assets P XXX
Retained Earnings XXX
TOTAL ASSETS P XXX
TOTAL SHAREHOLDER’S EQUITY XXX
 WHAT IS CASH?

• Bills & coins in circulation

• Use as a standard medium of exchange for provision/acquisition of goods and services.
• Acceptable by bank or other financial institutions for deposit at face value (checks,bank drafts ,postal money
orders, etc.)
• Generally measured at FACE VALUE
• For an item to be considered as cash included in the line item “ Cash “ or “ Cash on hand and in banks”, it
should meet the following criterias:
Payment of operating expenses
- UNRESTRICTED
- IMMEDIATELY AVAILABLE FOR USE IN CURRENT OPERATIONS Payment of current liabilities

Acquisition of current assets

• If to be use other than for current operations or restricted but not for current operation, it will be
classified as part of “Other non-current financial assets”. Examples are cash set aside for the settlement of
long-term liabilities or for acquisition of non-current assets. The expected timing of disbursement of these
cash funds set aside is not a consideration in classifying them into current or non-current.
 “CASH” OR
“CASH ON HAND AND IN BANKS”
CASH ON HAND
1. Undeposited cash collections
a. Bills and coins
Customer’s check
b. Checks
Types Company’s check

1. Post-dated checks - checks that are dated at a future date.

ex. Check received on December 31,2020 but dated on January 5, 2021.

2. Ante-dated checks- checks that are dated that is earlier than the date it can be presented to the bank.
ex. Check received on December 31,2020 but dated on December 15, 2020.

3. No sufficient fund checks - checks that are issued and presented to the bank but are not encashed by the bank
because there is insufficient funds
Types :
a.) DAIF - Drawn against insufficient funds
b.) DAUD - Drawn against uncleared deposits
a.) DAIF

Ex. Check received from a customer amounting to P 50,000 dated December 15,2020, presented to the bank on
December 16,2020 and upon presentment, the bank did not pay to the payee because the customer has only P 45,000 in
its bank account. Bank balance:
*3 days for check to clear
P 150,000
b.) DAUD -
Deposited check Issued check for P Presented the Check to
Bank balance: P
Ex. worth P 50,000 150,000 check to bank clear
100,000

December 15,2020 December 18,2020 December 19,2020 December 20,2020 December 21,2020

4.Traveler’s check - checks that are issued by banks that are purchased for set amounts to be used to
purchase goods or services when traveling to foreign countries.

5. Manager’s check/ cashier’s check/ bank draft - issued by bank in their name and drawn against the bank itself.

6. Stale checks - checks that are not presented to the bank within a reasonable time. (within 6 months or 180 days)
Ex. Check received from a customer dated April 1,2020 and presented only at November 15,2020.
As a general rule, checks on hand are included as part of cash when and only when:
- Received or on hand ( undelivered or unreleased )on or before the end of the reporting period AND
- The date written in the check for it to be encashed is on or before the end of the reporting period.

Example:
Which of the following customer’s check on hand shall be included as part of cash on hand if the reporting period
ends on December 31,2020?
A. ) A customer’s check received on December 31,2020 ,dated January 10,2021 for P 500,000.
B.) A customer’s check received on December 31,2020 ,dated December 15,2020 for P 100,000.
C.) A customer’s check received and dated on December 28,2020 amounting to P 450,000, presented to the bank
also on December 28,2020. The bank returned the check on December 31,2020 due to the payor’s account balance of
only P 400,000.
D.) Received a manager’s check on December 31,2020.
E.) A customer’s check received and dated on May 1,2020.

c. Money orders - a paper document that is used as a form of payment that requires the amount indicated to be prepaid.
 2. Working funds - funds segregated for current use in the ordinary conduct of business.
a.) Petty cash fund
b.) change fund
c.) payroll fund
d.) dividend fund
e.) tax fund
f.) interest fund

CASH IN BANK - Savings account and Checking accounts that are unrestricted and can be withdrawn upon
demand.

*The following checks drawn are considered as part of Cash in bank as of the end of the reporting period:

1.Undelivered or still on hand as of the end of the reporting period.

2. Released or delivered to the payee but dated after the end of the reporting period.
3. DAIF or DAUD check issued.
 Example:
Which of the following company’s check on hand shall be included as part of cash in bank if the reporting period ends
on December 31,2020?

A. ) Check written and payable to a supplier amounting to P 500,000 dated January 5,2021. The check was already
received by the supplier as of December 31,2020.

B.) Check written and payable to a supplier amounting to P 500,000 dated December 28,2021. The check was still
on hand as of December 31,2020.

C.) Check drawn dated on December 27,2020 amounting to P 550,000 payable to a supplier and presented to the
bank also on the same date. The supplier returned the check on December 31,2020 because as it was presented to the
bank, it was known that there is insufficient funds. The amount written in the check was deducted in the cash balance
on December 27,2020.
 OTHER ITEMS TO BE CONSIDERED IN THE “C ASH” OR “
C ASH ON HAND AND IN B ANK” B ALANCE

1. Cash in Foreign Currency and Deposits in Foreign banks

- should be translated in Philippine currency using the exchange rate at the end of the reporting period
- if cash in foreign currencies are restricted , they are presented as part of the non-current assets.

Example :
Cash in Foreign Banks - $ 500,000
Exchange rates:
December 31, 2019 - $1 = P 52.00
December 31, 2020 - $ 1 = P 53.00
At what amount will the cash in foreign currencies be included in the cash balance to be presented in the
statement of financial position as of December 31,2020?
$ 500,000 x P 53.00 = P 26,500,000
 OTHER ITEMS TO BE CONSIDERED IN THE “C ASH” OR “
C ASH ON HAND AND IN B ANK” B ALANCE

2. Cash in closed banks or banks having financial difficulty or in bankruptcy

- should be reclassified as RECEIVABLE and written down at its RECOVERABLE VALUE
- The classification of the receivable depends on the timing of the realization of the receivable.

Example :
December 31, 2020:
Cash in Closed Banks - P 1,000,000
It was known bank deposits can only be recovered up to P 500,000.

What amount will be included in the cash balance as of December 31,2020?

None
 OTHER ITEMS TO BE CONSIDERED IN THE “C ASH” OR “
C ASH ON HAND AND IN B ANK” B ALANCE

3. Postage stamps and expense advances

Ex. Advances for employees travels, postage stamps
- they are not considered as cash but they are reported as prepaid expenses

4. Bank overdraft
- A negative balance in the bank account caused by issuing a check with an amount higher than the bank balance.
Bank overdraft happens when the bank honors the issued check even if there is an insufficient funds.
- As a general rule, bank overdrafts are reported as current liability.
- Exception: A bank overdraft may be offset against a positive balance in another bank account if :
1. if there is another bank account from the same bank with a positive balance AND
2. there is a right of offset between the depositor and bank
*Cash is reported net of the overdraft.
 Example: Savings Account no. 100 - P 750,000

Cash in BDO -
Checking Account no. 200 - (P 50,000)

Checking Account no. 400 - (P 100,000)

Cash in BPI -

1. If the depositor and the bank has an agreement regarding right of offset, how much is the total cash in bank ?

Cash in BDO - P 700,000

Cash in BPI - 0 P 100,000 bank overdraft in BPI is presented as current liability
Cash in Bank P 700,000
2. If the depositor and the bank has no agreement regarding right of offset, how much is the total cash in bank ?

Cash in BDO - P 750,000 P 50,000 bank overdraft in BDO and100,000 bank overdraft in BPI are
Cash in BPI - 0
presented as current liability
Cash in Bank P 750,000
 OTHER ITEMS TO BE CONSIDERED IN THE “C ASH” OR “
C ASH ON HAND AND IN B ANK” B ALANCE

5. Compensating balances - minimum amounts that a company agrees to maintain in a bank checking account as a
support or collateral for a loan by the depositor
Type of loan it supports Unrestricted or Restricted Considered as Cash
Short term loan Unrestricted Yes
Short term loan Restricted No, classified as current asset
Long term loan Restricted No, classified as non-current
asset

Example:
As of December 31, 2020, The Cash in BDO of P 1,000,000 includes a compensating balance of P 500,000. It
Was known that the compensating balance of P 500,000 relates to the following loans to BDO:
a.) P 100,000 compensating balance for a loan dated July 1, 2020, which will mature on June 30, 2021. The compensating
balance is not legally restricted as to withdrawal.
b.) P 300,000 compensating balance for a loan dated January 1,2020, which will mature on December 31,2023.
The compensating balance restricted as to withdrawal.
c.) P 100,000 compensating balance for a loan dated July 1,2020, which will mature on June 30,2021.
The compensating balance restricted as to withdrawal.
 CASH EQUIVALENTS

- Highly liquid financial instruments that are so near their maturity and there is insignificant risk of change in
value due to fluctuation of interest rates.
- As a rule, enterprises sets their accounting policy regarding financial instruments that qualify as cash and cash
equivalent.
- DEFAULT: A financial instrument qualifies as cash equivalent if it matures 3 months or less from the date of
acquisition up to the date of maturity.
Dates to take note to know if an item is a cash equivalent:
1. Date of acquisition
2. Date of maturity

*Date indicated in the face of the instrument and the balance sheet date are not considered when recognizing
cash equivalents.
Example:

1. Time deposit - P 50,000

Issue date: Nov 1,2020
Maturity date : April 30, 2021

Assuming the company’s reporting period ends on December 31,2020 and the time deposit
was acquired on December 1,2020, will it be considered as cash equivalent as of December 31?
Issue date Acquisition Date Balance sheet date Maturity date

November 1,2020 December 1,2020 December 31,2020 April 30, 2021

5 months

Not a cash equivalent!

Example:

2. Treasury bills- P 200,000

Issue date: December 15,2020
Term : 90 days

Assuming the company’s reporting period ends on December 31,2020 and the time deposit
was acquired on December 20,2020, will it be considered as cash equivalent as of December 31?
Issue date Acquisition Date Balance sheet date Maturity date

12/15/2020 12/20/2020 12/31/2020 3/15/2021

85 days

Cash equivalent!
 CASH MANAGEMENT

• Segregation of Duties - CAR

• Imprest System
• Voucher system
• Internal audits at irregular intervals
• Periodic reconciliation of bank statement balance and cash balance in the
company’s books
 ACCOUNTING FOR PETTY CASH FUND

• Fund established to cover small and miscellaneous expenses of the business.

• Can be accounted either IMPREST SYSTEM or FLUCTUATING SYSTEM.
 CASH SHORT OR OVER

• Nominal account that is debited for shortages and credited for overages in the petty cash fund.
• A debit balance in cash short and over account must be reported as miscellaneous expense, while a credit balance
is reported as miscellaneous revenue.
• Material cash shortage which are probable to be recovered are charged to RECEIVABLE account. It should be
properly documented thru prepared petty cash vouchers.
• Cash overages should be taken out of the petty cash fund and deposited to the general cash account of the
company. Also, it should be properly documented thru official receipts.
• To know if there is a CASH SHORT OR OVER, per physical count must be compared to per accountability.

PER PHYSICAL COUNT VS. PER ACCOUNTABILITY

Equal à No cash short or over
Greater than ( >) à cash over
Less than (<) à cash short
 ILLUSTRATIVE PROBLEM:

1. ABC Company has established a petty cash fund for P 20,000 on January 1,2020.
2. From January 1 - November 30,2020, payments were made from the petty cash fund for the following items:
Transportation P 5,000
Representation 3,000
Office Supplies 2,000
3. On November 30,2020, petty cash vouchers related to expenditures from January 1- November 30, 2020 were submitted to request for
reimbursement. A check was issued equivalent to the total expenditures submitted.
4. From November 30 to December 31, 2020 , the following expenditures from the fund were made:
Transportation 1,000
Employee advance 5,000
Representation 2,000
5. On December 31,2020, no replenishment from the fund was made. A count and review of the fund revealed the following items:
Bills and coins P 12,000
Petty cash vouchers for
Transportation 1,000
Employee advance 5,000
Representation 2,000
 Imprest Fluctuating
1. Petty Cash Fund 20,000 Petty Cash Fund 20,000
Establishment
of fund
Cash in Bank 20,000 Cash in Bank 20,000

2. Payment of No Entry Transportation Expense 5,000

Expenses Representation Expense 3,000
Office Supplies Expense 2,000
Petty Cash Fund 10,000

3.Replenishm Transportation Expense 5,000 Petty Cash Fund 10,000

ent of PCF Representation Expense 3,000 Cash in Bank 10,000
Office Supplies Expense 2,000
Cash in Bank 10,000

4. Payment No Entry Transportation Expense 1,000

of Expenses Advances to Employees 5,000
Representation Expense 2,000
Petty Cash Fund 8,000

5. Transportation Expense 1,000 No Entry

Adjustment Advances to Employees 5,000
for the Representation Expense 2,000
unreplenish Petty Cash Fund 8,000
ed expenses
 PER COUNT VS. PER ACCOUNTABILITY

Bills and coins P 12,000 Petty cash fund - P 20,000

Petty cash vouchers for

Transportation 1,000
Employee advance 5,000
Representation 2,000
Total P 20,000
Total P 20,000

EQUAL
 WHAT IF THE PER COUNT ON 12/31/2020,
THE BILLS AND COINS IS P 10,000 ONLY?
PER COUNT VS. PER ACCOUNTABILITY

Bills and coins P 10,000 Petty cash fund - P 20,000

Petty cash vouchers for
Transportation 1,000
Employee advance 5,000
Representation 2,000
Total P 18,000 Total P 20,000

NOT EQUAL --> 2,000 difference

Entry:
Transportation Expense 1,000
Advances to Employees 5,000
Representation Expense 2,000
Cash short or over 2,000
Petty Cash Fund 10,000
 WHAT IF THE PER COUNT ON 12/31/2020,
THE BILLS AND COINS IS P 13,000 ONLY?
PER COUNT VS. PER ACCOUNTABILITY

Bills and coins P 13,000 Petty cash fund - P 20,000

Petty cash vouchers for
Transportation 1,000
Employee advance 5,000
Representation 2,000
Total P 21,000 Total P 20,000

NOT EQUAL --> 1,000 difference

Entry:
Transportation Expense 1,000 Cash in Bank 1,000
Advances to Employees 5,000 Miscellaneous Income 1,000
Representation Expense 2,000
Petty Cash Fund 8,000
 BANK RECONCILIATION

• Businesses normally have a lot of checking accounts in bank and with this, the business ( depositor) have double
records of its cash in bank transactions. ( Cash in Bank per books vs the Cash per bank statement)
• Bank statement is a monthly report provided by the bank to the depositor which shows the following:
a.) beginning of the month cash balance
b.) total deposits made by the depositor and other bank credits during the month
c.) total checks paid by the bank and other bank charges during the month, and
d.) end of month cash balance
CASH IN BANK VS. CASH PER BANK STATEMENT

INC DEC DEC INC

BAL. BAL.

DIFFERENCES: TIME LAPSE DIFFERENCE

GOAL : SHOULD BE EQUAL
ERRORS
TIME LAPSE DIFFERENCES

a. DEPOSIT IN TRANSIT OR UNDEPOSITED COLLECTIONS ( PER BANK RECONCILING ITEM)

• These are deposits already recorded in the cash books in one period but were taken up by the bank only in the next
period, either because it is not yet received by the bank as of cut-off time (deposit in transit) or it has not yet been
deposited as of the end of the month (undeposited collection).
• The amount of the deposit in transit or undeposited collection can be determined by comparing the receipts as
reflected in the company’s accounting records with the deposits as reflected in the bank statement.
• In order to correct the understatement, the collections awaiting deposit or are in transit should be added to the
bank in arriving at the correct cash balance.
TIME LAPSE DIFFERENCES

b.) OUTSTANDING CHECKS ( PER BANK RECONCILING ITEM)

• These are checks written and released to payees and are already recorded in the cash books but are not yet
presented for encashment to the bank.
• The amounts of outstanding checks is determined by comparing the checks written during the month as reflected in
the company’s check register or cash disbursements journal with the cancelled checks included in the bank
statement.
• In order to correct the overstatement, the amount of the outstanding checks should be deducted from the bank
balance.
TIME LAPSE DIFFERENCES

c.) DEBIT MEMOS (PER BOOK RECONCILING ITEM)

• These are charges and deductions made by the bank to the account of the company but not yet recorded by the
entity. E.g. Bank service charges, NSF or DAIF or DAUD checks, Technically defective checks and Payment of loan.
• Debit memos charged directly by the bank should be deducted from the balance per books in determining
the correct cash balance.
d.) CREDIT MEMOS (PER BOOK RECONCILING ITEM)
• These are collections or deposits made by the bank to the account of the company but not yet recorded by the
entity. E.g. Collections made by the bank on behalf of the entity, Proceeds of bank loan credited to the account of
the entity, Matured time deposits transferred by the bank to the current account of the depositor and Interest
earned on the notes collected.
• These credits made by the bank increased the bank statement balance and, therefore, should be added to the cash
balance per books in order to obtain the correct cash balance.
 FORMS OF BANK RECONCILIATION
STATEMENT

1. Both bank and book balances are reconciled to a correct balance.

• It has two section: The bank statement balance being adjusted to the correct cash balance in the first section
which reflects bank reconciling items and correction of errors made by the bank and the book balance being
adjusted to the same corrected cash balance in the second section which reflects books reconciling items and
correction of errors made on the depositor’s book.
• This form has the advantage of clearly identifying items requiring adjustments in the depositor’s accounting
records. In addition, it develops a corrected cash balance that is reported in the statement of the financial position.
2. Bank balance reconciled with book balance (Bank to Book method).
• This form reconciles the bank balance to the unadjusted balance of the depositor’s cash account in
the general ledger

3. Book balance reconciled with bank balance (Book to Bank method).

• This form starts with the cash balance per ledger and reconciled to the balance per bank statement.
 ILLUSTRATIVE PROBLEM

All the date pertaining to the cash transactions and bank accounts of Landmark Company for March 2021 are as follows:

Cash balance per accounting records, March 31, 2021 P20,633

Cash balance per bank statement, March 31, 2021 P38,218

• Bank statement disclosed the following information:

• Bank service charge for March, P132
• Debit memo for printed checks delivered by the bank P270
• Proceeds of a bank loan on March 31 not recorded in the accounting records, net of P660 interest, P6,840
• Proceeds from customer’s promissory note, principal amount, P9,600, collected by the bank, not taken up in the books, with
P120 interest, P9,720.
• Customer’s check returned by the bank marked NSF amounting to P912.
• Stolen checks lacking an authorized signature deducted from Landmark’s account by the bank in error, P960
• Note collected by the bank amounting to P3,000 with interest earned of P600.
• Outstanding checks, March 31, 2021 is amounting to P8,075
• Deposits in Transit on March 31, 2021 not recorded by the bank until April 1, P5,856
• Customers’ checks totaling P3,600 were still on hand at March 31, 2021 awaiting deposit
• Check #1234 payable to a supplier entered in the accounting records as P2,520 deducted in the bank statement
the erroneous amount of P1,440
BOTH B ANK AND BOOK ARE
RECONCILED TO A CORRECT B ALANCE
BANK TO BOOK
BOOK TO BANK
• Upon completion of the bank reconciliation, journal entries must be made by the company to bring
its records up to date. Meanwhile, the bank should be notified of any bank error noted in the reconciliation.
• Only the book reconciling items require adjusting entries in the company’s books. All reconciling items added
to the cash balance per books of the depositor are debited to cash in bank account, while all items deducted
from the book are credited to the cash in bank account.

Journal Entries:
Miscellaneous Expense (or Bank Service Charge) 132
Cash in Bank 132
• To record bank service charge

Miscellaneous Expense 270

Cash in Bank 270
• To record debit memo for printed checks delivered
 Cash in Bank 9,720
Notes Receivable 9,600
Interest Revenue 120
• To record proceeds from customer’s promissory note with interest

Cash in Bank 6,840

Interest Expense 660
Loan Payable 7,500
• To record proceeds of a bank loan net of interest

Accounts Receivable 912

Cash in Bank 912

• To record customer’s check returned by the bank marked NSF

Cash in Bank 3,600

Notes Receivable 3,000
Interest Revenue 600
• To record note collected by the bank amounting with interest