CASH AND CASH

EQUIVALENTS
Learning Objectives
• Identify the items that are included in the cash and cash equivalent
• Account for petty cash fund and cash shortages or overages.
 Cash
It includes money or its equivalent that is readily available for unrestricted use.
- Cash on hand
- Cash in bank
EXAMPLES:
1. Coins and currencies
2. Demand deposits
3. Bank drafts
4. Money orders
5. Checks
6. Cash funds set aside for use in current operations

***Revolving Fund
***Tax Fund
 EXCLUDED IN CASH
• Unused credit line
• Postdated checks received

ORIGINAL ENTRY
Cash XX
Accounts Receivable XX

ADJUSTING ENTRY
Accounts Receivable XX
Cash XX
 INCLUDED IN CASH
• Stale checks
• Unreleased checks drawn and Postdated checks drawn

ORIGINAL ENTRY
Accounts Payable XX
Cash XX

ADJUSTING ENTRY
Cash XX
Accounts Payable XX
Sample Problem
The following were taken from the records of CPA Co. as of December 31, 2020:
Checks drawn but not yet issued to payees P120,000
Customer’s checks dated January 15, 2021 35,000
Customer’s checks dated Dec. 31, 2020 40,000
CPA’s check dated Jan. 15, 2021 already mailed to 16,000
payee
Cash on hand 130,000
Employees’ checks representing unclaimed salaries, 14,000
held by the treasurer
Petty cash fund (fully replenished) 20,000

Compute the amount of cash to be presented in CPA’s Dec. 31, 2020 cash? 340,000
 CASH EQUIVALENTS
Short-term, highly liquid investments that are readily convertible to known of cash which
are subject to an insignificant risk of changes in value.

Only debt instruments acquired within 3 months or less before their maturity date can
qualify as cash equivalents.
3 MONTHS

Acquisition date Maturity date

Redeemable Preference Shares that are acquired 3 months or less their specified
redemption date may qualify as cash equivalents

Equity securities (Investments in stocks) cannot qualify as cash equivalents.

Sample Problem
The records of ABC Co. show the following:
• Treasury bills acquired on Nov. 1, 2020, maturing on Jan. 31, 2021 amounting to P300,000.
• Money market replacements to MBA trust made on Dec. 15, 2020, maturing on Aug. 31, 2021
amounting to P800,000.
• Investment in redeemable preference shares of XYZ Co redeemable on March 31, 2021 in the
amount of P1,600,000.
• Three month time deposit with UCPB-unrestricted for withdrawal in the amount of P950,000.
• Investments in equity securities of DEF co. purchased on Dec. 31, 2020 to be sold on Jan. 5,
2021 amounting to P450,000.

How much of the items listed above will be included in CPA’s Dec. 31, 2020 cash equivalents?
Deposit in Foreign Banks
Unrestricted deposits in foreign banks that are available for immediate withdrawal are
included as cash at face amount 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
uncollectibility and impairment.

COMPENSATING BALANCE
• Legally restricted as to withdrawal = excluded in cash
• Not legally restricted as to withdrawal = included in cash

BANK OVERDRAFT = current liabilities except in cases where offsetting is permitted.

Sample Problem
CPA Co. had the following account balances at Dec. 31, 2020:

Cash in Bank P2,250,000

Cash on hand 125,000
Cash legally restricted for additions to plant 1,600,000

The cash in bank includes P600,000 compensating balance against short-term borrowing
arrangements. The compensating balance is not legally restricted as to withdrawal by
CPA Co.

Compute the total cash to reported in CPA’s De. 31, 2020 balance sheet. P2,375,000
Sample Problem
The cash balance of CPA Co. comprises the following:

Cash on hand P40,000

Cash in bank – savings BPI 100,000
Cash in bank – current BPI (10,000)
Cash in bank – current Metrobank (60,000)

Additional information:
- Cash on hand includes undeposited collections of P2,000.
- The cash in bank – savings maintained at BPI includes a P20,000 compensating balance which
is restricted.

Compute for the amount of cash to be reported in the financial statements. P110,000
INTERNAL CONTROL OVER CASH
• Segregation of incompatible duties (C.A.R.E.)
• Imprest System
• Bank Reconciliation
• Cash counts
• Minimum cash balance
• Lockbox System
• Non-encashment of personal checks from petty cash fund
• Voucher system
Accounting for Petty Cash Fund
• Petty cash fund is established

Petty cash fund XX

Cash in Bank XX

• Disbursements out of the petty cash fund (NO ENTRY)

• Replenishment of petty cash disbursements

Various expense accounts XX

Cash in Bank XX
Accounting for Petty Cash Fund
• Adjustments for unreplenished fund at reporting date

Various expense accounts XX

Petty cash fund XX

• Subsequent changes in ledger balance of petty cash fund

INCREASE THE PCF
Petty cash fund XX
Cash in Bank XX
DECREASE THE PCF
Cash in Bank XX
Petty cash fund XX
Sample Problem
The accounted for CPA Co. established a petty cash fund of P1,400. During September, the fund
was depleted by the following disbursements: Total Disb. P1,380
Shipping expense P740
Travel expense 240
Postage expense 230
Miscellaneous expense 170

In addition to receipts for the above items, the petty cash box contained P8 in coins and an IOU
of P8 from the secretary handling the fund. The company uses a cash over and short expense
account, as needed. The company decided to decrease the petty cash fund to P1,000.

Prepare all the necessary entries in accounting for petty cash fund.
• Establishment of petty cash fund
Petty cash fund 1,400
Cash in bank 1,400
• Entry to record the disbursements as they occur NO ENTRY
• Entry to record replenishment of petty cash fund
Shipping expense 740
Travel expense 240
Postage expense 230
Miscellaneous expense 170
Receivable from secretary 8
Cash short or over 4
Cash in bank 1,392

• Entry to record the decrease in the petty cash fund

Cash in bank 400

Petty cash fund (1,400-1,000) 400
CLOSE THE SUSUPENSE ACCOUNT

*CASH SHORTAGE

Receivable from Custodian 4

Cash short or over 4

*CASH OVERAGE

Cash short or over XX

Gain/Misc. Revenue/Payable XX
 BANK C

RECONCILIATION
February 4, 2022
Learning Objectives
• Prepare Bank Reconciliation
• Prepare Proof of Cash
Bank Reconciliation Statement
• It is a report that is prepared for the purpose of bringing the balances of cash per books
and per bank statement into agreement.

CPA Co.
Bank Reconciliation
For the month ended January 31, 2021

Balance per books, end PXX Bal. per bank statement, end PXX
Add: Credit Memos (CM) XX Add: Deposit in Transit (DIT) XX
Less: Debit Memos (DM) XX Less: Outstanding Checks (OC) XX
Add/Less: Book Errors XX Add/Less: Bank Errors XX
Adjusted Balance XX Adjusted Balance XX
Transactions of the Company

1. CPA Co. deposits P10,000 cash in the bank.

2. CPA Co. issued checks to MBA amounting to P5,000.
3. The deposit made was recorded on the books as P3,010 but it is actually a deposit of
P3,100. (UNDERSTATED = 90)

BOOKS BANK
Record of the Company Records of the Bank

CASH DEPOSIT LIABILITY

Dr. Cr. Dr. Cr.

Transactions of the Bank

1. A bank collected P1,000 interest in the CPA’s account.

2. A bank erroneously debited the P8,000 cash collection to CPA’s account.
Bank Reconciliation Statement
• It is a report that is prepared for the purpose of bringing the balances of cash per books
and per bank statement into agreement.

CPA Co.
Bank Reconciliation
For the month ended January 31, 2021

Balance per books, end PXX Bal. per bank statement, end PXX
Add: Credit Memos (CM) XX Add: Deposit in Transit (DIT) XX
Less: Debit Memos (DM) XX Less: Outstanding Checks (OC) XX
Add/Less: Book Errors XX Add/Less: Bank Errors XX
Adjusted Balance XX Adjusted Balance XX
 PROCEED TO EXCEL
FOR SAMPLE PROBLEM