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*CASH AND CASH EQUIVALENTS*

CASH
- includes money and any other negotiable instrument that is
payable in money and acceptable by the bank for deposit and
immediate credit.
- must be unrestricted in use or must be readily available in the
payment of current obligations and not be subject to any
restrictions, contractual or otherwise.

*Deposits in foreign countries which are not subject to any forex


restriction are included in CASH.

CASH ITEMS:
a. CASH ON HAND undeposited cash collections and other
cash items (Customers, cashiers, managers and travelers
check, bank drafts and money order)
b. CASH IN BANK includes demand deposit or checking
account and saving deposit which are unrestricted as to
withdrawal
c. CASH FUND set aside for current purposes (Petty cash,
payroll, and dividend fund)

*CURRENT ASSET if for use in current operations or payment


of current obligation (under Cash and Cash equivalent) (Petty
cash, payroll, travel, interest, dividend and tax fund)
*LONG TERM INVESTMENT if for noncurrent purpose or
payment of noncurrent obligation (Sinking, preference share
redemption, contingent, insurance fund and fund for acquisition
or construction of PPE)
Note: Classification as current or noncurrent should parallel the
classification applied to the related liability.

CASH EQUIVALENTS
- Short-term and highly liquid investments that are readily
convertible into cash and presents insignificant risk of changes
of value due to changes in interest rates.
- Only highly liquid investments that are acquired 3 mos. before
maturity
(Commercial paper, Marketable securities, Money market funds,
Short-term government bonds and Treasury bills)

BANK OVERDRAFT
When cash in bank account has credit balance resulting from
the issuance of checks in excess of the deposits.
classified as CURRENT LIABILITY and should not be offset
against other bank accounts with debit balances. (Exception is
when not material)

MEASUREMENT
CASH at Face Value
CASH IN FOREIGN CURRENCY at Current Exchange Rate
CLASSIFICATION OF INVESTMENTS IN TIME DEPOSIT,
MONEY MARKET INSTRUMENTS AND TREASURY BILLS:
a. 3 months or less Cash equivalents
b. More than 3 months bit within 1 year Short-term
financial asset or Temporary Investment
c. More than 1 year Long term investments
*if become due within 1 year, reclassified as Temporary
investment.
FOREIGN CURRENCY

*When subject to restriction and if material, should be classified


among NONCURRENT ASSETS and the restriction clearly
indicated.
CLASSIFICATION OF CASH FUND ACCORDING TO
PURPOSE:

COMPENSATING BALANCE takes the form of minimum


checking or demand deposit account balance that must be
maintained in connection with a borrowing arrangement with a
bank.
CLASSIFICATION OF COMPENSATING BALANCE:
*If not legally restricted as to withdrawal (Informal) Cash
*If legally restricted (Formal):
Short term loan Cash held as compensating balance
(Current Assets)
Long term loan Noncurrent investment
UNDELIVERED OR UNRELEASED CEHCK one that is merely
drawn and recorded but not given to the payee before the end
of reporting period.
Adjusting entry:

Cash

Note: It is usually employed at the end of the month.


No entry is made for both drawing and depositing
For cash shortage
POSTDATED CHECK DELIVERED check drawn, recorded and Journal entry: (Recognition)
already given to the payee but it beats a date subsequent to
Cash short or over
the end of reporting period.
Cash
Adjusting entry:
Adjusting entry:
Cash
*if the cashier or cash custodian is the responsible
Accounts Payable or appropriate account
Due from cashier
STALE CHECK OR CHECK LONG OUTSTANDING check not
Cash short or over
enchased by the payee within a relatively long period of time.
*if reasonable efforts fail to disclose the cause
Note: In banking practices, check become stale if not enchased Loss from cash shortage
within 6 mos.
Cash short or over
For cash overage
THINGS TO CONSIDER IN DETERMINING REASONABLE
Journal entry: (Recognition)
TIME
Cash
a. Nature of the instrument
Cash short or over
b. Usage of trade or business
Adjusting entry:
c. Facts of the particular case
*If there is no claim (treated as Miscellaneous Income)
Cash short or over
Journal Entry:
Miscellaneous income
If immaterial
*if found to be the money of the cashier
Cash
Cash short or over
Miscellaneous Income
Payable to cashier
If material and liability is expected to continue
Cash
IMPREST SYSTEM system of control of cash which requires
Accounts Payable or appropriate account
that all cash receipts should deposited intact and cash
disbursement should be made by means of check.
WINDOW DRESSING practice of opening the books of
PETTY CASH FUND money set aside to pay small expenses
accounts beyond the close of the reporting period for the
which cannot be paid conveniently by means of check.
purpose of showing a better financial position and performance.
How to correct: Reversing the entries
Two methods of handling petty cash:
a. Imprest fund sytem one usually followed in handling
LAPPING
petty cash transactions
practice used for concealing a cash shortage
Journal entry
consists of misappropriating a collection from one customer
1. Establishing the fund
and concealing this defalcation by applying a subsequent
Petty cash fund
collection made from another customer.
Cash in Bank
2. Payment of expenses
KITING occurs when a check drawn against a first bank and
Memo entry only
depositing the same check in a second bank to cover the
3. Replenishment of petty cash payments
shortage in the latter bank.
Expenses
Accounts Payable or appropriate account

Cash in bank
4. Adjusting unreplenished expenses
Expenses
Petty cash fund
Note: To be reversed at the beginning of the next
accounting period.
5. Increasing the fund
Petty cash fund
Cash in bank
6. Decreasing the fund
Cash in bank
Petty cash fund
b. Fluctuating fund system checks drawn to replenish the
fund do not necessarily equal the petty cash disbursements.
Journal entry
1. Establishment of the fund
Petty cash fund
Cash in bank
2. Payment of expenses
Expenses
Petty cash fund
3. Replenishment or increase of the fund
Petty cash fund
Cash in bank
Note: At the end of reporting period, no adjustment is
necessary.
4. Decreased of the fund
Cash in bank
Petty cash fund
*BANK RECONCILIATION*
3 KINDS OF BANK DEPOSIT
1. DEMAND DEPOSIT current account or checking account
or commercial deposit where deposits are covered by the
deposits slips and where funds are withdrawable on demand
by drawing checks against the bank.
Note: It is noninterest bearing. Bank reconciliation is
necessary.
2. SAVING DEPOSIT passbook is given and is required when
making deposits and withdrawals (sometimes may require
notice of withdrawal)

Note: It is interest bearing


3. TIME DEPOSIT evidenced by a formal agreement
embodied in an instrument called certificate of deposit.
Note: It is interest bearing. May be preterminated or
withdrawn on demand or after a certain period of time
agreed upon.
BANK RECONCILIATION a statement which brings into
agreement the cash balance per book and cash balance per
bank.
Note: Usually prepared monthly
BANK STATEMENT a monthly report of the bank to the
depositor showing the cash balance per bank at the beginning,
the depositor acknowledged, the checks paid, other charges
and credits and the daily cash balance per bank during the
month.
CANCELLED CHECKS checks issued by the depositor and
paid by the bank during the month.
RECONCILING ITEMS:
For Book:
1. Credit memos items not representing deposits credited
by the bank but not yet recorded by the depositor as cash
receipts.
(Increases the bank balance)
2. Debit memos items not representing checks paid by bank
which are charged or debited by the bank but not yet
recorded by the depositor as cash disbursements.
(Decreases the bank balance)
3. Errors
For Bank:
1. Deposit in transit collections already recorded by the
depositor as cash receipts but not yet reflected on the bank
statement.
2. Outstanding Checks checks already recorded by the
depositor as cash disbursements but not yet reflected on the
bank statement.

*Certified checks - one where the bank has stamped on its


face the word accepted or certified indicating sufficiency
of funds
Note: If included in outstanding checks, it should be
deducted from it.
FORMS OF BANK RECONCILIATION
1. Adjusted balance method (most preferred)
Book balance
Add: Credit memo
Total
Less: Debit memo
Adjusted Book balance
Bank balance
Add: Deposit in transit
Total
Less: Outstanding checks
Adjusted Bank balance
2. Book to bank method
Book balance
Add: Credit memos
Outstanding checks
Total
Less: Debit memos
Deposit in transit
Bank Balance
Note: Reverse treatment of Bank reconciling items.
3. Bank to book method
Bank balance
Add: Deposit in transit
Debit memos
Total
Less: Outstanding Checks
Credit memos
Book balance
Note: Reverse treatment of Book reconciling items.
*PROOF OF CASH*
Book balance
Balance per book beg.

Add: Book debits during the month


Total
Less: Book credits during the month
Balance per book end
*Book debits are cash receipts
*Book credits are cash disbursements
Bank balance
Balance per bank beg.
Add: Bank credits during the month
Total
Less: Bank debits during the month
Balance per bank end
*Bank credits includes deposits acknowledged by bank and
credit memos (In absence, assumed to be deposits
acknowledged)
*Bank credits includes checks paid by bank and debit memos
(In absence, assumed to be checks paid)
Deposits in transit
Deposits in transit beg.
Add: Cash receipts deposited during the month
Total
Less: Deposits acknowledge by bank during the month
Deposit in transit end
Outstanding checks
Outstanding checks beg.
Add: Checks drawn by depositor during the month
Total
Less: Checks paid by bank during the month
Outstanding checks end
PROOF OF CASH an expanded reconciliation which includes
proofs of receipts and disbursements.

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