PETTY CASH FUND

Take note that the imprest system is a kind of internal control measure over cash to safeguard it
from theft, misappropriation and other financing schemes. However, risk in cash is inherent and no
control measure can guarantee elimination of risks.

Presented below are the two fund system in accounting for petty cash. Imprest fund system is
more common while fluctuating fund system is more time consuming in maintaining, recording and, in
effect, costlier.

IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM

Setting up petty cash fund Setting up petty cash fund
PCF 10,000 PCF 10,000
Cash in Bank 10,000 Cash in Bank 10,000

Use of Petty Cash Fund Use of Petty Cash Fund

*Memo Entry only Various Expenses 8,000
PCF 8,000

Replenishment Replenishment
Various Expenses 8,000 PCF 8,000
Cash in Bank 8,000 Cash in Bank 8,000

After the foregoing entry, PCF is still at 10,000. Cash in Bank forwarded to Petty cash custodian

Increase of PCF Increase of PCF

PCF xx PCF xx
Cash in Bank xx Cash in Bank xx

Decrease of PCF Decrease of PCF

Cash in Bank xx Cash in Bank xx
PCF xx PCF xx

BANK RECONCILIATION
A very important control measure of cash in practice. Several entities are having difficulty in
maintaining an effective bank reconciliation due to the data that must be processed and monitored. This
control measure is used to ensure that receipts and disbursements per the entity’s and bank’s records are
the same and accounted for.
Normally done on a monthly basis that coincides the bank’s issuance of a bank statement of the
entity, which comprises the cash beginning, deposits acknowledged, checks paid, other charges, and
credits and daily cash balance per bank during the month.
 Cancelled checks, any debit or credit memoranda that have affected the depositor’s account are
attached to the bank statement
Types of Deposits:
1. Demand deposit – normally charge by the bank with fees for using and maintaining this account.
This includes checking or current account or commercial deposit where deposits are covered with
deposit slips and funds are withdrawable on demand. This account is non-interest bearing
2. Savings deposit – where a passbook is essential in depositing and withdrawing funds. This are
interest-bearing account.
3. Time deposit – with formal agreement with the bank evidenced by a certificate of deposit and
bears a higher interest than the savings. However, funds in this account are not withdrawable
within a short period of time (say, 6 months or 1 year) otherwise, the depositor shall be charged
with a fee for breach of terms.

In bank recon, banks require specimen signature and list of authorized officers to approve
transactions or sign checks.

Book Reconciling Items

1. Credit Memos – recorded by bank that does not yet appear on the books. Ex. Collection of
receivable of the entity, loan proceeds, etc.
2. Debit Memos – includes charges by the bank such as bank service charge or checks presented but
without sufficient funds (NSF)
3. Errors – error in recording by the book which may include transposition errors

Bank Reconciling Items

1. Deposit in transit (DIT) – undeposited cash on hand of the entity or those that have not yet cleared
by the bank
2. Outstanding Checks (OC)– checks drawn by the entity but not presented (encashed or deposited)
by the recipient
3. Errors- same as above.

FORMS OF BANK RECONCILIATION:

1. Adjusted Balance Method – book and bank balance are brought to a correct cash balance that
must appear on the balance sheet. Preferred method.
2. Book to bank method – Book balance is reconciled with the bank balance or adjusted to equal
bank balance
3. Bank to Book Method – Bank balance is reconciled with the book balance or adjusted to equal
book balance.

ADJUSTED BALANCE METHOD BOOK TO BANK BANK TO BOOK

Book Balance XX Book balance xx Bank balance xx
Add: Credit Memos XX add: Credit Memos xx Add: DIT xx
Total XX OC XX Debit Memos xx
Less: Debit Memos (XX) Total XX Total XX
Adjusted Book Balance XX Less: Debit Memos (XX) Less: OC (XX)
DIT (XX) Credit Memos (XX)
Bank Balance XX Bank Balance XX Book Balance XX
Add: DIT XX
Total XX
 Less: OC (XX)
Adjusted Bank Balance XX

TWO-DATE BANK RECONCILIATION

Bank recon that literally involves two dates. Procedures followed are the same with a one date
reconciliation. It becomes complicated when certain facts or data are omitted. To help with the missing
data, the following formulas may help.

Computation of Book Balance Computation of DIT

Balance per Book, Beg of Month xx DIT, Beg of Month xx
Add: Book debits during the month xx Add: Cash receipts deposited during the month xx
Total xx Total deposits to be acknowledged by the bank xx
Less: Book credits during the
month (xx) Less: Deposits acknowledge by the bank (xx)
Balance per book, End of month xx DIT, End of Month xx

Computation of Bank Balance Computation of OC

Balance per Bank, Beg of Month xx OC, Beg of Month xx
Add: Checks drawn by deposited during the
Add: Bank credits during the month xx month xx
Total xx Total checks to be paid by the bank xx
Less: Bank debits during the month (xx) Less: Checks paid by bank during the month (xx)
Balance per Bank, End of month xx OC, End of Month xx

PROOF OF CASH
Is an expanded reconciliation that includes receipts and disbursements columns. It is useful in discovering
possible discrepancies in handling cash particularly when cash receipts have been recorded but not
deposited.

January 31 Receipts Disbursements February 28

A B C D = A+B-C
Balance per book 50 200 180 70
Note collected:
January 15 -15
February 20 20
NSF Check/ Service
Charge:
January -5 -5
February 10 -10
Adjusted Book balance 59 205 184 80
 Balance per bank 84 170 130 124
Deposit in transit:
January 40 -40
February 75 75
Outstanding checks:
January -65 -65
February 119 -119
Adjusted Bank Balance 59 205 184 80

 Receipts and Disbursement indicated in the proof of cash pertains to the current month or the
month of February in this case
 Do take note that any discrepancies in the previous month shall be discovered and adjusted on
the following month by the receipt of the bank statement. Therefore,
o On Credit Memos or Note collected in January, it must be added to the January column
while deducted for the Receipts of the current month because it is overstated by the
adjusting entry made.
o Credit Memos or Note collected in February must be added to the Receipts of the current
month as it truly pertains to the current month and such amount extended under the
February 28 column.
o The same logic applies for the Debit Memos/ NSF Checks, Bank service Charge, Deposit
in transit, and Outstanding Checks

STATEMENT OF CASH FLOWS

Provides information about the cash receipts and payments of an entity during a period.

COMPONENTS:
1. OPERATING ACTIVITIES – derived primarily from the principal revenue producing activities of the
entity.
a. Cash receipts from sale of goods and/ or services, royalties, rental, fees, commissions
b. Cash payment to suppliers for goods and services, selling and administrative expenses
2. INVESTING ACTIVITIES – cash flows derived from acquisition and disposal of long-term assets and
other investments not included in cash equivalents (or non-operating assets)
a. Sale or acquisition of Plant, property, and equipment, debt or equity instruments of other
entities
b. Cash advances and loans to other parties other than those by financial institutions
c. Payments or receipts for futures contract, forward contract, option and swap contracts
3. FINANCING ACTIVITIES – Cash flows from equity capital and borrowing of the entity. It results
from transactions between the entity & owners and entity & creditors. Involves non-trade
liabilities and equity
a. Cash receipts from issuance of shares
b. Payment to acquire treasury shares
c. Issuance of debentures, loans, notes, bonds and mortgages
d. Payment for amounts borrowed

Noncash transactions are not reflected on the Statement of Cash flows but elsewhere in the
Financial Statements. Examples are:
 o Acquisition of Asset through a liability account or issuance of shares/ bonds.
o Conversion of Bonds payable to share capital
o Conversion of preference shares to ordinary shares

Presentation of certain accounts:

1. Interest paid and received is presented under operating activities as it is included in determining
the net income or loss of the entity.
a. Alternatively, interest paid may be presented under financing activities as it represents
cost of obtaining financial resources while interest received may be presented under
investing activities representing return on investment
2. Dividends received is presented under operating activities as it is included in determining the net
income while dividends paid shall be presented under financing activities representing cost of
obtaining financial resources.
a. Alternatively, interest received may be presented under investing activities representing
return on investment while dividend paid may be presented under operating acitivites to
determine ability of the entity to pay dividends out of operating cash flows.
3. Income taxes – separately disclosed under operating activities.