Subject: Financial Analysis and Reporting

This module is a compilation of portions of original works by other authors (which are duly
credited in the bibliography section) and may contain copyrighted material, the use of which
has not been specifically authorized by the copyright holders.

The module is purely for non-profit research, reporting, commentary, criticisms and
transformative educational purposes. There is no reason to believe that the use of this module
will affect the market value of the copyrighted works.

For these reasons we believe that the use of this module will affect the market value of the
copyrighted works.

For these reasons we believe that this compilation is covered under the current fair use local
republic act (RA) 8293 or the intellectual Property Code of the Philippines and International
Copyright laws.

We do not support any actions in which the materials in this module are used for the purposes
that extend beyond fair use.

Module 1: Cash and Cash equivalents

1 Module 1 – Cash and Cash equivalents

Intended Learning Outcomes (ILO)

By the end of the module, the students are expected to:

1. Have a basic understanding of what is financial reporting

2. Have technical knowledge to:
o Understand the concept of cash
o Understand the concept of cash equivalents
o Identify items considered as cash
o Identify items considered as cash equivalents
o Know the accounting for petty cash fund

Lecture Proper and Discussion

What is Financial Reporting?

In any industry, whether manufacturing or service, we have multiple departments, which function day
in day out to achieve organizational goals. The functioning of these departments may or may not be
interdependent, but at the end of the day they are linked together by one common thread –
Accounting & Finance department. The accounting & financial aspects of each and every department
are recorded and are reported to various stakeholders.

There are two different types of reporting –

1. Financial reporting for various stakeholders - External users

2. Management reporting for internal Management of an organization. – Internal users

Both this reporting are important and are an integral part of Accounting & reporting system of an
organization. But considering the number of stakeholders involved and statutory & other regulatory
requirements, Financial Reporting is a very important and critical task of an organization. It is a vital
part of Corporate Governance

Definition of Financial Modeling

Financial Reporting involves the disclosure of financial information to the various stakeholders about
the financial performance and financial position of the organization over a specified period of time.
These stakeholders include – investors, creditors, public, debt providers, governments & government
agencies. In case of listed companies, the frequency of financial reporting is quarterly & annual.

Financial Reporting is usually considered an end product of Accounting. The typical components of
financial reporting are:

1. The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)

2 Module 1 – Cash and Cash equivalents

 4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)

Objectives of Financial Reporting

According to International Accounting Standard Board (IASB), the objective of financial reporting is
“to provide information about the financial position, performance and changes in financial position of
an enterprise that is useful to a wide range of users in making economic decisions.”

The following points sum up the objectives & purposes of financial reporting:

1. Providing information to the management of an organization which is used for the purpose of
planning, analysis, benchmarking and decision making.

2. Providing information to investors, promoters, debt provider and creditors which is used to
enable them to male rational and prudent decisions regarding investment, credit etc.

3. Providing information to shareholders & public at large in case of listed companies about
various aspects of an organization.

4. Providing information about the economic resources of an organization, claims to those

resources (liabilities & owner’s equity) and how these resources and claims have undergone
change over a period of time.

5. Providing information as to how an organization is procuring & using various resources.

6. Providing information to various stakeholders regarding performance management of an

organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.

7. Providing information to the statutory auditors which in turn facilitates audit.

8. Enhancing social welfare by looking into the interest of employees, trade union & Government.

Importance of Financial Reporting

The importance of financial reporting cannot be over emphasized. It is required by each and every
stakeholder for multiple reasons & purposes. The following points highlights why financial reporting
framework is important:

1. In help and organization to comply with various statues and regulatory requirements. The
organizations are required to file financial statements to ROC, Government Agencies. In case
of listed companies, quarterly as well as annual results are required to be filed to stock
exchanges and published.

2. It facilitates statutory audit. The Statutory auditors are required to audit the financial statements
of an organization to express their opinion.

3 Module 1 – Cash and Cash equivalents

 3. Financial Reports forms the backbone for financial planning, analysis, benchmarking and
decision making. These are used for above purposes by various stakeholders.

4. Financial reporting helps organizations to raise capital both domestic as well as overseas.

5. On the basis of financials, the public in large can analyze the performance of the organization
as well as of its management.

6. For the purpose of bidding, labor contract, government supplies etc., organizations are
required to furnish their financial reports & statements.

What are the four main financial statements?

 Balance sheets
 Income statements
 Cash flow statements
 Statements of shareholders' equity.

A balance sheet is a summary of all of your business assets (what the business owns) and liabilities
(what the business owes). At any particular moment, it shows you how much money you would have
left over if you sold all your assets and paid off all your debts (i.e. it also shows 'owner's equity').

An income statement is a financial statement that shows you the company's income and
expenditures. It also shows whether a company is making profit or loss for a given period.
The income statement, along with balance sheet and cash flow statement, helps you understand the
financial health of your business.

A cash flow statement is a financial statement that provides aggregate data regarding
all cash inflows a company receives from its ongoing operations and external investment sources. It
also includes all cash outflows that pay for business activities and investments during a given period.

The statement of shareholder equity tells you the value of a business after investors
and stockholders are paid out. A statement of shareholder equity is a section of the balance sheet
that reflects the changes in the value of the business to shareholders from the beginning to the end of
an accounting period.

4 Module 1 – Cash and Cash equivalents

Balance sheet

Definition of cash

From the point of view of a layman, “cash" simply means money.

Money is the standard medium of exchange in business transactions.

Money refers to the currency and coins which are in circulation and legal tender.
However, in the accounting parlance, the term "cash" has a special and broader meaning. It
connotes more than money. As contemplated in accounting, cash includes money and other
negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate
credit.

Cash includes checks, bank drafts and money orders because these are acceptable by the bank for
deposit or immediate encashment.

For example, when checks are received in full settlement of an account receivable, cash is
immediately debited. But postdated checks received cannot be considered as cash yet because
these checks are unacceptable by the bank for deposit and immediate credit or outright encashment.

5 Module 1 – Cash and Cash equivalents

Unrestricted cash

There is no specific standard dealing with "cash". The only guidance is found in PAS 1, paragraph 66,
which provides that an entity shall classify an asset as current when the asset is cash or a cash
equivalent unless it is restricted to settle a liability for more than twelve months after the end of the
reporting period.

Accordingly, to be reported as "cash", an item must be unrestricted in use.

This means that the cash must be readily available in the payment of current obligations and not be
subject to any restrictions, contractual or otherwise.

Cash items included in cash

a. Cash on hand - This includes undeposited cash collections and other cash items awaiting
deposit such as customers' checks, cashier's or manager's chécks, traveler's checks, bank
drafts and money orders.

b. Cash in bank - This includes demand deposit o" checking account and saving deposit which
are unrestricted as to withdrawal.

c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend
fund.

Cash equivalents

PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid investments that are
readily convertible into cash and so near their maturity that they present insignificant risk of changes
in value because of changes in interest rates.

The standard further states that only highly liquid investments that are acquired three months before
maturity can qualify as cash equivalents.

Examples of cash equivalents are:

a. Three-month BSP treasury bill

b. Three-year BSP treasury bill purchased three months before date of maturity
c. Three-month time deposit
d. Three-month money market instrument or commercial раper

Equity securities cannot qualify as cash equivalents because shares do not have a maturity date.

However, preference shares with specified redemption date and acquired three months before
redemption date can qualify as cash equivalents.

Note that what is important is the date of purchase which should be three months or less before
maturity.

Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if
the remaining maturity is three months or less.
6 Module 1 – Cash and Cash equivalents
Investment of excess cash

The control and proper use of cash is an important aspect of cash management. Basically, the entity
must maintain sufficient cash for use in current operations.

Any cash accumulated in excess of that needed for current operations should be invested even
temporarily in some type of revenue earning investment.

Accordingly, excess cash may be invested in time deposits, money market instruments and treasury
bills for the purpose of earning interest income.

Classifications of investment of excess cash

Investments in time deposit, money market instruments and treasury bills should be classified as
follows:

If the term is three months or less, such instruments are classified as cash equivalents and therefore
included in the caption "cash and cash equivalents".

If the term is more than three months but within one year, such investments are classified as short-
term financial assets or temporary investments and presented separately as current assets.
If the term is more than one year, such investments are classified as noncurrent or long-term
investments.

However, if such investments become due within one year from the end of the reporting period, they
are reclassified as current or temporary investments.

Measurement of cash

Cash is measured at face value.

Cash in foreign currency is measured at the current exchange rate.

If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty,
cash should be written down to estimated realizable value if the amount recoverable is estimated to
be lower than the face value.

Financial statement presentation

The caption cash and cash equivalents should be shown as the first line item under current assets.

This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash
equivalents which are unrestricted in use for current operations.

However, the details comprising the cash and cash equivalents should be disclosed in the notes to
financial statements.

Foreign currency

Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.
7 Module 1 – Cash and Cash equivalents
Deposits in foreign countries which are not subject to any foreign exchange restriction are included in
"cash".

Deposits in foreign bank which are subject to foreign exchange restriction should be classified
separately among noncurrent assets and the restriction clearly indicated.

Cash fund for a certain purpose

If the cash fund is set aside for use in current operations or for the payment of current obligation, it is
a current asset.

The cash fund is included as part of cash and cash equivalents.

Examples of this fund are petty cash fund, payroll fund, travel fund, interest fund, dividend fund and
tax fund.

On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent
obligation, it is shown as long-term investment.

Examples of this fund are sinking fund, preference share redemption fund, contingent fund, insurance
fund and fund for acquisition or construction of property, plant and equipment.

Classification of cash fund

The classification of a cash fund as current or noncurrent should parallel the classification of the
related liability.

For example, a sinking fund that is set aside to pay a bond payable shall be classified as current
asset when the bond payable is already due within one year after the end of reporting period.

However, a cash fund set aside for the acquisition of a noncurrent asset should be classified as
noncurrent regardless of the year of disbursement.

Bank overdraft

When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance
in the cash in bank account results from the issuance of checks in excess of the deposits.

A bank overdraft is classified as a current liability and should not be offset against other bank
accounts with debit balances.

For example, an entity maintains two bank accounts:

a. Cash in bank – First Bank, which is overdrawn by P10,000.
b. Cash in bank - Second Bank, with a debit balance of P100,000.

The net cash balance is P90,000.

The proper statement classification of the two accounts is as follows:

8 Module 1 – Cash and Cash equivalents

Current asset:

Cash in bank-Second Bank - 100,000

Current liability:

Bank overdraft – First Bank - 10,000

Note that it is not necessary to adjust and open a bank overdraft account in the ledger.

In other words, the Cash in Bank – First Bank account is maintained in the ledger with a credit
balance.

It is to be stated that generally overdrafts are not permitted in the Philippines.

Exception to the rule on overdraft

When an entity maintains two or more accounts in one bank and one account results in an overdraft,
such overdraft can be offset against the other bank account with a debit balance in order to show
cash, net of bank overdraft or bank overdraft, net of other bank account.

An overdraft can also be offset against the other bank account if the amount is not material.

Under IFRS, bank overdraft can be offset against other bank account when payable on demand and
often fluctuates from positive to negative as an integral part of cash management.

Compensating balance

A compensating balance generally takes the form of minimum checking or demand deposit account
balance that must be maintained in connection with a borrowing arrangement with a bank.

For example, an entity borrows P5,000,000 from a bank and agrees to maintain a 10% or P500,000
minimum compensating balance in a demand deposit account.

In effect, this arrangement results in the reduction of the amount borrowed because the
compensating balance provides a source of fund to the bank as partial compensation for the loan
extended.

Classification of compensating balance

If the deposit is not legally restricted as to withdrawal by the borrower because of an informal
compensating balance agreement, the compensating balance is part of cash.

If the deposit is legally restricted because of a formal compensating balance agreement, the
compensating balance is classified separately as "cash held as compensating balance" under current
assets if the related loan is short-term.

If the related loan is long-term, the compensating balance is classified as noncurrent investment.

9 Module 1 – Cash and Cash equivalents

Undelivered or unreleased check

An undelivered or unreleased check is one that is merely, drawn and recorded but not given to the
payee before the end of reporting period.

There is no payment when the check is pending delivery to the payee at the end of reporting period.

The reason is that undelivered check is still subject to the entity's control and may thus be canceled
anytime before delivery at the discretion of the entity.

Accordingly, an adjusting entry is required to restore the cash balance and set up the liability.

Cash xx
Accounts payable or appropriate account xx

In practice, the foregoing adjustment is sometimes ignored because the amount is not very
substantial and there is no evidence of actual cancelation of the check in the subsequent period.

Postdated check delivered

A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a
date subsequent to the end of reporting period.

The original entry recording a delivered postdated check shall also be reversed and therefore
restored to the cash balance.

Cash xx
Accounts payable or appropriate account

The reason is that there is no payment until the check can be presented to the bank for encashment
or deposit.

Stale check or check long outstanding

A stale check is a check not encashed by the payee within a relatively long period of time.

The question is how long a time must the check remain outstanding?

The Negotiable Instruments Law provides that where the instrument is payable on demand,
presentment must be made within a reasonable time after issue.

In determining what is a reasonable time, consideration should be made regarding the nature of the
instrument, the usage of trade or business, if any, with respect to such instrument and the facts of the
particular case.

Clearly, the law does not specify a definite period within which checks must be presented for
encashment. Reference is made to usage of trade or business practice.

In banking practice, a check becomes stale if not encashed within six months from the time of
issuance. Of course, this is a matter of entity policy.
10 Module 1 – Cash and Cash equivalents
Thus, even after three months only, the entity may issue a stop payment order to the bank for the
cancelation of a previously issued check.

If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income.

Cash xx
Miscellaneous income xx

However, if the amount is material and liability is expected to continue, the cash is restored and the
liability is again set up.

Cash xx
Accounts payable or appropriate account xx

Accounting for cash shortage

Where the cash count shows cash which is less than the balance per book, a cash shortage is to be
recorded.

Cash short or over xx

Cash xx

The cash short or over account is only a temporary or suspense account. When financial statements
are prepared the same should be adjusted.

Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment
should be:

Due from cashier xx

Cash short or over xx

However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is

Loss from cash shortage xx

Cash short or over xx

Accounting for cash overage

Where the cash count shows cash which is more than the balance per book, a cash overage is to be
recorded.
Cash xx
Cash short or over xx

Note that whether it is a cash shortage or cash overage, the offsetting account is cash short or over
account. Such account. should be adjusted when statements are made.

11 Module 1 – Cash and Cash equivalents

The cash overage is treated as miscellaneous income if there is no claim on the same.

Cash short or over xx

Miscellaneous income xx

But where the cash overage is properly found to be the money of the cashier, the journal entry is:

Cash short or over xx

Payable to cashier xx

Imprest system

The imprest system is a system of control of cash which requires that all cash receipts should be
deposited intact and all cash disbursenents should be made by means of check.

While internal control ideally requires that all payments should be made by means of check, this is
sometimes impossible.

There are occasions when the issuance of checks becomes impractical or inconvenient such as when
small amounts are paid or things are hurriedly bought or customers are entertained.

Consequently, in such instances, it may be more economical and convenient to pay in cash rather
than issue checks.

Petty cash fund

The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by
means of check.

There are two methods of handling the petty cash, namely:

a. Imprest fund system
b. Fluctuating fund system

Imprest fund system

The imprest fund system is the one usually followed in handling petty cash transactions.

Accounting procedures

a. A check is drawn to establish the fund.

Petty cash fund xx
Cash in bank xx

b. Payment of expenses out of the fund.

No formal journal entries are made.

The petty cashier generally requires a signed petty cash voucher for such payments and simply
prepares memorandum entries in the petty cash journal.

12 Module 1 – Cash and Cash equivalents

 c. Replenishment of petty cash payments.

Whenever the petty cash fund runs low, a check is drawn to replenish the fund.

The replenishment check is usually equal to the petty cash disbursements.

It is at this time that the petty cash disbursements are recorded.

Expenses xx
Cash in bank xx

It is to be pointed out that the petty cash disbursements should be replenished only by means of
check and not from undeposited collections.

d. At the end of the accounting period, it is necessary to adjust the unreplenished expenses in
order to state the correct petty cash balance.

Expenses xx
Petty cash fund xx

The adjustment is to be reversed at the beginning of the next accounting period.

The reversal is made in order that the normal replenishment procedures may be followed by simply
debiting expenses and crediting cash in bank without distinguishing whether the expenses pertain to
the current period or prior period.

e. An increase in the fund is recorded as:

Petty cash fund xx
Cash in bank xx

f. A decrease in the fund is recorded as:

Cash in bank xx
Petty cash fund xx

Illustration

2020
Nov. 10 The entity established an imprest fund of P10,000.

Petty cash fund 10,000

Cash in bank 10,000

29 Replenished the fund. The petty cash items include the following:

Currency and coin 2,000

Supplies 5,000
Telephone 1,800
Postage 1,200
13 Module 1 – Cash and Cash equivalents
Nov. 29 the journal entry to record the replenishment is:

Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000

Dec. 31 the fund was not replenished.

The fund is composed of the following: currency and coin P7,000, supplies P1,500, postage P500.
miscellaneous expense P1,000.

Supplies 1,500
Postage 500
Miscellaneous expense 1,000
Petty cash fund 3,000

2021

Jan. 1 the adjustment made on December 31, 2020 is reversed.

Petty cash fund 3,000

Supplies 1,500
Postage 500
Miscellaneous expense 1,000

2021
Feb. 1 The fund is replenished and increased to P15,000.

The composition of the fund:

Currency and coin 1,000

Supplies 4,500
Postage 3,000
Miscellaneous expense 1,500

Total 10,000

Journal entry

Petty cash fund 5,000

Supplies 4,500
Postage 3,000
Miscellaneous expense 1,500
Cash in bank 14,000

14 Module 1 – Cash and Cash equivalents

The total amount of the check drawn is P14,000 representing the petty cash disbursements of P9,000
and the fund increase of P5,000.

Fluctuating fund system

The system is called "fluctuating fund system" because the checks drawn to replenish the fund do not
necessarily equal the petty cash disbursements.

The replenishment checks are simply drawn upon the request of the petty cashier.

Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty
cash balance per book from time to time:

a. Establishment of the fund:

Petty cash fund xx

Cash in bank xx

b. Payment of expenses out of the petty cash fund:

Expenses xx
Petty cash fund xx

Under this system, the disbursements from the petty cash fund are immediately recorded in
contradistinction with the imprest fund system where the disbursements are recorded upon the
replenishment of the fund.

c. Replenishment or increase of the fund:

Petty cash fund xx

Cash in bank xx

The replenishment check may or may not be the same as the petty cash disbursements.

d. At the end of the reporting period, no adjustment is necessary because the petty cash
expenses are recorded outright.

e. Decrease of the fund is reverted to the general cash.

Cash in bank xx
Petty cash fund XX

Illustration

Nov. 10 the entity established a petty cash fund of P10,000.

Petty cash fund 10,000

Cash in bank 10,000

15 Module 1 – Cash and Cash equivalents

Nov. 11-28 Petty cash disbursements amounted to P8,000

Expenses 8,000
Petty cash fund 8,000

Nov. 29 Issued a check for P10,000 to replenish the fund.

Petty cash fund 10,000

Cash in bank 10,000

At this point, the petty cash balance per book is P12,000.

Dec. 1-30 Petty cash expenses amounted to P9,000.

Expenses 9,000
Petty cash fund 9,000

31 Issued a check for P15,000 to replenish the fund.

Petty cash fund 15,000

Cash in bank 15,000

At this point, the petty cash balance is P18,000.

Suggested Teaching Activities (TAs)

 FB Group chats have been created for student interactions.

 Recorded PPT presentations with narrations will be provided/ Uploaded in gclassroom

Assessment Tasks / Output (ATOs)

QUESTIONS

1. Define cash.

2. Explain the meaning of unrestricted cash.

3. Define cash equivalents.

4. Explain the measurement of cash.

5. Explain the financial statement presentation of cash and cash equivalents.

6. Explain the classification of investments of excess cash in time deposits, money market
instruments and treasury bills.

7. Explain the treatment of foreign currency.

16 Module 1 – Cash and Cash equivalents

 8. Explain the classification of a cash fund

9. Explain a bank overdraft

10. Explain a compensating balance.

11. Explain undelivered check, postdated check delivered and stale check.

12. Explain the accounting for cash shortage or cash overage.

13. Explain the imprest system of internal control.

14. What is a petty cash fund?

15. Explain the two methods of accounting for petty cash fund.

Problem

Argentina Company reported the following accounts on December 31, 2020:

Cash on hand 1,000,000

Petty cash fund 50,000
Security Bank current account 2,000,000
PNB current account 1,500,000
BDO current account (overdraft) (200,000)
BSP treasury bill- 120 days 3,000,000
BPI time deposit – 90 days 2,000,000
Bond sinking fund 2,500,000

The cash on hand included a customer postdated check of P150,000 and postal money order of
P50,000.

The petty cash fund included unreplenished petty cash vouchers for P10,000 and an employee check
for P5,000 dated January 31, 2021.

The BPI time deposit is set'aside for acquisition of land to be made in early January 2021.

The bond sinking fund is set aside for payment of bond payable due December 31, 2021.

Required:

1. Prepare adjusting entries on December 31, 2020.

2. Compute the total amount of cash and cash equivalents.
3. Explain the presentation of the items excluded from cash and cash equivalents.

Readings and Other References

https://www.edupristine.com/blog/financial-reporting
17 Module 1 – Cash and Cash equivalents
https://www.business.qld.gov.au/running-business/finances-cash-flow/managing-money/financial-
statements-forecasts/balance-sheets

Intermediate Accounting Volume 1 by Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

Acknowledgements to Authors and Other Creators:

Eric De Jesus Simon M.B.A CLSSYB

18 Module 1 – Cash and Cash equivalents

 Subject: Financial Analysis and Reporting

This module is a compilation of portions of original works by other authors (which are duly
credited in the bibliography section) and may contain copyrighted material, the use of which
has not been specifically authorized by the copyright holders.

The module is purely for non-profit research, reporting, commentary, criticisms and
transformative educational purposes. There is no reason to believe that the use of this module
will affect the market value of the copyrighted works.

For these reasons we believe that the use of this module will affect the market value of the
copyrighted works.

For these reasons we believe that this compilation is covered under the current fair use local
republic act (RA) 8293 or the intellectual Property Code of the Philippines and International
Copyright laws.

We do not support any actions in which the materials in this module are used for the purposes
that extend beyond fair use.

Module 2: Bank Reconciliation

1 Module 1 – Cash and Cash equivalents

Intended Learning Outcomes (ILO)

By the end of the module, the students are expected to:

 To understand the need for a bank reconciliation.

 To know the reconciling items affecting the cash in bank per ledger.
 To know the reconciling items affecting the cash in bank per bank statement.
 To be able to prepare a bank reconciliation.
 To be able to prepare the necessary adjusting entries to reconcile the cash in bank per ledger
with the cash in bank per bank statement.

Lecture Proper and Discussion

Bank deposits

There are three kinds of bank deposits, namely demand deposit, saving deposit and time deposit.

Demand deposit

The demand deposit is the current account or checking account or commercial deposit where
deposits are covered by deposit slips and where funds are withdrawable on demand by drawing
checks against the bank.

A demand deposit is noninterest bearing.

Saving deposit

In a saving deposit, the depositor is given a passbook upon the initial deposit. The passbook is
required when making deposits and withdrawals.

Withdrawals are made anytime but the bank sometimes may require notice of withdrawal.

A saving deposit is interest bearing.

Time deposit

The time deposit is similar to saving deposit in the sense that it is interest bearing.

A time deposit is evidenced, however, by a formal agreement embodied in an instrument called

certificate of deposit.

Time deposit may be preterminated or withdrawn on demand or after a certain period of time agreed
upon.

What is a bank reconciliation?

Before we answer the question, let us have a background on the matter of opening a demand deposit
or checking account.

2 Module 1 – Cash and Cash equivalents

Incidentally, of the three kinds of deposit, a bank reconciliation is necessary only for a demand
deposit or checking account.

When an account is opened at the bank, the person authorized to draw checks against the account
will be required to sign cards furnished by the bank, to show the specimen signatures to be used on
the checks.

These specimen signatures will be filed by the bank so that any teller who may be unfamiliar with a
depositor’s signature can test the authenticity of a check by comparing the depositor's signature on
the card with the signature on the check.

If the depositor is a corporation, the bank will request that the directors pass a resolution authorizing
certain officers of the corporation as signatories of checks and that a copy of this resolution be filed
with the bank.

Let us now illustrate some fundamental transactions affecting the depositor and the bank.

Assume that Company X (the depositor) collected P100,000 from a customer in settlement of an
account. The collection is deposited at the First Bank.

The journal entry to record the collection and the subsequent deposit is:

Cash (or cash in bank) 100,000

Accounts receivable 100,000

On the books of the bank, the journal entry is:

Cash 100,000
Company X 100,000

The journal entry on the books of the bank shows the credit is Company X account. This is made, for
our purpose, to facilitate the illustration.

In practice, however, the account credited by the bank is demand deposit account but the same is
posted to the subsidiary ledger of Company X.

When the bank credits the account of the depositor, Company X, it recognizes its liability to the
depositor.

Legally, when a deposit is made, there exists a debtor-creditor relationship between the bank and the
depositor, the bank being the debtor, and the depositor being the creditor.

Hence, when the account of the depositor is increased the same is credited.

Let us assume further that Company X subsequently issued a check for P30,000 in payment of an
account payable. On the books of Company X, the journal entry is.

Accounts payable 30,000

Cash 30,000

3 Module 1 – Cash and Cash equivalents

The journal entry on the books of the bank is:

Company X 30,000
Cash 30,000

When a check is issued, the payee will present the same to the bank for payment.

The depositor is actually ordering the bank to pay the payee out of its deposit in the bank.

This is the reason the bank debits the account of the depositor thereby reducing its liability to the
depositor.

Thus, when the depositor's account is decreased, the same is debited.

At this point, when balances are extracted, the cash in bank account on the depositor's book has a
balance of P70,000, and the CompanyX account on the book of the bank has also a balance of
P70,000.

Explanation

The two accounts have equal or the same balances because they are reciprocal accounts.

This means that when one account is debited, the other account is credited or vice versa.

The reason for this is that the two accounts cover or reflect the same items or transactions.

Thus, if no errors are committed in recording, and the same information has been recorded by both
accounts, the two should have equal or the same balances.

But very frequently, there are items on the depositor's book which do not appear on the bank records
as of the same date.

For example, checks issued by the depositor are not yet presented for payment to the bank or
deposits may have been made after the bank records are sent out to the depositor.

And less frequently, there are items on the bank records which do not appear on the depositor's book.

For example:

a. The bank may have charged the depositor's account with service charges which the depositor
may not know about until a report is received from the bank.

b. Notes endorsed to the bank for collection have been collected by the bank and credited to the
depositor's account but notice of collection is not yet received from the bank by the depositor.

In the light of the foregoing, it becomes necessary to prepare a bank reconciliation.

Bank reconciliation

4 Module 1 – Cash and Cash equivalents

A bank reconciliation is a statement which brings into agreement the cash balance per book and cash
balance per bank.

The reconciliation is usually prepared monthly because the bank provides the depositor with the bank
statement at the end of every month.

A bank statement is a monthly report of the bank to the depositor showing:

a. The cash balance per bank at the beginning

b. The deposits made by the depositor and acknowledged by the bank
c. The checks drawn by the depositor and paid by the bank
d. The daily cash balance per bank during the month

Actually, the bank statement is an exact copy of the depositor's ledger in the records of the bank.

When the bank statement is received, attached thereto are the depositor's cancelled checks and any
debit or credit memoranda that have affected the depositor's account.

The cancelled checks are the checks issued by the depositor and paid by the bank during the month.

These are called cancelled checks because they are literally cancelled by stamping or punching to
show that they have been paid.

Reconciling items

At the end of every month, comparison between the cash records of the depositor and the bank
statement received from the bank will yield the following reconciling items:

1. Book reconciling items:

a. Credit memos
b. Debit memos
c. Errors

2. Bank reconciling items

a. Deposits in transit
b. Outstanding checks
c. Errors

Credit memos

Credit memos refer to items not representing deposits credited by the bank to the account of the
depositor but not yet recorded by the depositor as cash receipts.

The credit memos have the effect of increasing the bank balance.

Typical examples of credit memos are:

a. Notes receivable collected by bank in favour of the depositor and credited to the account of the
depositor.
b. Proceeds of bank loan credited to the account of the depositor
5 Module 1 – Cash and Cash equivalents
 c. Matured time deposits transferred by the bank to the current account of the depositor.

Debit memos

Debit memos refer to items not representing checks paid by bank which are charged or debited by
the bank to the account of the depositor but not yet recorded by the depositor as cash disbursements.
The debit memos have the effect of decreasing the bank balance.

Typical examples of debit memos are:

a. NSF or no sufficient fund checks - These are checks deposited but returned by the bank
because of insufficiency of fund. The other name for NSF is DAIF or "drawn against insufficient
fund".

b. Technically defective checks - These are checks deposited but returned by the bank because
of technical defects such as absence of signature or countersignature, erasures not
countersigned, mutilated checks, conflict between amount in words and amount in figures.

c. Bank service charges – These include bank charges for interest, collection, checkbook and
penalty.
d. Reduction of loan - This pertains to amount deducted from the current account of the depositor
in payment for loan which the depositor owes to the bank and which has already matured.

Deposits in transit

Deposits in transit are collections already recorded by the depositor as cash receipts but not yet
reflected on the bank statement.

Deposits in transit include:

a. Collections already forwarded to the bank for deposit but too late to appear in the bank
statement.
b. Undeposited collections or those still in the hands of the depositor. In effect, these are cash on
hand awaiting delivery to the bank for deposit.

Outstanding checks

Outstanding checks are checks al-ready recorded by the depositor as cash disbursements but not yet
reflected on the bank statement.

Outstanding checks include:

a. Checks drawn and already given to payees but not yet presented for payment.

6 Module 1 – Cash and Cash equivalents

 b. Certified checks - A certified check is one where the bank has stamped on its face the word
"accepted" or "certified" indicating sufficiency of fund.

When the bank certifies a check, the account of the depositor is immediately debited or
charged to insure the eventual payment of the check.

Certified checks should be deducted from the total outstanding checks (if included therein)
because they are no longer outstanding for bank reconciliation purposes.

Forms of bank reconciliation

The following formats may be used in reconciling the book balance and the bank balance:

a. Adjusted balance method – Under this method, the book balance and the bank balance are
brought to a correct cash balance that must appear on the balance sheet.

b. Book to bank method - Under this method, the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.

c. Bank to book method - Under this method, the bank balances reconciled with the book balance
or the bank balance is adjusted to equal the book balance.

The first method is preferred over the other two.

Proforma reconciliation

Adjusted balance method

Book balance xx
Add: Credit memos xx

Total xx
Less: Debit memos xx

Adjusted book balance xx

Bank balance xx
Add: Deposits in transit xx

Total xx
Less: Outstanding checks xx

Adjusted bank balance xx

7 Module 1 – Cash and Cash equivalents
The reconciling items of the book are simply termed as credit memos and debit memoş.

No details are shown to simplify the illustration.

In actual formal reconciliation, details will have to be shown.

Moreover, errors are excluded because no definite rule can be made whether these are to be added
or deducted.

Errors will have to be analyzed for proper treatment.

However, errors are reconciling items of the party which committed them.

It will be observed that under the adjusted balance method, the credit memos are always added to
the book balance and the debit memos are always deducted from the book balance.

Deposits in transit are always added to the bank balance and the outstanding checks are always
deducted from the bank balance.

Explanation

The foregoing procedures can be explained as follows:

The adjusted balance method means that the book balance and the bank balance are adjusted to
equal the correct cash balance.

Credit memos already increased the bank balance but have effect on the book balance because the
credit memos are not yet recorded by the depositor.

Consequently, the book balance is understated in relation to the correct cash balance.

Hence, credit memos are added to the book balance.

Debit memos already decreased the bank balance but have effect on the book balance because the
debit memos are not yet recorded by the depositor.

Consequently, the book balance is overstated in relation to the correct cash balance.

Hence, debit memos are deducted from the book balance.

Deposits in transit already increased the book balance but have no effect on the bank balance
because the deposits are not yet recorded by the bank.

8 Module 1 – Cash and Cash equivalents

Consequently, the bank balance is understated in relation to the correct cash balance.

Hence, deposits in transit are added to the bank balance.

Outstanding checks already decreased the book balance but have no effect on the bank balance
because the checks are not yet paid by the bank.

Consequently, the bank balance is overstated in relation to the correct cash balance.

Hence, outstanding checks are deducted from the bank balance.

Book to bank method

Book balance xx
Add: Credit memos xx
Outstanding checks xx xx
Total xx
Less: Debit memos xx
Deposits in transit xx xx

Bank balance xx

When the reconciliation starts with the book balance and ends with the bank balance, the usual book
reconciling items are treated in the same manner they are treated in the "adjusted balance method",
that is, credit memos are added and debit memos are deducted.

However, with respect to the bank reconciling items the treatment is simply "reversed."

Thus, since the deposit in transit is added to the bank balance, it is now deducted from the book
balance, and since the outstanding check is deducted from the bank balance, it is now added to the
book balance.

Explanation of reversal rule

The book to bank method means that the book balance is adjusted to equal the bank balance.

Deposits in transit already increased the book balance but have no effect on the bank balance
because the deposits are not yet recorded by the bank. Consequently, the book balance is overstated
in relation to the bank balance.

Hence, deposits in transit are deducted from the book balance following the book to bank method.

9 Module 1 – Cash and Cash equivalents

On the other hand, outstanding checks already decreased the book balance but have no effect on the
bank balance because the checks are not yet paid by the bank. Consequently, the book balance is
understated in relation to the bank balance.

Hence, outstanding checks are added to the book balance, following the book to bank method.

Bank to book method

Bank balance xx
Add: Deposits in transit xx
Debit memos xx xx
Total xx
Less: Outstanding checks xx
Credit memos xx xx
Book balance xx

When the reconciliation starts with the bank balance and ends with the book balance, the usual bank
reconciling items are treated in the same manner they are treated in the "adjusted” balance method",
that is, deposit in transit is added and outstanding check is deducted.

However, with respect to the book reconciling items, the treatment is simply "reversed".

Thus, since the credit memos are added to the book balance. They are now deducted from the bank
balance, and since the debit memos are deducted from the book balance, they are now added to the
bank balance.

Explanation of reversal rule

The bank to book method means that the bank balance is adjusted to equal the book balance.

Debit memos already decreased the bank balance but have no effect on the book balance because
they are not yet recorded by the depositor.

Consequently, the bank balance is understated in relation to the book balance. Hence, debit memos
are added to the bank balance.

On the other hand, credit memos already increased the bank balance but have no effect on the book
balance because they are not yet recorded by the depositor.

Consequently, the bank balance is overstated in relation to the book balance. Hence, credit memos
are deducted from the bank balance.

10 Module 1 – Cash and Cash equivalents

Illustration

The cash records of Company X show the following for the month of January.

CASH RECEIPTS CASH DISBURSEMENTS

Jan. 5 60,000 Jan. 6 Check No. 721 5,000
13 20,000 7 Check No. 722 10,000
25 30,000 10 Check No. 723 18,000
31 40,000 14 Check No. 724 2,000
28 Check No. 725 37,000
150,000 31 Check No. 726 28,000

100,000

The general ledger of the company shows the cash in bank account for January as follows:

Cash in bank - First Bank

Jan. 31 CR 150,000 Jan. 31 CD 100,000

The balance of the cash in bank on the depositor's book is P50,000.

Bank statement

The following is the bank statement for January received from the First Bank:

The following data are gathered in connection with the CM and DM appearing on the bank statement:

a. The CM of P15,000 on January 26 represents proceeds of note collected by the bank in favour
of the company.

b. The RT of P5,000 represents check of customer deposited previously but returned by the bank
because of “no sufficient fund" or NSF.
11 Module 1 – Cash and Cash equivalents
General procedures in preparing the reconciliation.

a. Determine the balance per book and the balance per bank.

As mentioned earlier, the cash in bank account on the book of the depositor has a debit
balance of P50,000.

The bank balance is shown on the bank statement as the final item, P84,000.

b. Trace the cash receipts to the bank statement to ascertain whether there are deposits not yet
acknowledged by the bank.

In the illustrative problem, the cash receipt of P40,000 on January 31 does not appear in the
bank statement. This represents deposit in transit.

c. Trace the checks issued to the bank statement to ascertain whether there are checks not yet
presented for payment.

In the illustrative problem, Check Nos. 725 for P37,000 and 726 for P28,000 do not appear in
the bank statement. These are outstanding checks.

d. The bank statement should be examined to determine whether there are bank credits or bank
debits not yet recorded by the depositor.

In the illustrative problem there is CM of P15,000 and DM for returned check of P5,000 and
service charge of P1,000.

e. Watch out for errors. Again, errors are reconciling items of the party which committed them. In
the illustrative problem, there are no errors committed.

At this point, a formal reconciliation may be prepared because all the reconciling items have already
been determined.

12 Module 1 – Cash and Cash equivalents

Adjusted balance method

Preparation of adjusting entries

Only the book reconciling items require adjusting entries on the book of depositor. This is but
understandáble.

The adjustments are necessary to bring the cash in bank balance to its correct balance for statement
presentation purposes.

To record the note collected by bank:

Cash in bank 15,000

Notes receivable 15,000

To record the NSF customer check:

Accounts receivable 5,000

Cash in bank 5,000

To record the bank service charge:

Bank service charge 1,000

Cash in bank 1,000

In the preparation of adjustments, an item added to the book balance is debited to cash and an item
deducted from the book balance is credited to cash.

13 Module 1 – Cash and Cash equivalents

Book to bank method

Bank to book method

Some errors and their correction

a. Understatement of cash receipts on the book of depositor.

For example, the collection from customer which is deposited amounts to P10,000 but
recorded in the book only as P1,000.

There is an understatement of cash receipt of P9,000. The error is added to the book balance
and adjusted as follows:

Cash in bank 9,000

Accounts receivable 9,000

14 Module 1 – Cash and Cash equivalents

 b. Understatement of checks drawn by depositor.

For example, a check in payment of account payable amounting to P20,000 is recorded in the
book as P2,000.

There is an understatement of cash disbursement and a consequent overstatement of book

balance in the amount of P18,000. The error is deducted from the book balance and adjusted, as
follows:

Accounts payable 18,000

Cash in bank 18,000

c. Deposit of another entity is credited by the bank to the account of the depositor.

This is a deduction from the bank balance because it erroneously increased the account balance
of the depositor in the bank. No adjustment is necessary on the book of the depositor.

d. Check of another entity charged to the account of the depositor.

This is an addition to the bank balance because it erroneously decreased the account balance of
the depositor in the bank. No adjustment is necessary on the book of the depositor.

Suggested Teaching Activities (TAs)

 Advance reading before PPT presentation is recommended

 FB Group chats have been created for student interactions.
 Recorded PPT presentations with narrations will be provided/ Uploaded in gclassroom

Assessment Tasks / Output (ATOs)

Provide answers in writing

1. Explain the three kinds of bank deposits.

2. What is a bank reconciliation?

3. What is a bank statement?

4. What are credit memos?

5. What are debit memos?

6. What are deposits in transit?

7. What are outstanding checks?

8. Define a certified check.

9. What is the treatment of certified check for bank reconciliation purposes?

15 Module 1 – Cash and Cash equivalents

 10. Explain the three forms of bank reconciliation.

Problem 2 -1

Apathy Company provided the following information:

The credit made by the bank on December 29 represents the proceeds of a note received from a
customer which was given to the bank for collection by the entity on December 26.

Required:

a. Prepare a bank reconciliation using adjusted balance method.

b. Prepare adjusting entries.

Readings and Other References

Intermediate Accounting Volume 1 2020 Edition by Conrado T. Valix, Jose T. Peralta, and Christian
Aris M. Valix

www.investopedia.com

www.accountingtools.com

16 Module 1 – Cash and Cash equivalents

Acknowledgements to Authors and Other Creators:

Eric De Jesus Simon M.B.A CLSSYB

17 Module 1 – Cash and Cash equivalents

 Subject: Financial Analysis and Reporting

This module is a compilation of portions of original works by other authors (which are duly
credited in the bibliography section) and may contain copyrighted material, the use of which
has not been specifically authorized by the copyright holders.

The module is purely for non-profit research, reporting, commentary, criticisms and
transformative educational purposes. There is no reason to believe that the use of this module
will affect the market value of the copyrighted works.

For these reasons we believe that the use of this module will affect the market value of the
copyrighted works.

For these reasons we believe that this compilation is covered under the current fair use local
republic act (RA) 8293 or the intellectual Property Code of the Philippines and International
Copyright laws.

We do not support any actions in which the materials in this module are used for the purposes
that extend beyond fair use.

Module 3: Proof of Cash

1 Module 1 – Cash and Cash equivalents

Intended Learning Outcomes (ILO)

 To be able to prepare a two-date bank reconciliation.

 To know the computation of deposits in transit and outstanding checks.

 To know the reconciliation of cash receipts per ledger with cash receipts per bank statement.

 To know the reconciliation of cash disbursements per ledger with cash disbursements per
bank statement.

 To understand the nature of proof of cash.

 To be able to prepare a reconciliation showing proof of cash.

Lecture Proper and Discussion

Two-date bank reconciliation

The bank reconciliation is so-called "two-date" because it literally involves two dates.

The procedures followed for a one-date reconciliation are the same for a two-date reconciliation.

A two-date reconciliation becomes complicated only when certain facts or data are omitted, hence the
necessity for computing them.

But if all the facts are available, then reconciliation statements will simply be prepared as of the two
dates required.

Among others, the omitted information may be any one or a combination of the following:

a. Book balance beginning and ending

b. Bank balance - beginning and ending
c. Deposits in transit - beginning and ending
d. Outstanding checks - beginning and ending

If the ending balances are not given, the following formulas may help.
If beginning balances are omitted, the formulas should simply be reversed or just work back.

Computation of book balance

Balance per book-beginning of month xx

Add: Book debits during the month xx
Total xx
Less: Book credits during the month xx
Balance per book-end of month xx

2 Module 1 – Cash and Cash equivalents

Book debits refer to cash receipts or all items debited to the cash in bank account.

Book credits refer to cash disbursements or all items credited to the cash in bank account.

In a T-account form, the cash in bank may appear as follows:

Cash in bank
Balance-beginning xx Book credits xx
Book debits xx Balance – ending xx

Computation of bank balance

Balance per bank-beginning of month xx

Add: Bank credits during the month xx
Total xx
Less: Bank debits during the month xx
Balance per bank-end of month xx

Bank credits refer to all items credited to the account of the depositor which include deposits
acknowledged by bank and credit memos.

In the absence of any statement to the contrary, bank credits are assumed to be deposits
acknowledged by bank.

Bank debits refer to all items debited to the account of the depositor which include checks paid by
bank and debit memos.

In the absence of any statement to the contrary, bank debits are assumed to be checks paid by bank.

In a T-account form, the depositor's account, Company X, will appear as follows:

Company X
Bank debits xx Balance- beginning xx
Balance - ending xx Bank credits xx

Computation of deposits in transit

Deposits in transit – beginning of month xx

Add: Cash receipts deposited during the month xx

Total deposits to be acknowledged by bank xx

Less: Deposits acknowledged by bank during month xx

Deposits in transit - end of month xx

3 Module 1 – Cash and Cash equivalents

Computation of outstanding checks

Outstanding checks- beginning of month xx

Add: Checks drawn by depositor during the month xx

Total checks to be paid by bank xx

Less: Checks paid by bank during the month xx

Outstanding checks- end of month xx

Illustration

Cash in bank per ledger

Balance, January 31 50,000

Book debits for February, including January CM
for note collected of P15,000 200,000
Book credits for February, including NSF check of P5,000
and service charge of P1,000 for January 180,000

Bank statement for February

Balance, January 31 84,000

Bank credits for February, including CM for
note colleted of P20,000 and January
deposit in transit of P40,000 170,000
Bank debits for February, including NSF check of
P10,000 and January qutstanding check of P65,000 130,000

The bank reconciliation for the month of January can easily be prepared because all the necessary
data are available:

Balance per book, January 31 50,000

Note collected by bank in January 15,000

Total 65,000
NSF check for January (5,000)
Service charge for January (1,000)

Adjusted book balance 59,000

Balance per bank, January 31 84,000

Deposit in transit for January 40,000

Total 124,000
Outstanding check for January (65,000)

Adjusted bank balance 59,000

4 Module 1 – Cash and Cash equivalents

The bank reconciliation for the month of February requires computation of balance per book, balance
per bank, deposits in transit and outstanding checks.

Computation of book balance

Balance per book-January 31 50,000

Add: Book debits during February 200,000

Total 250,000
Less: Book credits during February 180,000

Balance per book-February 28 70,000

Computation of bank balance

Balance per bank-January 31 84,000

Add: Bank credits during February 170,000

Total 254,000
Less: Bank debits during February 130,000

Balance per bank -February 28 124,000

Computation of deposits in transit

Deposits in transit - January 31 40,000

Add: Cash receipts deposited during February:
Book debits 200,000
Less: January CM for note collected 15,000 185,000

Total 225,000
Less: Deposits acknowledged by bank in February:
Bank credits 170,000
Less: February CM for note collected 20,000 150,000

Deposits in transit- February 28 75,000

The January CM of P15,000 is deducted from the book debits of P200,000 because this item is a
cash receipt not representing deposit for the month of February.

All items debited to the cash in bank account which do not represent deposits should be deducted
from the book debits total to arrive at the cash receipts deposited.

In the absence of any statement to the contrary, book debits are assumed to be cash receipts
deposited.

The February CM of P20,000 for note collected is deducted from the bank credits because this is not
a deposit.

5 Module 1 – Cash and Cash equivalents

All items credited to the depositor's account which do not represent deposits should be deducted from
the bank credits to determine the deposits acknowledged by bank.

Bank credits are assumed to be deposits acknowledged by bank in the absence of any statement to
the contrary.

Computation of outstanding checks

Outstanding checks-January 31 65,000

Add: Checks drawn by depositor during February:
Book credits 180,000
Less: January DMs 6,000 174,000

Total 239,000
Less: Checks paid by bank during February:
Bank debits 130,000
Less: February NSF 10,000 120,000

Outstanding checks- February 28 119,000

The January DMs of P6,000 are deducted from the book credits, because they are cash
disbursements not representing checks.

All items not representing checks credited to the cash in bank account should be deducted from the
book credits total to arrive at the checks drawn by the depositor.

But as a rule, all book credits in the absence of any statement to the contrary are assumed to be
checks issued.

The February DM for NSF of P10,000 is deducted from the bank debits because this is not a bank
disbursement representing a check paid.

All items debited to the accunt of the depositor not representing checks paid should be deducted from
the bank debits total to arrive at the checks paid by bank.

But as a rule, all bank debits in the absence of any statement to the contrary are assumed to be
checks paid by bank.

Company X
Bank Reconciliation
February 28
Balance per book 70,000
Note collected by bank in February 20,000

Total 90,000
NSF check for February (10,000)

6 Module 1 – Cash and Cash equivalents

Adjusted book balance 80,000

Balance per bank 124,000

Deposits in transit for February 75,000

Total 199,000
Outstanding checks for February (119,000)

Adjusted bank balance 80,000

Proof of cash

A proof of cash is an expanded reconciliation in that it includes proof of receipts and disbursements.

This approach may be useful in discovering possible discrepancies in handling cash particularly when
cash receipts have been recorded but have not been deposited.

There are three forms of proof of cash, namely:

a. Adjusted balance method

b. Book to bank method
c. Bank to book method

In all the three forms, a four-column worksheet is necessary, although under the adjusted balance
method, an 8-column worksheet may be required.

For our illustration, let us summarize the data used in the two-date reconciliation.

Summary

January 31 February 28
Balance per book 50,000 70,000
Balance per bank 84,000 124,000
Book debits 200,000
Book credits 180,000
Bank debits 130,000
Bank credits 170,000
Deposits in transit 40,000 75,000
Outstanding checks 65,000 119,000
NSF check 5,000 10,000
Service charge 1,000
Note collected by bank 15,000 20,000

The book debits and credits, and the bank debits and credits for January are not listed anymore
because they are not necessary.

The proof of cash pertains to the receipts and disbursements for the current month of February.

7 Module 1 – Cash and Cash equivalents

Adjusted balance method

СОMPANY X
PROOF OF CASH
For the month of February
January 31 Receipts Disbursements February 28
Balance per book 50,000.00 200,000.00 180,000.00 70,000.00
Note collected:
January 15,000.00 (15,000.00)
February 20,000.00 20,000.00
NSF check
January (5,000.00) (5,000.00)
February 10,000.00 (10,000.00)
Service charge:
January (1,000.00) (1,000.00)
Adjusted book balance 59,000.00 205,000.00 184,000.00 80,000.00

Balance per bank 84,000.00 170,000.00 130,000.00 124,000.00

Deposits in transit:
January 40,000.00 (40,000.00)
February 75,000.00 75,000.00
Outstanding checks:
January (65,000.00) (65,000.00)
February 119,000.00 (119,000.00)
Adjusted bank balance 59,000.00 205,000.00 184,000.00 80,000.00

General comments

a. The January 31 and February 28 columns require no further explanation. They represent the
usual reconciliations discussed earlier.

b. The receipts and disbursements columns pertain to the current month of February. Actually,
the proof of cash is a reconciliation of the receipts and disbursements for the current period.

c. The proof of cash, following the adjusted balance method, means that the book receipts and
disbursements, and the bank receipts and disbursements for the current month are adjusted to
equal the correct receipts and disbursements for the current month.

Comments on the book items

a. Credit memos of the previous month do not affect the bank receipts for the current month but
increased the book receipts for the current month because the credit memos for the previous
month are recorded only by the depositor during the current month.

Consequently, the book receipts for the current month are overstated in relation to the correct
receipts for the current month. Hence, credit memos of the previous month are deducted from
the book receipts for the current month.

8 Module 1 – Cash and Cash equivalents

 Thus, the January note collected amounting to P15,000, is deducted from the February book
receipts.

b. Credit memos of the current month already increased the bank receipts for the current month
but have no effect on the book receipts for the current month because the credit memos of the
current month are not yet recorded by the depositor during the current month.

Consequently, the book receipts for the current month are understated in relation to the correct
receipts for the current month. Hence, credit memos of the current month are added to the
book receipts for the current month.

Thus, the February note collected, amounting to P20,000, is added to the February book
receipts.

c. Debit memos of the previous month do not affect the bank disbursements for the current
month but increased the book disbursements for the current month because the debit memos
of the previous month are recorded only by the depositor during the current month.

Consequently, the book disbursements for the current month are overstated in relation to the
correct disbursements for the current month. Hence, debit memos of thè previous month are
deducted from the book disbursements for the current month.

Thus, the January NSF of P5,000 and January service charge of P1,000 are. deducted from
the February book disbursements.

d. Debit memos of the current month already increased bank disbursements for the current
month but have no effect on the book disbursements for the current month because the debit
memos of the current month are not yet recorded by the depositor.

Consequently, the book disbursements for the current month are understated in relation to the
correct disbursements for the current month. Hence, debit memos of the current month are
added to the book disbursements for the current month.

Thus, the February NSF of P10,000 is added to the February book disbursements.

Comments on the bank items

a. Deposits in transit of previous month do not affect book receipts for the current month but
increased bank receipts for the current month because the deposits are recorded only by the
bank during the current month.

Consequently, bank receipts for the current month are overstated in relation to the correct
receipts for the current month. Hence, deposits in transit of the previous month are deducted
from the bank receipts for the current month.

Thus, January deposit in transit of P40,000 is deducted from the February bank receipts.

9 Module 1 – Cash and Cash equivalents

b. Deposits in transit of the current month already increased book receipts but have no effect on
the bank receipts for the current month because the deposits are not yet recorded by the bank
during the current month.

Consequently, the bank receipts for the current month are understated in relation to the correct
receipts for the current month. Hence, deposits in transit of the current month are added to the
bank receipts of the current month.

Thus, the February deposit in transit of P75,000 is added to the February bank receipts.

c. Outstanding checks of the previous month do not affect the book disbursements but increased
the bank disbursements for the current month because the outstanding checks of the previous
month are paid only by the bank during the current month.

Consequently, the bank disbursements for the current month are overstated in relation to the
correct disbursements for the current month. Hence, outstanding checks of the previous month
are deducted from the bank disbursements for the current month.

Thus, the January outstanding check of P65,000 is deducted from the February bank
disbursements.

d. Outstanding checks of the current month increased the book disbursements for the current
month but have no effect on the bank disbursements for the current month because the checks
are not yet paid by the bank during the current month.

Consequently, the bank disbursements for the current month are understated in relation to the
correct disbursements for the current month. Hence, outstanding checks of the current month
are added to the bank disbursements for the current month.

Thus, the February outstanding check of P119,000 is added to the February bank
disbursements.

10 Module 1 – Cash and Cash equivalents

Book to bank method

СОMPANY X
PROOF OF CASH
For the month of February
January 31 Receipts Disbursements February 28
Balance per book
50,000.00 200,000.00 180,000.00 70,000.00
Note collected:
January 15,000.00 (15,000.00)
February
20,000.00 20,000.00
NSF check
January (5,000.00) (5,000.00)
February
10,000.00 (10,000.00)
Service charge:
January (1,000.00) (1,000.00)
Deposits in transit:
January (40,000.00) 40,000.00
February
(75,000.00) (75,000.00)
Outstanding checks:
January 65,000.00 65,000.00
February
(119,000.00) 119,000.00
Balance per bank
84,000.00 170,000.00 130,000.00 124,000.00

Comments

a. The book reconciling items - note collected, NSF and service charge - are treated in the same
manner following the adjusted balance method.

b. The bank reconciling items deposit in transit and outstanding check are treated in the
"reverse."

c. The book to bank proof of cash means that the book receipts and disbursements are adjusted
to equal the bank receipts and disbursements.

d. Deposits in transit of previous month do not affect the book receipts for the current month but
increased the bank receipts for the current month.

Consequently, the book receipts for the current month are understated in relation to the bank
receipts for the current month. Hence, deposits in transit of the previous month are added to
the book receipts for the current month.

Thus, the January deposit in transit of P40,000 is added to the February book receipts.

11 Module 1 – Cash and Cash equivalents

e. Deposits in transit of the current month increased the book receipts for the current month but
have no effect on the bank receipts for the current month. Consequently, the book receipts for
the current month are overstated in relation to the bank receipts for the current month. Hence,
deposits in transit of the current month are deducted from the book receipts for the current
month.

Thus, the February deposit in transit of P75,000 is deducted from the February book receipts.

f. Outstanding checks of the previous month do not affect the book disbursements for the current
month but increased the bank disbursements for the current month. Consequently, the book
disbursements for the current month are understated in relation to the bank disbursements for
the current month. Hence, outstanding checks of the previous month are added to the book
disbursements for the current month.

Thus, the January outstanding check of P65,000 is added to the February book
disbursements.

g. Outstanding checks of the current month increased the book disbursements for the current
month but have no effect yet on the bank disbursements for the current month.

Consequently, the book disbursements for the current month are overstated in relation to the
bank disbursements for the current month. Hence, outstanding checks of the current month
are deducted from the book disbursements for the current month.

Thus, the February outstanding check of P119,000 1s deducted from the February book
disbursements.

12 Module 1 – Cash and Cash equivalents

Bank to book method

СОMPANY X
PROOF OF CASH
For the month of February
January 31 Receipts Disbursements February 28
Balance per bank
84,000.00 170,000.00 130,000.00 124,000.00
Deposits in transit:
January 40,000.00 (40,000.00)
February
75,000.00 75,000.00
Outstanding checks:
January (65,000.00) (65,000.00)
February
119,000.00 (119,000.00)
Note collected:
January (15,000.00) 15,000.00
February
(20,000.00) (20,000.00)
NSF check
January 5,000.00 5,000.00
February
(10,000.00) 10,000.00
Service charge:
January 1,000.00 1,000.00
Balance per book
50,000.00 200,000.00 180,000.00 70,000.00

Comments

a. The bank reconciling items - deposit in transit and outstanding check - are treated in the same
manner following the adjusted balance method.

b. The book reconciling items - note collected, NSF and service charge - are treated in the
"reverse".

c. The bank to book proof of cash means that the bank receipts and disburşements for the
current month are adjusted to equal the book receipts and disbursements for the current
month.

d. Credit memos of previous month do not affect the bank receipts for the current month but
increased the book receipts for the current month. Consequently, the bank receipts for the
current month are understated in relation to the book receipts for the current month.

13 Module 1 – Cash and Cash equivalents

 Hence, the credit memos of the previous month are added to the bank receipts for the current
month.

Thus, the January note collected of P15,000 is added to the February bank receipts.

e. Credit memos of the current month increased the bank receipts for the current month but have
no effect yet on the book receipts for the current month.

Consequently, the bank receipts of the current month are overstated in relation to the book
receipts of the current month. Hence, the credit memos of the current month are deducted
from the bank receipts for the current month.

Thus, the February note collected of P20,000 is deducted from the February bank receipts.

f. Debit memos of previous month do not affect the bank disbursements for the current month
but increased the book disbursements for the current month.

Consequently, the bank disbursements for the current month are understated in the relation to
the book disbursements for the current month. Hence, the debit memos of previous month are
added to the bank disbursements for the current month.

Thus, the January NSF of P5,000 and the January service charge of Pl,000 are added to the
February bank disbursements.

g. Debit memos of current month increased the bank disbursements for the current month but
have no effect yet on the book disbursements for the current month.

Consequently, the bank disbursements for the current month are overstated in relation to the
book disbursements for the current month. Hence, the debit memos of current month are
deducted from the bank disbursements for the current month.

Thus, the February NSF of P10,000 is deducted from the February bank disbursements for the
current month.

Suggested Teaching Activities (TAs)

 FB Group chats have been created for student interactions.

 Recorded PPT presentations with narrations will be provided/ Uploaded in gclassroom

Assessment Tasks / Output (ATOs)

QUESTIONS

1. What is a two-date bank reconciliation?

2. Explain book debits.

3. Explain book credits.

14 Module 1 – Cash and Cash equivalents
 4. Explain bank debits.

5. Explain bank credits.

6. What is the formula in the computation of balance per book?

7. What is the formula in the computation of balance per bank?

8. What is the formula in the computation of deposits in transit?

9. What is the formula in the computation of outstanding checks?

10. What is a proof of cash?

Problem 3-1

Fabulous Company provided the following data concerning cash on July 31:

Checks drawn Bank statement

No. 101 600,000 Balance, July 31 2,700,000

No. 102 700,000 Charges:
No. 103 300,000 Checks paid 4,000,000
No. 104 400,000 Service charge 20,000
No. 105 450,000 Credits:
No. 106 600,000 Deposits 3,500,000
No. 107 650,000 Note collected 1,500,000
No. 108 500,000

Balance of cash per book on July 1, P1,270,000. Cash receipts per cash book for the month of July
P3,400,000.

Checks paid by bank include all checks issued during the month of July except No. 107 and No. 108.

On July 31 cash received but not deposited in bank, P400,000.

Required:

a. Prepare bank reconciliation on July 1 and July 31.

b. Prepare adjusting entries on July 31.

Readings and Other References

https://www.edupristine.com/blog/financial-reporting
https://www.business.qld.gov.au/running-business/finances-cash-flow/managing-money/financial-
statements-forecasts/balance-sheets

15 Module 1 – Cash and Cash equivalents

Intermediate Accounting Volume 1 by Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix

Acknowledgements to Authors and Other Creators:

Eric De Jesus Simon M.B.A CLSSYB

16 Module 1 – Cash and Cash equivalents