Institute of Business and Accountancy

ACT15 – Intermediate Accounting 1 M. Manayao, CPA, MBA, CAP

Cash and Cash Equivalents

I. Learning Outcomes
➢ To understand the concept of cash.
➢ To understand the concept of cash equivalents.
➢ To identify items considered cash.
➢ To identify items considered cash equivalents.
➢ To know the accounting for petty cash fund.

II. Contents
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 and connotes more than
money.

As contemplated in accounting, cash includes money and any other negotiable instrument that is payable in
money and acceptable by the bank for deposit and immediate credit.

Accordingly, 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 the postdated checks are unacceptable
by the bank for deposit and immediate credit or outright encashment.

Unrestricted Cash
There is no specific standard dealing with cash.

The only guidance is found in PAS 1, paragraph 66.

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.

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 includes undeposited cash collections and other cash items awaiting deposit such as
customers checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders.
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 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 rate.

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The standard further states that only highly liquid investments 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 paper

Equity securities or equity investments 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 from the end of reporting period.

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.

Investments in time deposit, money market instruments and treasury bills should be properly classified.
a. If the term is three months or less, such instruments are classified as cash equivalents.
b. If the term is more than three months but within one year, such investments are classified as short-term or
temporary investments and presented separately as current assets.
c. If the term is more than one year, such investments are classified as noncurrent or long-term investments.

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

Measurement and Presentation of Cash

Cash is measured at face value.

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.

Cash in foreign currency should be translated to Philippine pesos using the current exchange rate.

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.

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

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

Classification of Cash Fund for 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.

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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 or noncurrent investment.

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

For example, a sinking fund set aside for the payment of 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, overdrawn by ₱100,000
b. Cash in bank - Second Bank, with a debit balance of ₱500,000.

Proper statement classification of the two accounts:

Current asset:
Cash in bank- Second Bank ₱500,000
Current liability:
Bank overdraft- First Bank ₱100,000

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.

Undelivered or Unreleased Check

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

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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.

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. 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 relatively lang 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

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 in within six months from the time of issuance. Of
course, this is a matter of entity policy.

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.

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

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 xxx
Cash xxx

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 xxx
Cash short or over xxx

However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is
Loss from cash shortage xxx
Cash short or over xxx

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 xxx
Cash short or over xxx

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

The cash overage is treated as miscellaneous income if there is no claim on the same.
Cash short or over xxx
Miscellaneous Income xxx

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But where the cash overage is properly found to be the money of the cashier, a liability should be established.
Cash short or over xxx
Payable to cashier xxx

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 disbursements 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 handing petty cash transactions.

Accounting procedures
a. A check is drawn to establish the fund.
Petty cash fund xxx
Cash in bank xxx

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 pay menta and simply prepares
memorandum entries in the petty cash journal.

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 xxx
Cash in bank xxx

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 xxx
Petty cash fund xxx

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 normally.

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 Petty cash fund xxx
Cash in bank xxx

f. A decrease in the fund is recorded normally.

Cash in bank xxx
Petty cash fund xxx

Fluctuating fund system

The accounting for petty cash 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 xxx
Cash in bank xxx

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

Expenses xxx
Petty cash fund xxx

c. Replenishment or increase of the fund:

Petty cash fund xxx
Cash in bank xxx

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 xxx
Petty cash fund xxx

III. Assessment
Problem A
On December 31, 2023, Albania Company provided the following data:
Cash in Bank 3,000,000
Time Deposit - 30 days 1,000,000
Money Market Placement due on June 30, 2024 2,000,000
Saving Deposit 500,000
Sinking Fund for Bonds Payable due June 30, 2025 1,500,000
Petty Cash Fund 50,000

• The cash in bank included customer check of ₱200,000 outstanding for 18 months.
• Check of ₱250,000 in payment of accounts payable was dated and recorded on December 31, 2023 but
mailed to creditors on January 15, 2024.
• Check of ₱100,000 dated January 31, 2024 in payment of accounts payable was recorded and mailed
December 31, 2023.
• The reporting period is the calendar year.

The cash receipts journal was held open until January 15, 2024 during which time an amount of ₱450,000
was collected from customers and recorded on December 31, 2023.

Required:
a. Prepare adjusting entries on December 31, 2023.
b. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2023.
c. Explain the presentation of the items excluded from cash and cash equivalents.

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Problem B
Argentina Company reported the following accounts on December 31, 2023:
Cash on Hand 1,000,000
Petty Cash Fund 50,000
Security Bank Current Account 2,000,000
BDO Current Account (Overdraft) (200,000)
BPI Time Deposit - 90 days for land acquisition 2,000,000
Sinking Fund for Bonds Payable due December 31, 2024 2,500,000

• The cash on hand included a customer postdate check of ₱150,000 and postal money order of ₱50,000.
• The petty cash fund included unreplenished petty cash vouchers for ₱10,000 and an employee check for
₱5,000 dated January 31, 2024.

Required:
a. Prepare adjusting entries on December 31, 2023.
b. Compute the total amount of cash and cash equivalents.

Problem C
Zealous Company established a petty cash fund.
1. Established a petty cash fund of ₱10,000 on January 2.
2. Petty cash expenses – January 31 are:
Postage 1,500
Supplies 5,500
Transportation 1,200
Miscellaneous Expense 800

3. The fund is replenished on February 1 and increased by ₱5,000.

Required:
Prepare journal entries to record the transactions under the fluctuating and imprest fund system.

Problem D
Zenith Company provided the following chronological transactions in relation to petty cash:
1. The entity established a petty cash fund of ₱10,000.
2. Petty cash disbursements were:
Postage 1,500
Supplies 3,000

3. Petty cash disbursements were:

Transportation 1,000
Accounts Payable 3,500

4. Issued check for an amount to replenish the fund and bring the balance of the petty cash to ₱20,000.

Required:
Prepare journal entries to record the transactions under the fluctuating and imprest fund system.

Problem E
Lantern Company closed the accounts on June 30. The entity provided the following transactions:
May 2 The entity established an imprest fund of ₱10,000.
29 The fund is replenished. The petty cash items include:

Currency and Coin 2,000

Supplies 3,000
Postage 1,000
Transportation 2,500

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 Miscellaneous Expense 1,500

June 30 The fund was not replenished. The fund is composed of the following:
Currency and Coin 6,000
Supplies 2,000
Postage 1,000
Transportation 1,000

July 15 The fund is replenished and increased to ₱15,000.

Currency and Coin 3,000
Supplies 3,500
Postage 1,500
Transportation 1,500
Miscellaneous Expense 500

Required:
Prepare journal entries to record the transactions under the fluctuating and imprest fund system.

Problem F
Tacit Company provided the following transactions:
2022
Nov. 2 The entity established an imprest petty cash fund of ₱10,000.

30 An examination of the cash fund disclosed:

Currency and Coin 3,000
Memoranda showing expenditures for:
Postage 2,000
Supplies 5,000

A check was drawn to replenish the fund and to increase its amount to ₱20,000.

Dec. 31 The fund was not replenished.

Currency and Coin 11,000
Memoranda showing expenditures for:
Postage 3,000
Supplies 4,000
Deposits for 20 cases of softdrinks 2,000

2023
Jan. 2 The deposit for the 20 cases of softdrinks is collected.
31 A check was drawn to replenish the fund.
Currency and Coin 1,000
Postage 500

Memoranda showing expenditures since November 30, 2022 for:

Postage 5,000
Supplies 6,000
Payment of Account 7,000

Required:
Prepare journal entries to record the transactions.

IV. References
Intermediate Accounting 1, 2022 edition, Conrado T. Valix

- End -

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