CHAPTER 3

CASH AND CASH EQUIVALENTS

Ninia C. Pauig-Lumauan, MBA, CPA

2nd Semester 2021
Lyceum of Aparri

Intermediate Accounting Part 1

 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. It
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.
Intermediate Accounting Part 1
 DEFINITION OF CASH
• 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.
Intermediate Accounting Part 1
 DEFINITION OF CASH
• For example, when checks are received in
full settlement of an accounts receivable,
cash is immediately debited.
• But post dated checks received cannot be
considered as cash yet because these
checks are unacceptable by the bank for
deposit and immediate credit or outright
encashment.
• There is no specific standard dealing with
“cash”. Intermediate Accounting Part 1
 UNRESTRICTED 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 accounting
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. Intermediate Accounting Part 1
 CASH ITEMS INCLUDED IN CASH
a. Cash on Hand – This include undeposited cash
collections and other cash items awaiting
deposit such as customers’ checks, cashier’s
or manager’s checks, traveller’s checks , bank
drafts and money orders.
b. Cash in Bank – This includes demand deposit
or checking account and savings 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.
Intermediate Accounting Part 1
 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.”
Intermediate Accounting Part 1
 EXAMPLES OF CASH EQUIVALENTS
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 cannot qualify as cash
equivalents because shares do not have a
maturity date.
Intermediate Accounting Part 1
 EXAMPLES OF CASH EQUIVALENTS
• 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.

Intermediate Accounting Part 1

 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.
Intermediate Accounting Part 1
CLASSIFICATIONS OF INVESTMENT OF EXCESS CASH

• Investments in time deposit, money

market instruments and treasury bills
should be classified as follows:
a. 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”.
Intermediate Accounting Part 1
 CLASSIFICATIONS OF INVESTMENT OF
EXCESS CASH
b. 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.
c. If the term is more than one year, such
investments are classified as non current 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.
Intermediate Accounting Part 1
 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.
Intermediate Accounting Part 1
 FINANCIAL STATEMENT PRESENTATION

• The caption “cash and cash equivalents”

should be shown as the first item among the
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.
Intermediate Accounting Part 1
 FOREIGN CURRENCY
• 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, if material, should
be classified separately among non-current
assets and the restriction clearly indicated.

Intermediate Accounting Part 1

 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. It
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.

Intermediate Accounting Part 1

 CASH FUND FOR A CERTAIN PURPOSE
• On the other hand, if the cash fund is set
aside for non current purpose or
payment of non current 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.
Intermediate Accounting Part 1
 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 non current asset should be classified as non
current regardless of the year of disbursement.
Intermediate Accounting Part 1
 BANK OVERDRAFT
• When the cash in bank account has a
negative (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 a debit balance.
Intermediate Accounting Part 1
 BANK OVERDRAFT
• For example, an entity maintains two bank
accounts.
Account Title Name of Bank Remarks
a. Cash in Bank First Bank overdrawn by P 10,000.
b. Cash in Bank Second Bank with a debit balance of P 100,000

• The net cash balance is P 90,000. The proper

statement classification of the two accounts is
as follows:
Current Asset:
Cash in Bank – Second Bank P 100,000
Current Liability:
Cash in Bank – First Bank P 10,000

Intermediate Accounting Part 1

 BANK OVERDRAFT
• It is to be stated that generally, overdrafts
are not permitted in the Philippines.
• If the deposit is not enough to cover an
outstanding check, then the check is
marked “No sufficient fund” by the
depository bank and returned to the
depositor, which in turn return to the
customer who issued the check. There are
related bank charges for returned checks
marked “NSF” depending upon the
amount of the check.
Intermediate Accounting Part 1
 EXCEPTION TO THE RULE ON BANK
OVERDRAFT
• As stated earlier, a bank overdraft should not be offset
against other bank accounts with debit balances. This
rule, however, is not without exception.
• 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.” Moreover, an overdraft can also be
offset against the other bank account if the amount is
not material.
Intermediate Accounting Part 1
 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 P 5,000,000
from a bank and agrees to maintain a 10%
or P 500,000 minimum compensating
balance in a demand deposit account.

Intermediate Accounting Part 1

CLASSIFICATION OF COMPENSATING BALANCE

• 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.
• 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.
Intermediate Accounting Part 1
 CLASSIFICATION OF COMPENSATING
BALANCE
• 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 non
current investment.
Intermediate Accounting Part 1
 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 thus maybe
cancelled anytime before delivery at the
discretion of the entity.
Intermediate Accounting Part 1
 UNDELIVERED OR UNRELEASED CHECK
• Accordingly, an adjusting entry is required to
restore the cash balance and set up the liability
as follows:
Cash xxx
Accounts Payable or appropriate account xxx

• In practice, the foregoing adjustment is

sometimes ignored because the amount is not
very substantial and there is no evidence of
actual cancellation of the check in the
subsequent period.
Intermediate Accounting Part 1
 POST DATED CHECK DELIVERED
• A post dated check delivered is a drawn check,
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 because
there is no payment until the check can be
presented in the bank for encashment or deposit
and therefore restored to the cash balance as
follows:
Cash xxx
Accounts Payable or appropriate account xxx
Intermediate Accounting Part 1
 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 and this includes checks,
presentment must be made within a
“reasonable time” after its issue.
Intermediate Accounting Part 1
 STALE CHECK OR CHECK LONG
OUTSTANDING
• 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.
Intermediate Accounting Part 1
 STALE CHECK OR CHECK LONG
OUTSTANDING
• In banking practice, a check becomes stale if
not encashed within six (6) 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 cancellation of a previously issued
check.

Intermediate Accounting Part 1

 STALE CHECK OR CHECK LONG
OUTSTANDING
• If the amount of stale check is immaterial, it is
simply accounted for as miscellaneous income
as follows:
Cash xxx
Miscellaneous Income xxx
• However, if the amount is material and liability
is expected to continue, the cash is restored
and the liability is again set up. The journal
entry is as follows:
Cash xxx
Accounts Payable or appropriate account xxx
Intermediate Accounting Part 1
 INTERNAL CONTROLS OVER CASH
• Internal control is any action or process
effected by management that is designed to
help an entity achieve its objectives. Such
objectives maybe categorized as follows:
a. Reliability in financial reporting
b. Effectiveness and efficiency of operations
c. Compliance with laws and regulations, and
d. Safeguarding of assets

Intermediate Accounting Part 1

 INTERNAL CONTROLS OVER CASH
• Inherent risk is normally higher for cash
compared to other assets because cash is
exposed more to risk of theft and other types of
fraud. Adequate and effective internal controls
should be in place to ensure that cash is
reasonably safeguarded.
• Examples of internal controls over cash
1. Segregation of incompatible duties – The duties
of (a) authorization, (b) execution, (c) recording,
and (d) custody over cash should be segregated.

Intermediate Accounting Part 1

 INTERNAL CONTROLS OVER CASH
• For example, in a typical organization, purchases
are approved by the manager (authorization),
purchases are made by the purchasing
department (execution), check payments are
released to payees by the treasurer (custody)
and purchased transactions are recorded by the
accountant (recording).
• The custody over cash should be given only to
the treasurer. Neither the purchasing
department, manager nor the accountant should
have access to cash.
Intermediate Accounting Part 1
 INTERNAL CONTROLS OVER CASH
2. Imprest System – The imprest system requires that
all cash receipts should be deposited intact and all
cash disbursements should be made through
checks.
 Collections should be deposited intact within a
reasonable period of time from the date of
collection and should not be used for any type of
disbursement.
 Disbursements should be made through checks and
not from cash collections. Disbursement for small
amounts are made through the petty cash fund.
Intermediate Accounting Part 1
 INTERNAL CONTROLS OVER CASH
3. Bank Reconciliation – Bank reconciliation should be
prepared regularly, immediately upon the receipt of the
monthly bank statement, to reconcile on a timely basis
the difference between the cash balance per books and
the cash balance per statement. The differences should
be duly investigated and accounted for.
4. Cash Counts – Periodic cash counts should be
performed to provide reasonable assurance that actual
cash tallies with the balance per records. Reconciliation
of any difference should be made immediately after the
count. Surprise cash counts should also be performed
at irregular intervals as part of internal audit.

Intermediate Accounting Part 1

 INTERNAL CONTROLS OVER CASH
5. Minimum cash balance – Minimum cash
balance should be maintained, especially for
cash funds, sufficiently only to defray specific
business requirements. For example, entities
often use the imprest bank accounts which are
amounts specifically aside for a limited
purpose, such as for the payment of payroll,
interest, or taxes. Maintaining excessive cash
balances may increase the risk of
embezzlement.

Intermediate Accounting Part 1

 INTERNAL CONTROLS OVER CASH
6. Lockbox accounts – Entities often utilize
lockbox accounts to expedite cash
collections and to ensure that cash
collections are deposited intact. A lockbox
is rented for a fee and customers are
advised to remit their payments directly to
the lockbox account. The bank empties the
box at least once a day and immediately
credits the entity’s account for collections.

Intermediate Accounting Part 1

 INTERNAL CONTROLS OVER CASH
7. Non-encashment of personal checks from the
petty cash fund – encashment of personal
checks from the petty cash fund should be
prohibited to discourage concealment of cash
shortages.
8. Voucher system – The voucher system is an
internal control over all cash disbursements.
Under this system, a voucher is prepared for
every cash disbursement in order to ensure that
each disbursement is properly authorized, made
for a valid expenditure and properly recorded.
Intermediate Accounting Part 1
 VOUCHER SYSTEM
• Voucher (check disbursement voucher of CDV)
is a business document or written
authorization that supports every
disbursement made by an entity.
• Supporting documents (e.g. Purchase order,
purchase invoice, delivery receipt) are
attached to the voucher to form the “voucher
package”. Unpaid vouchers are filed in the
order of their required payment dates so that
available cash discounts are not missed.
Intermediate Accounting Part 1
 VOUCHER SYSTEM
• The supporting documents are reviewed and
compared to determine their validity before each
check disbursement is drawn. The individual
preparing the check (i.e. Treasurer) stamps the
supporting documents as “paid” to ensure that they
are not presented for payment more than once.
• The check number and journal entry are indicated in
the voucher. One check is drawn for each voucher
to ensure proper audit trail. Also vouchers are pre-
numbered to help ensure their completeness.
Cancelled vouchers or cancelled checks are not
destroyed or removed from the file.
Intermediate Accounting Part 1
 ACCOUNTING FOR CASH SHORTAGE
• Where the cash count shows cash which is less
than the balance per book, there is a cash
shortage to be recorded as follows:
Cash Short or Over xxx
Cash xxx
• The cash short or over is only a temporary or
suspense account. When financial statements
are prepared the same should be adjusted.
Hence, the cashier or cash custodian is held
responsible for the cash shortage, the
adjustment should be:
Due from Cashier xxx
Cash short or over
Intermediate Accounting Part 1
xxx
 ACCOUNTING FOR CASH OVERAGE
• 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

• Where the cash count shows cash which is

more than the balance per book, there is cash
overage to be recorded as follows:
Cash xxx

Cash short or over xxx

Intermediate Accounting Part 1

 ACCOUNTING FOR CASH OVERAGE
• Note that whether it is a cash shortage or cash
overage, the offsetting account is cash short or
over. Such account should be adjusted when
statements are made.
• The cash overage is treated as miscellaneous
income if there is no claim on the same:
Cash short or over xxx
• But where the cash
Miscellaneous Income
overage is properly
xxx
found to
be the money of the cashier, the journal entry
is:

Cash short or over xxx

Payable to Cashier xxx
Intermediate Accounting Part 1
CONCEALMENT OF CASH SHORTAGES
• Cash shortages are fraudulently concealed in
various ways. Examples include, but not
limited to the following:
1. Lapping – occurs when collection of
receivable from one customer is
misappropriated and then concealed by
applying a subsequent collection from another
customer. Lapping is made possible when the
incompatible duties of recording and cash
custody are combined.

Intermediate Accounting Part 1

CONCEALMENT OF CASH SHORTAGES

Intermediate Accounting Part 1

 CONCEALMENT OF CASH SHORTAGES
2. Kiting – occurs when cash shortage is concealed
by overstating the balance of cash. Kiting is
made possible by exploiting the float period (i.e.
The time it takes for a check to clear at the bank
where it was drawn). Kiting normally occurs at
month-end when a check is written to transfer
funds from one bank account to another bank
account where the misappropriation was made.
Kiting is done by recording only the receipt
portion of the fund transfer but not the
disbursement period. In effect, cash is
overstated in order to conceal a shortage.
Intermediate Accounting Part 1
 CONCEALMENT OF CASH SHORTAGES
3. Window dressing – In a broad sense, window
dressing is a form of fraudulent financial
reporting and not primarily a method of
concealing cash shortages. Window dressing
occurs when books are not closed at year end
and transactions in the subsequent period are
deliberately recorded in the current period in
order to improve the entity’s financial
performance or financial ratios. The fraudulent
reporting is also called “cooking the books.”
Intermediate Accounting Part 1
 CONCEALMENT OF CASH SHORTAGES
• For instance, sales in subsequent period are
recorded as current period sales in order to
improve the current period’s profit and
current ratio or to increase management
bonuses that are based on sales.
• Window dressing can also be used to conceal
cash shortages as of the reporting date by:
a. Including collections in the subsequent
period to the current period, and
b. By deferring the recording of current year’s
disbursements to the subsequent period.
Intermediate Accounting Part 1
 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 by
means of check.
• While internal control ideally requires
that all payments should be made by
means of check, this is sometimes
impossible.
Intermediate Accounting Part 1
 IMPREST SYSTEM
• 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.
• In practice, entities set a threshold amount for
check issuance say P 5,000, and all other
disbursements below this threshold amount are
paid out through petty cash funds.
Intermediate Accounting Part 1
 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
• The imprest fund system is the one usually
followed in handling petty cash transactions.

Intermediate Accounting Part 1

 ACCOUNTING PROCEDURES FOR IMPREST
FUND SYSTEM
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 payments and simply
prepares memorandum entries in the petty
cash journal.
Intermediate Accounting Part 1
 ACCOUNTING PROCEDURES FOR
IMPREST FUND SYSTEM
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 as
follows:
Expenses xxx
Cash in Bank xxx

It is to be pointed out that the petty cash

disbursements should be replenished by means
of check and not from undeposited collections.
Intermediate Accounting Part 1
ACCOUNTING PROCEDURES FOR IMPREST
FUND SYSTEM
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
as follows:
Expenses xxx
Petty Cash Fund xxx

The adjusment is to be reversed at the

beginning of the next accounting period. Before
replenishment, a petty cash count should be
performed to determine cash shortages or
overages. Intermediate Accounting Part 1
 ACCOUNTING PROCEDURES FOR
IMPREST FUND SYSTEM
• 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
follows:
Petty Cash Fund xxx
Cash In Bank xxx

Intermediate Accounting Part 1

 ACCOUNTING PROCEDURES FOR IMPREST
FUND SYSTEM
f. A decrease in the fund is recorded as
follows:
Cash In Bank xxx
Petty Cash Fund xxx

ILLUSTRATIVE EXAMPLE:
2019
Nov. 10 The entity established an imprest fund
of P 10,000.
Cash In Bank 10,000
Petty Cash Fund 10,000

Intermediate Accounting Part 1

ACCOUNTING PROCEDURES FOR IMPREST
FUND SYSTEM
ILLUSTRATIVE EXAMPLE:
Nov. 29 Replenished the fund. The petty cash items include the
following: Currency and coins – 2,000; Supplies-5,000;
Telephone – 1,800; and Postage – 1,200.
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.

Intermediate Accounting Part 1

 ACCOUNTING PROCEDURES FOR IMPREST
FUND SYSTEM
Dec 31 The fund is composed of the following: currency
and coins – P 7,000; Supplies – P 1,500; Postage
– 500; Miscellaneous expenses – P 1,000.
Supplies 1,500
Postage 500
Miscellaneous Expenses 1,000
Petty Cash Fund 3,000
2020
Jan 1 The adjustment made on December 31, 2019
was reversed.
Petty Cash Fund 3,000
Supplies 1,500
Postage 500
Miscellaneous Expenses 1,000
Intermediate Accounting Part 1
 ACCOUNTING PROCEDURES FOR
IMPREST FUND SYSTEM
Feb 1 The fund is replenished and increased to P
15,000.
The composition of the fund: currency and
coins – P 1,000; Supplies – P 4,500; Postage – P
3,000 and Miscellaneous Expenses – 1,500.
Petty Cash Fund 5,000
Supplies 4,500
Postage 3,000
Miscellaneous Expenses 1,500
Cash In Bank 14,000
The total amount of the check drawn is P
14,000 representing the petty cash
disbursements of P 9,000 and the fund increase
of P 5,000.

Intermediate Accounting Part 1

 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.
Intermediate Accounting Part 1
 FLUCTUATING FUND SYSTEM
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
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. Intermediate Accounting Part 1
 FLUCTUATING FUND SYSTEM
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 recorded as follows:
Cash In Bank xxx
Petty Cash Fund xxx

Intermediate Accounting Part 1

 FLUCTUATING FUND SYSTEM
• ILLUSTRATION
Nov 10 The entity established a petty cash fund of P 10,000
Petty Cash Fund 10,000
Cash In Bank 10,000
Nov 11-28 Petty cash disbursements amounted to P 8,000
Expenses 8,000
Petty Cash Fund 8,000
Nov 29 Issued a check for P 10,000 to replenish the fund
Petty Cash Fund 10,000
Cash in Bank 10,000
At this point, the petty cash balance per
book is P 12,000.

Intermediate Accounting Part 1

 FLUCTUATING FUND SYSTEM
ILLUSTRATION:
Dec 1-30 Petty cash expenses amounted to P 9,000
Expenses 9,000
Petty cash fund 9,000
Dec 31 Issued a check for 15,000 to replenish the fund
Petty cash fund 15,000
Cash in bank 15,000
At this point, the petty cash balance is P
18,000.

Intermediate Accounting Part 1