Module1- Cash and Cash Equivalents

Learning Objectives:
At the end of the module, students shall be able to:
1. Understand the concept of cash equivalents
2. Identify items considered cash
3. Identify items considered cash equivalents
4. Know the accounting for petty cash fund

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 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 any other negotiable instrument
That is payable in money and acceptable by the bank for deposit and immediate credit.
Accordingly, cash include checks, bank drafts and money orders because they are acceptable
by the bank for deposit or immediate encashment.

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 pe 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 checks, travelers 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.
Cash equivalents
Cash equivalents are 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.

Measurement of Cash
Cash is measured at face value.
Cash in foreign currency is measured at the current exchange rate.
If a bank in 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

Cash and cash equivalent should be shown as the first line item under current assets.
The 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.

Bank overdraft
When cash in bank account has a credit balance, it is said to be overdraft. The credit balance in the cash
in bank account results from the issuance of checks in excess of cash deposits.
A bank overdraft is classified as a current liability and should not be offset against other bank accounts
with debit balances.

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.
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, it 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 payee
before the end of reporting period.

There is no payment when the check is pending delivery to the payee at the end of the reporting period.
The reason is that undelivered check is still subject to the entity’s control and may thus be canceled any
time before delivery at the discretion of the entity.

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

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

Cash xxx
Accounts payable or appropriate account xxx

The reason is that there is no payments 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.

In banking practice, a check becomes stable if not encashed within six months from the time of issuance.

If the amount of stale check is immaterial, it is simply accounted for a 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
Accounting for cash shortage
When the cash count shows cash which is less than the balance, there is a cash shortage to be recorded
as follows:

Cas 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

When the cash count shows cash which is more than the balance per book, there is a cash overage to be
recorded as follows:

Cash xxx
Cash short or over xxx

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

The cash short or over is treated as miscellaneous income if there is no claim on the sane

Cash xxx
Miscellaneous income xxx

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

Cash short or over xxx

Payable to cashier xxx
Imprest system
The imprest system is a system of control of cash which require 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 no occasions when the issuance of checks become 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 caanot 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 xxx

Cash in bank xxx
b. Payment of expenses out of the fund
No formal journal entries are made.
The petty cashier generally required a signed petty cash voucher for such payment 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 the petty cash disbursements are recorded.

Expenses xxx
Cash in bank xxx
 It is to be pointed out that the petty cash disbursements should be replenished only by means of
checks 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 as:

Petty cash fund xxx
Cash in bank xxx

f. A decrease in the fund is recorded as:

Cash in bank xxx
Petty cash fund xxx

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
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

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

The composition of the fund:

Currency and coins 1,000

Supplies 4,500
Postage 3,000
Miscellaneous expense 1,000
Total 10,000

Journal entry:
Petty cash fund 5,000
Supplies 4,500
Postage 3,000
Misc expense 1,000
Cash in bank 14,000
 The total amount of 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 xxx
Cash in bank xxx

b. Payment of expense out of the petty cash fund

Expenses xxx
Petty cash fund xxx

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

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
Illustration

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

Petty cash fund 10,000

Cash in bank 10,000
Nov. 11 -28 Petty cash disbursement amounted to P8,000.
Expenses 8,000
Petty cash fund 8,000

Nov. 29 issued a check for P10,000 to replenished 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

Dec. 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

Activity 1. Answer the ff.

1. Define cash
2. Define cash equivalents
3. Explain the measurement of cash
4. Explain a bank overdraft.
5. Explain a compensating balance

Activity2 . Problems

1. At year-end, Myra Company reported cash and cash equivalents which comprised the following:
Cash on hand 500,000
Demand deposit 4,000,000
 Certificate of deposit 2,000,000
Postdated customer check 300,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000
What total amount should be reported as “cash” at year-end?
a. 7,000,000
b. 4,800,000
c. 6,800,000
d. 5,000,000

Everlast Company reported the following information at year-end:

 Share investment of 1,000,000 that are very actively traded in the stock market
 Government treasury bills of 2,000,000 with a 10-year term but purchased on December
31 at which time they had two months to go until maturity.
 Cash of 3,400,000 in the form of coin, currency, saving account and checking account.
 Commercial papers of 1,500,00 with term if nine months but purchased on December
31 at which time they had three months to go until maturity.

2. What total amount should be reported as cash?

a. 3,400,000
b. 4,900,000
c. 4,400,000
d. 5,400,000
3. What total amount should be reported as cash equivalent?
a. 2,000,000
b. 1,500,000
c. 3,500,000
d. 4,500,000

4. Burr Company had the following account balances at year-end:

Cash in bank 2,250,000
Cash on hand 125,000

Cash restricted for addition to plant end

Expected to be disbursed next year 1,600,000

Cash in bank included 600,000 of compensating balance against short-term borrowing

arrangement.
The compensating balance is not legally restricted as to withdrawal.
What total amount of cash should be reported under current assets at year-end?
a. 1,775,000
b. 2,250,000
 c. 2,375,000
d. 3,975,000

5. Ral Company reported the checkbook balance on December 31, 2018 at 5,000,000 and held the
following items on same date:
Check payable to Ral, dated January 2, 2019 in payment of a sale
Made in December 2018 not included in December 31
Checkbook balance 2,000,000
Check payable to Ral, deposited December 15 and included
In December 31 checkbook balance, but returned by bank
On December 30 stamped “NSF”. The check was redeposited
On January 2, 2019 and cleared on January 9, 2019 500,000
Check drawn on Ral’s account payable to a vendor, dated
And recorded in Ral’s book on December 31, 2018
But not mailed until January 10, 2019 300,000
Certificate of time deposit 1,000,000
What amount should be reported as cash on December 31, 2018?
a. 4,800,000
b. 5,300,000
c. 6,500,000
d. 5,800,000

6. Timex Company reported petty cash fund which comprised the following:
Coins and currency 3,300
Paid vouchers:
Transportation 600
Gasoline 400
Office suppliers 500
Postage stamps 300
Due from employees 1,200 3,000
Manager’s check returned by bank marked “NSF” 1,000
Check drawn by the entity to the order
Of petty cash custodian 2,700

What is the current amount of petty cash fund for statement presentation purposes?
a. 10,000
b. 7,000
c. 6,000
d. 9,000

7. Liwanag Company reported an impress petty cash fund of 50,000 with the following details:
Currencies 20,000
Coins 2,000
 Petty cash vouchers:
Gasoline payment for delivery equipment 3,000
Medical supplies for employees 1,000
Repairs of office equipment 1,500
Loans to employees 3,500
A check drawn by the entity payable to the order of Grace
De la Cruz, petty cash custodian, representing
Her salary 15,000
An employee check returned by the bank for insufficiency
Of fund 3,000
A sheet of paper with names of several employees together
With contribution for a birthday gift of a co-employee,
Attached to the sheet of paper is a currency of 5,000
What amount of petty cash fund should be reported in the statement of financial position?
a. 42,000
b. 27,000
c. 37,000
d. 22,000

8. Tranvia Company had the following balances on December 31, 2018

Cash In checking account 350,000
Cash in money market account 750,000
Treasury bill, purchased November 1, 2018
Maturing January 31, 2019 3,500,000
Time deposit purchased December 1, 2018
Maturing March 31, 2019 4,000,000
What amount should be reported as cash and cash equivalent on December 31, 2018?
a. 1,100,000
b. 3,850,000
c. 4,600,000
d. 8,600,000

9. Pygmalion Company had the following balances on December 31, 2018:

Cash in bank – current account 5,000,000
Cash in bank – payroll account 1,000,000
Cash on hand 500,000
Cash in bank – restricted account for building
Construction expected to be disbursed in 2019 3,000,000
Time deposit, purchased December 15, 2018 and
Due March 15, 2019 2,000,000
The cash on hand included a 200,000-check payable to Pygmalion date January 15, 2019.
 What total amount should be reported as cash and cash equivalents on December 31, 2019?
a. 6,300,000
b. 8,300,000
c. 6,500,000
d. 8,700,000

10. Yasmin Company provided the following information on December 31, 2018
Petty cash fund 50,000
Current account – First bank 4,000,000
Current account – Second bank (overdraft) (250,000)
Money market placement – Third bank 1,000,000
Time deposit – Fourth bank 2,000,000

 A check of 100,000 was drawn against First bank current account dated and recorded
December 29, 2018 but delivered to payee on January 15, 2019.
 The Fourth bank time deposit is set aside for land acquisition in early January 2019.

What total amount should be reported as cash and cash equivalents on December 31, 2018?
a. 5,050,000
b. 5,150,000
c. 4,900,000
d. 4,150,000

11. Karla Company provided the following information on December 31, 2018:
Cash on hand 500,000
Security bank and current account 1,000,000
PNB current account No. 1 400,000
PNB current account No. 2 (overdraft) (50,000)
BSP treasury bill – 60 days 3,000,000

 The cash on hand included a customer postdated check of 100,000 and postal money
order of 40,000.

 A check of 200,000 in payment of account was drawn against Security Bank account,
dated January 15, 2019, delivered to the payee and recorded December 31, 2018.

What total amount of cash and cash equivalents should be reported on December 31, 2018?
a. 4,550,000
b. 5,050,000
c. 4,750,000
d. 1,950,000
12. On December 31, 2018, Erika Company reported cash account balance per ledger of 9,500,000
which included the following:
Cash in bank – demand deposit 3,000,000
Time deposit – 30 days 500,000
NSF check of customer 200,000
Money market placement due on June 30, 2019 2,000,000
Saving deposit 1,000,000
IOU from an employee 300,000
Pension fund 1,500,000
Customer check dated January 31, 2019 600,000
Customer check outstanding for 18 months 400,000
9,500,000
 Check if 100,000 in payment of accounts payable was dated and recorded on December
31, 2018 but mailed to creditors on January 15, 2019.
 Check of 300,000 dated January 31, 2019 in payment of account payable was recorded
and mailed December 31, 2018
 The cash receipts journal was held open until January 15, 2019, during which time
200,000 was collected and recorded on December 31, 2018.

What total amount should be reported as cash and cash equivalents on December 31, 2018?
a. 4,700,000
b. 6,700,000
c. 4,900,000
d. 5,100,000

13. On December 31, 2018, Roma Company reported cash of 9,950,000 with the following details:
Undeposited collections 600,000
Cash in bank – BDO checking account 4,000,000
Undeposited NSF check received from customer,
Dated December 1, 2018 150,000
Undeposited check from a customer,
Dated January 15, 2019 250,000
Cash in bank - BDO fund for payroll 1,000,000

Cash in bank – BDO money market instrument, 90days 2,000,000

Cash in foreign bank restricted 1,500,000
Cash in bank – BDO value added tax account 450,000
Total 9,950,000

On December 31, 2018, what total amount should be reported as cash and cash equivalents?
a. 7,600,000
b. 8,200,000
c. 6,050,000
 d. 8,050,000

Love Company reported the following information in relation to cash on December 31, 2018:
 Checkbook balance, 4,000,000
 Undeposited collections, 400,000
 A customer check amounting of 200,000 dated January 2, 2019 was included in the
December 31, 2018 checkbook balance.
 Another customer check for 500,000 deposited on December 22, 2018 was included in
the checkbook balance but returned by the bank for in sufficiency of fund.
This check was redeposited on December 26, 2018 and cleared two days later.
 A 400,000-check payable to supplier dated and recorded on December 30, 2018 was
mailed on January 16, 2019.
 A petty cash fund of 50,000 comprised the following on December 31, 2018:
Coins and currencies 5,000
Petty cash vouchers 40,000
Refundable deposit for returnable containers 5,000
50,000
 A check of 40,000 was drawn on December 31, 2018 payable to Petty cash.
14. What is the adjusted cash in bank on December 31, 2018?
a. 4,600,000
b. 4,200,000
c. 4,400,000
d. 3,700,000

15. What total amount should be reported as cash on December 31, 2018?
a. 4,645,000
b. 4,845,000
c. 4,600,000
d. 4,650,000

16. Campbell Company had the following account balances on December 31, 2018:
Petty cash fund 50,000
Cash in bank – current account 4,000,000
Cash in bank – payroll account 1,200,000
Cash in bank – sinking fund 2,000,000
Cash on hand 500,000
Cash in bank – restricted account for plant addition
And expected to be disbursed in 2019 1,500,000
Treasury bills 1,000,000

The petty cash fund included unreplenished December 2018 petty cash expense vouchers 5,000
and employee IOU 5,000.
 The cash on Hand included a 100,000-customer check payable to Campbell dated January 15,
2019.

In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum
balance of 200,000 in the unrestricted current bank account.

The sinking fund is et aside to settle a bond payable that is due on June 30,2019

What total amount should be reported as cash and cash equivalents on December 31, 2018?
a. 8,640,000
b. 7,440,000
c. 7,640,000
d. 5,640,000

a. 2,780,000

Reference:
Valix, Conrado T, Peralta, Jose F. and Valix, Christian Aris M. (2020). Intermediate Accounting I. Manila:
GIC Enterprise Co., Inc.