Cash and Cash
Equivalents
Jemmalyn G. Aloc, CPA, MBA

Learning Objectives
• To understand the concept of cash
• To understand the concept of cash equivalents
• To identify items of considered cash
• To identify items of considered cash equivalents
• To know accounting for petty cash fund

Cash
• Includes money and other negotiable instrument that is
payable in money and acceptable by the bank for
deposit and immediate credit.
• Checks, bank drafts and money orders
• Postdated Check – Not cash

Unrestricted cash
• No specific standards dealing with cash
• Pas 1 par 66, which provides that an entity shall classify an asset as
current when asset is cash or cash equivalent unless it is restricted to
settle a liability for more than twelve months after the end of the
reporting period.

Cash items included in cash
• Cash on hand – undeposited cash collection and other cash items
awaiting deposit
• Cash in bank – demand deposit, checking account and saving
account which are unrestricted as to withdrawal
• Cash fund – set aside for current purposes such as petty cash fund,
payroll fund and dividend fund

Cash Equivalents
• PAS 7, par 6 – defines cash equivalents as a 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.
• Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents

Examples of Cash Equivalents
• Three-month BSP treasury bill
• Three-year BSP treasury bill purchased three months before
the date of maturity
• Three months time deposit
• Three month money market instrument or commercial paper

Classification of investments of excess cash
• A. Three months or Less – cash and cash equivalents
• B. 3 months with in 1 year – short term financial assets (CA)
• C. More than one year – Long term investments (NCA)
However, if investments become due within one year
from the end of reporting period, reclassified as current or
temporary investment

Measurement of cash
• FACE VALUE
• Cash in foreign currency – current exchange rate
• If bank or FI holding funds is in bankruptcy – Net realizable
value if the amount recoverable is estimated to be lower than
the face value

Financial Statement Presentation
• Cash and cash Equivalent - first line item under
current assets
• Details should be disclosed in the notes to financial statements

Cash Fund for a certain purpose
• Set aside for use in current operations or for payment
of current obligation – Cash and cash equivalent
(CA)
• Examples – Petty cash fund, payroll fund, travel fund,
interest fund, dividend fund and tax fund

Cash Fund for a certain purpose
• Set aside for use in noncurrent purposes or for payment of
noncurrent obligation – Long-term Investment
• Examples – Sinking fund, preference share redemption
fund, contingent fund, insurance fund, and fund for
acquisition or construction of property, plant and
equipment.

Bank overdraft
• Overdraft – Cash in Bank that has a credit balance
• Results from issuance of checks in excess of the deposits
• Classified as current liability and should not be offset against
other bank accounts with debit balances.
• 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 – allowed
to offset
• 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
• 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.

Classification of Compensating Balance
• Deposit is not legally restricted as to withdrawal – informal
compensating balance agreement, - CASH
• Legally restricted - formal compensating agreement – “cash
held as compensating balance” current assets if the related
loan is short-term
• If loan is long-term – noncurrent investment

Undelivered or unreleased check
•Is one that is merely drawn and recorded but
not given to the payee before the end of the
reporting period
• Unreleased checks drawn are included in cash.

Postdated check delivered
• Check drawn, recorded and already given to the payee but it
bears a date subsequent to the end of reporting period
• Postdated checks drawn are included in cash.
• Postdated checks received from customers are excluded from
cash.

Staled Check
• Check not encashed by the payee within a relatively long
period of time
• Reasonable period of time after issue – depends on entity
policy
• Staled checks drawn are included in cash
• Staled checks received from customers are excluded from cash

Accounting for Cash shortage
• Where the cash count < balance per book
Cash short or over 10,000
Cash 10,000
• If cashier or cash custodian is held responsible – Due from cashier
Due from cashier 10,000
Cash short or over 10,000
• If fail to disclose the cause of the shortage – Loss from cash shortage
Loss from cash shortage 10,000
Cash short or over 10,000

Accounting for Cash Overage
• Where the cash count > balance per book
• Cash 10,000
• Cash short or over 10,000
• If no claim - miscellaneous income
• Cash short or over 10,000
• Miscellaneous income 10,000
• If found to be the money of cashier – Payable to cashier
• Cash short or over 10,000
• Payable to cashier 10,000

Petty Cash Fund
• Petty cash fund is money set aside to pay small expenses
which cannot be paid conveniently by means of check
• Two methods
• Imprest Fund system – usually followed
• Fluctuating Fund system – checks drawn to replenish the
fund do not necessarily equal the petty cash disbursements
• -

ACCOUNTING
PROCEDURES
IMPREST FUND
SYSTEM
FLUCTUATING
FUND SYSTEM
Check is drawn to established
the fund
Petty Cash Fund xx
CIB xx
Petty Cash Fund xx
CIB xx
Payment of expenses out of
the fund
No journal entries
Memo entries in petty cash
journal
Expenses xx
Petty cash fund xx
Replenishment of the fund Expenses xx
CIB xx
Petty cash fund xx
CIB xx
At the end of the accounting
period – adjust unreplenished
expenses
Expenses xx
Petty Cash Fund xx
Reversed in beginning of the
next acc period
No adjustment
Increase in the fund Petty Cash fund xx
CIB xx
Petty cash fund xx
CIB xx
Decrease of the fund CIB xx
Petty cash fund xx
CIB xx
Petty cash fund xx

Exercises !

Problem 2

Assignment

Example