FINANCIAL ACCOUNTING AND REPORTING

Cash and Cash Equivalents

Money Cash Fund Set Aside for Current Purposes

It is the standard medium of exchange in Examples of this include:
business transactions. it refers to the currency and a. Petty cash fund
coins which are in circulation and legal tender. b. Dividend fund
c. Payroll fund
Cash d. Revolving fund
In the context of accounting, it includes e. Tax fund
money and any other negotiable instrument that is f. Interest fund
payable in money and acceptable by the bank for ***
deposit and immediate credit.
Bond Sinking Fund
Check It is a restricted asset of a corporation that
It is a document that orders a bank to pay was required to set aside money for redeeming or
a specific amount of money from the person's buying back some of its bonds payable.
account to the person in whose name the same General rule: It is presented as a
has been issued. In general, it is included in the noncurrent asset.
books as cash provided that the same is payable Exception: It is presented as a current
to the reporting entity. asset when the bonds associated to it become due
within 12 months after the end of the reporting
Bank Draft period.
It is a check drawn by a bank on its own
funds in another bank. If it is payable to the Fund Held for Future Plant Expansion
reporting entity, it is included in the books as cash. It is a noncash item always presented as a
noncurrent asset.
Money Order
It is a paper document, similar to a check, Preference Share Redemption Fund
used for making payments. it is prepaid, so it is It is a noncash item always presented as a
only issued after a buyer pays for the same with noncurrent asset.
cash or another form of guaranteed funds. If it is
payable to the reporting entity, it is included in the Cash Equivalents
books as cash. These are short-term and highly liquid
investments that are readily convertible into cash
Postdated Check and so near their maturity that they present
It is a check written by the drawer (payor) insignificant risk of changes in value because of
for a date in the future. it may only be cashed or changes in interest rates.
deposited on or after the date written on it. If it is
payable to the reporting entity, it is not included in Criterion for an Item to Qualify as Cash
the books as cash. If it is payable to a different Equivalent
party, it should not be excluded in the total cash Only highly liquid investments that are
balance. acquired three months before maturity can qualify
as cash equivalents.
Cash Items Included in the Accounting Books
Equity Securities as Cash Equivalents
Cash on Hand General rule: Equity securities cannot
It includes undeposited cash collections qualify as cash equivalents because shares do not
and other cash items awaiting deposit. have a maturity date.
Exception: Preference shares with
Cash in Bank specified redemption date and acquired three
It includes demand deposit or checking months before redemption date can qualify as
account and saving deposit which are unrestricted cash equivalents.
as to withdrawal.

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

Classification of Investments of Excess Cash Bank Overdraft

It occurs when the cash in a bank account
Cash Equivalent has a credit balance resulting from the issuance of
See no. 152 for definition. checks in excess of deposits.

Short-Term Financial Asset Classification of Bank Overdraft

It is an investment that matures in more General rule: It shall be classified as a
than three months but within one year from the end current liability and should not be offset against
of the reporting period and is presented separately other bank accounts with debit balances.
as current asset.
Exceptions:
Long-Term Investments a. If there are other deposit accounts in the
It is an investment that matures in more same bank as the account with the credit
than one year from the end of the reporting period balance, offsetting with such other
and is classified as noncurrent asset. accounts is allowed.
*** b. If the amount is immaterial, offsetting is
allowed.
Reclassification of Long-Term Investments
If a long-term investment becomes due Compensating Balance
within one year from the end of the reporting It generally takes the form of minimum
period, the same shall be reclassified as current or checking or demand deposit account balance that
temporary investment. must be maintained in connection with a borrowing
arrangement with a bank.
Measurement of Cash
a. In general – face value Types of Compensating Balance
b. Foreign currency – current exchange rate
c. Cash held by a bank or financial institution Informal Compensating Balance
under bankruptcy or financial difficulty – It refers to one that is not legally restricted
estimated realizable value and shall be included as part of cash. If the
problem is silent, the compensating balance is
treated as unrestricted.
Foreign Exchange Restriction
Deposits in foreign banks which are subject Formal Compensating Balance
to foreign exchange restriction, if material, should It refers to one that is legally restricted and
be classified separately among noncurrent assets shall be classified as current or noncurrent asset
and the restriction clearly indicated. depending on the terms of the related loan.
***
Classification of Cash Fund Related to a
Liability Unreleased or Undelivered Checks
The classification should be parallel with It is a check that is merely drawn and
such related liability (i.e., if the noncurrent liability recorded but not given to the payee before the end
is reclassified as current, the related noncurrent of reporting period.
cash fund shall also be reclassified as current
asset). Adjustment Required for Undelivered or
Unreleased Checks
Classification of Cash Fund Set Aside for the Dr. Cash in bank; Cr. Expense or liability –
Acquisition of a Noncurrent Asset The entry made upon issuance of said check
Such fund should be classified as should be reversed because in essence, no
noncurrent asset regardless of the year of payment has really been made.
disbursement.

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

Postdated Check Delivered

It is a check drawn, recorded and already Methods of Handling the Petty Cash Fund
given to the payee but it bears a date subsequent
to the end of reporting period. Imprest Fund System
a. A memorandum entry is simply prepared in
Adjustment Required for Postdated Checks the petty cash journal for each
Delivered disbursement.
Dr. Cash in bank; Cr. Expense or liability – b. Replenishment of the fund is usually equal
The entry made upon issuance of said check to the petty cash disbursements.
should be reversed because in essence, no c. Replenishment should only be by means of
payment has really been made. drawing checks and not from undeposited
collections.
Stale Check or Check Long Outstanding d. It is necessary to adjust the unreplenished
It is a check not encashed by the payee expenses at the end of the reporting period
within a relatively long period of time. in order to state the correct balance of the
fund.
Prescriptive Period for Checks
In banking practice, a check becomes stale Fluctuating Fund System
if not encashed within 6 months from the time of a. Disbursements are immediately recorded
issuance. in the general journal or cash
disbursements journal.
Adjustment Required for Issued Checks That b. Replenishment of the fund may or may not
Became Stale be the same amount as the petty cash
a. If the amount is material - Dr. Cash in bank; disbursement.
Cr. Accounts payable or appropriate c. No adjustment for unreplenished expenses
account is needed at the end of the reporting period
b. If the amount is immaterial - Dr. Cash in because of the outright recording of
bank; Cr. Miscellaneous income expenses.

Journal Entries for Cash Shortage Journal Entries for the Handling of Petty Cash
a. Initial entry – Dr. Cash short or over; Cr. Fund
Cash)
b. If the cashier or cash custodian is held Imprest Fund System
responsible for the cash shortage – Dr. Due a. Establishment of the fund – Dr. Petty cash
from cashier; Cr. Cash short or over fund; Cr. Cash in bank
c. If reasonable efforts fail to disclose the b. Payment of expenses out of the fund –
cause of the shortage – Dr. Loss from cash memorandum entry in the petty cash
shortage; Cr. Cash short or over journal
c. Replenishment of petty cash payments –
Journal Entries for Cash Overage Dr. Expenses; Cr. Cash in bank
a. Initial entry – Dr. Cash; Cr. Cash short or d. Adjusting entry if no replenishment is made
over at year-end – Dr. Expenses; cr. Cash in
b. If there is no claim on the overage – Dr. bank
Cash short or over; Cr. Miscellaneous e. Increase in fund – Dr. Petty cash fund; Cr.
income Cash in bank
c. If the cash overage is properly found to be f. Decrease in fund – Dr. Cash in bank; Cr.
the money of the cashier – Dr. Cash short Petty cash fund
or over; Cr. Payable to cashier
Fluctuating Fund System
Imprest System a. Establishment of the fund – Dr. Petty cash
It is a system of control of cash which fund; Cr. Cash in bank
requires that all cash receipts should be deposited b. Payment of expenses out of the petty cash
intact and all cash disbursements should be made fund – Dr. Expenses; Cr. Petty cash fund
by means of check.

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

c. Replenishment or increase of the fund – Dr. Bank Reconciliation

Petty cash fund; Cr. Cash in bank It is a statement which brings into
d. Adjusting entry if no replenishment is made agreement the cash balance per book and cash
at year-end – no entry required balance per bank.
e. Decrease of the fund – Dr. Cash in bank;
Cr. Petty cash fund Bank Statement
It is a monthly report of the bank to the
Demand Deposit depositor showing data about the transactions of
It is the current account or checking the reporting entity with the bank during the period
account or commercial deposit where deposits are and the beginning and ending balances of its bank
covered by deposit slips and where funds are account.
withdrawable on demand by drawing checks
against the bank. Cancelled Checks
These are the checks (attached to the bank
Savings Deposit statement upon receipt) issued by the depositor
It is a bank account where the depositor is and paid by the bank during the month.
given a passbook upon initial deposit. the
passbook is required when making deposits and Book Reconciling Items
withdrawals. this type of bank deposit is interest
bearing. Credit Memos
These refer to items not representing
deposits credited by the bank to the account of the
Time Deposit depositor but not yet recorded by the depositor as
It is a bank deposit evidenced by a formal cash receipts.
agreement called certificate of deposit. it is interest
bearing and may be preterminated or withdrawn on Examples:
demand or after a certain period of time agreed a. Notes receivable collected by bank in favor
upon. of the depositor
b. Proceeds of bank loan
Journal Entry Used to Record Collection of c. Matured time deposits transferred by the
Cash in the Books of the Reporting Entity bank to the current account of the depositor
Dr. Cash or Cash in bank; Cr. Accounts
receivable or any other appropriate account Debit Memos
These refer to items not representing
Journal Entry Used by the Bank to Record checks paid by bank which are charged or debited
Collection of Cash by the Reporting Entity and by the bank to the account of the depositor but not
Subsequent Deposit to the Bank yet recorded by the depositor as cash
Dr. Cash; Cr. Bank account of reporting disbursements. Examples:
entity a. NSF checks or DAIF (drawn against
insufficient fund) checks
Journal Entry Used to Record Disbursements b. Technically defective checks
of Cash in the Books of the Reporting Entity c. Bank service charges
Dr. Expenses or any other appropriate d. Reduction of loan
account; Cr. Cash or Cash in bank
Book Errors
Journal Entry Used by the Bank to Record These refer to incorrect recording of cash
Withdrawals or Disbursements of Cash by the receipts or disbursements resulting to either
Reporting Entity overstatement or understatement of cash balance
Dr. Bank account of reporting entity; Cr. in the books of the entity.
Cash ***

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

NSF or DAIF Checks or the bank balance is adjusted to equal the book
These are checks deposited but not balance.
returned by the bank because of insufficiency of ***
fund.
Formula to Compute for the Adjusted Book
Bank Reconciling Items Balance under the Adjusted Balance Method of
Bank Reconciliation
Deposits in Transit Book balance + Credit memos - Debit
These are collections already recorded by Memos ± Effect of errors = Adjusted book balance
the depositor as cash receipts but not yet reflected
on the bank statement. Formula to Compute for the Adjusted Bank
Balance under the Adjusted Balance Method of
Outstanding Checks Bank Reconciliation
These are checks already recorded by the Bank balance + Deposits in transit -
depositor as cash disbursements but not yet Outstanding checks (after excluding certified
reflected on the bank statement. checks) ± Effect of errors = Adjusted bank balance

Bank Errors Formula Used Under the Book to Bank Method

These refer to incorrect posting of cash of Bank Reconciliation
deposits or withdrawals resulting to either Book balance + Credit memos +
overstatement or understatement of cash balance Outstanding checks (after excluding certified
in the bank account of the depositor. checks) - Debit memos - Deposits in transit ± Effect
*** of errors = Bank balance

Certified Check Formula Used Under the Bank to Book Method

It is a check for which the issuing bank of Bank Reconciliation
guarantees availability of cash in the holder's Bank balance + Deposits in transit + Debit
account. memos - Outstanding checks (after excluding
certified checks) - Credit memos ± effect of errors
Accounting Treatment for Certified Checks = book balance
Certified checks should be deducted from
the total outstanding checks (if included therein) Proof of Cash
because they are no longer outstanding for bank It is a reconciliation of the general ledger
reconciliation purposes. cash balance at both the beginning and end of a
period, combined with a reconciliation of cash
Forms of Bank Reconciliation deposited for the period with the cash receipts
journal, and a reconciliation of checks for the
Adjusted Balance Method period with the cash disbursements journal.
It is a form of bank reconciliation where the
book balance and the bank balance are brought to Computation of End of Month Balance per
a current cash balance that must appear on the Book
balance sheet. Beginning of month balance per book +
Book debits during the month - Book credits during
Book to Bank Method the month = End of month balance per book
It is a form of bank reconciliation where the
book balance is reconciled with the bank balance Book Debits
or the book balance is adjusted to equal the bank These refer to cash receipts or all items
balance. debited to the cash in bank account.

Bank to Book Method Book Credits

It is a form of bank reconciliation where the These refer to cash disbursements or all
bank balance is reconciled with the book balance items credited to the cash in bank account.

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

Computation of End of Month Balance per Computation of End of Month Deposits in

Bank Transit
Beginning of month balance per bank + Beginning of month deposits in transit +
Bank credits during the month - Bank debits during Book debits - CM from previous month - Bank
the month = End of month balance per bank credits + CM from current month = End of month
deposits in transit
Bank Credits
These refer to all items credited to the Computation of End of Month Outstanding
account of the depositor which include deposits Checks
acknowledged by bank and credit memos. Beginning of month outstanding checks +
Book credits – DM from previous month + Bank
Bank Debits debits + DM from current month = End of month
These refer to all items debited to the outstanding checks
account of the depositor which includes checks
paid by bank and debit memos.

Summary of Proof of Cash Procedures for the Book Balance

Book Ending
Book Credits or
Beginning Cash Debits or Cash
Bank Reconciling Items Cash
Balance per Book Cash Balance
Disbursements
Receipts per Book
Credit memos from previous
Add Deduct
month’s bank statement
Credit memos from current
A A
month’s bank statement
Debit memos from previous
D D
month’s bank statement
Debit memos from current
A D
month’s bank statement
NSF check deposited last month
D A D A
redeposited this month
NSF check deposited this month
A A
redeposited this month
NSF check deposited this month
A D
to be redeposited next month
Overstated recording of cash
receipts in the cash in bank
account (committed during the D D
previous month, discovered in the
current month)
Overstated recording of cash
receipts in the cash in bank
account (committed during the D D
current month, discovered upon
the receipt of bank statement)
Overstated recording of cash
receipts in the cash in bank
account (committed and D D
discovered during the current
month)
Understated recording of cash
receipts in the cash in bank A D
account (committed during the

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

previous month, discovered in the

current month)
Understated recording of cash
receipts in the cash in bank
account (committed during the A A
current month, discovered upon
the receipt of bank statement)
Understated recording of cash
receipts in the cash in bank
account (committed and No adjustment required
discovered during the current
month)
Overstated recording of cash
disbursements in the cash in
bank account (committed during A D
the previous month, discovered in
the current month)
Overstated recording of cash
disbursements in the cash in
bank account (committed during
D A
the current month, discovered
upon the receipt of bank
statement)
Overstated recording of cash
disbursements in the cash in
bank account (committed and D D
discovered during the current
month)
Understated recording of cash
disbursements in the cash in
bank account (committed during D D
the previous month, discovered in
the current month)
Understated recording of cash
disbursements in the cash in
bank account (committed during
A D
the current month, discovered
upon the receipt of bank
statement)
Understated recording of cash
disbursements in the cash in
bank account (committed and No adjustment required.
discovered during the current
month)
Summary of Proof of Cash Procedures for the Bank Balance
Beginning Bank
Bank Debits or Ending Cash
Cash Balance Credits or
Bank Reconciling Items Cash Balance per Bank
per Bank Cash
Withdrawals Statement
Statement Deposits
Deposits in transit as of
A D
beginning of the current month
Deposits in transit as of end of
A A
the current month

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

Outstanding checks as of
D D
beginning of the current month
Outstanding checks as of end of
A D
the current month
Cash collections disbursed
A A
instead of being deposited intact
Overstated recording of cash
deposit in the bank account of
reporting entity (committed during D D
the previous month, corrected in
the current month)
Overstated recording of cash
deposit in the bank account of
reporting entity (committed during
D D
the current month, still
uncorrected as per bank
statement)
Overstated recording of cash
deposit in the bank account of
D D
reporting entity (committed and
corrected in the current month)
Understated recording of cash
deposit in the bank account of
reporting entity (committed during A D
the previous month, corrected in
the current month)
Understated recording of cash
deposit in the bank account of
reporting entity (committed during
A A
the current month, still
uncorrected as per bank
statement)
Understated recording of cash
deposit in the bank account of
No adjustment required.
reporting entity (committed and
corrected in the current month)
Overstated recording of cash
withdrawal in the bank account of
the reporting entity (committed A D
during the previous month,
corrected in the current month)
Overstated recording of cash
withdrawal in the bank account of
reporting entity (committed during
D A
the current month, still
uncorrected as per bank
statement)
Overstated recording of cash
withdrawal in the bank account of
D D
reporting entity (committed and
corrected in the current month)
Understated recording of cash
withdrawal in the bank account of D D
reporting entity (committed during

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 FINANCIAL ACCOUNTING AND REPORTING
Cash and Cash Equivalents

the previous month, corrected in

the current month)
Understated recording of cash
withdrawal in the bank account of
reporting entity (committed during
A D
the current month, still
uncorrected as per bank
statement)
Understated recording of cash
withdrawal in the bank account of
No adjustment required.
reporting entity (committed and
corrected in the current month)

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