NATURE AND COMPOSITION OF CASH
Cash – is widely used as a medium of exchange. It is classified as current asset because it is expected to
be used in the daily transactions of the company. It is usually presented as the first line item in the
statement of financial position of every company.
Two requirements before an item can be presented as CASH:
1. The item must be unrestricted as to its withdrawal – one common example of a cash item is a
regular savings account where withdrawals can easily be made over the counter or through
ATM (automated teller machine)
2. The item must be immediately available for use in the current operations of the company –
restricted items may include bank accounts that have been freeze by the government due to
illegal activities or violation of Anti-Money Laundering.
a) It will be used to pay for operating expenses like salaries, interest, dividends and
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taxes.
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b) It will be used to pay for current liabilities like accounts payable and short term
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notes payable.
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c) It will be used to acquire current assets like inventories and trading securities.
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SPECIFIC CASH ITEMS
1. CASH ON HAND
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a) Bills and coins – these are paper bills and metal coins issued by the BSP. These are the
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most common items being used in day to day operation.
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b) Different checks – check received as payment from other persons entitles the holder to
demand payment from the drawee bank indicated in the check. The date indicated in
the check is usually the date when the check can now be encashed or deposited in a
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bank. But before a check can be classified as cash, it should first meet the following
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criteria.
i. The check was received from the customer on or before the balance
sheet date
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ii. The check is dated on or before the balance sheet date
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DIFFERENT KIND OF CHECKS:
1. Customer’s check – these are checks received from the customers. They are
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usually issued as payment for the inventories or services that they received from
the entity.
2. Traveler’s Check – This is a kind of check with security feature. Upon receipt of
the check, the payee should immediately sign the check. Before the payee can
make use of such check, the payee must sign the same check again. This is done
to prevent unauthorized use of such traveler’s check.
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3. Manager’s Check – these are checks being issued by bank managers. This is a
guaranty by such bank that the holder of the check has the necessary funds
deposited with their financial institution.
4. Cashier’s Check – these are checks issued by bank cashiers. This check also
indicates a guaranty by such bank that such an amount has been deposited to
them.
5. Company’s undelivered check – these are checks prepared by the company that
will eventually be delivered to corporate creditors or suppliers. As long as they
have not yet been delivered to the payee, the amount indicated in the check
should be considered as part of the cash of the company.
6. Company’s post-dated check – these are company’s checks that were already
delivered to the payees but they cannot be encashed or deposited yet because
the date indicated in the check has not yet arrived.
7. Company’s stale check – these are checks issued by the company to the
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suppliers and creditors and were not encashed on time. Payees like suppliers
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and creditors are usually given 6 months from the date of check to encash it. If
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such checks were not yet encashed after the 6 month period, then it is to be
considered as stale and will no longer be accepted by the bank. The creditor will
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just request for another check from the company as replacement.
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c) Bank drafts – these are documents issued by bank as evidence of money deposited to
them.
d) Postal money order – these are cash items being sent through the post office. This was
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done during earlier times when cash remittances and inter-bank transfers were not yet
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prevalent
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2. CASH IN BANK
a) Savings Account – this is the usual and regular savings account that earns interest. The
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bank depositor is usually issued a passbook for over the counter withdrawals and
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deposits. Other depositors would prefer to be issued with ATM cards since it is more
accessible than the traditional over the counter.
b) Checking Account – The bank will issue a checkbook to the depositor upon opening of
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the account. This will be used to issue check payment to creditors and suppliers. This is
safer because there is no need to carry huge amounts of cash anymore. Checking
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accounts do not usually earn interest income though some banks are giving interest to
encourage more depositors.
c) Bank accounts in foreign currency – these are cash deposited in foreign countries and
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are denominated in different currencies. Following the monetary unit concept, all items
in the financial statement should be stated in one currency only. As such, all foreign
currency should be translated to Philippine Peso using the exchange rate.
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3. WORKING FUNDS – these are cash items segregated by the company for a specific purpose only. It is
usually used for the day to day operations of the company.
a) Petty cash fund – this is usually intended to pay for small expenses incurred by the company
on a daily basis.
b) Change Fund – this will be used in the store by the cashier.
c) Payroll fund – this fund will be segregated to make sure that there will be enough funds to
pay the salaries of the employees.
d) Dividend Fund – this fund will be segregated to pay the dividends that were declared by the
corporation to their stockholders.
e) Tax fund – this fund will be segregated to pay taxes owed to BIR. This will prevent the
company from incurring additional interest and penalty on unpaid income and business
taxes to the government.
f) Interest fund – this fund will be set aside to pay interest that will become due from short and
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long term liabilities of the company.
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CASH MANAGEMENT
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It is not generally acceptable that the company possess a very low amount of cash. It may be an indicator
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that the company is no longer liquid and does not possess the capability to pay their currently maturing
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obligations.
It is likewise unacceptable that the company maintains a very high amount of cash because it would
mean that the company is not maximizing the earning potential of its assets.
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The company may employ the following to protect its cash:
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1. SEGREGATION OF DUTIES
In a company, there are 3 duties that are considered to incompatible and therefore should be
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given to 3 different persons. This is to prevent manipulation and inappropriate use of the company’s cash
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balances.
a) Authorization – the person will be in charge of the allowing the purchase requisition orders.
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Requisition orders are requests from employees to purchase the needed assets of the company.
These must be approved first by a higher level manager where the authorization function is
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given.
b) Custodian – this is usually reserved to treasurers of the company. They are in charge of safe
keeping the assets of the company. The person will be in charge of releasing the cash to
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requesting employees.
c) Recording - this is usually reserved to accountants and bookkeepers. They are in charge of
making the necessary journal entries in the books of the company. The source document that
will be used for recording will come from the employees who purchased the assets needed in
their operations.
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If all of these functions are given to one and the same person, there will always be a risk that he will use
it for his own benefit. This can happen where there is “no check and balance”
2. IMPREST SYSTEM
Two important features under the imprest system:
a) All cash receipts for the day must be deposited intact to their depositary bank - this is to prevent
huge amounts of cash to be left in the premises of the company.
b) All cash disbursements must be made through checks – paying creditors through checks is a safer
alternative for companies than handing out actual bills and coins.
3. VOUCHER SYSTEM – employees must first get the approval of a higher level management before
disbursements can be made.
4. INTERNAL AUDIT AT IRREGULAR INTERVALS - internal audit is a very common procedure for every
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company. This is to check the accuracy of the work of the every employee, especially those who are
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handling important matters like cash.
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5. PERIODIC BANK RECONCILIATION – records of the company must be reconciled with the bank
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records. This s usually done on a monthly basis.
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