Definition of cash From the point of view of a layman, “cash” simply me ‘any money. Money transactions. Money refers to the currency and coins which are j circulation and. legal tender. —— in counting parlance, the term “cash” has otes more than money, ig the standard medium of exchange in busin, re ~— Eevee leg However, in the ac special and broader meaning. It conn ted in accounting, cash includes money and any payable in money and d immediate credit. As contemplai other negotiable instrument that is acceptable by the bank for deposit an checks, bank-drafts and money Accordingly, cash includes bc céptable by the bank for deposit orders because these are ac or immediate encashment. For example, when checks are received in full settlement of an account receivable, cash is immediately debited. But postdated check# received cannot be considered as cash yet because these checks are unacceptable by the bank for deposit and immediate credit or outright encashment. Unrestricted cash There is no specific standard dealing with "cash". 6, which The only: guidance is found in PAS 1, paragraph 6 provides that an entity shall classify an asset as current when the asset,is cash or a cash equivalent unless it is restrict a settle a liability for more than twelve months after the end of the reporting 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 Ye subject to 8Y restrictions, contractual or otherwise.Cash items included in cash a. sh_on hand — This includes undeposited cash Sees and other cash items awaiting deposit such as customers’ checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders. b. Cash in bank — This includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividen fund. Cash equivalents PAS 7, paragraph 6, defines cash equivalents as short-term and highly hquid 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. Examples of cash equivalents are: ~ a. Three-month BSP treasury bill b. Three-year BSP treasury bill purchased three months before date of maturity ¢. Three-month time deposit d. Three-month money market instrument or commercial paper » Equii itie#cannot qualify as cash equivalents beca cue do. aot have a maturity date. r uae However, preference shares with specified redemption and acquired three months before redemption ica. Sata and iets cash equi alents. t what is important is the date of purchase whi Note three months or less before maturiy, ay which Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the remaining maturi is three months or less. redof excess cash use of cash is an important aspect of cash the entity must maintain sufficient cash Investment The control and proper management. Basically, t for use in current operations. ulated in excess of that needed for current Any cash accum' be invested even temporarily in some type of operations should 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. Classifications of investment of excess cash Investments in time deposit, money market instruments and treasury bills should be classified as follows: a. Tf the term is three months or less, such instruments are classified as cash equivalents and therefore included in the caption “cash and cash equivalents”. b. If the term is more than three months but within one year, such investments are classified as short-term financi@ assets or temporary investments and presented separately as current assets. c. ‘i : Ae ‘erm is more than one year, such investments are ied as noncurrent or long-term investments. He i i fom eh Jf such investments become due within Ot year as peas of the reporting period, they are re ied or temporary investments.Measurement of cash Cash is measured gt e Cash in foreign curreneyis rate. eS easured at the current exchang. Ifa bank or financial institution holdin, i < t ig the funds of an entity isin bankruptcy or financial difficulty, cash should be writter down to estimated realizable value if the amount recoverable is estimated to be lower than the face value. Financial statement presentation The caption cash and cash equivalents should be shown ar the first line item under current assets. This caption includes all cash items, such as cash on hand cash in bank, petty cash fund and cash equivalents which arc unrestricted in use for current operations. However, the details comprising the cash and cash equivalent: should be disclosed in the notes to financial statements. 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 should be classified separately among noncurrent assets and the restriction clearly indicated. 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, The cash fund is included as part of cash and cash equivalents, les of this fund are petty cash fund, payroll fund, travel Anarene fund, dividend fund and tax fund. On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term investment. E: les of this fund are sinking fund, preference share redemotion fund, contingent fund, insurance fund and fund for acquisition or construction of property, plant and equipment. 5cation of cash fund tion of a cash’ fund as current o : | the classification of the related abi y. Classifi The classifica should paralle’ For example, & sinking fund that is set aside to pay a bo payable shall be classified as current asset when the bel payable is already due within one year after the cid a reporting period. o However, a cash fund set aside for the acquisition of a noncurrent asset should be classified as noncurrent regardless of the year of disbursement. Bank overdraft When the cash in bank account has a credit balance, it is said to be an gverdraft. The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits. Abank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. an entity maintains two bank accounts: overdrawn by P10,000. h a debit balance of For example, a. Cashin bank — First Bank, which is b. Cash in bank — Second Bank, wit! P100,000. The net cash balance is P90,000. The proper statement classification of the two accounts is 88 follows: Current asset: Cash in bank — Second Bank 100,000 Current liability: 10,000 Bank overdraft — First Bank Note that it is not j Be necessary to adjust and open 4 overdraft account in the edger: ’ In other words, the Cash i it is other words, ash in Bank — First Bank accou” maintained in the ledger with a credit balance. It is to be i in the Peaatea shat generally overdrafts are not permitteException to the rule on overdraft 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. : An 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 pS an integral part of cash management. Compensating balance A compensating balance generally takes the form of minimum chécking 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 P600,000 minimum compensating balance in a demand deposit account. 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. 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. I sit is legally restricted because of a formal Eearaintce 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 noncurrent investment. 7| ! | fs Undelivered or unreleased check An L i is one that is drawn and recorded but not given to the payee before”! end of reporting period. the There is no payment when the check is pending delivery oe payee at the end of reporting period. ‘The reason is that undelivered check is still subject to the entiy, control and may thus be canceled anytime before delivery at thy discretion of the entity. Accordingly, an adjusting entry is required to restore the cash valance and set up the liability. Cash x Accounts payable or appropriate account a In practice, the foregoing adjustment is sometimes ignored because the amount is not very substantial and there is no evidence of actual cancelation of the check in the subsequent period. y Postdated check delivered A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a date subsequent t0 the end of reporting period. The original entry recording a delivered postdated check shall also be reversed and therefore restored to the © balance. Cash Accounts payable or appropriate account xx a i : pas reason is that there is no payment until the check cant 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. 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, presentment must be made within a reasonable time after issue. 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. In banking practice, a check becomes stale if not encashed within six 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 cancelation of a previously issued check. If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income. Cash . XX Miscellaneous income x However, if the amount is material and liability is expected to continue, the cash is restored and the liability is again set up. Cash : xx Accounts payable or appropriate account XXAccounting for cash shortage Where the cas: balance per boo! Cash short or over x Cash h count shows cash which is ] k, a cash shortage is to be recordej ty x The cash short or over account is only a temporary or sug account. When financial statements are prepared the same eg be adjusted. ‘ Hence, if the cashier or cash custodian is held responsible for cash shortage, the adjustment should be: Due from cashier Cash short or over = However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is Loss from cash shortage x Cash short or over i Accounting for cash overage Where the cash count shows cash which is more than the balance per book, a cash overage is to be recorded. xx Cash short or over a Note that whether it is a cash shortage or cash overage, the t. Such account offsetting account is cash short or over accoun' 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 = Miscellaneous income - But where the cash ove: i f i. rage is found to be them?" of the cashier, the journal ee ae Cash short or over a Payable to cashier B 10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 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 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, 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 Imprest fund system The imprest fund system is the one usually followed in handling petty cash transactions. Accounting procedures a. Acheck is drawn, to establish the fund. Petty cash fund . Cash,in bank 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, 11c. Replenishment of petty cash payments. Whenever the petty cash fund runs low, a check ; to replenish the fund. ck ig ate, The replenishment check is usually equal to th cash disbursements. ety It is at this time that the petty cash disbursement, recorded. ae Expenses - Cash in bank s It is to be pointed out that the petty cash disbursemen, should be replenished only by means of check and ny from undeposited collections. d. At the end of the accounting period, it is necessary tp adjust the unreplenished expenses in order to state the correct petty cash balance. Expenses Xx Petty cash fund x The adjustment is to be reversed at the beginning of the next accounting period. The reversal is made in order that the norm 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 a Cashin bank : f£. A decrease in the fund is recorded as: Cash in bank = Petty cash fund 12Illustration 2020 Nov. 10 29 Nov. 29 Dec. 31 2021 The entity established an imprest fund of P10,000. Petty cash fund 10,000 Cash in bank “10,000 Replenished the fund. The petty cash items include the following: Currency and coin 2,000 Supplies 5,000 Telephone 1,800 Postage 1,200 The journal entry to record the replenishment is: Supplies 5,000 Telephone 1,800 Postage 1,200 Cash in bank 8,000 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 The adjustment made on December 31, 2020 is reversed. Petty cash fund 3,000 ‘Supplies 1,500 Postage 500 Miscellaneous expense 1,000 182021 Feb. 1 os The fund is replenished and increased to P1504, The composition of the fund: Currency and coin Low Supplies 4.50, Postage 3,009 Miscellaneous expense 15a Total om Journal entry Petty cash fund 5,000 Supplies 4,500 Postage 3,000 Miscellaneous expense 1,500 Cash in bank 1400 The total amount of the check drawn is P14,00 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 i Sa aty cea dabereemacte ind do not necessarily equal The replenishment checks are si dr: of the petty cashier. simply drawn upon the request 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 x Cash in bank x b. Payment, of expenses out of the petty cash fund: Expenses x Petty cash fund . x 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. c. Replenishment or increase of the fund: Petty cash fund S Cash in bank xx 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 reverted to the general cash. Cash in bank cy Petty cash fund 16Illustration i blished a pett; 10 The entity esta Y cash fy Nov. ™ 10,000. My Petty cash fund 10,000 Cash in bank 10 Nov. 11-28Petty cash disbursements amounted to P8009 Expenses 8,000 Petty cash fund Bon Nov. 29 Issued a check for P10,000 to replenish the fung Petty cash fund 10,000 Cash in bank 10,00 At this point, the petty cash balance per book is P12,000. Dec. 1-30 Petty cash expenses amounted to P9,000. 9,000 Petty cash fund 9,000 31 Issued a check for P15,000 to replenish the fund. Petty cach fund 15,000 Cash in bank 15,000 At this point, the petty cash balance is P18,000. 16