Financial Accounting for
Non-BSA (ACCCOB2)
Lesson 04
Cash and Cash Equivalents
What is Cash?
● It is a financial asset and medium of exchange which
includes (1) currency (bills), (2) coins, (3) savings and
checking accounts, and (4) undeposited checks received
from customers, the use of which must be
unrestricted.
Categories of Cash
● Cash on Hand. These are currencies, coins, and other
cash items in the possession of the entity awaiting
deposit with the bank. Other cash items are cashier’s
checks, manager’s checks, demand drafts,
traveler’s checks, and postal money orders.
Categories of Cash - continued
● Cash in Bank. These are amounts of cash under savings
or checking accounts. Checking accounts are also called
demand deposit accounts or current accounts.
● Cash set aside for current use. These are amounts of
cash that include petty cash fund, payroll fund, travel
fund, interest fund, dividend fund, and tax fund.
Cash Equivalents
● These are short-term, highly liquid investments that
are (1) readily convertible to known amount of
cash and (2) subject to an insignificant risk of
changes in value.
Cash Equivalents - continued
● They are investments that have very short term
● They are investments that have been purchased so close
to their maturity dates that they present insignificant risk
already.
● Investments (time deposits, treasury bills, treasury
notes, and commercial papers) purchased 90 days or
less before maturity date; or purchased three (3) months
prior to maturity are classified as cash equivalents.
Cash Equivalents - continued
● Investments (time deposits, treasury bills, treasury
notes, and commercial papers) purchased beyond 90
days but not more than 1 year or 360 days before
maturity date are classified as short-term investments.
● Investments (time deposits, treasury bills, treasury
notes, and commercial papers) purchased to be held for
more than one year or 360 days are classified as long-
term investments.
Terms and Definitions
● Compensating balance – it is the minimum balance that an
account holder normally maintains in his bank account if he has
obtained a loan from the bank. This is also called maintaining or
compensating balance. Compensating balances are included in
the Cash balance of the entity if they are not legally restricted;
otherwise, they are treated as Other Assets under the non-
current asset classification of the SFP. Unless the legal restriction
is explicitly stated in the problem, then the compensating balance
is deemed without legal restriction and classified under the Cash
account.
Terms and Definitions - continued
● Postdated check – check that bears a future date on
its face and as such, is not eligible for negotiation with
the bank. For financial statement purposes, postdated
checks should not form part of the Cash balance of
the entity as of a given cut-off date.
Terms and Definitions - continued
● Stale check – check that has not been negotiated
with the bank for quite some time. In practice, a
check is considered stale if it is not negotiated with
the bank within six months after its date. Stale check
should not form part of the Cash balance of the
holder.
Terms and Definitions - continued
● NSF check – check issued against a checking account
that has insufficient balance. NSF means “no sufficient
fund”. This check should not form part of the Cash
balance of the holder or payee. This check is also
called “DAIF” check (DAIF means “drawn against
insufficient fund”).
Terms and Definitions - continued
● Undelivered check – check that has been issued
by the entity and has been deducted already from
the cash balance but not yet mailed or delivered to
the payee as of cut-off date. The amount of this
check should be added back to the entity’s Cash
balance as of cut-off date.
Bank Overdraft
● When the Cash in Bank ledger account of the depositor
has a credit (negative) balance, it is said to be an overdraft.
● The credit balance in the Cash in Bank account results
from the issuance of check whose amounts exceed the
available deposit balance as of a given date.
● A bank overdraft is classified as a current liability.
● A bank overdraft is different from a bank draft, which is a
current asset (part of cash).
How is Bank Overdraft presented in the Balance Sheet?
● As a rule, bank overdraft should not be offset against other
bank accounts with sufficient debit balances.
● Example A:
Sea Breeze Company maintains two checking accounts (CAs):
One with Premiere Bank and another with Summer Bank. At
year end 2024, the two accounts had the following balances:
Premiere CA - ₱54,700 – normal debit balance
Summer CA – (₱23,500) – credit balance (overdraft)
Bank overdraft - continued
Under the foregoing rule, the correct presentation of the two bank
account balances should be:
● Under the current asset section of the balance sheet, Premiere
CA should be presented at its balance of ₱54,700 as part of Cash
and Cash Equivalents.
● Under the current liabilities section, Summer CA should be
presented as:
Bank Overdraft - ₱23,500
Bank Overdraft – continued
● When an entity maintains two or more checking accounts in one bank only,
and one account results in an overdraft, such overdraft can be offset against
the other account(s) with sufficient debit balance.
● Example B:
Sea Breeze Company maintains two checking accounts with Premiere Bank:
CA #1 and CA #2. At year-end 2024, CA #1 had a debit balance of ₱54,700
while CA #2 had a credit balance of ₱23,500.
● Under this rule, the bank overdraft in CA #2 can be offset against the debit
balance of CA #1, so that ONLY the net amount of ₱31,200 (P54,700-
P23,500) is presented as part of Cash and Cash Equivalent in the balance
sheet.
Bank Overdraft - continued
● Furthermore, an overdraft can also be offset against an account
maintained by the entity in another bank if the amount is not
material.
● Example C:
Sea Breeze Company maintains checking accounts with two banks:
Premiere Bank (CA #1) and Summer Bank (CA #2). At year-end
2024, CA #1 had a balance of ₱54,700 while CA #2 had an overdraft
of ₱1,700, which Sea Breeze deemed immaterial as to amount.
● Under this rule, CA #2 (overdraft) is offset against CA #1 and the net
amount of P53,000 is presented as part of Cash and Cash
Equivalents in the Balance Sheet.
Cash Set Aside for Acquisition
of Non-Current Assets
● Once an amount of cash has been set aside or restricted
for a special purpose like acquisition of land, it becomes
a non-current asset and will no longer form part of the
entity’s cash and cash equivalents since the amount is no
longer available for immediate use.
What is Internal Control?
● It is a procedure or policy put in place by management
to safeguard assets, promote accountability, increase
efficiency, and stop fraudulent behavior.
● For more details, please read your textbook on page 19
and 20.
Internal Control Measures for Cash
1. The person in charge of receiving and depositing cash
should not be the person preparing the bank
reconciliation.
2. Access to cash should be limited only to those duly
authorized to handle cash.
Internal Control Measures for Cash - continued
3. Accountable forms like check books, official receipts,
invoices, and vouchers should be kept in safe or vault
to prevent unauthorized use.
4. The Imprest System and Voucher System should be
adopted by the entity to monitor and control the
movement of cash.
Internal Control Measures for Cash - continued
5. Cash holdings of the cash custodian should be
subjected to surprise cash counts by the internal
auditor or accountant.
6. Bank reconciliation should be thoroughly
conducted by the accountant and books of accounts
should be reviewed by the auditor.
The Voucher System
● It is an internal control measure for cash payments or
disbursements using vouchers.
● All purchases are on credit and paid only after the
supporting vouchers have been verified and approved
for payment by a responsible officer.
● For more details, read your textbook on page 21.
The Imprest System
● It is an internal control for both cash receipts and cash
payments.
● Cash receipts are deposited intact daily to the Bank
● Cash payments are made through issuance of checks,
except for small expenses which are paid through the
Petty Cash Fund.
The Imprest System - continued
● The Petty Cash Fund is a special type of cash that is set
aside for current purpose, which is to pay petty or small
expenses using an approved petty cash voucher.
● The fund is managed by a Petty Cash Custodian or
Petty Cashier.
The Imprest System - continued
● Regular payments from the fund decrease its balance.
These payments are evidenced by petty cash vouchers,
awaiting replenishment.
● At year end, the amount of Petty Cash Fund to be
included in the Cash balance will only be the
currencies (bills) and coins. Total amount of
unreplenished petty cash vouchers are excluded.
● For more details, read your textbook on page 21-23.
Bank Reconciliation (pages 23-28)
● It is the process of putting into agreement the cash
balance per records of the entity with the cash balance
per bank statement.
● Most often, these two cash balances would not be
equal; thus, the need for bank reconciliation.
Bank Reconciliation - continued
● It is the responsibility of the accountant to determine
the reconciling items to be able to correctly prepare a
bank reconciliation statement.
● The reconciling items are grouped under the
following:
A. Timing difference
B. Errors in recording
Reconciling Items
A. Under Timing Difference
1. Deposit in Transit – deposit already recorded by the entity
but not yet recorded by the bank. As a reconciling item,
this is ADDED to the Balance Per Bank.
2. Outstanding check – check already issued by the entity
but not yet recorded by the bank. As a reconciling item,
this is DEDUCTED from the Balance Per Bank.
Reconciling Items
A. Under Timing Difference - continued
3. NSF check – check already recorded by the bank as a deduction
from the account of the entity but not yet recorded by the entity.
As a reconciling item, this is DEDUCTED from the Balance Per
Books.
4. Bank credit memo – amount already credited by the bank to the
account of the entity but not yet recorded by the entity. As a
reconciling item, this is ADDED to the Balance Per Books
Reconciling Items
A. Under Timing Difference - continued
5. Bank debit memo – amount already deducted by the
bank from the account of the entity but not yet recorded
by the entity. As a reconciling item, this is DEDUCTED
from the Balance Per Books.
Reconciling Items
B. Under Error in Recording
● General Rule: The party that committed the error should
correct its own books.
1. Errors committed by the bank should be corrected under the
Balance Per Bank section of the bank reconciliation
statement.
2. Errors committed by the entity should be corrected under
the Balance Per Books section of the bank reconciliation
statement.
Reconciling Items
B. Under Error in Recording
● Errors should be analyzed whether they overstated or
understated the cash balance.
▪ Overstatement errors should be deducted.
▪ Understatement errors should be added.
Next Topic – Lesson 05
Receivables
