Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
FINANCIAL ACCOUNTING 1
Session 1, First Semester, SY 2020-21

LEARNING PACKET NO. 002 DATE: Sept. 7-10, 2020

TOPIC: CASH AND CASH EQUIVALENTS Week No.: 05
Session: 1

INTENDED LEARNING OUTCOME:

At the end of this learning units, the learners shall:
1. Define cash and identify the items that are included in the “Cash and Cash Equivalents” line item.
2. Account for petty cash funds and cash shortages/overages.
3. Understand the basic internal controls for cash.
4. Prepare a bank reconciliation.

I. CONCEPT NOTES

Cash includes money or its equivalent that is readily available for unrestricted use. Money is the standard medium
of exchange and the basis of accounting measurements. Other negotiable instruments that can be used to settle
obligations and are readily available for unrestricted use may form part of cash.

Cash includes cash on hand and in banks.

a. Cash on hand – refers to undeposited collections awaiting deposit and other current funds held as of the
reporting date.
b. Cash in bank – refers to deposits in banks that are available for immediate withdrawal and unrestricted
use.

Examples of Cash:
1. Coins and currencies
2. Demand deposits (checking or current accounts) and savings accounts
3. Bank Drafts – guarantees by bank to advance funds on demand by the party to whom the draft was
directed.
4. Money Orders – similar to bank drafts but are drawn from post offices or other financial institutions.
5. Checks – such as Cashier’s checks, Personal Checks, Manager’s checks, Traveller’s checks and Certified
checks received from customers or other external parties.
6. Cash funds set aside for use in current operations, such as:
a. Petty Cash Fund
b. Revolving Fund
c. Payroll Fund
d. Change Fund
e. Dividend Fund
f. Tax Fund
g. Travel Fund
h. Interest Fund
i. Other types of imprest bank accounts used in current operations

Examples of items NOT included as CASH:

1. Postdated Checks – checks dated at a future date.
2. IOUs or advances to employees
3. Cash funds not available for use in current operations, such as Sinking Fund, Plant expansion fund,
depreciation fund, Preference share redemption fund, Contingency Fund and Insurance fund.
4. Postage stamps

Postdated Checks received

Entities normally record check collections on account by debiting “Cash” and crediting “Accounts Receivable”,
regardless of whether the checks received are postdated or not. Thus, at reporting date (at year end), an
adjustment is necessary to revert back postdated checks to accounts receivable.
Example:

ABC Company received customer’s check totaling P100,000.

The entry to record the receipt of the checks is as follows:

Cash 100,000
Accounts Receivable 100,000

At the end of the reporting period, you determined that a customer’s check of P20,000, included in the collections,
is postdated.

The adjusting entry is as follows:

Accounts Receivable 20,000

Cash 20,000

Unreleased checks drawn and Postdated checks drawn

Entities normally record checks drawn by debiting “Accounts Payable” and crediting “Cash”. However, when the
checks drawn are either (a) unreleased or undelivered to the payee or (b) postdated, no payment has actually
been made. Therefore, an adjusting entry is needed to revert back the unreleased check or postdated check to
cash and accounts payable.

Example:

The entity wrote the following checks today.

 Check #1 is drawn for P10,000 and dated today but yet to be delivered to payee Mr. A next year.
 Check #2 is drawn for P15,000 and was delivered to the payee Mr. B today but the check is dated 100 years
from now.

The entry for the checks drawn is as follows:

Accounts Payable – Mr. A 10,000
Accounts Payable – Mr. B 15000
Cash 25,000

If financial statements are prepared today, both the checks drawn should be reverted back to cash and accounts
payable because:

a. There is no way Mr. A can encash check#1 because the entity still holds it.
b. Mr. B holds check#2 but he cannot yet encash it until after 100 years.

In both cases, the cash balance is reduced but no payments have actually been made. Therefore, the following
adjusting entry is necessary:

Cash 25,000
Accounts Payable – Mr. A 10,000
Accounts Payable – Mr. B 15,000
Stale Checks
When checks delivered to payees are not encashed within a relatively long period of time, normally 6 months or
more, the checks are referred to as “stale”. Stale checks are reverted back to cash.

Quick Review:

Cash includes money or its equivalent that is readily available for unrestricted use.
Postdated checks received from customers Excluded from Cash
Undelivered checks drawn Included in cash
Postdated checks drawn Included in cash
Stale Checks Included in cash

Cash Equivalents

These are “short-term, highly liquid investments that are readily convertible to known amounts of cash and which
are subject to an insignificant risk of changes in value.” (PAS 7.6)
Only debt instruments acquired within 3 months or less before their maturity date can qualify as cash
equivalents.

Examples of Cash Equivalents

1. Treasury bills, notes, or bonds acquired 3 months before maturity date.

 Treasury bill is a short term obligation issued by the government at a discount. Normally have a
maturity date of 90 days to less than a year.
 Treasury notes and treasury bonds are long term obligations issued also by the government.
Treasury notes have maturity of 1 year to less than 10 years. Treasury bonds have a maturity of 10
years or more.

2. Money market instrument or commercial paper acquired 3 months before maturity date.

 Monet market instruments are investments in portfolios of short term securities.

 Commercial papers consist of short-term, unsecured, notes payable issued in large denominations
by large companies with high credit ratings to other companies and institutional investors. The
maturity date of commercial paper is normally less than 270 days and is traded in money markets
and, thus, is highly liquid.

3. 3-month time deposit

 Time deposit is a form of a bank deposit normally made in fixed denomination, bears interest
higher than that of regular deposits, and has a pre-agreed maturity. A time deposit is evidenced by a
certificate of deposit.

Illustration:

ABC Co. holds the following short-term investments as of December 31, 20x1:

1. 1-year Treasury bill maturing on March 30, 20x2 acquired on July 1, 20x1
2. 1-year Treasury bill maturing on March 30, 20x2 acquired on December 31, 20x1.

Requirement: Which of the investments may qualify as cash equivalents?

Answer:

 Only the second T-bill qualifies as cash equivalent because it is acquired 3 months or less before
maturity date (acquired on December 31, 20x1 and matures on March 30, 20x1).

**Note that what is important is the date of acquisition which should be 3 months or less before maturity date.

Compensating Balance

Compensating balance is a minimum amount that must be maintained in an entity’s bank account as support for
funds borrowed from the bank.
 Legally restricted compensating balance are excluded from cash and shown as part of other current
assets or other noncurrent assets depending on the nature of the restriction.
 Not legally restricted as to withdrawal are included in cash.

Bank Overdraft

Bank overdraft (cash overdraft) is a negative (credit) balance in the cash in bank account resulting from
overpayment of checks in excess of the amount of deposit. Overdrafts occur only in checking accounts; not in
savings and time deposits.

Overdrafts are payable on demand; thus, they are presented as current liabilities, except in cases where
offsetting is permitted.

It should be noted that offsetting of setting of assets and liabilities is appropriate only when permitted by a PFRS.
Financial assets and financial liabilities may be offset if the entity has both:

a. a legal right of setoff; and

b. an intention to settle the amounts on a net basis or simultaneously
Illustration:

The cash balance of ABC Co. comprises the following:

Cash on hand 100,000
Cash in bank – savings BPI 200,000
Cash in bank – current BPI (80,000)
Cash in bank – deposit in escrow-Metrobank 100,000
Cash in bank – current – Metrobank (20,000)
Cash in bank – current – BDO (30,000)
Total 270,000

Additional information:
 Cash on hand includes undeposited collections of P20,000.
 The cash in bank-savings maintained at BPI includes a P50,000 compensating balance which is not
restricted.

Requirement:
Compute for the amount of cash to be reported in the financial statements.

Answer:

Cash on hand 100,000

Cash in bank – savings BPI 200,000
Cash in bank – current BPI (80,000)
Adjusted balance of Cash 220,000

Financial Statement Presentation

Cash and cash equivalents are normally presented as current assets unless they are restricted from being
exchanged or used to settle a liability for atleast twelve months after the reporting date.

Measurement of Cash

Cash is measured at face amount (face value). Cash denominated in foreign currency is translated at the current
exchange rate at the reporting date.

Internal Controls over Cash

Cash is the one asset that is readily convertible into any other type of asset. It also is easily concealed and
transported, and is highly desired. Because of these characteristics, cash is the asset most susceptible to fraudulent
activities. In addition, because of the large volume of cash transactions, numerous errors may occur in executing
and recording them. To safeguard cash and to ensure the accuracy of the accounting records for cash, effective
internal control over cash is critical.

Examples of Internal controls over cash

1. Segregation of duties
2. Imprest System – requires that all cash receipts should be deposited intact and all cash
disbursements should be made through checks.
3. Bank reconciliation – Bank reconciliation should be prepared regularly, immediately upon receipt
of the monthly bank statement, to reconcile on a timely basis the differences between the cash
balance per books and the cash balance per bank statement. The differences should be duly
investigated and accounted for.
4. Cash counts – Periodic cash counts should be performed to provide reasonable assurance that
actual cash tallies with the balance per records.
5. Minimum cash balance – Minimum cash balance should be maintained, especially for cash funds,
sufficient only to defray specific business requirements.
6. Lockbox accounts – Entities often utilize lockbox accounts to expedite cash collections and to
ensure that cash collections are deposited intact.
7. Non-encashment of personal checks from petty cash fund – encashment of personal checks from the
petty cash fund should be prohibited to discourage concealment of cash shortages.
 8. Voucher System – The voucher system is an internal control over all cash disbursements. Under
this system, a voucher is prepared for every cash disbursement in order to ensure that each
disbursement is properly authorized, made for a valid expenditure, and properly recorded.

Accounting for petty cash fund

The accounting procedures for PCF are shown below:

1. Petty cash fund is established
Petty Cash Fund xxx
Cash in bank xxx

2. Disbursement out of the petty cash fund

No journal entries are recorded when disbursements are made out of the petty cash fund. In
petty cash payments are initially recorded in a petty cash register (ex. a log book) and supported
by signed petty cash voucher.

3. Replenishment of petty cash disbursements

The PCF is replenished when its balance becomes low. This time, a journal entry is made for the
disbursements during the period that were initially recorded in the petty cash register.
Various expense accounts xxx
Cash in bank xxx
4. Subsequent changes in ledger balance of PCF
a. To increase the PCF balance:
Petty cash fund xxx
Cash in bank xxx
b. To decrease the PCF balance:
Cash in bank xxx
Petty cash fund xxx
Illustration:
On September 1, 20x1, the board of directors of ABC Co, passed a resolution for the establishment of a
P10,000 petty cash fund. Single disbursements amounting to less than P2,000 will be made through this
fund. Those amounting to P2,000 or more will be made through checks. The following were the
transactions during the period.
Sept. 1 - Established P10,000 petty cash fund
Sept. 1 through 21, 20x1 - Disbursements are made for the following:
 Groceries for use of employees in the pantry P1,400
 Transportation of the messenger boy 500
 Snacks during meetings & conferences 1,000
 Gasoline for company vehicles P3,000
 Pedicure of the secretary (authorized) 3,000
Total P8,900
Sept.22 - Total coins and currencies in the petty cash box is P500.
Replenishment is made.
Requirement: Provide the journal entries.

Sept. 1 Petty Cash Fund 10,000

Cash in bank 10,000
Sept. 1-21 No entry
Sept. 22 Pantry Supplies 1,400
Transportation Expense 3,500
Meeting & Conferences 1,000
Miscellaneous Expense 3,000
Cash shortage or overage* 600
Petty Cash Fund 9500

*Computation of cash shortage or overage account:

Coins & currencies 500
Petty cash vouchers 8,900
Total Cash count 9,400
Less: Total accountability (PCF balance) 10,000
PCF shortage (600)
Bank Reconciliation

A bank reconciliation statement is a report that is prepared for the purpose of bringing that balances of
cash (a) per records and (b) per bank statement into agreement. In addition, bank reconciliations are
made only for checking accounts.

More specifically, bank reconciliations are prepared to:

a. Explain the difference between cash balance in the accounting records and the cash balance
reported on the bank statement.
b. Arrive at the adjusted (correct) cash balance to be shown in the financial statements; and
c. Provide information for reconciling journal entries.

Pro forma bank reconciliation statement

Name of the Company

Bank Reconciliation
For the month ended September 30, 2020

Balance per books, end Pxx Balance per bank statement, end Pxx
Add: Credit Memos xx Add: Deposits in transit (DIT) xx
(xx (xx
Less: Debit Memos ) Less: Outstanding checks (OC) )
Add/Less: Book errors xx Add/Less: Bank errors xx
Adjusted Balance Pxx Adjusted Balance Pxx

Definition of items in the bank reconciliation:

 Credit Memos – are additions (bank credits) made by the bank to the depositor’s bank account
but not yet recorded by the depositor.

Examples:
1. Collections made by the bank on behalf of the depositor.
2. Interest income earned by the deposit.
3. Proceeds from loan directly credited or added by the bank to the depositor’s account.
4. Unrolled-over matured time deposits transferred by the bank to the entity’s account.

 Debit Memos – are deductions (bank debits) made by the bank to the depositor’s bank account
but not yet recorded by the depositor.

Examples:
1. Bank service charges
2. No sufficient funds checks (NSF) or Drawn against insufficient funds checks (DAIF) – these are
checks deposited and already recorded by the bank but subsequently returned to the
depositor because the drawer’s fund is insufficient to pay for the check.
3. Automatic debits
4. Payment of loans

 Book errors – errors committed by the depositor.

 Deposits in transit – are deposits made but not yet credited by the bank to the depositor’s
accounts.
 Outstanding checks – are checks drawn and released to payees but are not yet encashed with the
bank.
Outstanding checks excludes the following:
1. Certified Checks – The bank, when certifying checks, automatically debits (reduces) the
depositor’s account and assumes direct liability on paying the certified checks to the
payee. Certified checks are already deducted from the account, thus, they are no longer
outstanding.
 2. Stale Checks – checks that remain outstanding for a relatively long period of time are
reverted back to cash, meaning they are added back to the cash balance per books and
are excluded from outstanding checks.

 Bank errors – errors committed by the bank.

Illustration:

ABC Co. receives its July 20x bank statement and immediately prepares its July 20x1 bank
reconciliation. Relevant information follows:

a. Cash balance per books – P300,000

b. Cash balance shown on the bank statement – P430,000
c. Credit Memo – P190,000
d. Debit Memo – P30,000
e. Outstanding checks – P25,000 (including certified check of P5,000)

Requirement: Prepare the bank reconciliation

Solution:

ABC Company
Bank Reconciliation
For the month ended July 31, 2020

Balance per books, ₱300,000.0 ₱430,000.0

end 0 Balance per bank statement, end 0
190,000.0
Add: Credit Memos 0 Add: Deposits in transit (DIT) 50,000.00
(30,000.00 (20,000.00
Less: Debit Memos ) Less: Outstanding checks (OC) )
Add/Less: Book
errors - Add/Less: Bank errors -
₱460,000.0 ₱460,000.0
Adjusted Balance 0 Adjusted Balance 0

Source: 1. Intermediate Accounting 1A by Zeus Millan

2. Accounting Principles Twelfth Edition by Wiley

II. CHECKING FOR UNDERSTANDING

Sample problems:

1. On December 31, 20x1, ABC Company had the following cash balances:

Cash in banks P1,800,000

Petty cash funds (all funds were reimbursed on 12/31/x1) 50,000

Cash in banks includes P600,000 of compensating balances against short-term borrowing arrangements at
December 31, 20x1. The compensating balances are not legally restricted as to withdrawal by ABC. In the current
assets section of ABC’ December 31, 20x1, balance sheet, what total amount should be reported as cash?

a. P1,200,000
b. P1,250,000
c. P1,800,000
d. P1,850,000

2. As of December 31, 20x1, the petty cash fund of XYZ Co. with a general leger balance of P15,000 comprises the
following:
Coins and currencies P 2,550
Petty cash vouchers:
Gasoline for delivery equipment 3,000
Medical supplies for employees 2,040 5,040
IOU’s:
Advances to employees 2,220
A sheet of paper with names of several employees
together with contribution to bereaved employee,
attached is a currency of 2,400
Checks:
Check drawn to the order of the petty cash custodian 3,000
Personal check drawn by the petty cash custodian 2,400

The entry to record the replenishment of the petty cash fund includes
a. A debit to cash short/overage account of P2,190 and a credit to cash on hand of P9,450.
b. A credit to cash short/overage account of P810 and a credit to cash of P12,450.
c. A debit to cash short/overage account of P810 and a credit to petty cash fund of P12,450.
d. A debit to cash short/overage account of P2,190 and a credit to cash in bank of P9,450.

3. Entity A is preparing its February 28, 20x1 bank reconciliation statement. The following information was
determined:
 Cash balance per accounting books, Feb. 28, 20x1 ₱260,000
 Cash balance per bank statement, Feb. 28, 20x1 ₱205,000

When investigating the difference, the accountant determined the following:

a. A customer deposited ₱30,000 to Entity A’s bank account as payment for an account receivable. This is not yet
recorded in the books of accounts.
b. A ₱102,500 check deposited by Entity A during the month is not yet credited to Entity A’s account.
c. A check drawn in the amount of ₱22,500 is not yet presented to the bank for payment.
d. The bank returned a check deposit amounting to ₱5,000 because of insufficiency in the funds of the drawer.
The check was received from a customer as payment for accounts receivable.

Requirements:
a. Prepare the bank reconciliation.
b. Prepare the adjusting (reconciling) entries.

III. ANALYSIS
1. D ( 1,800,000 + 50,000 = 1,850,000)
2. D (2,550+5,040+2,220+3,000)=12,810 per count – 15,000 accountability = (2,190) shortage
3. Requirement (a): Bank reconciliation

Bal. per books, end. ₱260,000 Bal. per bank, end. ₱205,000
Add: CM 30,000 Add: DIT 102,500
Less: DM (5,000) Less: OC (22,500)
Add/Less: Book errors Add/Less: Bank errors
Adjusted balance ₱285,000 Adjusted balance ₱285,000

Requirement (b): Adjusting (Reconciling) entries

AJE (c) Cash 30,000

Accounts receivable 30,000
to record the collection of accounts receivable
AJE (d) Accounts receivable 5,000
Cash 5,000
to revert the NSF check back to accounts receivable

IV. INTEGRATION

How would you relate the topic on cash and equivalents to your situation right now, specifically we are
currently experiencing the pandemic? What are your valued assets and how will you apply internal
control on it?

Just a thought….
V. INDEPENDENT LEARNING

Second long exam on the topic of cash and cash equivalents, including bank reconciliation, will be out any
time this week. So start studying.

PREPARED BY:

________________________________________
FINACC1 Melanie M. Manuel, CPA MBA