Вы находитесь на странице: 1из 12


-in accounting, cash includes money and any other negotiable instruments that is payable in
money by the bank for deposit or immediate credit.
Cash includes:
Bank Drafts- are account of a bank from another bank commanding the other bank to pay in
Money Orders- when we say money orders these are issued by public entities such as banks
and government that is entitled for in demand payment or receipt of cash.
You don’t necessarily have to receive cash (pertaining to material money or cash) to debit cash.
For example, if you receive a cheque in exchange for a product an accountant can debit cash
unless it is a post-dated cheque receive. There would be an exemption depending on the post-
dated time that the cheque can be readily convertible into cash or becomes liquid.
-Accordingly, in order to be considered cash an item must be unrestricted. In short it must not
be a subject to any contractual or restrictions etc.
2 types of cash or 2 items included in cash
1.CASH ON HAND- this includes undeposited cash collections and other cash shinanigans
awaiting deposits such as customer’s checks, cashier or manager’s checks, traveler’s checks,
bank drafts and money orders.
A traveler's cheque is a medium of exchange that can be used in place of hard currency. They
can be denominated in one of a number of major world currencies
A manager's check is a secure check that a bank issues for an individual who has purchased it.
They are also called treasurer's checks, official checks and certified checks. All parties involved
in a transaction benefit from the use of a manager's check.
2.CASH IN BANK-this include demand deposit or checking account and saving deposit which
are of course unrestricted as to withdrawal.
3.CASH FUND- set aside for current purposes such as petty cash fund, payroll fund and
dividend fund
Deposit on a bank closed- non-current
IOU signed by employees- is treated as advances to employees
Vouchers paid out of collections – are classified as expenses
Checks in the order of the petty cash custodian for her salary is included in cash. Cause the
check drawn in the order of the petty cash custodian representing her salary is actually an
accommodation check.
If the sinking fund is due for within 1 year after the end of the reporting period, it shall be
Included in the cash and cash equivalents. If the term or maturity is silent it is treated as non-
current and is related to a non-current liability.
Petty Cash fund less unreplenished vouchers, less IOU or employee checks is equal to the net
petty cash included in cash or cash and cash equivalents.
Petty cash should not have a negative balance
Certificate of Deposit is a non-current investment
Postdated check and undelivered or unreleased check can never be treated as outstanding
check. Certified Customer check is included in cash because when a specific check from a
customer was certified it means that it was received by the bank and was credited to our
Cash advances to affiliates or subsidiary is a non-current investment

-short term and highly liquid investments that are readily convertible into cash and so near
their maturity that they do not present any insignificant risk of changes in value because of
changes in interest rates.
-the standard further states that “only highly liquid investments that are acquired 3 months
before maturity can qualify as cash equivalents.
Equity securities cannot qualify as cash equivalents because shares do not have maturity dates.
However, preference share with specified redemption date and acquired 3 months before
maturity can qualify as cash equivalents.
Note that what is important is the date of purchase
Thus, if you purchased a treasury bill 1 year ago that has only 3 months before maturity cannot
qualify as cash equivalents.
Cash in excess of cash for current operations must be invested in some type of revenue earning
investments. Such as time deposits, money market instruments, and treasury bills for the
purpose of earning interest income.
Classification of excess cash
Investments in time deposit, money market instrument and treasury bills
1.If the term is 3 months or less such instruments are classified as cash equivalents and therefor
included in the caption C AND C EQUIVALENTS.
2.If the term is not 3 months but more that 3 months such investments is classified as short-
term financial assets or temporary investments and presented as current asset.
3.If the term is more than 1 year such investments are classified as non-current or long term
How ever if they become due for within 1 year after the reporting period. Then they shall be
classified as current financial asset or temporary investments
Measurement of Cash
Cash is measured at face Value
Cash in foreign Currency is measured at current exchange rate.
If the bank or financial institution holding the funds of an entity is in some kind of financial
difficulty or is in bankruptcy, cash should be written down to its estimated realizable value if
the amount recoverable is estimated to be lower than its face amount.
Cash set aside for current purposes or current operations examples includes the ff:
Petty Cash fund, Payroll fund, travel fund, interest fund, dividend fund, and tax fund.
Cash set aside for non-current purposes are of course regarded as non-current. Usually these
are the ff: Sinking fund, preference share redemption fund, contingent fund, insurance fund
and fund for acquisition or construction of property plant and equipment.
Cash fund classification of current or non-current should parallel the liability. Therefor it shall
be classified as current if and only if the liability would be due for within one year after the end
of the reporting period.
However, Cash set aside for acquisition of non-current assets shall be classified as non-
current regardless of the year of disbursement.
Bank overdraft
- Is a credit balance in a bank account or cash in bank. And should not be offset against
debit balances on other bank accounts.
- Bank overdrafts are classified as current liability.
Note: If the question is net cash balance or cash, net of bank overdraft or bank, net of other
bank account it is ok to deduct the overdraft against other cash balances or debit balances in
other bank accounts. BUT if the question is simply asking what should be recorded then
therefor there is no need to offset or deduct. Meaning the overdraft is simply ignored.
Compensating balance- if the deposit is not legally restricted as to withdrawal because of
certain reasons such as informal compensating balance agreement, the compensating balance
is part of cash.
If otherwise the compensating balance is legally restricted as to withdrawal the balance is
classified as “cash held for compensation or cash help for compensating balance” under current
asset if the related loan is short term.
If the related loan is long term, the compensating balance is classified as non-current
Undelivered or Unreleased check
Post dated Check
Stale or Long outstanding check
A checking account is a deposit account held at a financial institution that allows withdrawals
and deposits. Also called demand accounts or transactional accounts, checking accounts are
very liquid and can be accessed using checks, automated teller machines and electronic debits,
among other


The disbursements equal the replenishment There is also reversal if not paid with end of
reporting period.
The replenishment does not equal the disbursement. When expense arise they are recorded
outright with a credit to petty cash fund. And if there is a replenishment it is simply a debit to
petty cash fund and increases the net amount of its balance. It is fluctuating because it can
increase the balance of the fund for every replenishment if the replenishment is higher than its
C. Questions
1. Q. Which statement is true?
a. Bank service charge will cause the cash balance per ledger to be higher than that reported by
the bank, all other things being equal
b. Outstanding checks will cause the cash balance per ledger to be greater than the balance
reported by the bank, all other things being equal
c. An error made by the bank by charging an amount to the depositor’s account requires a
correcting entry in the depositor’s own records
d. The cash amount shown in the balance sheet must be the balance reported in the bank
2. Q. Which item should be excluded from cash and cash equivalent on the current year-end balance
sheet of an entity?
a. The minimum cash balance in the entity’s current account which is maintained to avoid service
b. A check issued by the entity on December 27 of the current year but dated January 15 of next
c. Time deposit which matures in one year
d. A customer’s check denominated in a foreign currency

3.Q. Which of the following can qualify as cash equivalents?

A Highly liquid investments that are acquired three months before maturity
b. Highly liquid investments that are acquired three months after maturity
c. Equity securities
d. Redeemable preferred shares
Preferred shares can qualify as cash equivalent if

Statement 1 – It has a specified redemption date

Statement 2 – Acquired three months before redemption date

a. Statement 1 only
b. Statement 2 only
c. Both statements
d. Preferred shares do not qualify as cash equivalent
5.Q.Which of the following statements is false?

a. Undelivered or unreleased checks should be treated as outstanding checks

b. Undelivered or unreleased checks should be restored to the cash balance
c. Post-dated checks that are delivered should be restored to the cash balance
d. Stale checks should be restored to the cash balance

6.Postage stamps on hand are considered as

A. Bank balance
B. Prepaid expenses
C. Accounts receivable
D. Creditors

6. B

RECEIVABLES-these are financial assets that represents a contractual right to receive cash or
another financial asset from another entity.
Trade Receivables- refers to claims arising from normal business operations such as sale of
merchandise or services or is a source from ordinary course of business transact.
Accounts Receivable- are open accounts arising from sale of goods and services in the
ordinary course of business and not supported by promissory notes.
Notes Receivable-are those supported by formal promises to pay in the form of notes.
Non-Trade Receivables- represent claims from sources other than sale of merchandise or
services in the ordinary course of business transact.
For banks and other financing institution, receivables result primarily from loans to customers.
Trade Receivables- which are expected to be realized for within one year after the end of the
reporting period is classified as current.
Non-Trade receivables- which are expected to be realized for within one year, the length of the
operating cycle notwithstanding are classified as current.
Trade and Non-Trade receivables are presented in the face of financial statement as one line
item “Trade and Other Receivables”
Example of Non-Trade Receivables
Advances to or receivables from shareholders, employees, directors, and officers. If collectible
for within one year, such advances or receivables should be classified as current asset, and if
otherwise non-current.
Advances to affiliates is usually treated as a long term or non-current investment.
Advances to supplier for the acquisition of merchandise is classified as current asset. Advances
to supplier is treated as non-trade though it is a business thing.
Subscription receivable-are current assets if collectible for within one year. If otherwise will be
shown as a deduction to subscribed share capital.
Creditor’s account may have a debit balance, and these are classified as current asset.
If the debit balance is immaterial or not material, an offset may be made against the creditor’s
account with credit balance to show the net accounts payable that may be presented.
Special Deposits on contract bids are usually classified as non-current asset because such
deposits are likely to remain outstanding for a considerable amount of time
However, such deposits that are collectible currently should be classified as current asset.
Accrued income such as dividends receivable, accrued rent income, accrued royalty’s income
and accrued interest on bond investment are usually classified as current.
Claims receivable such as claims against common carriers for losses or damages, claim for
rebates and tax refunds claims from insurance entities are normally classified as current assets.
Initial Measurement of Accounts Receivable
At initial measurement accounts receivable are recorded at fail value plus transaction cost that
are attributable to the acquisition.
The fair value is usually the transaction price, meaning the fair value of the consideration given.
For short term receivables the fair value is usually the face amount.
Since Discounting a short-term receivable should not be done because discounting is
immaterial when it comes to short term receivables.
Accordingly, accounts receivable should be measured initially at face amount or original invoice
After initial recognition/ subsequent to its initial recognition the A/R will then be measured at
amortized cost subsequent to its initial recognition
The amortized cost has more relevance on long term note receivable.
The term nrv is preferably used in accounts receivable.
The nrv of an accounts receivable in the amount of cash expected to be collected or the
estimated recoverable amount.
The initial amount for the recognized A/R will then be reduced by some necessary adjustments
(allowances created) which is from the ordinary course of business. And will result to the net
recoverable amount or nrv from customers.
This is based on the basic established principle that asset should not be carried at above their
recoverable amount.

Accordingly, in computing the net realizable amount the following allowances or deductions
should be made:
Allowance for Freight Charge
Allowance for Sales Discount
Allowance for Sales Return
Allowance for doubtful accounts


- These 2 Fobs’ basically pertains to the transfer of ownership to the buyer. And if the
transfer of ownership is transferred to a certain entity. That entity is then vested with a
responsibility to pay for the freight charge. Meaning HE or She should shoulder the
Freight Collect- the freight charge is not yet paid and the common carrier will collect the same
to the buyer
Freight Prepaid- already paid by the seller
These 2 freight terms mainly pertain as to who paid or who will pay the freight charges.
Sometimes Merchandises are sold fob destination, but freight collect. Meaning the
Freight charge should be vested upon by the seller. But freight collect means that the freight
charge was not yet paid and will collect the same by the common carrier to the buyer and will
be recorded as follows:
Initial recognition will be recorded as follows
Accounts receivable (@Invoice Amount or Face Amount)
Freight Charge
Allowance for freight charge (contra account)

Receipt of cash will be recorded as follows

Allowance for freight charge
Sales Discount (if any)
Accounts Receivable (invoice amount or face value)


-the measurement of accounts receivable shall also recognize the probability that some
customers will return goods that are unsatisfactory, defective etc. or maybe they will make
other claims such as reduction in the amount due as in the case of shipment shortages.
For example, an amount of 50k represents an amount of selling price of the goods that will
probably be returned.
Sales return
Allowance for Sales Return

-Entities usually offer cash discounts to encourage prompt payment from customers. A cash
discount is a reduction from an invoice price.
A cash discount is known as sales discount on the part of the seller and purchase discount on
the part of the buyer.
Which may be expressed 5/10 n/30. Which means that the customer is entitled for a 5 percent
discount if paid with 10 days from the invoice date. And if the customer fails to pay for within
10 days the gross amount of the invoice price must be paid within 30 days from the invoice
Gross Method
-the Accounts receivable and sales are recorded at gross amount of the invoice. Which is the
common and widely used method because it is simple to apply.
Net Method
The Accounts Receivable and Sales are recorded at net amount of the invoice meaning the price
minus the discount. Significant account for net method- (Sales Discount Forfeited)- which is
classified as other income.


So, if customers are granted a certain percentage for encourage of prompt payment or is cash
discount. Then therefor estimation of discounts to be taken by the customers is possible. Which
is why there is a creation of allowance for sales discount.
For example, A/R amounting to 1,000,000 at the end of reporting period, it is reliably estimated
that the discount to be taken is 50,000. The adjustment to record the expected sales discount
Sales Discount
Allowance for Sales Discount
The adjustments may then be reversed at the beginning of the next period so that the discount
may be charged normally to sales discount account.


Business entities sell on credit rather than on cash to increase total sales and thereby increase
However, entities who sells on credit assumes the risk that some customer will not pay their
When an account becomes uncollectible, the entity has sustained a bad debt loss. This loss is
simply one of the risks of doing business on credit.
Two method are followed in accounting for this bad debt loss, namely:
1.Allowance Method-
2.Direct writeoff Method
-the allowance method requires a recognition of bad det loss if the accounts are proven to be
doubtful of collection. The journal entry to recognize the doubtful account is
The allowance for doubtful account is a deduction from accounts receivable*
If the doubtful account are subsequently found to be worthless or uncollectible the accounts
are written off as follows:

Allowance for Doubtful account

Accounts receivable
GAAP requires the use of allowance method rather than the direct writeoff method because
it conforms with the matching principle of accounting. Where as the direct writeoff method
which is the method being used for tax purposes does not conform with the matching
Moreover, accounts receivable would be properly measured at nrv.


-requires recognition of bad debt loss only when accounts are proven to be worthless or
Accounts of 30k are proven to be doubtful of collection
No entry is necessary*
Accounts are proven to be worthless
The same account which was proven to be worthless was recovered and collected
If the recovery is subsequent to the year of writeoff and the direct writeoff method is used, the
recovery may simply be credited to other income.
Doubtful accounts in the income statements
If the granting of credit and collection of accounts was under the charge of the sales manager,
doubtful accounts shall then be considered as distribution cost
If granting of credit and collection of accounts are under the charge of an officer other than
sales manager. Doubtful accounts shall then be considered as administrative expense.