ACCTG 21 CHAPTER 1 Ok

Korbel Foundation College, Inc.
Purok Spring, Brgy. Morales, City of Koronadal

Tel Number 877-2051/0228-1996
CHAPTER 1 CASH AND CASH EQUIVALENTS

ACCTG 21
INTERMEDIATE ACCOUNTING 1
Prepared by: JERIC M. TABLERO

Instructor’s Name
KFCI-Module 1
Learning Objectives
01 To understand the mission and mission of the institution.
 The vision/mission of the institution, program outcomes,
classroom rules and grading system
02 To define cash and cash equivalents.

 Definition of cash
 Cash equivalents
03 To know the valuation and statement presentation of cash.

Valuation and statement presentation of
cash
04 To understand the treatment for investment of
excess cash.
Investment of excess cash
05 To understand currency, cash fund for certain
purpose, bank overdraft and compensating balance.
 Foreign currency, cash fund for certain purpose,
bank overdraft and compensating balance
06 To determine accounting treatment for

undelivered check, postdated check delivered.
 Undelivered check, postdated check delivered
07 ToWindow
discuss different types of window dressing.
dressing, lapping and kiting
To know the accounting treatment for the two methods of petty cash fund.
08 Petty cash fund –imprest fund system and
fluctuating fund system
Content
THE KFCI VISION
KFCI-Module 1
Content
THE KFCI MISSION
KFCI-Module 1
Content
PROGRAM OUTCOMES
KFCI-Module 1
Content
CLASSROOM RULES
KFCI-Module 1
Content
GRADING SYSTEM
KFCI-Module 1
 Definition of cash
 Cash equivalents
 Valuation and statement presentation of cash
 Investment of excess cash
 Foreign currency, cash fund for certain purpose, bank overdraft and compensating balance
 Undelivered check, postdated check delivered
 Window dressing, lapping and kiting
 Petty cash fund –imprest fund system and fluctuating fund system
KFCI-Module 1
DEFINITION OF CASH
KFCI-Module 1
Definition of Cash
• From the point of view of a layman, “cash” simply means money.
• Money is the standard medium of exchange in business
transactions.
• Money refers to the currency and coins which are in circulation
and legal tender.
• However, in the accounting parlance, the term “cash” has a
special and broader meaning. It connotes more than money.
KFCI-Module 1
Definition of Cash
• As contemplated in accounting, cash includes money and any other negotiable
instrument that is payable in money and acceptable by bank for deposit and
immediate credit.
• Cash includes (because these are acceptable by the bank for deposit or immediate
encashment.)
1. checks
2. bank drafts
3. money orders
• But postdated checks received cannot be considered as cash yet because these
checks are unacceptable by the bank for deposit and immediate credit or outright
encashment.
KFCI-Module 1
Unrestricted cash
• There is no specific standard dealing with “cash”.
• The only guidance is found in PAS 1, paragraph 66, which provides that
“an entity shall classify an asset as current when the asset is cash or
cash equivalent unless it is restricted to 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 readily available in the payment of current
obligations and not be subject to any restrictions, contractual or
otherwise.
KFCI-Module 1
Cash items included in cash
a. Cash on hand - This includes undeposited cash collections and other cash items
awaiting deposit such as customer’s 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
dividend fund.
KFCI-Module 1
CASH EQUIVALENTS
KFCI-Module 1
Cash equivalents
• PAS 7, paragraph 6, defines “cash equivalents” as
short-term and highly liquid 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
investment that reacquired three months before
maturity can qualify as cash equivalents”.
KFCI-Module 1
Examples of Cash Equivalents are:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased
three months before date maturity
c. Three-month time deposit
d. Three-month money market instrument or
commercial paper
KFCI-Module 1
• Equity securities cannot qualify as cash equivalents because shares do
not have a maturity date.
• However, preference shares with specified redemption date and
acquired three months before redemption date can qualify as cash
equivalents.
• Note that what is important is the date of purchase which should be
three months or less before maturity.
• Thus, a BSP treasury bill that was purchased one year ago cannot
qualify as cash equivalent even if the remaining maturity is three months
or less.
KFCI-Module 1
• Equity securities cannot qualify as cash equivalents because shares do
not have a maturity date.
• However, preference shares with specified redemption date and
acquired three months before redemption date can qualify as cash
equivalents.
• Note that what is important is the date of purchase which should be
three months or less before maturity.
• Thus, a BSP treasury bill that was purchased one year ago cannot
qualify as cash equivalent even if the remaining maturity is three months
or less.
KFCI-Module 1
VALUATION AND
STATEMENT
PRESENTATION OF CASH
KFCI-Module 1
Measurement of cash
• Cash is measure at face value.
• Cash in foreign currency is measured at the current
exchange rate.
• If a bank or financial institution holding the funds of an
entity is in bankruptcy or financial difficulty, cash should
be written down to estimated realizable value if the
amount recoverable is estimated to be lower than the
face value.
KFCI-Module 1
Financial statement presentation

• The caption “cash and cash equivalents” should be shown
as the first line item among the current assets.
• This caption includes all cash items, such as cash on hand,
cash in bank, petty cash fund and cash equivalents which are
unrestricted in use for current operations.
• However, the details comprising the “cash and cash
equivalents” should be disclosed in the notes to financial
statements.
KFCI-Module 1
INVESTMENT OF
EXCESS CASH
KFCI-Module 1
Investment of excess cash

• Any cash accumulated in excess of that needed for current
operations should be invested even temporarily in some type of
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.
KFCI-Module 1
Classifications of investment of excess cash
Investments in time deposit, money market instruments and treasury bills should be
classified as follows:
a. If the term is three months or less, such as instruments are classified as cash
equivalents and therefore included in caption “cash and cash equivalents”.
b. If the term is more than three months but within one year, such investments classified
as short-term financial assets or temporary investments and presented separately as
current assets.
c. If the term is more than one year, such investments are classified as noncurrent or
long-term investments.
However, if such investments become due within one year from the end of the reporting
period, they are reclassified as current or temporary investments.
KFCI-Module 1
FOREIGN CURRENCY
KFCI-Module 1
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, if material, should be classified
separately among noncurrent assets and the restriction
clearly indicated.
KFCI-Module 1
CASH FUND FOR

CERTAIN PURPOSE
KFCI-Module 1
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. It is included as
part of cash and cash equivalents.
• Examples of this fund are petty cash fund, payroll fund, travel fund,
interest fund, dividend fund and tax fund.
• If the cash fund is set aside for noncurrent purpose or payment of
noncurrent obligation, it is shown as long-term investment.
• Examples of this fund are sinking fund, preference share redemption
fund, contingent fund, insurance fund and fund for acquisition or
construction of property, plant and equipment.
KFCI-Module 1
Classification of cash fund
• The classification of a cash fund as current or noncurrent should
parallel the classification of the related liability.
• For example, a sinking fund that is set aside to pay a bond
payable shall be classified as current asset when the bond
payable is already due within one year after the end of
reporting period.
• However, a cash fund set aside for the acquisition of a
noncurrent asset should be classified as noncurrent regardless
of the year of disbursement.
KFCI-Module 1
BANK OVERDRAFT
KFCI-Module 1
Bank overdraft
When the cash in bank account has a credit balance, it is said to

be an overdraft. The credit balance in the cash in bank account
results from the issuance of checks in excess of the deposits.
A bank overdraft is classified as a current liability and should not

be offset against other bank accounts with debit balances.
KFCI-Module 1
For example, an entity maintains two bank accounts:
a. Cash in bank – First Bank, which is overdrawn by 10,000.
b. Cash in bank – Second Bank, with a debit balance of 100,000.
The net cash balance is 90,000.
The proper statement classification of the two accounts is as follows:

Current asset:
Cash in bank – Second Bank 100,000
Current liability:
Cash in bank - First Bank 10,000
• Note that it is not necessary to adjust and open a bank overdraft account in the ledger.
In other words, the Cash in Bank – First Bank account is maintained in the ledger with
a credit balance.
• It is to be stated that generally overdrafts are not permitted in the Philippines.
KFCI-Module 1
Exception to the rule on overdraft
• As stated earlier, a bank overdraft should not be offset against other
bank accounts with debit balances. This rule, however, is not without
exception.
• 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”.
• Moreover, an overdraft can also be offset against the other bank account
if the amount is not material.
KFCI-Module 1
COMPENSATING
BALANCE
KFCI-Module 1
Compensating balance
• A compensating balance generally takes the form of minimum checking
or demand deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank.
For example, an entity borrows 5,000,000 from a bank and agrees to maintain a
10% or 500,000 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.
KFCI-Module 1
Classification of compensating balance
a. 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.
b. If the deposit is legally restricted because of a formal
compensating balance agreement, the compensating balance is
classified separately as “cash held as compensating
balance” under current assets if the related loan is short-term.
c. If the related loan is long-term, the compensating balance is
classified as noncurrent investment.
KFCI-Module 1
UNDELIVERED CHECK
KFCI-Module 1
Undelivered or unreleased check
• An undelivered or unreleased check is one that is merely drawn
and recorded but not given to the payee before the end of
reporting period.
• There is no payment when the check is pending delivery to the
payee at the end of reporting period.
• The reason is that undelivered check is still subject to the
entity’s control and may thus be canceled anytime before
delivery at the discretion of the entity.
KFCI-Module 1
Accordingly, an adjusting entry is required to restore the cash
balance and set up the liability as follows:
Cash xx
Accounts payable or appropriate account xx

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.
KFCI-Module 1
POSTDATED CHECK
DELIVERED
KFCI-Module 1
Postdated check delivery
A postdated check delivery is a check drawn, recorded and already given
to the payee but it bears a date subsequent to the end of reporting period.

The original entry recording a delivered postdated check shall also be
reversed and therefore restored to the cash balance as follows:
Cash xx
The reason is that there is no payment until the check can be presented to
the bank for encashment or deposit.
KFCI-Module 1
STALE CHECK OR CHECK

LONG OUTSTANDING
KFCI-Module 1
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 and this includes checks,
presentment must be made within a “reasonable time” after its
issue.
KFCI-Module 1
• 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 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.
KFCI-Module 1
If the amount of stale check is immaterial, it is simply accounted
for as miscellaneous income as follows:
Cash xx
Miscellaneous income xx

However, if the amount is material and liability is expected to
continue, the cash is restored and the liability is again set up. The
journal entry is as follows:
Cash xx
KFCI-Module 1
Accounting for cash shortage
Where the cash count shows cash which is less than the balance
per book, there is a cash shortage to be recorded as follows:
Cash short or over xx

Cash xx
The cash short or over account is only a temporary or suspense

account. When financial statements are prepared the same should
be adjusted.
KFCI-Module 1
Hence, if the cashier or cash custodian is held responsible for the
cash shortage, the adjustment should be:
Due from cashier xx

However, if reasonable efforts fail to disclose the cause of the
shortage, the adjustments is
Loss from cash shortage xx
KFCI-Module 1
Accounting for cash overage
Where the cash count shows cash which is more than the balance
per book, there is a cash overage to be recorded as follows:
Cash xx
Note that whether it is a cash shortage or cash overage, the

offsetting account is cash short or over account. Such account
should be adjusted when statements are made.
KFCI-Module 1
The cash overage is treated as miscellaneous income if
there is no claim on the same.
Miscellaneous income xx
But where the cash overage is properly found to be the

money of the cashier, the journal entry is:
Payable to cashier xx
KFCI-Module 1
WINDOW DRESSING
KFCI-Module 1
LAPPING
KFCI-Module 1
KITING
KFCI-Module 1
PETTY CASH FUND –

IMPREST FUND SYSTEM
KFCI-Module 1
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
KFCI-Module 1
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.
• The imprest fund system is the one usually followed in handling petty
cash transactions.
KFCI-Module 1
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.
KFCI-Module 1
Accounting procedures
a. A check is drawn to establish the fund.
Petty cash fund xx
Cash in bank xx
KFCI-Module 1
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.
KFCI-Module 1
c. Replenishment of petty cash payments.
 Whenever the petty cash fund runs low, a check is drawn to replenish the
fund.
 The replenishment check is usually equal to the petty cash
disbursements. It is at this time that the petty cash disbursement are
recorded as follows:
Expenses xx
Cash in bank xx
 It is to be pointed out that the petty cash disbursements should be
replenished only by means of check and not from undeposited
collections.
KFCI-Module 1
d. At the end of the accounting period, it is necessary to adjust the
unreplenished expenses in order to state the correct petty cash balance as
follows:
Expenses xx
Petty cash fund xx
 The adjustment is to be reversed at the beginning of the next accounting
period.
 The reversal is made in order that the normal 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.
KFCI-Module 1
e. An increase in the fund is recorded as
follows:
Petty cash fund xx
Cash in bank xx
KFCI-Module 1
f. A decrease in the fund is recorded as
follows:
Cash in bank xx
Petty cash in fund xx
KFCI-Module 1
Illustration
2017
Nov. 10 The entity established an imprest fund of
10,000.
Petty cash fund 10,000
Cash in bank 10,000
KFCI-Module 1
Illustration
2017
Nov. 29 Replenished the fund. The petty cash items include the
following:
Currency and coin 2,000
Supplies 5,000
Telephone 1,800
Postage 1,200
KFCI-Module 1
Illustration
2017
Nov. 29 The journal entry to record the replenishment is:
Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000
KFCI-Module 1
Illustration
2017
Dec. 31 The fund was not replenished.
The fund is composed of the following: currency and coin 7,000,
supplies 1,500, postage 500, miscellaneous expense 1,000.
Supplies 1,500
Postage 500
Miscellaneous expense 1,000
KFCI-Module 1
2018
Jan. 1 The adjustment made on December 31, 2017 is reversed.
Supplies 1,500 Postage
500
KFCI-Module 1
2018
Feb. 1 The fund is replenished and increase to 15,000.
 The composition of the fund: currency and coin 1,000, supplies 4,500, postage
3,000 and miscellaneous expense 1,500.
Supplies 4,500
Postage 3,000
Cash in bank 14,000
 The total amount of the check drawn is 14,000 representing the petty cash
disbursements of 9,000 and the fund increase of 5,000.
KFCI-Module 1
PETTY CASH FUND –

FLUCTUATING FUND
SYSTEM
KFCI-Module 1
Fluctuating fund system
 The system is called “fluctuating fund system”
because the checks drawn to replenish the
fund do not necessarily equal the petty cash
disbursements.
 The replenishment checks are simply drawn
upon the request of the petty cashier.
KFCI-Module 1
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 xx
Cash in bank xx
KFCI-Module 1
b. Payment of expenses out of the petty cash fund:
Expenses xx
Petty cash fund xx
 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.
KFCI-Module 1
c. Replenishment or increase of the fund:
Petty cash fund xx
Cash in bank xx
 The replenishment check may or may not be

the same as the petty cash disbursements.
KFCI-Module 1

d. At the end of the reporting
period, no adjustment is necessary
because the petty cash expenses
are recorded outright.
KFCI-Module 1

e. Decrease of the fund is recorded
as follows:
Cash in bank xx
Petty cash fund xx
KFCI-Module 1
Illustration
Nov. 10 The entity established a petty cash fund of
10,000.
Cash in bank 10,000
KFCI-Module 1
Illustration
Nov. 11-28 Petty cash disbursements amounted
to 8,000.
Expenses 8,000
KFCI-Module 1
Illustration
Nov. 29 Issued a check for 10,000 to replenish the fund.
Cash in bank 10,000
 At this point, the petty cash balance per book is 12,000.
KFCI-Module 1
Illustration
Dec. 1-30 Petty cash expenses amounted to
9,000.
Expenses 9,000
KFCI-Module 1
Illustration
Dec. 31 Issued a check for 15,000 to replenish the fund.
Cash in bank 15,000
 At this point, the petty cash balance is 18,000.
KFCI-Module 1
QUESTIONS
1. Define cash.
2. Explain the meaning of unrestricted cash.
3. Define cash equivalent.
4. Explain the measurement of cash.
5. Explain the financial statement presentation of “cash and cash equivalents”
6. Explain the classification of investments of excess cash in time deposits, money market instruments and treasury bills.
7. Explain the treatment of foreign currency.
8. Explain the classification of a cash fund.
9. Explain a bank overdraft.
10. Explain a compensating balance.
11. Explain undelivered check, postdated check delivered and stale check.
12. Explain the accounting for cash shortage or cash overage.
13. Explain the imprest system of internal control.
14. What is a petty cash fund?
15. Explain the two methods of accounting for petty cash fund.
KFCI-Module 1
Highlight Summary
KFCI-Module 1

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Korbel Foundation College, Inc.

Purok Spring, Brgy. Morales, City of Koronadal

CHAPTER 1 CASH AND CASH EQUIVALENTS

Prepared by: JERIC M. TABLERO

02 To define cash and cash equivalents.

03 To know the valuation and statement presentation of cash.

06 To determine accounting treatment for

THE KFCI VISION

THE KFCI MISSION

Financial statement presentation

Investment of excess cash

CASH FUND FOR

When the cash in bank account has a credit balance, it is said to

A bank overdraft is classified as a current liability and should not

The proper statement classification of the two accounts is as follows:

STALE CHECK OR CHECK

Cash short or over xx

The cash short or over account is only a temporary or suspense

Note that whether it is a cash shortage or cash overage, the

But where the cash overage is properly found to be the

PETTY CASH FUND –

Petty cash fund

PETTY CASH FUND –

 Under this system, the disbursements from the petty

 The replenishment check may or may not be

Fluctuating fund system

Fluctuating fund system

 At this point, the petty cash balance per book is 12,000.

 At this point, the petty cash balance is 18,000.

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