FinAcc1 Cash and Cash Equivalents / Petty Cash Fund G.

Ong

CASH – defined as the most liquid asset of an enterprise; thus, it is usually the first item presented in the
current assets section of the balance sheet.
– to be reported as cash, it must be unrestricted and immediately available for use in the current
operations.

CASH EQUIVALENTS – are short-term investments, highly liquid investments that are both:
a. Readily convertible to known amounts of cash;
b. So near their maturity that they present insignificant risk of changes in value because of changes in
interest rates.
c. In other words, only investments with ORIGINAL MATURITIES of three (3) months or less qualify as
cash equivalents.

1. Components of Cash
a. Coin and currency on hand, including petty cash funds.
b. Negotiable papers (i.e., transferable by endorsement). Such as checks, money orders, traveler’s checks,
bank draft, and cashier’s checks.
c. Money market funds.
d. Passbook savings accounts
e. Deposits held as compensating balance against borrowing arrangements with a lending institution which
are NOT legally restricted.
f. Checks written by the enterprise, but not mailed until AFTER the financial statement date should be
ADDED BACK to the cash balance.

2. Items Excluded from Cash

Classification
1. Time Certificates of Deposit Either a temporary or long-term investment depending upon
maturity date and managerial intent.
2. Deposits in banks under Segregate from unrestricted cash.
receivership or in foreign banks
which are restricted as to Classify as a current or non-current asset depending upon expected
withdrawal and/or transfer. date of availability.

3. Legally restricted deposits held as a. Compensating balances against a short-term borrowings, classify
compensating balances against as current asset but segregate from unrestricted cash.
borrowing arrangements with a b. Compensating balances against a long-term borrowings, classify
lending institution. as non-current asset in either the investments or other asset
section.

4. Restricted cash Classify based upon the date of availability or disbursement.

a. If restricted for a current asset or current liability, classify as a
current asset but segregate from unrestricted cash.
b. If restricted for a non-current asset or non-current liability (e.g.,
cash to be used for plant expansion or the retirement of long-term
debt), classify as a non-current asset in either the investments or
other assets section regardless of whether the cash is expected to
be disbursed within one year of the financial statement date.

5. Cash fund for certain purpose.
If cash is to be used for current operations, it is part of cash and
cash equivalents.

If cash is set aside for non-current purpose, it is classified as long-
term investment.

If cash is set aside for payment of non-current obligation but
payable is already due within one year from balance sheet date, it
should be classified as Current asset.

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FinAcc1 Cash and Cash Equivalents / Petty Cash Fund G. Ong
6. Postdated checks received from Classify as receivable.
customers

7. IOU’s from officers or employees Classify as receivable.

8. Postage stamps Classify as supplies or a prepaid expense.

9. Cash in foreign currency Should be translated to the Philippine pesos using the current
exchange rate.

3. Other Items Affecting Cash

Accounting Treatment
A. Bank overdraft
It should be classified as Current Liability.
A credit balance in the cash in
It should NOT be offset against OTHER BANK accounts with
bank account resulting from the DEBIT balances.
issuance of checks in excess of
When the company maintains two or more accounts in ONE
the amount on deposit. BANK and one account results in an overdraft, such overdraft
maybe 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”

B. Undelivered / Unreleased checks
It should be ADDED back to the cash balance.

Checks that are merely drawn
An adjusting entry is required to restore the cash balance and set
and recorded but not given to up the liability as follows:
the payees. There is no payment
when the checks are pending Cash xxx
delivery to the payees on balance Accounts payable or appropriate account xxx
sheet date.

C. Post-dated checks and delivered
It should be ADDED back to the cash balance.
Checks drawn, recorded and
The original entry recording these checks should be reversed as
already given to the payees but follows:
they bear a date subsequent to Cash xxx
the balance sheet date. Accounts payable or appropriate account xxx

D. Stale checks or checks long
In banking practice, checks become stale if not encashed within
outstanding six months from the time of issuance. However, company policies
When the checks are not should be considered.
encashed by the payees within a
relatively long period of time, they
If the amount is immaterial, it is simply accounted for as
are said to be “stale.” In banking miscellaneous income. The accounting entry is as follows:
practice, checks become state if not Cash xxx
encashed within 6 months from Miscellaneous income xxx
time of issuance.

If the amount is material and liability is expected to continue, the
cash is restored and the liability is again set up. The accounting
entry is as follows:
Cash xxx
Accounts payable or appropriate account xxx

4. Accounting for cash shortage

Cash shortage – when the balance of cash per cash count is less than the balance per book.
1. The entry to record cash shortage Cash short or over* xxx
Cash xxx
* a temporary or suspense account.

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FinAcc1 Cash and Cash Equivalents / Petty Cash Fund G. Ong
2. If the cashier or cash custodian is Due from cashier xxx
held responsible for the cash Cash short or over xxx
shortage.

3. However, if reasonable efforts fail Loss from cash shortage** xxx

to disclose the cause of the Cash short or over xxx
shortage. ** if the amount is immaterial, it can be debited to miscellaneous
expense.

5. Accounting for cash overage

Cash overage - when the balance of cash per cash count is more than the balance per book.
1. The entry to record cash overage. Cash xxx
Cash short or over* xxx
2. The cash overage is treated as Cash short or over xxx
miscellaneous income if there is no Miscellaneous income xxx
claim on the same.

3. However, when the cash overage is Cash short or over xxx

properly found to be the money of Payable to Cashier xxx
the cashier.

Petty Cash - is money set aside to pay small expenses which cannot be paid conveniently by means of check.

 Note: There are some instances when it may be economical and convenient to pay in cash rather than issue checks, that’s
why it becomes necessary to establish a Petty Cash Fund.

1. Methods of Handling Petty Cash Fund

a. Imprest Fund System - 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.

b. Fluctuating Fund System - checks drawn to replenish the fund do not necessarily equal the petty cash
disbursement, resulting to the increase and decrease of the petty cash fund.

 Note: The Imprest fund system is the one usually followed in handling petty cash transactions.

2. Accounting for Petty Cash Fund – Imprest System

a. Established of an imprest fund. Petty Cash Fund xxx
Cash in bank xxx

b. Payment of expenses out of the - No Entry -

fund.

c. Replenishment of petty cash Expenses (itemized) xxx

payments Cash in bank xxx

d. End of accounting period entry if Expenses (itemized) xxx

the fund is not replenished. Petty Cash Fund xxx

e. Adjustment made on the next Petty Cash Fund xxx

accounting period. (if letter d was Expenses (itemized) xxx
made)

f. *To increase the petty cash fund. Petty Cash Fund xxx
Cash in bank xxx

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FinAcc1 Cash and Cash Equivalents / Petty Cash Fund G. Ong
g. *To decrease the petty cash fund. Cash in bank xxx
Petty Cash Fund xxx

3. Accounting for Petty Cash Fund – Fluctuating System

a. Established of a fluctuating fund. Petty Cash Fund xxx
Cash in bank xxx

b. Payment of expenses out of the Expenses (itemized) xxx

fund. Petty Cash Fund xxx

c. Replenishment or increase of petty Petty Cash Fund xxx

cash. Cash in bank xxx

d. End of accounting period entry if - No adjustment needed -

the fund is not replenished.

e. *To decrease the petty cash fund. Cash in bank xxx

Petty Cash Fund xxx

 Note: Cash is valued at FACE VALUE. Cash in foreign currency is value at the current exchange rate, in the
absence of exchange rate as of the balance sheet date, the available exchange rate nearest to the balance sheet
should be the basis of conversion.

 Note: If the fund is in a financial institution that is in bankruptcy, insolvency or financial difficulty, the amount
should be written down to ESTIMATED REALIZABLE VALUE, if the amount recoverable is estimated to be
lower than the face value.

 Note: Good internal control system (check and balance) requires that all cash receipts should be deposited in the
bank intact (no expenses should be disbursement from cash collected from sales or customers), and all cash disbursements
should be made through the issuance of check (small amount of expenses are made through the petty cash fund.)

 Note: Custodianship, Authorization and Recording (C.A.R.) should be assigned to different person, as to
maintain a check and balance of the transaction.

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FinAcc1 Cash and Cash Equivalents / Petty Cash Fund G. Ong

Illustration: Accounting for Petty Cash Fund – Imprest System

11/05 – Established of an imprest fund Petty Cash Fund 5,000
of P5,000. Cash in bank 5,000

11/05 – 11/28 Payments out of the

fund: Supplies P2,500, Telephone - No Entry -
P900, Miscellaneous P600.
11/29 – Replenishment of petty cash Supplies 2,500
payments. Telephone 900
Miscellaneous 600
Cash in bank 4,000

11/29 – 12/29 Payments out of the

fund: Transportation P250, Supplies - No Entry -
P750, Miscellaneous P500.

12/30 – The fund was not replenished. Transportation 250

Supplies 750
Miscellaneous 500
Petty Cash Fund 1,500

(The amount of petty cash to be reported in the balance is

P3,500)

01/02 – Reversing entry to the entry of Petty Cash Fund 1,500

12/30. Transportation 250
Supplies 750
Miscellaneous 500

01/25 – The fund is replenished and Petty Cash Fund 5,000

increased to P10,000. The fund is Transportation 1,500
composed of the following: Coins and Supplies 2,250
currencies P500, Supplies P2,250, Miscellaneous 750
Transportation P1,500, Miscellaneous Cash in bank 9,500
P750.

*To decrease the petty cash fund. Cash in bank xxx

Petty Cash Fund xxx

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