Accounting for CASH AND CASH EQUIVALENTS
ODM
DEFINITIONS (Excerpts from IAS 7)
CASH
comprises cash on hand and demand deposits.
CASH EQUIVALENTS
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.
GENERAL RULE FOR RECOGNITION, MEASUREMENT, AND DISCLOSURE
The item should be unrestricted for use. This means that the cash must be readily available for the payment of current
obligations and not be subject to any restrictions, contractual or otherwise.
Items of cash and cash equivalents are measured at their face values.
Cash and Cash equivalents are disclosed as one- and first-line item in the current asset section on the face of the balance
sheet.
ITEMS INCLUDED IN “CASH”
CASH IN BANK4
CASH ON HAND
1
Undeposited Collections ;
- Bills and Coins
- Customers’ Personal Checks
- Cashier’s Checks
- Manager’s Checks
- Traveler’s Checks
- Bank Drafts2
- Money Orders3
Company’s own;
- Savings Account
- Checking/ Current/ Demand-deposit Account
- Foreign Currency Deposit5
- Compensating Balance6
- Undelivered Checks
- Delivered but Post-dated or Stale Checks
CASH IN FUND
For Current Purpose7, such as;
- Petty Cash Fund
- Revolving Fund8
- Payroll Fund
- Change Fund
- Dividend Fund
- Interest Fund
- Tax Fund
- Travel Fund
ITEMS TO BE TREATED AS “CASH EQUIVALENTS”
REMEMBER: Cash equivalents are;
Convertible into cash easily
Acquired not more than three months before maturity
Short-term
Highly liquid investments
Note: Criteria would be 12 months for cash in funds and
3 months for cash equivalents.
EXAMPLES
Three-month Treasury Bill
90-day Money Market Instrument9
90-day Commercial Paper10
Three-month Time Deposit11
One-year Treasury Bill acquired three months (or less) before maturity12
Redeemable preference shares that are acquired three months or less
before their specified redemption date.
RULE TO OFFSET (Offsetting account with negative balance to account with positive balance)
If a cash-in-bank (deposit) account obtained a credit balance (“Overdraft” or “Overdrawn”), generally, this shall be
presented in the current liabilities section of the balance sheet as “Bank overdraft”. This overdraft can be offset to other
account with debit balance only if both accounts are maintained in one bank and be labeled as “Cash, net of overdrafts”.13
1
Undeposited check collections must not be post-dated to be considered as “cash”.
Bank Drafts are guarantees by bank to advance funds on the demand by the party to whom the draft was directed.
3 Money Orders are similar to bank drafts but are drawn from post offices or other financial institutions.
4 If the bank, where the account of the company is deposited, is in financial difficulty, the account shall be measured at its estimated realizable value and shall be
reported as part of the receivables.
5 Foreign Currency Deposit is measured at its current or closing exchange rate.
6 Compensating Balance is a minimum amount that must be maintained in an entity’s bank account as support for funds borrowed from the bank. This amount can be
used by the bank as cushion for the days when cash demands are greatest, and deposits fail to materialize. A compensating balance that is restricted as to withdrawal
shall not form part of “cash”, instead it will be reported depending on the related loan to which it was created and be disclosed as “Cash held as compensating
balance”.
7 If the fund is not for current purpose, the item should be reported in the noncurrent assets section under the caption “Long-Term Investments”. Example of funds
that are typically for noncurrent purposes are sinking fund, preferred redemption fund, contingency fund, insurance fund, depreciation fund or asset replacement
fund, and plant expansion fund.
8 Revolving fund is a fund similar to the petty cash fund but is used for a limited or specific purpose set by the management (e.g. revolving funds held by sales
representatives and revolving funds held by field engineers in a construction firm.
9 Money Market Instruments are investment portfolios of short-term securities.
10 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.
11 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.
12 Treasury bills is a short-term obligation issued by the government usually at a discount.
13 Bank borrowings are generally considered to be financing activities. However, in some countries, bank overdrafts which are repayable on demand form an integral
part of an entity’s cash management. In these circumstances, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such
banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
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Accounting for CASH AND CASH EQUIVALENTS Page 1 of 2
ACCOUNTING FOR PETTY CASH FUND
IMPREST FUND SYSTEM
Petty Cash Fund
Cash in bank
xxx
xxx
<-Disbursements->
xxx
xxx
<-Replenishment->
(Equal to Petty Cash Disbursements)
Various Expenses
Petty Cash Fund
- Fund level is fluctuating
- Perpetual
<-Establishment of the fund->
Memo in Petty Cash Journal
Various Expenses
Cash in bank
FLUCTUATING FUND SYSTEM
FUND OPERATIONS
(STAGES)
- Fund level is maintained
- Periodic
xxx
xxx
Petty Cash Fund
Cash in bank
xxx
xxx
Various Expenses
Petty Cash Fund
xxx
xxx
Petty Cash Fund
Cash in bank
xxx
xxx
(May not be equal to Petty Cash Disbursements)
<-End of the period->
Without adjusting entry
(With adjusting entry subject to reversal)
BANK RECONCILIATION
A bank reconciliation is a process which brings into agreement the cash balance per book and cash balance per bank.
A bank reconciliation statement is usually prepared monthly because the bank provides the depositor with the bank
statement as at the end of every month.
RECONCILING ITEMS
Credit memos
Book reconciling items
Debit memos
Receivable collected by the bank
Proceeds of loan directly credited by the bank
Matured time deposit transferred to current account
NSF / DAIF Checks
Technically defective checks
Bank service charges
Automatic debit of loan payment
Book errors
Deposit in transit
Outstanding checks
Bank errors
Bank reconciling items
RECONCILIATION METHODS
BOOK
ADD:
DEDUCT:
ADD/DEDUCT:
Unadjusted Balance
Credit Memos
Debit Memos
Book Errors
Adjusted Balance
ADJUSTED BALANCE METHOD
BOOK-TO-BANK METHOD
BANK-TO-BOOK METHOD
BANK
ADD:
DEDUCT:
ADD/DEDUCT:
Unadjusted Balance
Deposit in Transit
Outstanding Checks
Bank Errors
Adjusted Balance
The unadjusted cash balance per ledger and the unadjusted bank statement balance are
simultaneously adjusted.
UNADJ BOOK + CM – DM ± BOOK ERRORS = UNADJ BANK + DIT – OC ± BANK ERRORS
The reconciliation starts with the unadjusted cash balance per ledger, take effect the
appropriate adjustments for the book and from the adjusted balance, work back the
unadjusted bank balance that is reflected in the bank statement.
UNADJ BOOK + CM – DM ± BOOK ERRORS ± BANK ERRORS + OC - DIT = UNADJ BANK
The reconciliation starts with the unadjusted cash balance per bank statement, take
effect the appropriate adjustments for the bank and from the adjusted balance, work
back the unadjusted book balance that is reflected in the company’s ledger.
UNADJ BANK + DIT – OC ± BANK ERRORS ± BOOK ERRORS + DM - CM = UNADJ BOOK
PROOF OF CASH
A Proof of cash statement is a four-column expanded, two-period bank reconciliation. Its purpose is to discover possible
discrepancies in cash.
“A wise person should have money in their head, but not in their heart. ” -Jonathan Swift
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