Chapter 2: Cash and Cash Equivalents

Cash

Cash

A financial asset; a contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity

Readily Available

Conditions for Cash:

One can use it anytime and anywhere as the need arises, such as for payment of current obligations or for use in current operations

Cash on Hand

General Categories of Cash:

Cash inside one’s wallet and/or coins inside one’s pocket or purse

ex: Checks on Hand, Manager’s checks, traveler’s checks, bank drafts

Cash in bank

General Categories of Cash:

Consists of savings and checking accounts

Cash Funds

General Categories of Cash:

Funds must be set aside for current purposes

ex: petty cash fun, payroll fund, travel fund, dividend fund,

Cash Equivalents

• Short-term, highly liquid investments that are readily convertible to known amounts of cash

• Investments purchased 90 days or less before the maturity date to be classify

Compensating Balance

• The minimum balance that an account holder should maintain in a bank account

  • Still considered cash if there is no legal restriction as to its withdrawal

Postdated Checks

• Checks that bear a future date on its face

• Should be recorded as payment or collection ONLY on the specified date on its face, not at the time it was received

Stale Checks

• Checks not received by an entity but are not yet negotiated with the bank within a significant period of time after the date of issue

  • Should not form part of the cash balance of the HOLDER

NSF Check

• A check previously received by an entity from its customer as collection of the latter’s account

• If the customer’s bank account does no have the sufficient balance at the time when the entity presents the check for negotiation, the check will NOT be honored by the bank

• Should not be considered part of the cash balance of the entity

Cash Set Aside for Acquisition of Non-current Assets

• Cash for the acquisition of NCA should NOT be part of the entity’s ash and cash equivalents

Bank Overdraft

• When an entity makes withdrawals or write check that would exceed the balance of the amount in currently has with the bank, resulting in a negative balance

• Overdrafts should be recognized as a CURRENT LIABILITY

  • Overdraft can be offset with other bank accounts (within the same bank)

Voucher System

A method for authorizing and controlling cash disbursements

Cash Voucher

• A document that supports a cash transactions

• Filled out to identify what is to be paid, the amount to be paid, and the accounts to be recorded

Imprest System

A control measure for both cash receipts and cash disbursements

Petty Cash Fund

Used for small expenditures, which would otherwise be impractical and inconvenient to be paid by check

Savings Account

Bank account that earns interest and may either be a passbook savings account or an ATM savings account

Time Deposit

Bank account that earns a higher interest than a savings account, has a maturity date, and withdrawal is allowed only upon its maturity

Checking Account

Bank Account where deposits are made by filling out checks

Bank Reconciliation

A process that shows the items or factors which caused the two cash balances to be unequal

Deposit in transit

Reconciliation Errors due to Timing Difference:

This deposit is already recorded by an entity but is not yet recognized by the bank

+ Balance Per Bank

Outstanding Check

Reconciliation Errors due to Timing Difference:

Check issued and recorded by the depositor, nut the payee has not yet negotiated it with the bank

- Balance Per Bank

Bank Debit Memos

Reconciliation Errors due to Timing Difference:

Items deducted by the bank from an entity’s account but not yet recored by the entity

- Balance Per Bank

Bank Credit Memos

Reconciliation Errors due to Timing Difference:

Items added by the bank to an entity’s account but not yet recorded by the entity

+ Balance Per Books

Reconciling items due to errors

1. Determine who committed the error (if depositor, then books must be corrected; if bank, then bank must be corrected)

   1. Determine the type of error committed

Deduct

Corrective action for the cash balance: (deduct/add)

Overstatement of Deposit

Add

Corrective action for the cash balance: (deduct/add)

Understatement of Deposit

Add

Corrective action for the cash balance: (deduct/add)

Overstatement of Check Issued

Deduct

Corrective action for the cash balance: (deduct/add)

Understatement of Check Issued

Bank

Wrong Depositor’s Account is made only by which entity?