CO2_Cash and Cash Equivalents

Cash

• Is a financial asset

• Technically speaking, a financial asset as defined by Philippine Accounting Standard 32 (PAS 32) Financial Instruments: Presentation, is 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

  • In other words, a financial asset allows us to receive cash or another financial asset of another company

• For business owners cash is a medium of exchange

  • Means that cash is exchanged either received or given up in every cash transactions. 

• It is most liquid asset

• Any instrument that is acceptable for deposit at face value to a bank or other financial institution is considered cash

Cash on hand

• Is cash inside one’s wallet and/or coins inside one’s pocket or purse

Ex. checks on hand, manager’s checks, traveler’s checks, cashier’s checks, and bank drafts (banker’s check)

Cash in bank

Consists of savings and checking accounts

Cash funds

• Include, but are not limited to, petty cash fund, payroll fund, travel fund, interest fund, and tax fund

• To be classified as cash, funds must be set aside for current purposes

RA 6426: Foreign Currency Deposit Act of the Philippines

• Covers Foreign currencies and deposits

• Any person, natural or juridical, may open foreign currency deposit accounts with any Philippine bank in good standing, provided the foreign currencies to be deposited are acceptable as part of the international reserve

The gain or loss on foreign currency translation is presented as part of profit or loss on the Statement of Comprehensive Income

Cash equivalents

• Short-term highly liquid investments readily convertible to cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates (PAS 7: Statement of Cash Flows)

• Only highly liquid investments that are acquired three months or 90 days prior to maturity regardless of its original term can qualify as cash equivalents

• PAS 7 allows investments purchased 90 days or less before maturity date to be classified as cash equivalents

• Ex. 

  • 90-day time deposits, time deposits purchased three months prior to maturity, treasury bills, commercial papers, certificate of deposits and money market placements

• <90 days

Short-term investments

• Investments whose maturity dates are over 90 days but do not exceed one year

• <90 but <360 days

Long-term investments

• Investments whose maturity dates beyond one year

• >360 days

Initial recognition

• You bought a building, if you buy it today, its __

• Happens when you purchase or acquire the asset

Subsequent recognition

• For the following months, market value might go up or down and when you record it, its called ___

• Reflect changes in the asset’s value after it has been initially recorded

Derecognition

• The time you will remove the building from your asset

• When the asset is sold, disposed of, or no longer provides economic benefit

Compensating Balance

• Minimum balance or maintaining balance

• Is the minimum balance that an account holder should maintain in his bank account at all times

• Are included in an entity’s cash balance is they could be withdrawn by the depositor without due penalties

• Is still considered as cash if there is no legal restriction as to its withdrawal. Otherwise, they should be treated as other assets

Postdated Checks

• Are checks that bear a future date on its face

• It has become the practice of some business entities to issue postdated checks as payment of liabilities and to receive postdated checks as collection from customers

• Should be recorded as payment or collection only on the specified date on its face, and not before

• The date signifies the time when it can finally be negotiated with the bank

• If there is a postdated check still on hand at the end of the year, the previous entry recording the payment of a payable or the collection of a receivable would result in an incorrect cash balance at the end of the year. For financial statement purposes, the cash balance should be corrected by reversing the previous payment or collection entry

Stale Checks

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

• In practice, if the check is not negotiated with the bank after 6 months from the date written on its faced, it is considered stale check and the bank woul no longer accept it

• Should not form part of the cash balance of the holder. Unless the issuer replaces the stale check with a new one within the current accounting period, the entity should deduct the amount from its cash amount for financial statement purposes

Ex.

if you got a check dated January 1 and you tried to cash it in August, the bank would probably not accept it because it’s too old and is now considered stale. In accounting, if a business still has a stale check that hasn’t been replaced with a new one, it should not count the amount of that check as part of its cash balance in its financial statements.

No Sufficient Fund (NSF) Checks

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

• If the customer’s bank account does not have sufficient balance at the time when the entity presents the check for negotiation, the check will not be honored by the bank and subsequently returned to the entity-depositor with a notation of ‘NSF’ or ‘no sufficient fund’

• In this case, the check should not be considered part of the cash balance of the entity

• The previous entry recording the collection from the customer should be reversed to reduce the cash balance

Cash Set Aside for Acquisition of Noncurrent Assets

• When an entity sets aside cash for the acquisition of noncurrent assets, such fund should not be part of the entity’s cash and cash equivalents

• The reason is that the fund does not meet the requirement of cash being readily available either for use in the ordinary course of business, or for settlement of a short-term obligation

• It should instead be reclassified as a non-current asset, particularly as a long-term investment

Ex.

if a business puts ₱1,000,000 in a special account just to buy new machinery next year, that money isn’t counted as "cash" on their balance sheet because it’s not available for regular use. Instead, in accounting, this money is recorded as a non-current asset, which means it’s reserved for future investments, not for daily business needs.

Bank Overdraft

• When an entity makes withdrawals or writes checks that would exceed the balance of the amount it currently has with the bank, the resulting negative balance is called an overdraft

• Such an occurrence is not accepted by the banks in the Philippines. However, should this occur, an overdraft should be recognized as a current liability, and not as a negative balance in an entity’s cash account

  • There are exceptions to this rule. If the amount of overdraft is immaterial or if the amount is material but there is another account in the same bank, the overdraft can be offset with other bank accounts

Ex.

if a company has ₱5,000 in the bank but writes checks totaling ₱7,000, it will have an overdraft of ₱2,000. In accounting, this ₱2,000 overdraft is not shown as negative cash, but instead is listed as a current liability, which means it’s money the company owes and needs to pay back soon.

Internal Control

• Is one of the most significant resources of a company

• It is also the asset most vulnerable to theft or misappropriation

• This high vulnerability of cash to irregularities should compel an entity to closely monitor its cash transactions

• A company must implement effective internal control measures to minimize, if not totally eliminate, employee fraud and accounting errors involving cash

Control of cash

• An effective system of internal control that protects cash and cash equivalents should meet 3 basic guidelines:

1. Handling cash is separate from recordkeeping for cash

2. Cash receipts are promptly deposited in a bank

3. Cash disbursements are made by check

Human error

• Limitations of internal control

  • ______

    • Negligence

    • Fatigue

    • Misjudgment

    • Confusion

  • Human fraud

    • Intent to defeat internal controls for personal gain

Human fraud

• Limitations of internal control

  • Human error

    • Negligence

    • Fatigue

    • Misjudgment

    • Confusion

  • ____

    • Intent to defeat internal controls for personal gain

Separation of cash duties

• Makes it difficult for dishonest employees to conceal their fraudulent transactions.

• Manager should check all transactions daily, as summarized by the accountant

Limiting access to cash

Total cash receipts for the day should be deposited immediately to the bank on the same day to prevent the cash custodian from using the cash for personal purposes

Proper documentation of cash receipts

• For cash receipts, the cash processing clerk should immediately record the receipt in a logbook 

• Cash receipts are easily recorded and monitored if the entity is using special journals such as the cash receipts journal

Official receipts

• Should be prepared for every cash inflow as supporting documents in posting the collection to specific customer accounts

• Are accountable forms, and their issuance should be carefully monitored

Strict control of cash disbursements

A company should ensure that all disbursements with a significant amount should be done through the issuance of checks, and the identity of the creditor’s representative receiving the check payment is verified and confirmed

Petty cash fund

For smaller disbursements

Voucher System

• A method for authorizing and controlling cash disbursements

• Prevents indiscriminate and unauthorized purchases and incurrences of expense because the whole cycle of purchasing, verifying/checking, paying, and recording requires the involvement of various employees and departments

• Cash or checks are not immediately paid upon the purchase of goods or incurrence of expense

Ex.

if a company needs to buy new computers, someone fills out a cash voucher showing what will be bought, how much it costs, and which account will be used. Before the company pays, different people and departments must review and approve the voucher, so no one can just spend money without permission-this helps prevent mistakes or dishonest spending.

Cash voucher

• A document that supports a cash transaction

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

• Once the voucher is approved, the authorized disbursing employee prepares the payment check

Unpaid vouchers file

• Prepared by the bookkeeper for every creditor

• Replaces the accounts payable ledger account normally used under the non-voucher system

Check register

Where payment is recorded once the check is signed

Imprest System

• A control measure for both cash receipts and cash disbursements

• Cash receipts are deposited intact daily to the bank and all payments of assets, liabilities, and expenses should be made by check except for small or petty expenditures

• A way for businesses to keep their cash safe and organized by making sure all money received is deposited in the bank every day, and all payments (except for small ones) are made by check

  • Means there’s a clear record of where the money comes from and where it goes, making it harder for mistakes or theft to happen

Ex. 

if a store gets cash from sales, they deposit all of it in the bank at the end of the day, and if they need to pay for new inventory, they write a check instead of using cash-only small things like buying office snacks are paid with petty cash.

Cash Receipts Journal (CRJ)

The control of cash receipts becomes more effective if a merchandising concern business is using special journals, particularly the CRJ

Intact

• Means that no portion of the total cash collections for the day should be used for the payment of assets, liabilities, or expenses

• To prevent the cash custodian from using the readily available cash for personal purposes

Control of cash disbursements

Requires that disbursements should be made by check instead of outright payment in cash, is taken care of by the voucher system

Petty Cash Fund

• The imprest system also provides an alternative method for recording small expenditures

• Since it is impractical and inconvenient for small expenditures to be paid by check, a petty cash fund is set up by the entity, out of which petty expenses are to be paid

• Purchase of small items like office supplies, fare of the company’s messenger, and snack items for officers and employees during staff meetings are usually paid out of the petty cash fund

• Is an essential part of the imprest system

Why?

• Reduce the workload of the cashier by delegating to another person: the petty cashier

• It is easier to control if similar transactions are dealt with together

Efficiency. Reduce the number of postings by adding transactions together. Although the transactions are individually insignificant they do need to be accounted for, as in total they may be significant

Petty cash cashier/custodian

Responsible for the petty cash fund

Petty cash voucher

To be filled out whenever a payment is to be made from the fund

Petty cash book

• Where the expense is recorded

• Serves as a schedule for small expenses

Cash payment journal

Where the specific expense accounts are individually recorded upon replenishment of the petty cash fund

Replenishment

The actual amount of cash is increased to equal the original amount of the fund

Cash over and short account

Used by an accountant if needed when operating a petty cash fund

Bank Reconciliation Statement

• Is a report which compares the bank balance as per company’s accounting records with the balance stated in the bank statement

• It is done by accountants to make detailed comparison of all transactions recorded by the entity against those recorded by the bank statement

• Prepared by the accountant as part of internal control

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

• When a company checks if the amount of money it thinks it has in the bank matches what the bank says in its statement

Reconciling items

By comparing the company’s records with the bank’s records to find any differences

Savings account, Time deposit, Checking account

3 MAJOR TYPES OF DEPOSIT ACCOUNTS TO THE PUBLIC

Time deposit

• Or certificate of time deposit

• Earns higher interest than savings account

• Has a maturity date

• Withdrawal is allowed only upon maturity

Checking account

• Or current account or demand deposit account

• Traditional = do not earn interest

• Current = minimal rate of interest

Balance per ledger

• Or balance per books

• Cash shown in a company’s records

Balance per bank

The account shown in the records of the bank at the end of the month

Bank statement

All increases  and decreases in an entity’s checking account are summarized here

Reconciling items due to timing difference

Arises when only one party has recorded a particular transaction as of the end of the month

Deposit in transit

Added to the balance per bank

Outstanding check

Deducted from the balance per bank

Bank debit memos

Deducted from the balance per book (NSF Checks, cost of checkbooks, service and penalty charges, reduction of loans)

Bank credit memos

Added to the cash balance per books

Adjusted balance method

• Preferred method

• Presents the cash balance that should be presented on the statement of financial position of the entity