CASH AND CASH EQUIVALENT

• Cash

• Layman: ____simply means money (currency and coins in circulation, legal tender) 

• Accounting: Cash has a broader meaning - includes: 

• Money 

• Negotiable instruments payable in money and acceptable by banks for deposit and immediate credit 

Items Included as Cash 

• Ordinary checks 

• Bank drafts 

• Cashier's checks 

• Certified checks 

• Money orders

Items NOT Considered Cash 

• Postdated checks - unacceptable by banks for deposit/encashment until the date arrives 

1. Cash on Hand 

• Undeposited cash collections 

• Customers' checks 

• Cashier's/manager's checks 

• Traveler's checks 

• Bank drafts 

• Money orders 

2. Cash in Bank 

• Demand deposit (checking account) 

• Saving deposit - unrestricted as to withdrawal 

3. Cash Funds for Current Purposes 

• Petty cash fund 

• Payroll fund 

• Dividend fund 

CASH ITEMS INCLUDED IN CASH 

CASH EQUIVALENTS 

Definition (PAS 7, Paragraph 6) 

Short-term, highly liquid investments that are: 

• Readily convertible into cash 

• So near maturity that they present insignificant risk of changes in value due to interest rate changes 

The Three-Month Rule  ( Cash equivalent)

• Only investments acquired three months before maturity qualify as cash equivalents 

• Purpose: Minimize price fluctuation due to interest changes 

• A highly marketable security with fluctuating price is NOT "equivalent" to cash 

Examples of Cash Equivalents 

• Three-month BSP treasury bill 

• Three-year BSP treasury bill purchased three months before maturity 

• Three-month time deposit 

• Three-month money market instrument or commercial paper 

Non-Qualifying Items  as cash equivalent

• Equity securities - no maturity date 

• Preference shares - qualify only if they have specified redemption date AND acquired three months before redemption 

• Treasury bill purchased one year ago - even if remaining maturity is three months, it does NOT qualify 

• Current operations 

Cash Management

• Maintain sufficient cash for

• Invest excess cash in revenue-earning investments 

Classification of Investments 

Term	Classification
3 months or less	Cash equivalents
More than 3 months but within 1 year	Short-term/temporary investments   (current assets)
More than 1 year	Noncurrent/long-term investments
Due within 1 year (from end of reporting period)	Reclassified as current

• face amount 

• estimated realizable value

Measurement 

• Cash is measured at

• If bank is in bankruptcy/financial difficulty: Write down to  

• Foreign currency: Translated to Philippine pesos using current exchange rate

• Included in cash 

Presentation 

• Caption: "Cash and cash equivalents" as first line item under current assets 

• Disclosure: Details comprising cash and cash equivalents in notes to financial statements 

• Foreign deposits: 

• No restriction →

• With restriction → Classified separately among noncurrent assets

Cash

CLASSIFICATION OF CASH FUNDS FOR SPECIFIC PURPOSES 

Current Asset (Included in ) 

• Set aside for current operations or payment of current obligations 

• Examples: Petty cash fund, payroll fund, travel fund, interest fund, dividend fund, tax fund 

Noncurrent Investment 

• Set aside for noncurrent purpose or payment of noncurrent obligation 

• Key rule: Classification should parallel the classification of the related liability 

• noncurrent

CLASSIFICATION OF CASH FUNDS FOR SPECIFIC PURPOSES 

Special Cases 

• Sinking fund for bond payable: Classified as current when bond payable is due within one year 

• Cash fund for acquisition of noncurrent asset: Classified as regardless of year of disbursement 

BANK OVERDRAFT 

Definition 

• Credit balance in cash in bank account 

• Results from issuing checks in excess of deposits 

Classification 

• Classified as current liability 

• Should NOT be offset against other bank accounts with debit balances 

Exception to the Rule  OF

Offset allowed when: 

1. Entity maintains two or more accounts in ONE bank - overdraft can be offset against debit balance in other account 

2. Amount is not material 

3. Under IFRS: Payable on demand and often fluctuates from positive to negative as part of cash management 

Note: Generally, overdrafts are not permitted in the Philippines 

COMPENSATING BALANCE 

 

Definition 

• Minimum checking/demand deposit account balance required to be maintained in connection with a borrowing arrangement with a bank 

Example 

• Entity borrows P5,000,000 

• Agrees to maintain 10% (P500,000) minimum compensating balance 

• Effectively reduces the amount borrowed 

Undelivered/Unreleased Check 

• Check drawn and recorded but not given to payee before end of reporting period 

• No payment has occurred 

• Still subject to entity's control (can be canceled anytime) 

• Adjusting entry required: Restore cash balance and set up liability 

Postdated Check Delivered 

• Check drawn, recorded, and given to payee but bears date subsequent to end of reporting period 

• No payment until check can be presented to bank 

• Original entry must be reversed: Restore cash balance and recognize liability

Stale Check 

• Check not encashed by payee within a long period 

• In banking practice: 6 months from issuance (business practice) 

• If immaterial: Accounted for as miscellaneous income 

• If material and liability expected to continue: Restore cash and set up liability 

Cash Shortage 

Situation: Cash count < Balance per book 

Initial Entry: 

Cash short or over     xx
Cash                           xx
 

If Cashier Responsible: 

Receivable from cashier xx
Cash short or over               xx
 

If Cause Cannot Be Found: 

Loss from cash shortage xx
Cash short or over               xx 

Cash Overage 

Situation: Cash count > Balance per book 

Initial Entry: 

Cash                   xx
Cash short or over               xx
 

If No Claim: 

Cash short or over     xx
Miscellaneous income             xx
 

If Cashier's Money: 

Cash short or over     xx
Payable to cashier               xx 

PETTY CASH FUND 

Definition 

• Money set aside to pay small expenses that cannot be paid conveniently by check 

• Imprest system: Control of cash requiring all receipts deposited intact and all disbursements by check

Two Methods FOR PETTY CASH FUND 

1. IMPREST FUND SYSTEM 

2. FLUCTUATING FUND SYSTEM

FLUCTUATING FUND SYSTEM 

Features: 

• Replenishment checks do not necessarily equal petty cash disbursements 

• Disbursements are recorded immediately 

• Petty cash balance fluctuates 

IMPREST FUND SYSTEM 

(Most commonly used) 

No formal journal entries 

• Petty cashier requires signed petty cash voucher 

• Only memorandum entries in petty cash journal