Cash, Petty Cash & Bank Reconciliation – Quick Notes

Definition of Cash

  • Medium of exchange: coins & currency.
  • Includes:
    • Cash on hand (undeposited collections, customer/cashier/manager checks, traveler’s checks, bank drafts, money orders).
    • Cash in bank: unrestricted demand, checking, savings accounts.
    • Cash funds for current operations (petty cash, payroll, dividend funds).
    • Cash equivalents: short-term, highly liquid investments convertible to cash within 33 months or less.

Examples of Cash Equivalents

  • 33-month BSP treasury bill.
  • 33-year BSP T-bill purchased 33 months before maturity.
  • 33-month time deposit.
  • 33-month commercial paper/money-market instrument.
  • Equity securities ❌ (no maturity date).
  • Redeemable preference shares ✅ if redemption within 33 months at reporting date.

Measurement & Special Cases

  • Cash measured at face value.
  • Foreign cash translated at spot rate on balance-sheet date.
  • Deposits in bankrupt bank: write-down to realizable value per BSP.
  • Bank overdraft → current liability.

Compensating Balance

  • Unrestricted → part of cash.
  • Legally restricted: “cash held as compensating balance.”
    • Current asset if linked to short-term loan.
    • Non-current asset if linked to long-term loan.

Check Classifications

  • Undelivered/unreleased: drawn but not yet given; remains in cash.
  • Post-dated: given & recorded but dated after period; treat as receivable.
  • Stale: un-cashed for long period; restore to cash via adjusting entry.

Cash Short & Over

  • Shortage:
    • Record: Cash Short or Over (debit) / Cash (credit).
    • If cashier liable: debit Due from Cashier instead of loss.
    • If not liable: debit Loss from Cash Shortage.
  • Overage:
    • Record: Cash (debit) / Cash Short or Over (credit).
    • If cashier’s money: credit Payable to Cashier.
    • No claimant: credit Miscellaneous Income.

Internal Control – COSO Components

  • Control environment.
  • Risk assessment.
  • Control activities.
  • Information & communication.
  • Monitoring.

Key Control Activities

  • Segregate duties.
  • Assign specific tasks; rotate jobs.
  • Use mechanical/IT devices.
  • SOX (2002) amplifies accountability: CEO/CFO certification, internal-control report, data-security policies, continuous documentation.

Controls over Cash Receipts

  • Record cash immediately.
  • Deposit intact daily.
  • Receiver ≠ recorder of cash.
  • Receiver ≠ disburser of cash.

Controls over Cash Disbursements

  • Pay by check/ACH; require approvals & documentation.
  • Serially numbered checks; limited access.
  • Dual signatures for material amounts.
  • Authorizer ≠ check signer.
  • Cancel (stamp paid) & file supporting docs.
  • Independent monthly bank reconciliation.

Petty Cash

  • Treasurer issues check to establish fund; custodian holds cash + vouchers.
  • Fund + vouchers should always equal preset amount.
Accounting Methods
  1. Imprest System (preferred)
    • Establish/increase/decrease: Petty Cash Fund ↔ Cash in Bank.
    • No entry for payments; replenish: debit expenses, credit Cash in Bank.
    • Period-end adjusting & reversing entries if shortages/overages.
  2. Fluctuating Fund System
    • Record each petty payment directly; fund balance fluctuates.

Bank Reconciliation Essentials

  • Purpose: explain difference between book cash & bank statement.
  • Adjust bank side: add deposits in transit, subtract outstanding checks, correct bank errors.
  • Adjust book side: add credit memos (e.g., note collected), subtract debit memos (e.g., NSF, service charges), correct book errors.
  • Adjusted balances must agree.
  • Proof of Cash: two-date reconciliation verifying total receipts & disbursements, detecting un-deposited or un-recorded items.

Reconciling Terms

  • Credit memos: bank additions not yet on books.
  • Debit memos: bank deductions not yet on books.
  • Deposit in transit: recorded by company, not yet by bank.
  • Outstanding check: recorded by company, not yet by bank.

Credit Card Transactions

  • Sales recording options:
    1. Net method (sales net of fee).
    2. Gross method (record full sales + separate fee expense).
    3. Accounts receivable method (set up receivable from card company).
  • Purchases: record payable to card issuer; settle on statement date.
Credit Card Internal Controls
  • Formal written policy.
  • Require original receipts with business purpose noted.
  • Independent, timely review of statements & receipts.

Financial Statement Presentation

  • Report “Cash and Cash Equivalents” together: coins, currency, checking, savings, petty cash, demand deposits, and investments with original maturity ≤ 9090 days (commercial paper, T-bills, money-market funds, etc.).
  • Example: Facebook, Inc. shows separate line items for cash/equivalents and marketable securities.

Quick Practice Reminders

  • Petty cash theft prevention: independent monthly counts & reconciliations.
  • Cash-equivalent identification: inventory ❌; money orders, T-bills, marketable securities (if ≤ 33 months) ✅.