CASH-AND-CASH-EQUIVALENTS

1. CASH AND CASH EQUIVALENTS
LEARNING OBJECTIVES
• TO UNDERSTAND THE CONCEPT OF CASH
• TO UNDERSTAND THE CONCEPT OF CASH EQUIVALENTS
• TO IDENTIFY ITEMS CONSIDERED AS CASH
• TO IDENTIFY ITEMS CONSIDERED AS CASH EQUIVALENTS
• TO UNDERSTAND THE OMPREST SYSTEMS OF INTERNAL
CONTROL
• TO KNOW ACCOUNTING FOR PETTY CASH FUND

2. CASH INCLUDES MONEY AND ANY OTHER NEGOTIABLE
INSTRUMENT THAT IS PAYABLE IN MONEY AND ACCEPTABLE BY
BANK FOR DEPOSIT AND IMMEDIATE CREDIT.
ACCORDINGLY, CASH INCLUDES CHECKS, BANK DRAFTS AND
MONEY ORDERS BECAUSE THESE ARE ACCEPTABLE BY THE BANK
FOR DEPOSIT OR IMMEDIATE ENCASHMENT.
BUT POSTDATED CHECKS RECEIVED CANNOT BE CONSIDERED AS
CASH YET BECAUSE THESE CHECKS ARE UNACCEPTABLE BY THE
BANK FOR DEPOSIT AND IMMEDIATE CREDIT OR OUTRIGHT
ENCASHMENT.

3. UNRESTRICTED CASH
THERE IS NO SPECIFIC STANDARD DEALING WITH “CASH.’’
THE ONLY GUIDANCE IS FOUND IN PAS 1, PARAGRAPH 66,
WHICH PROVIDES THAT AN “ENTITY SHALL CLASSIFY AN ASSET
AS CURRENT WHEN THE ASSET IS CASH OR A CASH EQUIVALENT
UNLESS IT IS RESTRICTED TO SETTLE A LIABILITY FOR MORE
THAN TWELVE MONTHS AFTER THE END OF THE REPORTING
PERIOD.”
ACCORDINGLY, TO BE REPORTED AS “CASH”, AN ITEM MUST BE
UNRESTRICTED IN USE.

4. CASH ITEMS INCLUDED IN CASH
a) CASH ON HAND—THIS INCLUDES UNDEPOSITED CASH
COLLECTIONS AND OTHER CASH ITEMS AWAITING DEPOSIT
SUCH AS CUSTOMERS’ CHECKS, CASHIER’S OR MANAGER’S
CHECKS, TRAVELER’S CHECKS, BANK DRAFTS AND MONEY
ORDERS.
b) CASH IN BANK—THIS INCLUDES DEMAND DEPOSITS OR
CHECKING ACCOUNT AND SAVINGS DEPOSIT WHICH ARE
UNRESTRICTED AS TO WITHDRAWAL.
c) CASH FUND SET ASIDE FOR CURRENT PURPOSES SUCH AS
PETTY CASH FUND, PAYROLL FUND AND DIVIDEND FUND.

5. CASH EQUIVALENTS
PAS 7, PAR 6, DEFINES “CASH EQUIVALENTS” AS SHORT-TERM
AND HIGHLY LIQUID INVESTMENTS THAT ARE READILY
CONVERTIBLE INTO CASH AND SO NEAR THEIR MATURITY THAT
THEY PRESENT INSIGNIFICANT RISK OF CHANGES IN VALUE
BECAUSE OF CHANGES IN INTEREST RATES.
THE STANDARD FURTHER STATES THAT “ONLY HIGHLY LIQUID
INVESTMENTS THAT ARE ACQUIRED THREE MONTHS BEFORE
MATURITY CAN QUALIFY AS CASH EQUIVALENTS”

6. EXAMPLES OF CASH EQUIVALENTS ARE:
a) THREE-MONTH BSP TREASURY BILL
b) THREE-YEAR BSP TREASURY BILL PURCHASED THREE
MONTHS BEFORE DATE OF MATURITY
c) THREE-MONTH TIME DEPOSIT
d) THREE-MONTH MONEY MARKET INSTRUMENT OR
COMMERCIAL PAPER
EQUITY SECURITIES CANNOT QUALIFY AS CASH EQUIVALENTS
BECAUSE SHARES DO NOT HAVE A MATURITY DATE.

7. HOWEVER, PREFERENCE SHARES WITH SPECIFIED REDEMPTION
DATE AND ACQUIRED THREE MONTHS BEFORE REDEMPTION
DATE CAN QUALIFY AS CASH EQUIVALENTS.
NOTE THAT WHAT IS IMPORTANT IS THE DATE OF PURCHASE
WHICH SHOULD BE THREE MONTHS OR LESS BEFORE MATURITY.
INVESTMENT OF EXCESS CASH
ESCESS CASH MAY BE INVESTED IN TIME DEPOSITS, MONEY
MARKET INSTRUMENTS AND TREASURY BILLS FOR THE PURPOSE
OF EARNING INTEREST INCOME.

8. CLASSIFICATION OF INVESTMENT OF EXCESS CASH
INVESTMENTS IN TIME DEPOSIT, MONEY MARKET
INSTRUMENTS AND TREASURY BILLS SHOULD BE CLASSIFIED AS
FOLLOWS:
a. IF THE TERM IS THREE MONTHS OR LESS, SUCH
INSTRUMENTS ARE CLASSIFIED AS CASH EQUIVALENTS AND
THEREFORE INCLUDED IN THE CAPTION “CASH AND CASH
EQUIVALENTS”
b. IF THE TERM IS MORE THAN THREE MONTHS BUT WITHIN
ONE YEAR, SUCH INVESTMENTS ARE CLASSIFIED AS SHORT-
TERM FINANCIAL ASSETS OR TEMPORARY INVESTMENTS
AND PRESENTED SEPARATELY AS CURRENT ASSETS.

9. c. IF THE TERM IS MORE THAN A YEAR, SUCH INVESTMENTS
ARE CLASSIFIED AS NONCURRENT OR LONG-TERM
INVESTMENTS .
HOWEVER, IF SUCH INVESTMENTS BECOME DUE WITHIN ONE
YEAR FROM THE END OF THE REPORTING PERIOD, THEY ARE
RECLASSFIED AS CURRENT OR TEMPORARY INVESTMENTS.
MEASUREMENT OF CASH
CASH IS MEASURED AT FACE VALUE.
CASH IN FOREIGN CURRENCY IS MEASURED AT THE CURRENT
EXCHANGE RATE.

10. FINANCIAL STATEMENT PRESENTATION
THE CAPTION “CASH AND CASH EQUIVALENTS” SHOULD BE
SHOWN AS THE FIRST LINE ITEM AMONG THE CURRENT ASSETS.
THIS CAPTION INCLUDES ALL CASH ITEMS, SUCH AS CASH ON
HAND, CASH IN BANK, PETTY CASH FUND AND CASH
EQUIVALENTS WHICH ARE UNRESTRICTED IN USE FOR CURRENT
OPERATIONS.
HOWEVER, THE DETAILS COMPRISING THE “CASH AND CASH
EQUIVALENTS” SHOULD BE DISCLOSED IN THE NOTES TO
FINANCIAL STATEMENTS.

11. FOREIGN CURRENCY
CASH IN FOREIGN CURRENCY SHOULD BE TRANSLATED TO
PHILIPPINE PESOS USING THE CURRENT EXCHANGE RATE.
DEPOSITS IN FOREIGN COUNTIRES WHICH ARE NOT SUBJECT TO
ANY FOREIGN EXHANGE RESTRICTION ARE INCLUDED IN “CASH”.
DEPOSITS IN FOREIGN BANK WHICH ARE SUBJECT TO FOREIGN
EXCHANGE RESTRICTION, IF MATERIAL, SHOULD BE CLASSIFIED
SEPARATELY AMONG NONCURRENT ASSETS AND THE
RESTRICTION CLEARLY INDICATED.

12. CASH FUND FOR A CERTAIN PURPOSE
IF THE CASH FUND IS SET ASIDE FOR USE IN CURRENT
OPERATIONS OR FOR PAYMENT OF CURRENT OBLIGATIONS, IT IS
A CURRENT ASSET. IT IS INCLUDED AS PART OF CASH AND
CASHF EQUIVALENTS.
EXAMPLES OF THIS FUND ARE PETTY CASH FUND, PAYROLL
FUND, TRAVEL FUND, INTEREST FUND, DIVIDEND FUND AND TAX
FUND.
ON THE OTHER HAND, IF THE CASH FUND IS SET ASIDE FOR
NONCURRENT PURPOSE OR PAYMENT OF NONCURRENT

13. OBLIGATION, IT IS SHOWN AS LONG-TERM INVESTMENT.
EXAMPLES OF THIS FUND ARE SINKING FUND, PREFERENCE
SHARE REDEMPTION FUND, CONTINGENT FUND, INSURANCE
FUND AND FUND FOR ACQUISITION OR CONSTRUCTION OF
PROPERTY, PLANT AND EQUIPMENT.
CLASSIFICATION OF CASH FUND
THE CLASSIFICATION OF A CASH FUND AS CURRENT OR
NONCURRENT SHOULD PARALLEL THE CLASSIFICATION OF THE
RELATED LIABILITY.

14. FOR EXAMPLE, A SINKING FUND THAT IS SET ASIDE TO PAY A
BOND PAYABLE SHALL BE CLASSIFIED AS CURRENT ASSET WHEN
THE BOND PAYABLE IS ALREADY DUE WITHIN ONE YEAR AFTER
THE END OF REPORTING PERIOD.
HOWEVER, CASH FUND SET ASIDE FOR THE ACQUISITION OF A
NONCURRENT ASSET SHOULD BE CLASSIFIED AS NONCURRENT
REGARDLESS OF THE YEAR OF DISBURSEMENT.
BANK OVERDRAFT
WHEN THE CASH IN BANK ACCOUNT HAS A CREDIT BALANCE, IT
IS SAID TO BE AN OVERDRAFT.

15. A BANK OVERDRAFT IS CLASSIFIED AS A CURRENT LIABILITY AND
SHOULD NOT BE OFFSET AGAINST OTHER BANK ACCOUNTS
WITH DEBIT BALANCES.
EXCEPTION TO THE RULE ON OVERDRAFT
AS STATED EARLIER, A BANK OVRDRAFT SHOULD NOT BE OFFSET
AGAINST OTHER BANK ACCOUNTS WITH DEBIT BALANCES. THIS
RULE, HOWEVER, IS NOT WITHOUT AN EXCEPTION.
WHEN AN ENTITY MAINTAINS TWO OR MORE ACCOUNTS IN
ONE BANK AND ONE ACCOUNT RESULTS IN AN OVERDRAFT,
SUCH OVERDRAFT CAN BE OFFSET AGAINST THE OTHER BANK

16. THE OTHER BANK ACCOUNT WITH DEBIT BALANCE IN ORDER TO
SHOW “CASH, NET OF BANK OVERDRAFT ” OR “BANK
OVERDRAFT, NET OF OTHER BANK ACCOUNT.”
MOREOVER, AN OVERDRAFT CAN ALSO BE OFFSET AGAINST THE
OTHER BANK ACCOUNT IF THE AMOUNT IS NOT MATERIAL.
COMPENSATING BALANCE
A COMPENSATING BALANCE GENERALLY TAKES THE FORM OF
MINIMUM CHECKING OR DEMAND DEPOSIT ACCOUNT
BALANCE THAT MUST BE MAINTAINED IN CONNECTION WITH A
BORROWING ARRANGEMENT WITH A BANK.

17. CLASSIFICATION OF COMPENSATING BALANCE
IF THE DEPOSIT IS NOT LEGALLY RESTRICTED AS TO
WITHDRAWAL BECAUSE OF AN INFORMAL COMPENSATING
BALANCE AGREEMENT, THE COMPENSATING BALANCE IS PART
OF CASH.
IF THE DEPOSIT IS LEGALLY RESTRICTED BECAUSE OF A FORMAL
COMPENSATING BALANCE AGREEMENT, THE COMPENSATING
BALANCE IS CLASSIFIED SEPARATELY AS “CASH HELD AS
COMPENSATING BALANCE” UNDER CURRENT ASSETS IF THE
RELATED LOAN IS SHORT-TERM.
IF THE RELATED LOAN IS LONG-TERM, THE COMPENSATING
BALANCE IS CLASSIFIED AS NONCURRENT INVESTMENT

18. UNDELIVERED OR UNRELEASED CHECK
AN UNDELIVERED OR UNRELEASED CHECK IS ONE THAT IS
MERELY DRAWN AND RECORDED BUT NOT GIVEN TO THE PAYEE
BEFORE THE END OF REPORTING PERIOD.
ACCORDINGLY, AN ADJUSTING ENTRY IS REQUIRED TO RESTORE
THE CASH BALANCE AND SET UP THE LIABILITY.
POSTDATED CHECK DELIVERED
A POSTDATED CHECK DELIVERED IS A CHECK DRAWN,
RECORDED AND ALREADY GIVEN TO THE PAYEE BUT IT BEARS A
DATE SUBSEQUENT TO THE END OF THE ACCOUNTING PERIOD.

19. THE ORIGINAL ENTRY RECORDING A DELIVERED POSDATED
CHECK SHALL ALSO BE REVERSED AND THEREFORE RESTORED
TO THE CASH BALANCE AS FOLLOWS:
CASH XX
ACCOUNTS PAYABLE OR APPROPRIATE ACCT XX
THE REASON IS THAT THERE IS NO PAYMENT UNTIL THE CHECK
CAN BE PRESENTED TO THE BANK FOR ENCASHMENT OR
DEPOSIT.
STALE CHECK OR CHECK LONG OUTSTANDING
A STALE CHECK IS A CHECK NOT ENCASHED BY THE PAYEE
WITHIN A RELATIVELY LONG PERIOD OF TIME.

20. THE QUESTION IS HOW LONG A TIME MUST THE CHECK REMAIN
OUTSTANDING?
THE NEGOTIABLE INSTRUMENTS LAW PROVIDES THAT WHERE
THE INSTRUMENT IS PAYABLE ON DEMAND AND THIS INCLUDE
CHECKS, PRESENTMENT MUST BE WITHIN A “REASONABLE
TIME” AFTER ITS ISSUE.
IN DETERMINING THE “REASONABLE TIME” , CONSIDERATION
SHOULD BE MADE REGARDING THE NATURE OF THE
INSTRUMENT, THE USAGE OF TRADE OR BUSINESS, IF ANY, WITH
RESPECT TO SUCH INSTRUMENT AND THE FACTS OF THE
PARTICULAR CASE.

21. IN BANKING PRACTICE, A CHECK BECOMES STALE IF NOT
ENCASHED WITHIN SIX MONTHS FROM THE TIME OF ISSUANCE.
IF THE AMOUNT OF CHECK IS IMMATERIAL, IT IS SIMPLY
ACCOUNTED FOR AS MISCELLANEOUS INCOME AS FOLLOWS:
CASH XX
MISCELLANEOUS INCOME XX
HOWEVER, IF THE AMOUNT IS MATERIAL AND LIABILITY IS
EXPECTED TO CONTINUE, THE CASH IS RESTORED AND THE
LIABILITY IS AGAIN SET UP. THE JOURNAL ENTRY AS FOLLOWS:
CASH XX
ACCOUNTS PAYABLE OR APPROPRIATE ACCT XX

22. ACCOUNTING FOR CASH SHORTAGEOR OVER
WHERE THE CASH COUNT SHOWS CASH WHICH IS LESS THAN
THE BALANCE PER BOOK, THERE IS A CASH SHORTAGE TO BE
RECORDED AS FOLLOWS:
CASH SHORT OR OVER XX
CASH XX
THE CASH SHORT OR OVER ACCOUNT IS ONLY TEMPORARY OR
SUSPENSE ACCOUNT. WHEN FINANCIAL STATEMENTS ARE
PREPARED THE SAME SHOULD BE ADJUSTED. WHEN FINANCIAL
STATEMENTS ARE PREPARED THE SAME SHOULD BE ADJUSTED.

23. HENCE IF THE CASHIER OR CASH CUSTODIAN IS HELD
RESPONSIBLE FOR THE CASH SHORTAGE, THE ADJUSTMENT
SHOULE BE:
DUE FROM CASHIER XXX
CASH SHORT OR OVER XXX
HOWEVER, IF REASONABLE EFFORTS FAIL TO DISCLOSE THE
CAUSE OF THE SHORTAGE, THE ADJUSTMENT IS:
LOSS FROM CASH SHORTAGE XXX
CASH SHORT OR OVER XXX

24. ACCOUNTING FOR CASH OVERAGE
WHERE THE CASH COUNT SHOWS CASH WHICH IS MORE THAN
THE BALANCE PER BOOK, THERE IS A CASH OVERAGE TO BE
RECORDED AS FOLLOWS:
CASH XXX
CASH SHORT OR OVER XXX
NOTE THAT WHETHER IT IS A CASH SHORTAGE OR CASH
OVERAGE, THE OFFSETTING ACCOUNT IS CASH SHORT OR OVER
ACCOUNT. SUCH ACCOUNT SHOULD BE ADJUSTED WHEN
STATEMENTS ARE MADE.

25. THE CASH OVERAGE IS TREATED AS MISCELLANEOUS INCOME IF
THERE IS NO CLAIM ON THE SAME.
CASH XXX
MISCELLANEOUS INCOME XXX
BUT WHERE THE CASH OVERAGE IS PROPERLY FOUND TO BE THE
MONEY OF THE CASHIER, THE JOURNAL ENTRY IS:
CASH SHORT OR OVER XXX
PAYABLE TO CASHIER XXX

26. IMPREST SYSTEM
THE IMPREST SYSTEM IS A SYSTEM OF CONTROL OF CASH
WHICH REQUIRES THAT ALL CASH RECEIPTS SHOULD BE
DEPOSITED INTACT AND ALL CASH DISBURSEMENTS SHOULD BE
MADE BY MEANS OF CHECK.
WHILE INTERNAL CONTROL IDEALLY REQUIRES THAT ALL
PAYMENTS SHOULD BE MADE BY MEANS OF CHECK, THIS IS
SOMETIMES IMPOSSIBLE.
PETTY CASH FUND
THE PETTY CASH FUND IS MONEY SET ASIDE TO PAY SMALL

27. EXPENSES WHICH CANNOT BE PAID CONVENIENTLY BY MEANS
OF CHECK.
THERE ARE TWO METHODS OF HANDLING THE PETTY CASH,
NAMELY:
a. IMPREST FUND SYSTEM
b. FLUCTUATING FUND SYSTEM
IMPREST FUND SYSTEM
THE IMPREST FUND SYSTEM IS THE ONE USUALLY FOLLOWED IN
HANDLING PETTY CASH TRANSACTIONS.

28. ACCOUNTING PROCEDURES
a) A CHECK IS DRAWN TO ESTABLISH THE FUND
PETTY CASH FUND XXX
CASH IN BANK XXX
b) PAYMENT OF EXPENSES OUT OF THE FUND
NO FORMAL JOURNAL ENTRIES ARE MADE. THE
PETTY FUND CASHIER GENERALLY REQUIRES A SIGNED
PETTY CASH VOUCHER FOR SUCH PAYMENTS AND SIMPLY
PREPARES MEMORANDUM ENTRIES IN THE PETTY CASH
JOURNAL.

29. c. REPLENISHMENT OF PETTY CASH PAYMENTS
WHENEVER THE PETTY CASH FUND RUNS LOW, A CHECK IS
DRAWN TO REPLENISH THE FUND.
THE REPLENISHMENT CHECK IS USUALLY EQUAL TO THE
PETTY CASH DISBURSEMENTS. IT IS AT THIS TIME THAT THE
PETTY CASH DISBURSEMENTS ARE RECORDED AS FOLLOWS:
EXPENSES XXX
CASH IN BANK XXX
IT IS TO BE POINTED OUT THAT THE PETTY CASH
DISBURSEMENTS SHOULD BE REPLENISHED ONLY BY CHECK AND
NOT FROM UNDEPOSITED COLLECTIONS.

30. d. AT THE END OF THE ACCOUNTING PERIOD, IT IS NECESSARY
TO ADJUST THE UNREPLENISHED EXPENSES IN ORDER TO STATE
THE CORRECT PETTY CASH BALANCE AS FOLLOWS:
EXPENSES XXX
PETTY CASH FUND XXX
THE ADJUSTMENT IS TO BE REVERSED AT THE BEGINNING OF
THE NEXT ACCOUNTING PERIOD.
THE REVERSAL IS MADE IN ORDER THAT THE NORMAL
REPLENISHMENT PROCEDURE MAY BE FOLLOWED BY SIMPLY
DEBITING EXPENSES AND CREDITING CASH IN BANK WITHOUT
DISTINGUISHING WHETHER THE EXPENSES PERTAIN TO THE
CURRENT PERIOD OR PRIOR PERIOD.

31. e. AN INCREASE IN THE FUND IS RECORDED AS FOLLOWS:
PETTY CASH FUND XXX
CASH IN BANK XXX
f. A DECREASE IN FUND IS RECORDED AS FOLLOWS:
CASH IN BANK XXX
PETTY CASH FUND XXX
FLUCTUATING FUND SYSTEM
THE SYSTEM IS CALLED “ FLUCTUATING FUND SYSTEM” BECAUSE
THE CHECKS DRAWN TO REPLENISH THE FUND DO NOT
NECESSARILY EQUAL THE PETTY CASH DISBURSEMENTS.

32. THE REPLENISHMENT CHECKS ARE SIMPLY DRAWN UPON
THE REQUEST OF THE PETTY CASH FUND CASHIER.
MOREOVER, PETTY CASH DISBURSEMENTS ARE
IMMEDIATELY RECORDED THUS RESULTING IN A FLUCTUATING
PETTY CASH BALANCE PER BOOK FROM TIME TO TIME.
a. ESTABLISHMENT OF THE FUND
PETTY CASH FUND XXX
CASH IN BANK XXX

33. b. PAYMENT OF EXPENSES OUT OF THE PETTY CASH FUND
EXPENSES XXX
PETTY CASH FUND XXX
UNDER THIS SYSTEM, THE DISBURSEMENTS ARE
IMMEDIATELY RECORDED IN CONTRADISTINCTION WITH THE
IMPREST FUND SYSTEM WHERE DISBURSEMENTS ARE
RECORDED UPON THE REPLENISHMENT OF THE FUND.
c. REPLENISHMENT OR INCREASE OF THE FUND
PETTY CASH FUND XXX
CASH IN BANK XXX
THE REPLENISHMENT MAY OR MAY NOT BE THE SAME AS
THE PETTY CASH DISBURSEMENTS.

34. d. AT THE END OF THE REPORTING PERIOD, NO ADJUSTMENT
IS NECESSARY BECAUSE THE PETTY CASH EXPENSES ARE
RECORDED OUTRIGHT.
e. DECREASE OF THE FUND IS RECORDED AS FOLLOWS:
CASH IN BANK XXX
PETTY CASH FUND XXX