This document defines key terms related to cash and cash management. It discusses how cash belongs to the broader category of financial assets, and defines cash items and cash equivalents. It also describes the establishment and use of petty cash funds, bank reconciliation procedures, and various adjustments that may reconcile the bank balance to the company's records.

1. "Rather fail with honor than succeed by fraud."
--Sophocles (496-406 BC)

3. CASH
- belongs to broad category of assets called financial
assets
FINANCIAL ASSET
- cash or contractual right to receive cash or another
financial instrument in the future
other example:
*receivables
* investments in debt and securities

4. CASH ITEM
- any item used as standard medium of
exchange
- for a limited viewpoint, it refers to currency
and coins in the circulation
- for accounting purposes, an item is considered
cash if it is acceptable by bank or other financial
institution for deposit at face value

9. - not all cash items qualify for reporting as
part of the account title “cash” or “Cash on Hand
and in Banks” on the statement of financial
position
- the cash item must be unrestricted and
must be immediately available for use in current
operations to qualify for presentation as part of
Cash on the statement of financial position

10. CASH ITEMS
Unrestricted and
immediately available for
use in current operations
For use other than
for current
operations
For payment of operating expenses
For payment of current liabilities
For acquisition of current asset
“CASH” in the current asset
section
Other non-current
financial asset

11. CASH ON HAND
a. Undeposited cash collections – currencies
such as bills and coins
b. Cash items awaiting deposit – customers’
checks, travelers’ checks, bank drafts, money orders.
CASH IN BANK
includes demand deposits. There are unrestricted
funds deposited in a bank that can be withdrawn upon
demand such as amounts in checking and savings
account.

12. WORKING FUNDS
cash segregated for current use in the ordinary
conduct of business.
a. Petty cash fund
b. Change fund
c. Payroll fund
d. Dividend fund
e. Tax fund
f. Interest fund

13. CASH EQUIVALENTS
• These are highly liquid financial instruments that
are so near their maturity and that there is
insignificant risk of change in value due to
fluctuation of interest rates
• Maturity dates start from the date of acquisition
of the instrument and not from the date indicated
on the face of the instrument.

14. TEMPORARY INVESTMENTS
• These are not included as part of cash equivalents
because these equity securities do not have
maturity dates.
• Redeemable preference shares that are to be
reacquired by the issuing corporation at a
determined redemption date, qualify to be
reported as cash equivalents if purchased within
three months or less before redemption date.

15. •
Although cash equivalents are not
cash, they are generally presented on the
statement of financial position together
with cash using the account title “Cash and
Cash Equivalents”

16. • CASH is generally measured at face
value, which is its fair value.
• DEMAND DEPOSITS are measured using
the exchange rate in effect on the reporting
date.
• Not necessary to classify cash to distinguish
between currencies on hand, cash in
banks, or deposits at various locations.

17. FOREIGN CURRENCY should be translated to
Philippine currency using exchange rate at the
reporting date.
CASH IN CLOSED BANKS OR BANKS HAVING
FINANCIAL DIFFICULTY OR IN BANKRUPTCY
should be reclassified as receivable and should be
written down to its recoverable amount.

18. CUSTOMERS’ POST-DATED CHECKS AND NSF
CHECKS AND IOUS should be reported as receivables
rather than cash.
EXPENSE ADVANCES such as advances for employee
travel, and postage stamps should be reported as
prepaid expenses and not as “cash”.
BANK OVERDRAFTS should be reported as a current
liability, except when the depositor has sufficient funds
in another account with the same bank.

19. UNDELIVERED OR UNRELEASED CHECKS
are the company’s checks drawn and recorded
but are not actually issued or delivered to the
payees as of the reporting date.
COMPANY’S POSTDATED CHECK which has
been recorded as issued and delivered to
payees before or at the reporting date should
be reverted to cash.

20. COMPENSATING BALANCES are minimum
amounts that a company agrees to maintain in
bank checking account as support or collateral
for a loan by the depositor.
CASH SET ASIDE FOR LONG-TERM SPECIFIC
PURPOSE is reported as non-current financial
asset.

22. • Segregation of duties for handling cash and
recording cash transactions.
• Imprest system
• Voucher system
• Internal audits at irregular intervals
• Periodic reconciliation of bank statement
balance and cash balance in the company’s
accounting records.

24. •
Under this system of cash control, all cash receipts are
deposited intact and all cash payments should be made by
means of checks.
•
However, an enterprise considers it inconvenient and
impractical to write checks for such small items as taxi
fares, newspaper delivery charges, postage, express
charges, and minor supplies.
•
A company usually pays for these kinds of items from a
•
An imprest petty cash fund is established for a fixed
amount and allows a company to effectively control
small amounts of cash fairly simply.
petty cash fund.

25. A responsible employee is designated as petty cashier. A
check drawn payable to petty cash is encashed, and the petty
cashier places the money in the petty cash fund (which is
often kept in a locked box or petty cash drawer). The
check, which establishes the fund, is usually for an amount
that the company estimates will last from two to four weeks.
Journal entry for the establishment of the petty cash fund is
as follows:
Petty Cash Fund
Cash in Bank
xxx
xxx

26. As time passes, the petty cashier disburses money from
the fund, but only upon authorization of a responsible
officer designated to authorize payment from the fund.
To request payment from the petty cash fund, a petty
cash voucher must be prepared by the petty cash
custodian for payment. Upon payment, the petty cashier
keeps the petty cash voucher, and he shall have it signed
by the person receiving cash. Any receipt or invoice
supporting the payment must be attached to the signed
voucher. Ideally at anytime, the remaining bills and coins
and the total amount of the paid petty cash fund was
established.

27. When the amount of cash in the fund is low, the petty
cashier submits the signed petty cash vouchers and
accompanying receipts and invoices to the general
cashier to request for reimbursement. Reimbursement is
made equal in amount to the sum of the petty cash
vouchers submitted. The reimbursement, therefore, is
for an amount that will increase the amount of bills and
coins remaining in the fund to its original amount. The
replenishment of the fund is recorded as:
Expenses
Cash in Bank
xxx
xxx

28. At year-end, prior to the preparation of financial
statements, an adjusting entry is made to recognize the
payments from the fund that are not replenished. This
adjustment likewise updates and brings the petty cash fund
general ledger account to an amount equal to actual cash
items in the petty cash fund as of the reporting date. This
avoids understatement of expenses and overstatement of
cash. This adjustment is usually reversed at the beginning
of the ensuring period. Year-end adjustment is recorded as
follows:
Expenses
Petty Cash Fund
xxx
xxx

29. In instances that the amount in the petty cash fund
may be deemed inadequate to satisfy the company’s
needs, the fund balance is increased and the
following journal entry is made:
Petty Cash Fund
Cash in Bank
xxx
xxx

31. • Is a nominal account that is debited for
shortages and credited for overages in the
petty cash fund.
• Such shortages and overages usually result
from errors in making change or failure to
obtain receipts for very small amounts.
• In addition, receipts may have been written
for an incorrect amount, or money from
the fund may have been lost or stolen.

32. Petty Cash Fund
10 000
Cash in Bank
10 000
*Establishment of petty cash fund
Transportation Expense
2 300
Representation Expense
3 400
Office Supplies Expense
4 200
Cash in Bank
*Replenishment
9 900

33. Transportation Expense
1500
Office Supplies Expense
2500
Advances to Employees
3000
Representation Expense
720
Cash Short and Over
Petty Cash Fund
*Adjusting Entry
80
7800

35. The balances of the bank statement
and the bank account in the cash
book rarely agree because of the
timing difference, omissions and
errors made by the bank or the firm
itself.

36. Bank reconciliation statements can be
used to explain the reasons for the
differences and to identify errors and
omissions in both documents, so that
corrections can be made as soon as
possible.

37. DEPOSIT IN TRANSIT or
UNDEPOSITED COLLECTION
These are amounts already received and recorded by
the company, but are not yet recorded by
the bank, either because it is not yet received by the
bank as of cutoff time (deposit in transit) or it has
not yet been deposited as of the end of the month
(undeposited collection)
* It understates the bank balance.

38. OUTSTANDING CHECKS
These are checks that have been written and recorded
in the company's Cash account, but have not yet
cleared the bank account. Checks written during the
last few days of the month plus a few older checks are
likely to be among the outstanding checks.
* It overstates the bank balance.

39. BANK ERRORS
These are mistakes made by the bank. Bank errors could
include the bank recording an incorrect amount, entering
an amount that does not belong on a company's bank
statement, or omitting an amount from a company's
bank statement. The company should notify the bank of
its errors. Depending on the error, the correction
could increase or decrease the balance shown on the bank
statement.
* (Since the company did not make the error, the
company's records are not changed.)

40. Balance per bank statement on Sept. 30, 2011
Adjustments:
Add: Deposits in transit
Deduct: Outstanding checks
Add or Deduct: Bank errors
Adjusted/corrected balance per bank

41. DEBIT MEMOS – BANK SERVICE
CHARGE
These are fees deducted from the bank statement for the
bank's processing of the checking account activity
(accepting deposits, posting checks, mailing the bank
statement, etc.) The bank might deduct these charges or
fees on the bank statement without notifying the
company. When that occurs the company usually learns
of the amounts only after receiving its bank statement.

42. DEBIT MEMOS – NSF, DAIF, DAUD
These are checks that were not honored by the bank of
the person or company writing the check because that
account did not have a sufficient balance. As a result, the
check is returned without being honored or paid.
When the NSF check comes back to the bank in which it
was deposited, the bank will decrease the checking account
of the company that had deposited the check. The
amount charged will be the amount of the check plus a
bank fee.

43. DEBIT MEMOS – CHECK PRINTING
CHARGES
This occurs when a company arranges for its bank to
handle the reordering of its checks. The cost of the
printed checks will automatically be deducted from
the company's checking account.

44. CREDIT MEMOS – INTEREST
EARNED
It will appear on the bank statement when a bank
gives a company interest on its account balances. The
amount is added to the checking account balance and
is automatically on the bank statement. Hence there
is no need to adjust the balance per the bank
statement. However, the amount of interest earned
will increase the balance in the company's Cash
account on its books.

45. CREDIT MEMOS – NOTES
RECEIVABLE
These are assets of a company. When notes come
due, the company might ask its bank to collect the
notes receivable. For this service the bank will charge a
fee. The bank will increase the company's checking
account for the amount it collected (principal and
interest) and will decrease the account by the
collection fee it charges.

46. ERRORS
It is in the company's Cash account result from the
company entering an incorrect amount, entering a
transaction that does not belong in the account, or
omitting a transaction that should be in the account.
Since the company made these errors, the correction
of the error will be either an increase or a decrease to
the balance in the Cash account on the company's
books.

47. Balance per books on Sept. 30, 2011
Adjustments:
Deduct: Bank service charges
Deduct: NSF , DAIF, DAUD checks & fees
Deduct: Check printing charges
Add: Interest earned
Add: Notes receivable collected by bank
Add or Deduct: Errors in company's cash account
Adjusted/corrected balance per books

48. CASH BOOK
DEBIT
CREDIT
It represents an
increase
It represent a
decrease

49. BANK STATEMENT
DEBIT
It represents
a decrease
CREDIT BALANCE
It represent
an increase
It represents
the amount
owed to the
clients

50. Company A's bank statement dated Dec 31, 2011 shows a balance
of $24,594.72. The company's cash records on the same date show
a balance of $23,196.79. Following additional information is
available:
1.Following checks issued by the company to its customers are still
outstanding:
No. 846 issued on Nov 29
No. 875 issued on Dec 26
No. 878 issued on Dec 29
No. 881 issued on Dec 31
$320.00
49.21
275.00
186.50

51. 2.A deposit of $400.00 made on Dec 31 does not appear on
bank statement.
3.An NSF check of $850 was returned by the bank with the bank
statement.
4.The bank charged $50 as service fee.
5.Interest income earned on the company's average cash balance
at bank was $1,250.
6.The bank collected a note receivable on behalf of the
company. Amount received by the bank on the note was $550.
This includes $50 interest income. The bank charged a collection
fee of $10.
7.A deposit of $430 was incorrectly entered as $340 in the
company's cash records.

52. Company A
Bank Reconciliation
December 31, 2011
Balance as per Bank, Dec 31
Add: Deposit in Transit
Less: Outstanding Checks:
No. 846 issued on Nov 29
No. 875 issued on Dec 26
No. 878 issued on Dec 29
No. 881 issued on Dec 31
Adjusted Bank Balance
$24,594.72
400.00
$24,994.72
$320.00
49.21
275.00
186.50
830.71
$24,164.01

53. Balance as per Books, Dec 31
Add:
Interest Income from Bank
Note Receivable Collected
by Bank
Interest Income from Note
Receivable
Deposit Understated
$23,196.79
$1,237.22
500.00
50.00
90.00
1,877.22
$25,074.01
Less:
NSF Check
Bank Service Fee
Bank Collection Fee
Adjusted Book Balance
850.00
50.00
10.00
910.00
$24,164.01

55. A PROOF OF CASH is essentially a roll forward
of each line item in a bank reconciliation from
one accounting period to the next,
incorporating separate columns for cash
receipts and cash disbursements. The columns
(and formula) used for a proof of cash are:
Beginning balance + Cash receipts in the period
- Cash disbursements in the period = Ending
balance

56. When used for each line item in a bank reconciliation, the
proof of cash highlights areas in which there are
discrepancies, and which may therefore require further
investigation, and probably some adjusting entries.
A proof of cash would be used in situations where controls
over cash are weak.
It essentially combines two bank reconciliations, reconciling
all transactions that occurred during the period to the client’s
Cash Receipts Journal and Cash Disbursements Journal.

57. A proof of cash can indicate an array of other
reconciliation issues that will require adjustments to a
company's accounting records, including:
• Bank fees not recorded
• Not sufficient funds checks not deleted from the deposit records
• Interest income or expense not recorded
• Checks or deposits recorded by the bank in different amounts than
what they were recorded by the company
• Checks cashed that the company voided
• Cash disbursements and/or receipts recorded in the wrong account

58. A PROOF OF CASH can also uncover instances of
fraud. If there is a difference between the totals, it can
indicate the presence of unauthorized borrowings and
repayments within the time period covered by a single
bank statement. Thus, if a controller were to illegally
withdraw 100,000 from the company accounts near
the beginning of the month for his personal use, and
replaced the funds before the end of the month, the
issue would not appear in a normal bank reconciliation
as a reconciling item. However, a proof of cash would
be more likely to flag the extra cash withdrawal and
cash return.

59. A PROOF OF CASH is more complicated to
complete than a bank reconciliation. However,
it provides a greater degree of detail, and so
makes it easier to locate errors than a bank
reconciliation. Thus, it may be cost-effective to
use a proof of cash when you expect to find a
large number of different cash-related errors
within an accounting period.

60. 1. The balance on the bank statement with the
general ledger balance at the beginning of the
proof-of-cash period
2. Cash receipts deposited per the bank with the cash
receipts journal for a given period
3. Cancelled checks clearing the bank with those
recorded in the cash disbursements journal for a
given period
4. The balance on the bank statement with the
general ledger balance at the end of the proof-ofcash period

62. Test cash transactions for a given period to
verify the following existence and completeness
assertions, as it relates to transactions, when
internal controls over cash transactions are not
effective in design or performance and an audit
of the ending cash balance is not enough
because of corollary misstatements to other
accounts that result from unrecorded cash
transactions or fictitious transactions.

63. •All recorded (on the client's books) cash
receipts were actually deposited. (existence)
•All receipts deposited in the bank were
recorded on the client's books. (completeness)
•All recorded cash disbursements were processed
by the bank. (existence)
•All disbursements processed by the bank were
recorded. (completeness)

64. The standard 4 column proof of cash reconciles client
books and records with 3rd party bank records for
beginning (column 1) and ending (column 2)
balances, as well as cash receipts/deposits (column 2)
and cash disbursements/charges (column 3) for a
given period. Usually one starts with amounts from
the bank statement(s) and reconciles to what is
reflected in the client's general ledger and/or cash
receipts and disbursements journal, as explained
below:

65. Reconciling
Item
Column
Affected
Explanation
Ending DIT
1
You must add this amount to the beginning cash
balance per bank because the bank did not receive
the deposits before the prior month cut off.
2
Beginning
DIT
You must subtract this amount from the deposits
shown by the bank for the period because these
were recorded on the client's books in prior
period.
2
You must add this amount to the deposits shown
by the bank for the period because these were
recorded on the client's books this period, but will
not be received by the bank until next period.
4
You must add this amount to the ending balance
per the bank because the bank did not received
them until after the end of the period, but they
were recorded on the client's books this period.

66. Beginning
Outstanding
Checks
Ending
Outstanding
Checks
Explanation
1
You must subtract this amount from the beginning cash
balance per bank because the bank did not receive the
checks for processing before the prior month cut off.
3
Reconciling Item
Column
Affected
You must subtract this amount from the
disbursements/charges shown by the bank for the
period because they were recorded on the client's books
in the prior period.
3
4
You must add this amount to the
disbursements/charges shown by the bank for the
period because they were recorded on the client's books
in this period, but will not be received by the bank for
processing until next period.
You must subtract this amount from the ending cash
balance per bank because the bank did not receive the
checks for processing until after this month's cut off,
but have been recorded on the client's books.

67. Reconciling Item
Customer NSF Checks
redeposited by client in
same period
Column
Affected
Explanation
3
Customer NSF Checks
redeposited by client in
the following period
2
You must subtract this amount from deposits
per bank because the client did not record the
second deposit as an additional receipt.
You must subtract this amount from
disbursements/charges per bank because the
return of the NSF check was not recorded on
the client's books as a cash disbursement.
3
4
You must subtract this amount from
disbursements/charges per bank because the
return of the NSF check was not recorded on
the client's books as a cash disbursement.
You must add this amount to the ending
balance per the bank because
the bank reduced the balance when the
check was returned NSF by the customer's
bank and the client did not record it as an
additional disbursement and
it is basically a DIT at period's end.

68. • http://www.accountingtools.com/questions-andanswers/what-is-a-proof-of-cash.html
• http://www.mccc.edu/~horowitk/documents/arens12e_23.pdf
• http://www.principlesofaccounting.com/chapter6/chapter6.ht
ml#Reconciliation
• proflorsbach.tripod.com/Proof.doc
• http://accountingexplained.com/financial/cash-andequiv/bank-reconciliation
• http://accountingcoach.com
• Intermediate Accounting Vol 1 (Nenita S. Robles & Patricia
Empleo)