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KFCI-Module 1
Learning Objectives
01 To understand the mission and mission of the institution.
The vision/mission of the institution, program outcomes,
classroom rules and grading system
07 ToWindow
discuss different types of window dressing.
dressing, lapping and kiting
To know the accounting treatment for the two methods of petty cash fund.
08 Petty cash fund –imprest fund system and
fluctuating fund system
Content
KFCI-Module 1
Content
KFCI-Module 1
Content
PROGRAM OUTCOMES
KFCI-Module 1
Content
CLASSROOM RULES
KFCI-Module 1
Content
GRADING SYSTEM
KFCI-Module 1
CHAPTER 1 CASH AND CASH EQUIVALENTS
Definition of cash
Cash equivalents
Valuation and statement presentation of cash
Investment of excess cash
Foreign currency, cash fund for certain purpose, bank overdraft and compensating balance
Undelivered check, postdated check delivered
Window dressing, lapping and kiting
Petty cash fund –imprest fund system and fluctuating fund system
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CHAPTER 1 CASH AND CASH EQUIVALENTS
DEFINITION OF CASH
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Definition of Cash
• From the point of view of a layman, “cash” simply means money.
• Money is the standard medium of exchange in business
transactions.
• Money refers to the currency and coins which are in circulation
and legal tender.
• However, in the accounting parlance, the term “cash” has a
special and broader meaning. It connotes more than money.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Definition of Cash
• As contemplated in accounting, cash includes money and any other negotiable
instrument that is payable in money and acceptable by bank for deposit and
immediate credit.
• Cash includes (because these are acceptable by the bank for deposit or immediate
encashment.)
1. checks
2. bank drafts
3. money orders
• 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.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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
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.
• This means that the cash must readily available in the payment of current
obligations and not be subject to any restrictions, contractual or
otherwise.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Cash items included in cash
a. Cash on hand - This includes undeposited cash collections and other cash items
awaiting deposit such as customer’s checks, cashier’s or manager’s checks, traveler’s
checks, bank drafts and money orders.
b. Cash in bank - This includes demand deposit or checking account and saving 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.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Cash equivalents
• PAS 7, paragraph 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
investment that reacquired three months before
maturity can qualify as cash equivalents”.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Examples of Cash Equivalents are:
a. Three-month BSP treasury bill
b. Three-year BSP treasury bill purchased
three months before date maturity
c. Three-month time deposit
d. Three-month money market instrument or
commercial paper
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Examples of Cash Equivalents are:
• Equity securities cannot qualify as cash equivalents because shares do
not have a maturity date.
• 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.
• Thus, a BSP treasury bill that was purchased one year ago cannot
qualify as cash equivalent even if the remaining maturity is three months
or less.
KFCI-Module 1
CHAPTER 1 CASH AND CASH EQUIVALENTS
Examples of Cash Equivalents are:
• Equity securities cannot qualify as cash equivalents because shares do
not have a maturity date.
• 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.
• Thus, a BSP treasury bill that was purchased one year ago cannot
qualify as cash equivalent even if the remaining maturity is three months
or less.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
VALUATION AND
STATEMENT
PRESENTATION OF CASH
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Measurement of cash
• Cash is measure at face value.
• Cash in foreign currency is measured at the current
exchange rate.
• If a bank or financial institution holding the funds of an
entity is in bankruptcy or financial difficulty, cash should
be written down to estimated realizable value if the
amount recoverable is estimated to be lower than the
face value.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
INVESTMENT OF
EXCESS CASH
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Classifications 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 as instruments are classified as cash
equivalents and therefore included in caption “cash and cash equivalents”.
b. If the term is more than three months but within one year, such investments classified
as short-term financial assets or temporary investments and presented separately as
current assets.
c. If the term is more than one 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 reclassified as current or temporary investments.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
FOREIGN CURRENCY
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Foreign currency
• Cash in foreign currency should be translated to
Philippine pesos using the current exchange rate.
• Deposits in foreign countries which are not subject to
any foreign exchange 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.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Classification of cash fund
• The classification of a cash fund as current or noncurrent should
parallel the classification of the related liability.
• 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, a cash fund set aside for the acquisition of a
noncurrent asset should be classified as noncurrent regardless
of the year of disbursement.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
BANK OVERDRAFT
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Bank overdraft
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CHAPTER 1 CASH AND CASH EQUIVALENTS
For example, an entity maintains two bank accounts:
a. Cash in bank – First Bank, which is overdrawn by 10,000.
b. Cash in bank – Second Bank, with a debit balance of 100,000.
The net cash balance is 90,000.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Exception to the rule on overdraft
• As stated earlier, a bank overdraft should not be offset against other
bank accounts with debit balances. This rule, however, is not without
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 account with a 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.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
COMPENSATING
BALANCE
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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.
For example, an entity borrows 5,000,000 from a bank and agrees to maintain a
10% or 500,000 minimum compensating balance in a demand deposit account.
• In effect, this arrangement results in the reduction of the amount
borrowed because the compensating balance provides a source of fund
to the bank as partial compensation for the loan extended.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Classification of compensating balance
a. If the deposit is not legally restricted as to withdrawal by the
borrower because of an informal compensating balance
agreement, the compensating balance is part of cash.
b. 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.
c. If the related loan is long-term, the compensating balance is
classified as noncurrent investment.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
UNDELIVERED CHECK
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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.
• There is no payment when the check is pending delivery to the
payee at the end of reporting period.
• The reason is that undelivered check is still subject to the
entity’s control and may thus be canceled anytime before
delivery at the discretion of the entity.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accordingly, an adjusting entry is required to restore the cash
balance and set up the liability as follows:
Cash xx
Accounts payable or appropriate account xx
In practice, the foregoing adjustment is sometimes ignored
because the amount is not very substantial and there is no
evidence of actual cancelation of the check in the subsequent
period.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
POSTDATED CHECK
DELIVERED
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Postdated check delivery
A postdated check delivery is a check drawn, recorded and already given
to the payee but it bears a date subsequent to the end of reporting period.
The original entry recording a delivered postdated check shall also be
reversed and therefore restored to the cash balance as follows:
Cash xx
Accounts payable or appropriate account xx
The reason is that there is no payment until the check can be presented to
the bank for encashment or deposit.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
• In determining what is a “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.
• Clearly, the law does not specify a definite period within which checks
must be presented for encashment. Reference is made to usage of trade
or business practice.
• In banking practice, a check becomes stale if not encashed within six
months from the time issuance. Of course, this is a matter of entity policy.
• Thus, even after three months only, the entity may issue a “stop payment
order” to the bank for the cancelation of a previously issued check.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
If the amount of stale 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 is as follows:
Cash xx
Accounts payable or appropriate account xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting for cash shortage
Where the cash count shows cash which is less than the balance
per book, there is a cash shortage to be recorded as follows:
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Hence, if the cashier or cash custodian is held responsible for the
cash shortage, the adjustment should be:
Due from cashier xx
Cash short or over xx
However, if reasonable efforts fail to disclose the cause of the
shortage, the adjustments is
Loss from cash shortage xx
Cash short or over xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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 xx
Cash short or over xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
The cash overage is treated as miscellaneous income if
there is no claim on the same.
Cash short or over xx
Miscellaneous income xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
LAPPING
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CHAPTER 1 CASH AND CASH EQUIVALENTS
KITING
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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CHAPTER 1 CASH AND CASH EQUIVALENTS
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.
• There are occasions when the issuance of checks becomes impractical or
inconvenient such as when small amounts are paid or things are hurriedly
bought or customers are entertained.
• Consequently, in such instances, it may be more economical and
convenient to pay in cash rather than issue checks.
• The imprest fund system is the one usually followed in handling petty
cash transactions.
KFCI-Module 1
CHAPTER 1 CASH AND CASH EQUIVALENTS
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.
• There are occasions when the issuance of checks becomes impractical or
inconvenient such as when small amounts are paid or things are hurriedly
bought or customers are entertained.
• Consequently, in such instances, it may be more economical and
convenient to pay in cash rather than issue checks.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
a. A check is drawn to establish the fund.
Petty cash fund xx
Cash in bank xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
b. Payment of expenses out of the fund
No formal journal entries are made. The
petty cashier generally requires a signed
petty cash voucher for such payments
and simply prepares memorandum
entries in the petty cash journal.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
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 disbursement are
recorded as follows:
Expenses xx
Cash in bank xx
It is to be pointed out that the petty cash disbursements should be
replenished only by means of check and not from undeposited
collections.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
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 xx
Petty cash fund xx
The adjustment is to be reversed at the beginning of the next accounting
period.
The reversal is made in order that the normal replenishment procedures
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.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
e. An increase in the fund is recorded as
follows:
Petty cash fund xx
Cash in bank xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Accounting procedures
f. A decrease in the fund is recorded as
follows:
Cash in bank xx
Petty cash in fund xx
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
2017
Nov. 10 The entity established an imprest fund of
10,000.
Petty cash fund 10,000
Cash in bank 10,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
2017
Nov. 29 Replenished the fund. The petty cash items include the
following:
Currency and coin 2,000
Supplies 5,000
Telephone 1,800
Postage 1,200
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
2017
Nov. 29 The journal entry to record the replenishment is:
Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
2017
Dec. 31 The fund was not replenished.
The fund is composed of the following: currency and coin 7,000,
supplies 1,500, postage 500, miscellaneous expense 1,000.
Supplies 1,500
Postage 500
Miscellaneous expense 1,000
Petty cash fund 3,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
2018
Jan. 1 The adjustment made on December 31, 2017 is reversed.
Petty cash fund 3,000
Supplies 1,500 Postage
500
Miscellaneous expense 1,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
2018
Feb. 1 The fund is replenished and increase to 15,000.
The composition of the fund: currency and coin 1,000, supplies 4,500, postage
3,000 and miscellaneous expense 1,500.
Petty cash fund 5,000
Supplies 4,500
Postage 3,000
Miscellaneous expense 1,500
Cash in bank 14,000
The total amount of the check drawn is 14,000 representing the petty cash
disbursements of 9,000 and the fund increase of 5,000.
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
Nov. 10 The entity established a petty cash fund of
10,000.
Petty cash fund 10,000
Cash in bank 10,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
Nov. 11-28 Petty cash disbursements amounted
to 8,000.
Expenses 8,000
Petty cash fund 8,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
Nov. 29 Issued a check for 10,000 to replenish the fund.
Petty cash fund 10,000
Cash in bank 10,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
Dec. 1-30 Petty cash expenses amounted to
9,000.
Expenses 9,000
Petty cash fund 9,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
Illustration
Dec. 31 Issued a check for 15,000 to replenish the fund.
Petty cash fund 15,000
Cash in bank 15,000
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CHAPTER 1 CASH AND CASH EQUIVALENTS
QUESTIONS
1. Define cash.
2. Explain the meaning of unrestricted cash.
3. Define cash equivalent.
4. Explain the measurement of cash.
5. Explain the financial statement presentation of “cash and cash equivalents”
6. Explain the classification of investments of excess cash in time deposits, money market instruments and treasury bills.
7. Explain the treatment of foreign currency.
8. Explain the classification of a cash fund.
9. Explain a bank overdraft.
10. Explain a compensating balance.
11. Explain undelivered check, postdated check delivered and stale check.
12. Explain the accounting for cash shortage or cash overage.
13. Explain the imprest system of internal control.
14. What is a petty cash fund?
15. Explain the two methods of accounting for petty cash fund.
KFCI-Module 1
Highlight Summary
KFCI-Module 1