Cash and Cash Equivalents

• Lesson 1 focuses on cash and cash equivalents, including their nature, composition, measurement, and presentation, as well as accounting for cash shortages/overages, petty cash funds, and bank reconciliations.

Cash

• Includes money and negotiable instruments acceptable by the bank.
• Composed of cash on hand, cash in bank, and cash funds.

Cash on Hand

• Includes currencies, coins, bank drafts, money orders, and checks withdrawable on the balance sheet date.
• Non-withdrawable checks are presented as accounts receivable.
  • Withdrawable checks consist of cashier's, certified, customer's, personal, manager's, and traveler's checks.
  • Non-withdrawable checks consist of customer's post-dated, NSF, and stale checks.

Company's Drawn Checks

• It's assumed it is already journalized (Dr. Accounts Payable, Cr. Cash).
• It is appropriate to reduce the cash balance, unless it is undelivered/unreleased or post-dated.

Undelivered or Unreleased Checks

• Checks drawn and recorded but not given to the payee before year-end.
• Requires an adjusting entry to restore cash balances and set up a liability.
• Pro-forma Adjusting Entry:
  • Dr. Cash
  • Cr. Accounts Payable

Post-Dated Check

• A check drawn, recorded, and delivered but dated after the reporting date.
• Requires an adjusting entry to revert cash back.
• Pro-forma Adjusting Entry:
  • Dr. Cash
  • Cr. Accounts Payable

Stale Checks

• A check not cashed by the payee within a relatively long period.
• Usually becomes stale if it is not encashed six months from issuance.
• If the company is the holder, amount should be reverted back to a receivable account if already recorded as part of cash.
  • Account Receivable Dr.
  • Cash Cr.
• If the company is the issuer of a stale check:
  • And the amount is immaterial, the entity should recognize miscellaneous income.
    • Cash Dr.
    • Miscellaneous income Cr.
  • And the amount is material and the liability is expected to continue, cash is restored and a liability set up.
    • Cash Dr.
    • Accounts Payable Cr.

Cash in Bank

• Includes cash deposited in checking/current and savings accounts.

Special Topics in Cash in Bank

• Time deposit - an interest-bearing bank account that has a specified date of maturity, may be part of cash equivalents.
• Compensating balance - minimum bank balance maintained for borrowing arrangements.
  • If legally restricted, it is excluded from cash and included in other current or non-current assets
  • If not legally restricted, it is included as part of cash
• Bank overdrafts - a credit balance in a bank account.
  • Classified as current liability and cannot be offset against accounts with debit balances unless in the same bank
• Deposits in foreign countries
  • Included as cash if not subject to foreign exchange restrictions
  • Separately classified among noncurrent assets if restricted
• Deposit in a closed bank
  • Excluded from cash, may be included as trade/other receivables, or other current assets.

Cash Funds

• Categorized by operations or non-operation purposes
• If use is for operations, always included as cash, including:
  • Petty cash, revolving, interest, tax, payroll, travel, change, and dividend funds
• If not for operations, classify based on settlement of liabilities or acquisition of non-current assets:
  • For settlement of liabilities: classification parallels related liability, include as cash if disbursed within 12 months, otherwise excluded as investment.
  • For acquisition of non-current assets: always classified as non-current asset.

Cash Equivalents

• Short-term, highly liquid investments easily convertible to cash with insignificant risk of value change.
• Generally include investments acquired three months before maturity (3-month rule).
• Examples:
  • Time deposits (Certificates of Deposit)
  • Money Market funds (Commercial Papers)
  • Treasury Bills
  • Investments in preference shares with fixed redemption dates
• Treasury notes and bonds are long-term forms of treasury bills and should be excluded from cash, if the 3-month rule cannot be tested

Items NOT Cash or Cash Equivalents

• IOUs: classified as Accounts Receivable.
• Postage stamps: classified as Supplies.
• Credit memos: classified as Purchase Returns.
• Cash surrender value: classified as investments.
• Ordinary shares: classified as investments.

Measurement and Presentation

• Cash and cash equivalents are measured at face value.
• Foreign currencies are measured at the current exchange rate.
• Presented as the first line item under current assets on the balance sheet.
• Requires detailed schedule disclosure in financial statement notes.

Cash Shortage

• Record when cash count is less than book balance.
• Cash short or over Dr.
• Cash Cr.
• The "cash short or over" is a suspense account to be adjusted when the FS are prepared.
• Responsible Cashier/Custodian:
  • Due from cashier/custodian Dr.
  • Cash short or over Cr.
• Unable to Determine Reason:
  • Loss from cash shortage Dr.
  • Cash short or over Cr.

Cash Overage

• Record when cash count exceeds book balance.
• Cash Dr.
• Cash short or over Cr.
• No Claim on Overage:
  • Cash short or over Dr.
  • Miscellaneous income Cr.
• Found to be Cashier/Custodian Money:
  • Cash short or over Dr.
  • Payable to cashier/custodian Cr.

Imprest System

• This is a cash control system where all receipts are deposited intact, and disbursements are made via check.
• Exceptions exist for economical reasons, such as purchasing small-value items that involve the use of petty cash fund.

Petty Cash Fund

• This is money set aside for small expenses paid with cash.
• The two methods of handling petty cash are:
  • Imprest fund system
  • Fluctuating fund system

Pro-forma Entries for Petty Cash Fund

• When a check is drawn to establish the fund:
  • Under the Imprest Fund System:
    • Petty cash fund Dr.
    • Cash in bank Cr.
  • Under the Fluctuating Fund System:
    • Petty cash fund Dr.
    • Cash in bank Cr.
• Payment of expenses out of the fund:
  • Under the Imprest Fund System:
    • No entry
  • Under the Fluctuating Fund System:
    • Expenses Dr.
    • Petty cash fund Cr.
• Replenishment of petty cash fund:
  • Under the Imprest Fund System:
    • Expenses Dr.
    • Cash in bank Cr.
  • Under the Fluctuating Fund System:
    • Petty cash fund Dr.
    • Cash in bank Cr.
• At the end of the reporting period, there may be unreplenished expenses:
  • Under the Imprest Fund System:
    • Expenses Dr.
    • Petty cash fund Cr.
  • Under the Fluctuating Fund System:
    • No entry
• When there is an increase in the petty cash fund:
  • Under the Imprest Fund System:
    • Petty cash fund Dr.
    • Cash in bank Cr.
  • Under the Fluctuating Fund System:
    • Petty cash fund Dr.
    • Cash in bank Cr.
• When there is a decrease in the petty cash fund:
  • Under the Imprest Fund System:
    • Cash in bank Dr.
    • Petty cash fund Cr.
  • Under the Fluctuating Fund System:
    • Cash in bank Dr.
    • Petty cash fund Cr.

Bank Reconciliation

• A statement that brings the cash balance per book and bank into agreement
• Prepared monthly using checking accounts
• Necessary because of reciprocal accounts, and due to items appearing on either the depositor's or bank's records, known as "Reconciling Items".

Reconciling Items

• Book reconciling items: debit memos, credit memos, and errors
• Bank reconciling items: deposits in transit, outstanding checks, and errors

Credit Memos

• These are items not representing deposits credited by the bank to the account which increase the bank balance.
• Examples:
  • Notes Receivable collected by the bank on depositor's behalf.
  • Proceeds of bank loan credited to the depositor's account.
  • Matured time deposits transferred by the bank to the current account.

Debit Memos

• These are items not representing checks paid by bank which reduce the bank balance.
• Examples of debit memos:
  • NSF checks (aka DAIF)
  • Defective checks
  • Bank service charges
  • Reduction of loan

Deposits in Transit

• These are collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement.
• Includes:
  • Collections forwarded to the bank too late to appear on the bank statement.
  • Undeposited collections

Outstanding Checks

• Also known as checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement.
• Includes checks drawn and given to the payee that have not yet been presented for payment as well as certified checks.

Forms of Bank Reconciliation

• Adjusted balance method: book and bank balances are brought to the correct cash balance.
• Book to bank method: book balance is reconciled to bank balance.
• Bank to book method: bank balance is reconciled to book balance.

Proforma reconciliation - Adjusted balance method

• Book balance
• Add: Credit memos
• Less: Debit memos
• Add/less: Errors
• Adjusted balance
• Bank balance
• Add: Deposit in transit
• Less: Outstanding check
• Add/less: Errors
• Adjusted balance

Proforma Reconciliation - Book to bank method

• Book balance
• Add: Credit memos
• Add: Outstanding check
• Less: Debit memos
• Less: Deposit in transit
• Add/Less: Errors
• Bank balance

Proforma Reconciliation - Bank to book method

• Bank balance
• Add: Deposit in transit
• Add: Debit memos
• Less: Outstanding checks
• Less: Credit memos
• Add/Less: Errors
• Book balance