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ACC-110: INTERMEDIATE ACCOUNTING 1 LESSON 1: 1st SEMESTER | A.Y. 202Y – 202Y LECTURER: SIR/MS. CASH AND CASH EQUIVALENTS (4) Traveler’s checks o It has already a fund....

ACC-110: INTERMEDIATE ACCOUNTING 1 LESSON 1: 1st SEMESTER | A.Y. 202Y – 202Y LECTURER: SIR/MS. CASH AND CASH EQUIVALENTS (4) Traveler’s checks o It has already a fund. CASH MANAGEMENT AND CONTROL o Cannot be bounced. o Considered cash. Cash is the single most important item on a balance sheet. (5) Bank drafts o Issued by the bank  It serves as the medium of exchange in our economy. o Most guaranteed by the bank  It provides the basis for measurement and accounting. o It has already a fund. o Assets, liabilities, equity, income, expenses. o Considered cash.  All businesses, individuals, and governments must have o Guarantees by bank to advance funds on the sufficient cash on hand to pay obligations as they become demand by the party whom the draft was due if they are to remain viable operating entities. directed.  The IASB has always identified the need to report on cash (6) Money order and liquidity as a key objective of financial reporting. o It is like a check but not from the bank. o Cash is always connected with the liquidity of the o Money order is considered as a cash because it company. has a fund. o If the company has no sufficient cash to run its o Similar to bank drafts but are drawn from post operations, then it seems that the company is not offices and other financial institutions. liquid. o Acceptable by the bank for deposit or immediate  This eventually led to the requirement of the statement of encashment. cash flows as one of the primary financial statements. (7) Value added tax account  Conversely, excessive cash on hand is idle cash; it cannot o Included in cash. appreciate. o Payment for current liability. o It is not good for the company to have excessive cash on hand because it is not managed well. o The idle cash should be either invest or time- NOTE! deposit.  Efficient cash management requires cash to be continually ─ Checks and bank drafts cannot qualify as cash equivalents working in one of several ways as part of the operating because these are not short-term investments. cycle or as a short-or long-term investment. ─ When checks and bank drafts are available for unrestricted  The management of cash is therefore a critical business and immediate use, they are included as cash but NOT as function. cash equivalents. CASH CASH IN BANK ─ Cash is the most liquid of current assets.  To be reported as cash, an item must be readily ─ Refers to deposits in banks that are available for available and not restricted for use in the payment of immediate withdrawal and unrestricted use. current obligations. o Cash in bank can only be used when we issue  Cash includes money and any negotiable instrument checks. that is payable in money and acceptable by the bank ─ Undeposited cash collections  bills and coins (cold cash). for deposit and immediate credit. ─ Demand deposit or checking account  for the purpose of using money everyday. ─ Saving deposit  for the purpose of saving and CASH ON HAND unrestricted withdrawal. ─ Undeposited cash collections  bills and coins (cold cash). (1) Saving Deposit ─ Other cash items awaiting deposit (other negotiable o For the purpose of saving and unrestricted instruments); withdrawal. o Considered cash. (1) Customers’ check (2) Demand Deposit or Checking account o Ordinary check o Unrestricted funds that can be withdrawn upon o No certainty demand from a bank. (2) Personal check o We can withdraw at any time what we have o Considered cash. deposited. (3) Cashier’s or Manager’s checks o Considered cash. o Always guaranteed by the bank because it has (3) Cash in bank – payroll account already a fund. o Part of cash. o Cannot be bounced o Considered cash. 1|Page CASH FUND o Postdated checks received cannot be considered as cash YET because the postdated checks are ─ Cash fund is restricted funds. unacceptable by the bank for deposit and ─ If the cash fund is set aside for current operations or immediate encashment. current obligations  current asset (part of cash and o Treated as a receivables. cash equivalents). (3) IOUS o Petty cash fund o Advances to employees. o Change fund o (“I owe you”) informal document that o Payroll fund (for salaries) acknowledges the existence of a debt (accounts o Dividend fund receivable). o Interest fund o Treated as a receivables. o Tax fund – set aside for paying taxes. (4) NSF checks o Travel fund o Non-Sufficient Fund checks cannot be cashed ─ If the cash fund is set aside for non-current purpose or due to insufficient funds in the payor's account payment of non-current obligation  long-term or non- (accounts receivable). current investment. (5) Travel Advance o Sinking fund is set aside for the payment of a bond o Travel advances are payments made before a payable (classified as current asset when it is due trip takes place. They can be cash to an within 1 year after the end of the reporting period.) employee or non-employee traveler. o Plant expansion fund o Classified as other current assets—prepaid o Depreciation fund expense. o Insurance fund o Pension fund (6) Cash funds set aside for non-current purpose or ─ If the cash fund is set aside for acquisition of a non-current payment of non-current obligation. asset  non-current (regardless of the year of disbursement. ─ Cash specifically designated for special purposes should be UNDELIVERED OR UNRELEASED CHECK reported separately in the current or noncurrent asset section. ─ An undelivered or unreleased check is one that is merely drawn and recorded but not given to the payee before the (1) Restricted Cash end of reporting period. o Classification should parallel the classification ─ The check has already a payor’s signature but not yet applied to the liability. given to the payee. o Restricted cash that is designated for the ─ Accordingly, an adjusting entry is required to restore the payment of current obligation  classified cash balance and set up the liability. under current asset. ─ The entry upon preparation of the check is: o Restricted cash that is designated for the payment of non-current obligation  classified Accounts payable 10,000 under non-current asset. Cash in bank 10,000 ─ There is still no payment because the check is still CASH EQUIVALENTS undelivered or unreleased. ─ It is considered paid when the check was already delivered ─ Cash equivalents are very short-term, interest-earning to the payee and deposited to its bank account. securities such as three-month Philippine Treasury ─ Since it is still undelivered or unreleased, we will restore securities. the cash balance: ─ Cash Equivalent is a highly liquid short-term investment with maturity of 90 days or less. Cash 10,000 Accounts 10,000 (1) Time Deposits Payable o Deposits that are not immediately available due to withdrawal or other restrictions. ─ Undelivered checks drawn are included in cash and o These are sometimes classified as temporary reverted back to accounts payable. investments (Certificates Of Deposit and Money Market Savings Certificates) depending upon how many days they were invested or deposited. POSTDATED CHECK ─ Postdated checks delivered are checks are drawn, NOT INCLUDED AS CASH recorded and already given to the payee but they bear a date subsequent to the end of reporting period. ─ Some items do not meet the "acceptance at face value on o Do not qualify as cash because postdated checks deposit" test and should not be reported as cash. are not presently available fo immediate use. ─ Checks dated at a future date. (1) Postage Stamps ─ Since it is a postdated check, it is not yet considered as o Unused postage stamps are treated as prepaid payment. supplies. (2) Postdated Checks 2|Page ─ It is only considered as payment until the check can be Accounts receivable 100,000 presented to the bank for encashment or deposit by the payee.  At the end of reporting period, you determined that a customer’s check of P20,000, included in the collections, (1) Postdated checks drawn are included in cash and reverted is postdated. back to accounts payable. The adjusting entry is as follows: The entry upon preparation of the check is: Accounts receivable 20,000 Accounts Payable xxx Cash 20,000 Cash xxx  You will report cash P80,000 in your financial statements. The original entry recording postdated checks should be reversed since there is no payment yet. STALES CHECK Cash xxx ─ A stales check is a check not encased by the payee within Accounts Payable xxx a relatively long period of time. o Normally within 6 months or more from the time of Example: issuance, the check is referred to as “stale” ─ If the amount of stale check is immaterial, it is simply You wrote the following checks today: accounted for as miscellaneous income. o Immaterial  there is already no liability to a) Check #1 is drawn for P10,000 and dated today but yet to continue. be delivered to payee Mr. A next year. b) Check # 2 is drawn for P15,000 and was delivered to payee Cash xxx Mr. B today but the check is dated 100 years from now. Miscellaneous income xxx The entry for the checks drawn is as follows: ─ If the amount of stale check is material and a liability is expected to continue, the cash is restored and the liability Accounts payable – Mr. A 10,000 is set up. Accounts payable – Mr. B 15,000 o Liability is considered to be paid. Cash 25,000  If FS is prepared today, both checks drawn should be Cash xxx reverted back to cash and accounts payable because: Accounts Payable xxx i. Since the check is yet to be delivered, it means that I still hold that and that Mr. A cannot encash check #1. ii. Mr. B holds check #2 but he cannot yet encash it until NOTE! after 100 years. Cash includes money or its equivalent that is readily available The following adjusting entry is necessary: for unrestricted use. Postdated check received from Exclude from Cash 25,000 customer. cash. Accounts payable – Mr. A 10,000 Undelivered check drawn. Include in cash. Accounts payable – Mr. B 15,000 Postdated check drawn. Include in cash. Stale checks. Include in cash. (2) Postdated checks received from customers are excluded ─ “Checks drawn” – withdrawn / encashed / deducted from from cash and reverted back to accounts receivable. the bank account. The entry upon check collections on account is: Cash xxx CASH EQUIVALENTS Accounts receivable xxx  Cash equivalents as short-term and highly liquid The adjusting entry is necessary to revert bank postdated investments that are readily convertible into cash and so checks to accounts receivable. near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Accounts receivable xxx o Since the maturity is so near, there is no much Cash xxx changes in value (because of changes in interest rates) o Short term: 3-months or less / 90-days. Example: You received customers’ checks totaling P100,000.  Items very near cash but not in negotiable form: The entry to record the receipt of the checks is as follows: o Treasury bills. o Commercial paper. Cash 100,000 o Money market funds. 3|Page  Examples of cash equivalents are:  An investment normally qualifies as a cash equivalent only when it has a short maturity of three months or less from (1) Treasury bills, notes, or bonds acquired 3 months the date of acquisition. before maturity date o It must have a 3-months life or maturity from the o Considered cash equivalent – even if in nature, date of acquisition. it is an investment but in substance, it can o For something to be considered as cash equivalent, considered as cash (because of eligible time we look at the “date of purchase” and not the period). “maturity date.” o Treasury bill is a short-term obligation issued by o It should be purchased within 90 days or less before the government at a discount. maturity. o Treasury bills normally have a maturity of 90 days to less than a year.  Equity investments (investment in stocks) are excluded o In the absence of any contrary statement, the from cash equivalents because shares do not have a treasury bills are considered cash equivalent. maturity date. o Treasury notes and treasury bonds are long- o Unless they are, in substance, cash equivalents. term obligations issued also by the government. o Substance over form o Treasury notes have a maturity of 1 year to less than 10 years. (1) Redeemable preference shares that are acquired 3 o Treasury bonds have a maturity of 10 years or months or less before their specified redemption date more. o Shares of stocks generally cannot qualify as cash equivalents except redeemable preference share. (2) Money market instrument or commercial paper  Share has no maturity date. acquired 3 months before maturity date o Redeemable preference shares are preference o Money market instruments are investments in shares with mandatory redemption. portfolios of short-term securities. o This can qualify as cash equivalents because o In the absence of specific term, money market redeemable preference shares are debt placement is short-term investment of three instruments rather than equity instruments. months or less. o Redeemable preference share  from the time of o Commercial papers consist of short-term, birth of corporation, there is a maturity date. unsecured, notes payable issued in large  Form: share denominations by large companies with high  Substance: liability (because of maturity date) credit ratings to other companies and institutional investors. Excess Cash (investment) o The maturity date of commercial paper is 3-months Cash Equivalents normally less than 270 days and is traded in More than 3 months, but Short-term investments money markets and, thus, is highly liquid. not more than 12 months o A commercial paper acquired 3 months or less More than 12 months Long-term investment before its maturity date may qualify as cash equivalent. NOTE! Commercial paper is the same as treasury bills ─ In the absence of specific term, money market account is short-term investment of three months or less.  The only difference is that commercial paper is not issued by BSP but by businesses. (3) 3-month time deposit MEASUREMENT AND PRESENTATION OF CASH o Kinds of cash  Cash on hand, Cash in bank,  Presentation  Current Asset. and Time deposit. o Cash is the first-line item in the current asset. o Time deposit is a form of a bank deposit o Exception: Restricted Cash (non-current asset). normally made in fixed denomination, bears  Measurement  Face Value. interest higher than that of regular deposits, o Cash is measure initially at face value. and has a pre-agreed maturity. o Face value is the peso value itself. o Time-deposit cannot be withdrawn at certain o Cash is measure subsequently at face value. period of time—you need to wait for the  Cash in Foreign Currency should be converted into Peso maturity date. using the current exchange rate. o But if your agreement maturity of the time deposit with the bank is after 3-months after you invest, then it is part of cash equivalents. o A time deposit is evidenced by a certificate of DEPOSIT IN FOREIGN BANKS deposit. o A time deposit in bank closed by BSP is a ─ Unrestricted deposits in foreign banks that are available noncurrent asset for immediate withdrawal are included as cash at face amount translated at the current exchange rate as of the  Cash equivalents are held for the purpose of meeting reporting date. short-term cash commitments rather than for investment o Foreign Deposits are reported in their Peso or other purposes. equivalents as of the date of the balance sheet. 4|Page  o Not subject to any foreign restriction. COMPENSATING BALANCES ─ Restricted deposits in foreign banks that are not available for immediate withdrawal are excluded from cash and ─ Compensating balances is a minimum or average balance presented as receivable subject to appropriate allowances on deposit with a bank. for uncollectability and impairment. o Minimum checking or demand deposit account o Subject to any foreign restriction should be balance that must be maintained in connection with classified separately among non-current assets and a borrowing arrangement with a bank. the restriction clearly indicated. o Ex. You open a bank account and opt for ATM. You ─ The classification of the restricted deposit as current or have to deposit P5,000 as a maintaining balance of noncurrent depends on the nature of the restriction. your account. o The nature of the restriction is disclosed in the ─ Constitutes support for existing borrowing arrangements. notes. ─ Provide a source of funds to the lender as partial compensation for the credit extended. ─ This usually occur when you obtain a loan in the bank. As part of the loan agreement and as a support for the loan, BANK OVERDRAFT you need to maintain a balance. o Ex. You can still borrow money with the bank, but ─ Cash Overdraft – credit balance (negative) in cash account you should maintain that agreed compensating resulting from the issuance of checks in excess of the balance. amount on deposit is reported as a current liability. ─ Compensating balances  Maintaining balances that can o Abnormal balance in “Cash in Bank” account. be either withdrawn (no restrictions as to withdrawal) or o Also known as Bank Overdraft. withdrawn (but there are restrictions as to withdrawal). o Overdrafts may occur only in checking accounts, o Depending on the loan agreement. but not in savings and time deposits. ─ Financial statement users may mistakenly assume the o Generally, overdrafts are not permitted in the entire cash balance is available to meet current obligations Philippines. when part of the balance is restricted. o Classified as current liability and should not be o The entire cash balance that includes compensating offset against other account balances with debit balance is sometimes mistakenly misunderstood as balances. always to meet current obligations.  Offset is not allowed. ─ Any legally restricted deposits held as compensating  An overdraft occurs when there isn't balances be segregated and reported separately. enough money in an account to cover a o Not part of Cash in Bank account. transaction or withdrawal, but the bank o If the deposit is legally restricted because of a allows the transaction anyway. formal compensating balance agreement—the  Overdrawn is when having taken more compensating balance is classified separately as money out of a bank account than the cash held as compensating balance under current account contained. assets if the related loan is short-term Example: arrangement. o If the related loan is long-term arrangement, the An entity maintains two bank accounts: compensating balance is classified as noncurrent asset. c) Cash in bank – First Bank, overdrawn by P100,000. ─ Some are not legally restricted and should therefore be d) Cash in bank – Second Bank, with a debit balance of disclosed in the notes to the financial statements. P500,000. o Part of Cash in Bank account. o This is assumed when there is no indicated in the Proper statement classification of the two accounts: problem. o If the deposit is not legally restricted as to Current Asset: Cash in bank – Second Bank 500,000 withdrawal by the borrower because of an informal compensating balance agreement—the Current Liability: compensating balance is part of cash. Bank overdraft – First Bank 100,000 o You can still withdraw from them at any time, provided that you are maintaining the agreed  Classified under current liability and except in cases where compensating balance. offsetting is permitted. Legally Restricted Not Legally Restricted Exception: (formal) (informal) Short-term Current  When an entity maintains two or more accounts in one assets bank. Long-term Non-current  Account 1 has negative balance (cash overdraft). Assets  Account 2 has a normal/debit balance. NOT PART OF CASH PART OF CASH  Cash overdraft (Account 1) can be offset against the other bank (Account 2) if the amount is immaterial.  This is still presented under cash. CONTROL OF CASH RECEIPTS  Offset is only applied in the scenario of 2 accounts under Separate responsibility for: 1 bank. (a) Handling cash 5|Page (b) Recording cash transactions (c) Reconciling cash balances  Two methods of handling petty cash fund:  Cash Receipt  received from customers. (1) Imprest Fund System  There should be separate responsibilities among the (2) Fluctuating Fund System persons handling cash, recording cash transactions, and reconciling cash balances. IMPREST FUND SYSTEM  Agree cash amounts deposited with cash amounts ─ The imprest fund system is the one usually followed in received. handling petty cash transactions.  Close supervision of cash-handling and cash- recording o Petty custodian  responsible for the custody of the activities. fund. o Petty Cash Memorandum Book  record of expenses CONTROL OF CASH DISBURSEMENTS using petty cash fund ─ Petty cash fund is intact. Separate responsibility for: o All cash disbursement were collected first through Petty Cash Vouchers (PCV) before simultaneously (a) Cash disbursement documents replenished with Cash in bank account. (b) Check writing ─ We use Cash in Bank account to replenish  issuing a (c) Check signing check (then encashment). (d) Check mailing o But if at the end of the period, the fund is not yet (e) Record keeping replenished—the credited account is Petty Cash account.  Cash Disbursements  paid out to the individuals ─ Petty cash fund account is also moving when there is an  All disbursements, except petty cash, made by check. increase or decrease in the account and/or during at the end of the reporting period. IMPREST SYSTEM Pro-forma Entries: Cash receipt  cash inflows (asset) A. Establishment of Petty Cash Fund Cash disbursements  cash outflows (expense) Petty Cash Fund xxx  Imprest system is a system of control of cash which Cash in Bank xxx requires that all cash receipts should be deposited intact (whole/complete) and all cash disbursements should be made by means of check. B. Payment of Expenses out of the Fund o Ex. You asked someone to pick some documents in Makati, so there is transportation cost (small No formal journal entries are made. amount). o That is why we need to set up petty cash fund. ─ The petty cashier generally requires a signed petty cash  However, requiring cash disbursements for relatively small voucher for such payments and simply prepares amounts to be made through checks is inexpedient. memorandum entries in the petty cash journal. o There are occasions when issuance of checks o Cost Benefit Principle becomes impractical or inconvenient: ─ All payments coming from the petty cash fund is supported by petty cash voucher (PCV). (1) When small amounts are paid ─ Ex. You asked messenger to pick some documents in (2) Things are hurriedly bought Makati, so you give him a transportation fee of P100. You (3) Customers are entertained. will make a PCV to be signed by the messenger that he received a P100 as a transportation fee.  Thus, it becomes necessary for an entity to establish a ─ You will initially collect all the petty cash voucher. petty cash fund. C. Replenishment of Petty Cash Payments ACCOUNTING FOR PETTY CASH FUND Expenses xxx  Money set aside to pay small expenses which cannot be Cash in Bank xxx paid conveniently by means of check. ─ The PCF is replenished when its balance becomes low. (1) Replenishment check ─ The replenishment is made through check and is supported o Check drawn order by the petty cash custodian by a check disbursement voucher (CDV). for replenishment of petty cash fund. o We credit “cash in bank” account because check was o Part of cash. given to the patty custodian by the treasury/accounting department. (2) Accommodation check ─ It is at this time that the petty cash disbursements are o Check drawn payable to the order of the petty recorded during the period that were initially record by the cash custodian—representing her salary. petty cashier/custodian. o Part of cash. ─ If there is no shortage or overage  replenishment check is usually equal to the petty cash disbursements. 6|Page ─ Petty cash disbursements should replenished only by B. Payment of Expenses out the Fund means of check (and not undeposited collections) ─ Ex. Your petty cash fund is P20,000. Overtime, petty cash Expenses xxx fund is decreasing. The remaining petty cash fund is only Petty Cash Fund xxx P2,000. There will be a period of time that the petty cash fund should be replenished—it should be returned to the ─ Petty cash disbursements are immediately recorded. P20,000 balance. As for now, your expenses are already P18,000. C. Replenishment or Increase of Petty Cash Payments D. Adjustment at the end of the accounting period Petty Cash Fund xxx Cash in Bank xxx Expenses xxx Petty Cash Fund xxx ─ The replenishment check may or may not be the same as the petty cash disbursements. ─ At the end of the accounting period, when preparing ─ The petty cash custodian was given a check to replenish financial statements it is necessary to adjust the PCF  PCF increased (went to the original unreplenished expenses in order to state the correct petty balance/establishment) cash balances. o In order not to overstate cash and not to understate expenses. D. Adjustment at the end of the accounting period ─ Since expenses made through PCF are only recorded in the No adjustment is necessary. journal when replenishment, there may be unreplenished expenses at the end of the period ─ At the end of the accounting period, no adjustment o However, we did not request for a check—it is just because petty cash expenses are recorded outright. coincident that there are unreplenished expenses o Petty cash fund is always updated. during the period. o We credit “petty cash fund” account  this is the true account that has been decreased. E. Increase Petty Cash Fund ─ The adjustment is to be reversed at the beginning of the next accounting period. Petty Cash Fund xxx ─ The reversal is made in order that the normal Cash in Bank xxx replenishment procedures may be followed by simply debiting expenses and crediting cash in bank without distinguishing whether the expenses pertain to current F. Decrease Petty Cash Fund period or prior period. Cash in Bank xxx Petty Cash Fund xxx E. Increase Petty Cash Fund Petty Cash Fund xxx ACCOUNTING FOR CASH SHORTAGES AND OVERAGES Cash in Bank xxx CASH SHORTAGE F. Decrease Petty Cash Fund  When the cash count results to an amount less than the balance per records. Cash in Bank xxx Petty Cash Fund xxx CASH OVERAGE FLUCTUATING FUND SYSTEM  When the cash count results to an amount more than the balance per records. ─ The checks withdrawn to replenish the fund do not necessarily equal the petty cash disbursements. ─ The replenishment checks are simply drawn upon the NOTE! request of the petty cashier. ─ Petty cash disbursements are immediately recorded, thus ─ Offsetting account is “cash short or over” account, whether resulting in a fluctuating petty cash balance per book from cash shortage or overage. time to time. Pro-forma Entries: Imprest Fund System A. Establishment of Petty Cash Fund A. Shortage in Petty Cash Fund Petty Cash Fund xxx Cash short or over xxx Cash in Bank xxx Cash in bank xxx 7|Page ─ Ex. Establishment of PCF is P10,000. When counting the Cash short or over xxx bills and coins, the balance was only P9.000  shortage. Cash in bank ─ "Cash short or over" account is credited when there is a overage  cash shortage is closed to either a payable or B. Overage in Petty Cash Fund gain account which has a normal credit balance. Cash in bank xxx Cash short or over xxx Fluctuating Fund System ADJUSTMENTS OF CASH SHORTAGES AND OVERAGES C. Shortage in Petty Cash Fund  When financial statements are prepared, the “Cash shortage or overage” account is closed to either a nominal Cash short or over xxx or real account. Petty cash fund xxx  “Cash shortage and overage” is a suspense account. o Suspense accounts or temporary accounts. ─ PCF account was credit, in fluctuating system, PCF account o It is only a pass through (daanan lang siya). is always used. ─ The only point of this JE is to record the cash shortage.  Suspense accounts should not appear in the financial statements.  “Cash shortage and overage” is pending proper D. Overage in Petty Cash Fund investigation of the cause of shortage or overage. o It is a temporary account because we are also going Petty cash fund xxx to close the suspense account depending on the Cash short or over xxx result of the investigation. ─ PCF account was credit, in fluctuating system, PCF account is always used. Cash Shortages ─ The only point of this JE is to record the cash overage. Depending on the result of the investigation, the shortage may be: REPLENISHMENT OF CASH SHORTAGES AND OVERAGES (a) Closed to a “receivable” account if the shortage was due to fault of an employee (e.g., the custodian stole funds Cash Shortages from petty cash funds).  When there is a petty cash shortage, the amount of ---------------------------- [OR] ---------------------------- replenishment is increased by the cash shortage in order to maintain the fixed balance of the fund. (b) Charged to “loss” or “miscellaneous expense” if the investigation was without merit. The entry to record the replenishment for cash shortage: The entries to close the cash shortage are as follows: Various expenses accounts xxx If the cashier/custodian is held responsible for cash shortage, Cash short or over xxx the adjustment would be: Cash in bank xxx Due from cashier xxx ─ "Cash short or over" account is debited when there is a Cash short or over xxx shortage  cash shortage is closed to either a receivable or a loss account which has a normal debit balance. If reasonable efforts fail to disclose the cause of the shortage, the adjustment is: Cash Overages Loss from cash shortage / Other xxx expenses Cash short or over xxx  When there is a petty cash overage, the amount of replenishment is decreased by the cash overage in order to maintain the fixed balance of the fund. Credit “Cash shortage” account to close it. “Cash Shortage” account is then cancelled. Cash Shortage The entry to record the replenishment for cash overage: Cash shortage (increase) Cash shortage (closing) Various expenses accounts xxx 8|Page  cash shortage Cash Overages a) Replenishment of Cash Shortage Depending on the result of the investigation, the overage may Expense 14,700 be: Cash short or over 100 Cash in bank 14,800 (a) Closed to a “payable” account or “payroll to custodian” if the overage was due to cash belonging to an employee that was mixed with the entity’s cash. b) Adjustment of Cash Shortage ---------------------------- [OR] --------------------------- Due from cashier 100 Cash short or over 100 (b) “Gain” or “miscellaneous income” if the investigation was OR without merit (e.g., custodian’s bills and coins were mixed Other expenses 100 up with the company’s petty cash funds). Cash short or over 100 The entries to close the cash overage are as follows: EXAMPLE 2: If the cash overage is properly found to be the money of the cashier, a liability should be established: A cash count showed the following: Cash short or over xxx Imprest amount P15,000 Payable to cashier xxx Coins and currencies 200 Petty cash receipts 14,900 If the there is no claim on the cause of the cash overage, the Required: Prepare all the necessary journal entries. adjustment would be: Cash short or over xxx Miscellaneous expense xxx Answer: Imprest amount P15,000 Debit “Cash overage” account to close it. Coins & currencies 200 “Cash Overage” account is then cancelled. Petty cash receipts 14,900 (15,100) Cash shortage/overage P100 Cash overage cash overage Cash overage (closing) Cash overage (closing) a) Replenishment of Cash Overage NOTE! Expense 14,900 Cash in bank 14,800 ─ Shortages/overages in the PCF are normally treated as Cash short or over 100 receivable from / payable to the petty cash custodian because the petty cash custodian is responsible for the PCF at all times. b) Adjustment of Cash Overage --------------------------------------------------------------------- Cash short or over 100 Payable to petty cashier 100 EXAMPLE 1: OR A cash count showed the following: Cash short or over 100 Other income 100 Imprest amount P15,000 Coins and currencies 200 Petty cash receipts 14,700 Required: Prepare all the necessary journal entries. Answer: Imprest amount P15,000 Coins & currencies 200 Petty cash receipts 14,700 (14,900) Cash shortage/overage P100 9|Page 10 | P a g e  ACC-110: INTERMEDIATE ACCOUNTING 1 LESSON 2: 1st SEMESTER | A.Y. 202Y – 202Y LECTURER: SIR/MS. BANK DEPOSITS Why is there a need to prepare a bank reconciliation? These are the 3 kinds of bank deposits – demand deposit, ~ Balance Per Bank and Balance Per Books saving deposit, and time deposit. Company books Bank DEMAND DEPOSIT The demand deposit is the current account or checking account or commercial deposit where deposits are covered ~ The relationship that exist between the bank and the by deposit slips and where funds are withdrawable on depositor is “debtor-creditor relationship”. demand by drawing checks against the bank. o Bank being the debtor and the Depositor being the  All of your collections will be placed in the current creditor. account with the purpose of using it for operations. o The depositor is requesting the bank to keep his  All expenses and disbursements are paid using money for safekeeping. checks. o While the bank is just asked to safe keep the  Demand deposit because it is withdrawal at any time. money, the bank has an obligation to the depositor. Money held under a checking account can be withdrawn through issuance of a check. EXAMPLE: A demand deposit is usually noninterest bearing. However, some banks allow a demand deposit account as The journal entry to record the collection and the subsequent interest bearing. deposit is: ─ Company X (Balance per Book) SAVING DEPOSIT Cash in bank xxx Accounts Receivable xxx The purpose of saving deposit is for personal savings.  Only used when needed it—not for every day.  Cash in bank  debited (increase cash in bank). A basic type of bank account that allows you to deposit money, keep it safe, and withdraw funds, all while earning ─ BDO (Balance per Bank) interest. In a saving deposit, the depositor is given a passbook upon Cash xxx the initial deposit. Company X xxx The passbook is required when making deposits and withdrawals.  “Company X”  credited (increased) to facilitate Withdrawals are made anytime but the bank sometimes illustration (to represent the balance of account) and may require notice of withdrawal. it recognizes liability to the depositor. A saving deposit is interest bearing.  Cash  debited (increase in account balance). TIME DEPOSIT A company issued in check in payment of an accounts payable It is the common bank deposit used in bank reconciliation. ─ Company X (Books) The time deposit is similar to saving deposit in the sense that it is interest bearing. Accounts Payable xxx  The only difference of time-deposit with demand Cash in bank xxx deposit and saving deposit is the restriction  time restriction.  Cash in bank  credit (decrease cash in bank).  This can or cannot be classified as cash, depending on the length of the period. ─ BDO (Bank)  It is either short-term investment or long-term Company X xxx investment. A time deposit is evidenced, however, by a formal Cash xxx agreement embodied in an instrument called certificate of deposit.  Cash  credit (decrease of account balance). Time deposit may be preterminated or withdrawn on  “Company X”  debited (reducing the liability to the demand or after a certain period of time agreed upon. depositor) When a check is issued, the payee will present the same to the bank for payment. 1|Page  The depositor is actually ordering the bank to pay the  This is also prepared by an individual who neither handles payee out of its deposit in the bank. nor records cash. NOTE! RECONCILING ITEMS The two accounts have equal or the same balances  The form has two sections—(1) the bank statement because they are reciprocal accounts. balance being adjusted to the corrected cash balance and This means that when one account is debited, the other (2) the book balance being adjusted to the corrected cash account is credited or vice versa. balance. The reason for this is that the two accounts cover or reflect o Reconciliation  restoration. the same items or transactions. o If the cash balances of the 2 sections are not equal, IF no errors are committed in recording, and the same it means that there are reconciling items. information has been recorded by both accounts, the two o After adjusting the reconciling items, the bank should have equal or the same balances. statement balance and the book balance should But very frequently, there are items on the depositor's always be equal. book which do not appear on the bank records as of the same date. Book Balance Bank Statement Balance = xx xx Bank Reconciliation  This develops a corrected cash figure and shows separately all items requiring adjustment on the  A bank reconciliation is a statement which brings into depositor's books. agreement the cash balance per book and cash balance  Rule: The one who holds the reconciling item, they are the per bank. ones who will correct the balance in their record. o Through bank reconciliation, the 2 accounts eventually became equal or have the same balances. Cause of Discrepancy Bank reconciliations are prepared to: Most differences are the results of temporary timing lags. (1) Explain the difference between the cash balance in  Time Lags the accounting records and the cash balance o Prevent one of the parties from recording the reported on the bank. transaction in the same period as the other (2) Arrive at the adjusted (correct) cash balance to be party. shown in the financial statements; and o There’s always common error (human (3) Provide information for reconciling journal entries. intervention)  Bank reconciliations are normally required only checking  Errors accounts.  Errors caused by either party in recording o Theoretically, bank reconciliation is not required for transactions. savings accounts because no checks can be drawn  This really happens because there are times that we from them. are the one who records first before the bank, or the bank will record first before the company.  The reconciliation is usually prepared monthly because the bank provides the depositor with the bank statement at BOOK RECONCILING ITEMS the end of every month. 1) Credit Memo ~ Credit memos refer to items not representing deposits  A bank statement is a report issued by a bank that shows credited by the bank to the account of the depositor the deposits and withdrawals during the period and the but not yet recorded by the depositor as cash receipts. cumulative balance of a depositor's bank account. o When the depositor received credit memo, it o It is an exact copy of the depositor's ledger in the means that the bank had already credited the records of the bank. depositor’s account, but yet known by the o Attached to the bank statement are the depositor's depositor. canceled checks and any debit or credit memoranda ~ The credit memos have the effect of increasing the that have affected the depositor's account. bank balance. o The canceled checks are the checks issued by the o Increasing liability of the bank to the depositor. depositor and paid by the bank during the month. o Depositor’s POV  Cash in bank is increasing. o “Canceled checks” because they are literally o The more liability the bank has to the depositor, canceled by stamping or punching to show that the more cash the depositor has in the bank. they have been paid ~ This is an adjustment in the cash balance per books (debit – increase)  Periodic bank reconciliations can help identify any cash o ADDED / debit to the depositor's recorded cash shortages or errors that have been made in accounting for balance. cash, specifically cash in bank.  This is prepared by the management to disclose any errors or irregularities in either the records of the bank or those of the business. 2|Page  Typical examples of credit memos are: Company books Bank xxxx xxxx a. Notes receivable collected by bank in favor of the depositor and credited to the account of the depositor Customers who have liabilities to the depositor/company paid their payables through There is a clearing of 3 days to confirm if the bank. check/checking account has really a fund. Interest income earned by the deposit. After 3 days clearing, for instance, it was found out b. Proceeds of bank loan directly credited or added by that the check has no sufficient funds issued by the the bank to the account of the depositor customer. The company is borrowing money from the bank. In this case, there shouldn’t have a deposit. It take several days to approve the request of borrowing money from the bank. What the bank can do to remove the credit (which In the event that this has been approved by the was an increase in deposit), they will debit the bank, the bank will simply credit (increase) the depositor’s account to offset whatever deposit was company’s account, instead of delivering the made. money itself. Company books Bank In order for the depositor/company to be aware xxxx (adj.) xxxx xxxx of this, the bank will give credit memo. c. Matured time deposits transferred by the bank to the current account of the depositor Adjustment in the company books. Time deposits are investments, thus cash equivalents but not cash. b. Bank service charges In the moment that time deposit reached its Fees deducted from the bank statement for the maturity, while also having demand deposit in bank’s processing of the checking account the same bank account, the time deposit is not activity. already an investment. This is the amount charged by the bank for It is transferred to the demand deposits. servicing specific transactions on behalf of the The bank is crediting (adding) the time deposit depositor. to the depositor’s account because it already Include bank charges for interest, collection, reached its maturity  the funds can now be checkbook, and penalty. withdrawn. c. Technically defective checks d. An amount owed to the depositor and paid directly to Checks deposited but returned by the bank the bank by a third party because of technical defects such as absence of Such as a direct payroll deposit or interest signature or countersignature, erasures not added by the bank. countersigned, mutilated checks, conflict between amount in words and amount in figures. 2) Debit Memo ~ Debit memos refer to items not representing checks d. Reduction / payment of loan paid by bank which are charged or debited by the This pertains to amount deducted from the bank to the account of the depositor but not yet current account of the depositor in payment for recorded by the depositor as cash disbursements. loan which the depositor owes to the bank and ~ The debit memos have the effect of decreasing the which has already matured. bank balance. ~ This is an adjustment in the cash balance per books e. Automatic debits (credit – decrease) Such as when the depositor and the bank agree o DEDUCTED / credit from the depositor's that the bank will make automatic payments of recorded cash balance. bills on behalf of the depositor. Typical examples of debit memos are: f. An amount owed by the depositor to a third party Such as transfer to a savings plan. a. NSF or No Sufficient Fund checks Checks deposited but returned by the bank because of insufficiency of fund. 3) Book Errors The other name for NSF is DAIF or "drawn ~ Errors committed by the depositor. against insufficient fund.” ~ If error by the depositor  cash balance per book should be adjusted. Ex. A customer's check returned because insufficient ~ Ex. Erroneous recording in the books of accounts. funds are available. ~ If the error understates the balance, add the net effect of the error to the understated balance. Deposit  DR. Cash (books) | CR. Cash (bank) ~ If the error overstated the balance, add the net effect (increase in deposit) of the error to the overstated balance. 3|Page  BANK RECONCILING ITEMS 3) Bank Errors ~ Errors committed by the bank. 1) Deposit in Transit ~ If error by the bank  cash balance per bank should ~ Deposits in transit (or Outstanding Deposits) are be adjusted. collections already recorded by the depositor as cash ~ Ex. The bank balance was understated, the amount of receipts but not yet reflected on the bank statement. error should be the on the net amount of error that is o Deposit (increase) in cash, but not yet recorded going to be added to the bank balance. by the bank—“in transit.” ~ If the error understates the balance, add the net effect ~ A deposit near the end of the month that is not of the error to the understated balance. reported on the bank statement. ~ If the error overstated the balance, add the net effect ~ ADDED / credit to the bank statement balance. of the error to the overstated balance. Deposits in transit include: NOTE! a. Collections already forwarded to the bank for deposit Credit memo and Debit memo received by the depositor but too late to appear in the bank statement. are from the bank. The adjusting entries are only made / applicable when b. Undeposited collections book balances are needed to adjust (that is only what Those still in the hands of the depositor. matters to us) In effect, these are cash on hand awaiting  If there is a need to adjust bank balances, there are delivery to the bank for deposit. no adjusting entries to be made. A Formal Reconciliation may be prepared because all the c. Deposits in transit often occur when deposits are reconciling items have already been determined/ mailed to the bank, placed in an overnight depository, made through check and the check has not yet cleared, or made after the bank's cut-off. FORM OF BANK RECONCILIATION Books Bank 2) Outstanding checks receipts disbursements withdrawal deposit ~ Checks already recorded by the depositor as cash disbursements but not yet reflected on the bank IN – cash - - IN – cash statement. - DE – cash DE – cash - ~ Checks drawn and released to payees but are not yet encashed with the bank. o Check already issued and drawn (released Increase in cash money) o The bank was still unware that you paid Books = debit (receipt) someone through issuance of check. Bank = credit (deposit) ~ SUBTRACT / debit from the bank statement balance (because it should have been really encashed) Decrease in cash Books = credit (disbursement) Outstanding checks include: Bank = debit (withdrawal) d. Checks drawn and already given to payees but not yet presented for payment ADJUSTED BALANCE METHOD e. Certified checks Under this method, the book balance and the bank balance A certified check is one where the bank has are brought to a correct cash balance that must appear on stamped on its face the word "accepted" or the statement of financial position. "certified" indicating sufficiency of fund.  From unadjusted to adjusted. The bank, when certifying checks, automatically Only the book reconciling items require adjusting entries debits (reduces) the depositor's account and on the book of depositor. assumes direct liability on paying the certified The adjustments are necessary to bring the cash in bank checks to the payee. balance to its correct balance for statement presentation Certified checks should be deducted from the purposes. total outstanding checks if included therein In the preparation of adjustments, an item added to the because the certified checks are no longer book balance is debited to cash and an item deducted from outstanding for bank reconciliation purposes. the book balance is credited to cash. f. Stales checks BOOK Checks that remain outstanding for a relatively Unadjusted Book Balance xxx long period of time are reverted back to cash, Add: Credit Memos xxx meaning they are added back to the cash Total xxx balance per books, and are excluded from Less: Debit Memos (xxx) outstanding checks. Adjusted Book Balance xxx 4|Page  Book reconciling items = credit memos, debit memos, NSF / DAIF and bank errors Deposited in bank through check.  The depositor should make reconciling entries for these items. Book Bank Cash in bank x Depositor (name) x Credit Memos (cash receipts) Cash on hand Cash x *No reconciliation since the two accounts were equal..  Increased in the bank balance.  Book balance is understated. Issued a Customer’s check. But the balance was  Credit memos are ADDED to book balance. insufficient (bounce check – because NSF/DAIF).  There are adjusting entries. Book Bank PROCEEDS OF A BANK LOAN Cash x No Entry. Not Aware. Depositor (name) x Book Bank **There will be a reconciliation because of NSF. Loans Payable x No Entry. Not Aware. Cash x Adjusting Entry. Book Bank Book Bank Cash x Loans Payable x Account receivable x Cash x Loans Payable x Cash x Cash x Depositor x MATURED TIME DEPOSIT TECHNICALLY DEFECTIVE CHECKS Book Bank Received customer’s check. Depositor (name) x No Entry. Not Aware. Book Bank Cash x Customer’s check x Depositor (name) x Acct. receivable x Cash x Book Bank *No reconciliation since the two accounts were equal. Cash x Time deposit x Time deposit x Cash x After clearing, customer’s check was bounced because of unauthorized signature included. COLLECTION OF NOTES / RECEIVABLES Book Bank Cash x Book Bank No Entry. Not Aware. Depositor (name) x Depositor (name) x No Entry. Not Aware. **There will be a reconciliation because it is technically Cash x defective. Book Bank Cash x Depositor (name) x Adjusting Entry. Note receivables x Cash x Book Bank Account receivable x Cash x Cash x Depositor x Debit Memos (cash disbursements)  Decreased in the bank balance. -------------------------------------------------------------------  Book balance is overstated.  Debit memos are DEDUCTED in the book balance. BANK  There are adjusting entries. Unadjusted Bank Balance xxx Add: Deposits in transit xxx BANK SERVICE CHARGE Total xxx Book Bank Less: Outstanding checks (xxx) Cash – charges x Adjusted Bank Balance xxx No Entry. Not Aware. Depositor x  Bank reconciling items = deposits in transits, Book Bank outstanding check, and bank errors. Service charge – exp. x Cash x  The depositor should NOT make reconciling entries for Cash x Depositor x these items. PAYMENT OF LOAN Deposits in Transits Book Bank Loans Payable x  Increased in the book balance. No Entry. Not Aware.  Bank balance is understated. Cash x  Deposits in transits are ADDED to the bank Book Bank balance. Loans Payable x Time deposit x  No adjusting entries. Cash x Cash x 5|Page  Books Bank BOOK TO BANK receipts disbursements withdrawal deposit Unadjusted Book Balance xxx Add: Credit Memos xxx Cash in bank No Entry. Add: Outstanding Checks xxx (deposit) Total xxx Less: Debit Memos xxx Less: Deposits in Transits xxx (xxx) Outstanding Checks Unadjusted Bank Balance xxx  Decreased in the book balance.  Bank balance is overstated. Credit memo is an increase in bank.  ADD.  Outstanding checks are DEDUCTED to the bank Outstanding checks already decreased the book balance balance. but have no effect on the bank balance because. The  No adjusting entries. checks are not yet paid by the bank.  ADD. Debit memo is a decrease in bank.  DEDUCT. Books Bank Deposits in transit already increased the book balance but receipts disbursements withdrawal deposit have no effect on the bank balance because the deposits are not yet recorded by the bank.  DEDUCT. Cash in bank No Entry. (encashment) BANK TO BOOK METHOD Bank Errors Under this method, the bank balance is reconciled with the  These are excluded because no definite rule can be book balance or the bank balance is adjusted to equal the made whether these are to be added or deducted.