Cash and Cash Equivalents: Philippine Accounting Standards Melanie C. Lazarte

CASH and CASH
EQUIVALENTS
Philippine Accounting Standards
≈Melanie C. Lazarte≈
WHAT IS CASH?
Cash includes money and any
other negotiable instrument
that is payable in money and
acceptable by the bank for
deposit and immediate
payment.
When Cash is Cash?
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 from being exchanged or used
to settle a liability for more than twelve
months after the end reporting period.
Cash items included in cash:
1. CASH ON HAND –
a. Undeposited cash collections or
undeposited negotiable checks.
b. Cashier’s or Manager’s Check.
c. Traveler’s Check
d. Bank Drafts
e. Money Orders
f. Foreign Currencies
2. CASH IN BANK –
a. Demand Deposit
3. CASH FUND –
a. Petty Cash Fund (2 methods: Imprest fund
system and Fluctuating fund system)
b. Payroll Fund
c. Dividend Fund
d. Other short-term funds fro current operations
When cash equivalents are 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
investments that are acquired three months before
maturity can qualify as cash equivalents.
Examples of Cash equivalents:
1. Three-month BSP treasury bill
2. Three-month time deposit
3. Three-month money market instrument or
commercial paper
Investment of excess cash
The control and proper use of cash is an important
aspect of cash management. Basically, the entity
must maintain sufficient cash for use in current
operations.
Accordingly, excess cash may be invested in time
deposits, money market instruments and treasury
bills for the purpose of earning interest income.
Classification of investment of
excess cash
a. If the term is three months or less, such instruments
are classified as cash equivalents and therefore
included in the caption “ cash and cash equivalents”.
b. If the term is more than three months but within one
year, such investments are classified as short-term
financial assets or temporary investments and
presented separately as current assets.
c. If the term is more than one year, such investments
are classified as noncurrent or long -term
investments.
Valuation of Cash in the Balance Sheet
 Cash is generally valued at FACE VALUE.
 Cash in foreign currency is valued in Philippine
peso using the CURRENT EXCHANGE RATE as
of the balance sheet.
 Cash in bank or financial institutions having
financial difficulty or in bankruptcy should be
shown at its ESTIMATED REALIZABLE VALUE
OR RECOVERABLE VALUE.
Bank Overdraft
When the cash in bank account has a credit
balance, it is said to be an overdraft. The
credit balance in the cash in bank account
results from the issuance of checks in
excess of the deposits.
A bank overdraft is classified as a current
liability and should not be offset against
other bank accounts with debit balances.
For example, an entity maintains two bank accounts:
a. Cash in bank- First bank, which is overdrawn by
P1o,000
b. Cash in bank-Second bank, with a debit balance
of P100,000.
The net cash balance is P90,000
The proper statement classification of the two
amounts is as follows:
Current Asset:
Cash in bank- Second bank P100,000
Current Liability:
Bank overdraft-First bank 10,000
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.
Example:
JBM Company borrows P100,000 from QUSHIN bank
and agrees to maintain 2%, which is P2,000 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.
Compensating balance- P2,000
Undelivered or unreleased checks
 Is one that is merely drawn and recorded but not given to
the payee before the end of reporting period.
Example:
Dean Winchester Company recorded a check of P50,000 in payment of
accounts payable on December 20, 2012 but mailed to creditors on January 2, 2013
.
December 20,2012:
Accounts Payable P 50,000

Cash P 50,000
Adjusting Entry
Cash P 50,000
Accounts Payable P 50,000
Postdated check delivered
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 on
the cash balance as follows:
Cash P xxx
Accounts Payable P xxx
Stale check or check long outstanding
Is a check not encashed by the payee within a

relatively long period of time.
In banking practice, checks become stale if not
encashed within six months from the time of
issuance. Of course, this is a matter of entity
policy.
If the stale check is immaterial, it is simply
accounted for as miscellaneous income.
Cash P50,000
Miscellaneous income P50,000
If the stale check is material and the liability is
expected to continue, the cash and the
liability are restored.
Cash P50,000
Accounts Payable P50,000
Thank
you!

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CASH and CASH

In effect, this arrangement results in the reduction of

Accounts Payable P 50,000

The original entry recording a delivered postdated

Is a check not encashed by the payee within a

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