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CASH AND CASH EQUIVALENTS

 To be reported as “cash”, an item must be unrestricted in use.

Cash Equivalents
PAS 77, paragraph 6, defines “cash equivalents” as short term and highly liquid investments that
are readily convertible to cash and so near maturity that they present insignificant risk of changes in
value because of changes in interests rates.
 Only highly liquid investments that area acquired three months before maturity can qualify as
cash equivalents.
 Equity securities cannot qualify as cash equivalents because shares don’t have maturity dates.
 Preference share with a specified redemption date and acquired three months before
redemption date qualify as cash equivalents.
 What is important is the date of purchase, it should be purchases three months or less before
maturity date.

Classifications of Investment in Excess of Cash


Time deposit, money market instruments, treasury bills

 The term is three months or less- classified as cash equivalents


 The term is more than three months but within one year- classified as current asset
 The term is more than one year- noncurrent asset, if become due within one year from the end
of the reporting period, it should be classified then as current asset

Measurement of Cash
 Cash is measure in face value.
 Cash in foreign currency is measure at the current exchange rate.
 If the bank or financial institution holding the funds of an entity in financial difficulty, cash
should be measure by its estimated realizable value if the recoverable amount is estimated to
be lower than the face value.

Foreign Currency

 Deposits in foreign bank which are not subject to foreign exchange restriction are included in
cash.
 Deposits in foreign bank which are subject to foreign exchange restrictions shall be classified as
noncurrent assets and the restriction clearly indicated.

Classification of Compensating Balance


 Not legally restricted due to an informal compensating balance agreement- part of cash.
 Legally restricted due to a formal compensating balance agreement and related loan is short-
term- part of current assets.
 Legally restricted due to a formal compensating balance agreement and related loan is long-
term- part of non-current assets.

Undelivered or Unreleased Check


 Drawn and recorded but not given to the payee before the end of the accounting period.
Cash xx
Accounts payable or appropriate account xx

Postdated Check
 Check drawn, recorded and given to the payee but bears a date subsequent to the end of the
reporting period

Cash xx
Accounts payable or appropriate account xx

Stale Check or Check Long Outstanding


 Check not encashed by the payee within a relatively long period of time.
 In banking practice, a check is stale if not encashed within 6 months.
 But it is a matter of company policy.
 Amount is immaterial:

Cash xx
Miscellaneous Income xx
 Amount is material and liability is expected to continue:

Cash xx
Accounts payable or appropriate account xx

Accounting for Cash Shortage

Cash shortage is recorded:

Cash short or over xx


Cash xx

Cashier or custodian is held responsible:

Due from cashier xx


Cash short or over xx

Fails to disclose the cause of shortage:

Loss from cash shortage xx


Cash short or over xx

Accounting for Cash Overage

Cash overage is recorded:

Cash xx
Cash short or over xx
No claim of cash overage:

Cash short or over xx


Miscellaneous Income xx

Claimed by Cashier:

Cash short or over


Payable to Cashier

Imprest System
 All cash receipts should e deposited intact and all cash disbursements should be done by means
of check.

Petty Cash Fund


 Fund set aside for small expenses which can’t be paid by means of check
 There are two methods of handling petty cash fund- imprest fund system and fluctuating fund
system.

Imprest Fund System Fluctuating Fund System


Petty cash fund xx Petty cash fund xx
Establishing the fund
Cash in bank xx Cash in bank xx

Payment of expenses out of the Memorandum entry in the petty Expenses xx


fund cash journal Petty cash fund xx
Replenishment of petty cash Expenses xx Petty cash fund xx
payments Cash in bank xx Cash in bank xx
Adjust the unreplenished Expenses xx
No adjustment needed
expenses Petty cash fund xx
Petty cash fund xx Petty cash fund xx
Increase in fund
Cash in bank xx Cash in bank xx
Cash in bank xx Cash in bank xx
Decrease in fund
Petty cash fund xx Petty cash fund xx