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Composition
Cash will include the following
1. Cash on hand includes cash collections and other cash items awaiting deposit.
This may be in the form of
Coins and currencies
Customers’ or personal check
Cashier’s check
Manager’s check
Traveler’s check
Bank drafts
Money order
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Statement of Financial Position Classification
Cash is presented under the caption Cash and Cash Equivalents and is shown as the
first item among the current assets on the statement of financial position.
It is not necessary to classify cash to distinguish between currencies on hand,
undeposited checks, cash in banks, or deposits at various locations.
The details comprising the “cash and cash equivalents” should be disclosed in
the notes to financial statements.
Other Concerns
1. Cash overdrafts are credit balances in bank accounts resulting from issuance of
checks in excess of the amount on deposit.
Generally not permitted
Can be offset against other accounts in the same bank with debit balances
but not against deposit balances in other banks.
Reported as a current liability if cannot be offset.
Can be offset against other bank accounts if the amount is not material.
2. Cash that is required to be maintained with a bank as a support for existing borrowing
arrangements is known as compensating balance. It generally takes the form of
minimum checking or demand deposit account balance. It is accounted for as
follows:
If there is no legal restriction, it is normally reported as cash but with proper
disclosure.
If there is legal restriction and the compensating balance is a result of a short
term financing arrangement, it is reported separately as a current asset.
If the compensating balance is in connection with a long-term financing
agreement, it should be classified as non-current assets.
In many instances, compensating balance is not legally restricted.
The amount and nature of compensating balance agreements should be fully
disclosed in the notes to financial statements.
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Commercial paper – is a short-term note issued by corporations with
good credit ratings. These notes generally yield a higher rate than
Treasury bills
Example:
Money market savings certificates – Issued by banks and savings loan
associations for 6-month periods (6 to 48 months). The interest rate is tied
to the 26-week Treasury bill rate.
5. Unreleased checks
These are checks drawn before the balance sheet but held for later delivery
to creditors.
These are not treated as outstanding checks.
These are restored to the cash balance.
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7. Postdated checks issued and delivered
These are restored as part of the cash account.
Imprest System
1. Cash receipts are deposited intact daily.
2. All significant disbursements shall be made through the issuance of checks.
3. Small payments shall be made through the petty cash fund.
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Cash Over and Short Account
1. This is the account used when the petty cash fund fails to prove out.
2. This is debited when there is a cash shortage.
There is a cash shortage when the cash count shows cash which is less than the
balance per book.
(Petty cash receipts + Remaining petty cash on hand) < Imprest amount
This account may be closed to a receivable or loss account.
3. This is credited when there is a cash overage.
There is a cash overage when the cash count shows cash which is more than the
balance per book.
(Petty cash receipts + Remaining petty cash on hand) > Imprest amount
This account may be closed to a liability or miscellaneous income account.
Expenses xxx
Cash over and short xxx
Petty cash fund/Cash in bank xxx
Cash overage
Cash over and short xxx
Accounts payable – Petty cashier/
Miscellaneous income xxx
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Bank Reconciliation
Bank Statement
1. A bank statement is a report prepared by the bank which shows the deposits made,
checks paid and other charges and credits recorded by the bank for the month as well
as the cash balance per bank records.
2. A bank statement is prepared only for demand or checking accounts.
3. A bank statement is prepared once a month.
Bank Reconciliation
1. A bank reconciliation is a schedule prepared by the business explaining the difference
between the bank’s and the company’s record of cash.
2. This is prepared once a month upon receipt of the bank statement.
3. There are three methods of preparing bank reconciliation.
Book to bank method
Bank to book method
Adjusted balances method
Reconciling Items
Outstanding checks Checks issued by the depositor but Subtract from balance per
are not yet presented to the bank bank
for payment.
*Certified Checks
*Checks where the bank immediately *Deduct from outstanding
debits the account of the depositor to checks if these are no longer
ensure or certify eventual payment. outstanding.
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Unrecorded bank Items which are charged or debited Subtract from balance per
charges by the bank to the account of the book
(debit memo/bank depositor aside from checks paid.
debits) These are evidenced by debit
memos.
Unrecorded bank Items which are credited by the Add to balance per book.
credits bank to the account of the
(credit memo) depositor aside from deposits
received. These are evidenced by
credit memos.
Common Errors
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Adjusting Entries
1. Adjusting entries for book reconciling items and errors of depositor should be prepared
in the books of the business.
2. This is necessary to bring the cash in bank balance to its correct balance for balance
sheet presentation.
ABC Company
Bank Reconciliation
December 31, 20xx
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Proof of Cash
1. Proof of cash is an expanded version of the bank reconciliation.
2. It is frequently used by auditors.
3. There are three methods of preparing proof of cash
Book to bank method
Bank to book method
Adjusted balances method
4. It is actually a reconciliation of bank records and book records of 4 items:
Beginning of the period cash balance
Current period cash receipts
Current period cash disbursements
End of the period cash balances
ABC Company
Proof of Cash
For the Month of December, 20xx
2. Imprest system
This system prevents the presence of significant amount of cash within the
business vicinity.
3. Voucher system
All potential payments are recorded first in the voucher register actual payments
are recorded in the check register.
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5. Periodic reconciliation of bank statement and cash balance per books
Regular reconciliation of bank balance and book balance for cash uncovers
immediately any error or irregularities in recording cash transactions. Any error or
irregularity is therefore, immediately rectified.
1. Window dressing
a. By recording as of the last day of the accounting period collections made subsequent
to the close of the period.
b. By recording as of the last day of the accounting period payments of accounts made
subsequent to the close of the period.
2. Lapping
Misappropriating a collection from one customer and concealing this defalcation by
applying a subsequent collection made from another customer
3. Kiting
When a check is drawn against a first bank and depositing the same check in a second
bank to cover the shortage in the latter bank. No entry is made for both the drawing and
deposit of the check.
May 2019
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