Professional Documents
Culture Documents
10/16-19
PAGE 2
B. Compensating Balance Agreement Part of or deposits that a bank can use to offset an
existing loan. However, compensating balances can also describe a minimum amount of
the deposit that a depositor agrees to maintain in order to guarantee future credit
availability.
In the case of deposits that a bank can use to offset a loan, the assumption is that
this amount is legally restricted to withdrawal and therefore excluded from cash,
however in cases that it still remains to be unrestricted, the compensating balance
shall be part of cash. If the compensating balance is legally restricted the following
rules shall be followed:
a) The related loan is short-term: The compensating balance shall be part of
current assets but separately from cash.
b) The related loan is long-term: The compensating balance is part of
noncurrent assets as an investment.
An informal agreement to maintain a minimum amount of deposit will not be legally
restricted and therefore included in cash.
C. Time Deposits Bank savings account that earns interest but not subject to immediate
withdrawal or check issuance. A notice must be submitted by the depositor for the
withdrawal of funds and interest earned shall be forfeited.
Time deposits are excluded from cash because of their restriction on availability as
funds and are classified as investments and shall follow these specific
classifications:
a. Cash equivalents if the original term is 3 months or less.
b. Short term investments if the original term is more than 3 months to 1 year
c. Long-term investments if the original term is more than 1 year.
Cash Equivalents The three important characteristics for cash equivalents as mentioned in PAS
7 are short-term, highly liquid and near maturity. In other words, short-term debt instruments with
low risk (also low yield) and acquired 3 months or less from maturity date shall be considered as
cash equivalents.
Examples include Treasury Bills, Bonds and Notes, Time Deposits, Certificate of deposits and
Bankers Acceptances and Commercial Papers.
Example of Adjusted Balance Reconciliation
Unadjusted Balance
Deposit in transit
Outstanding checks
Errors
Adjusted balance
Bank
X
+
(-)
+/(-)
X
Unadjusted Balance
Credit memo*
Debit memo**
Errors
Adjusted balance
Book
X
+
(-)
+/(-)
X
*Credit memos include collections by the bank; interest credited by the bank and matured time
deposits transferred to the current account.
**Debit memos include NSF checks, bank service charges and authorized bank debits.
END
10/16-19