...........

chapter 8 - Cash and Cash Equivalents

CHAPTER S
CASH AND CASH EQUIVALENTS

TOPIC OVERVIEW:
This chapter discusses the concept of cash and cash equivalents, its
characteristics and componen ts, prepa ration of bank reconciliation and proof of
cash.

LEARN ING OBJECTIVES:

After stu dying this chapter, you should be able to:
1. Identify what items are included as cash and cash equivalents.
2. Calculate the correct balance of petty cash fund.
3. Identify bank and book reconciling items.
4. Prepare bank reconciliation and proof of cash.

SUMMARY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR

CASH

Cash Items

Unrestricted and immediately available for

use in the current
operations

For use other than for current operations

. -

- For payment of operating expense

- For paymen t of current liabilities
- For acquisition of current assets

..Cash"in the c.urrent asset

section � ' �
Other noncurrent financial assets

. . }
,,. .

. ..�'. .. �::;r �-� ..

- . � ,,.,� -� :(r) , ..

DEFINITION OF CASH
Cash includes money and other negotiable instrumet that .is payabl.e in money
and acceptable by the bank for deposit and immediate credit
It

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d cash Equivalents I
chapter 8 - cash an . . d would be three months fr
d market, the reckoning per10 Otl} ,
secon ary . aturity date.
acquisition date u?t1 m . re ard to: .
v' If the problem is silent with g ed non-current investment
d bonds - assum . I

Treasury note an
. ma

rket account
-
cash and cash equ1va ent

2. Cash in moey h nd cash equivalent

3. Time deposit - cas a
d Frequent Encountered Tricks in Ca h
Some Measurement Issues an s
and Cash Ee uivalents Com ,utation Remarks
Items Measured at face value -...
Cash Should be translated to Philippine Peso using....

cash in foreign currency

the closing rate or spot rate at the reporting date.

Deposit in foreign bank a. Unrestricted - part of cash -

b. Restricted - if material, classified separately
among noncurrent assets as receivables
Cash in closed bank banksin bankruptcy

/ Measured at estimated realizable value and be included among noncurrent assets if

the amount recoverable is lower than face value.

Bank overdraft Definition: Negative balance in the cash in

bank account
Treabnent: If the company is maintaining two
accounts in
a. Different banks
v' current liability or may be netted against other bank if immaterial.
V' netted against other account if it is part
of cash management. [PAS 7.8]
b. Same bank - maybe netted against the account with positive amount but cannot be
offset a1?ainst restricted account.
Compensating balance Definition: Compensating balance is minimum
checking account balance that must be maintained in connection with a borro\ving
agreement with a bank
Treabnent:
a. Not leg ally restricted - part of cash
b. Legally restricted - if the related loan is:
1) Short-term - presented as "cash held as compensating balance" (current
receivable)
2) Long-term - presented as "cash held as
com oensatinJ? balance'' �noncu rren!..
156

chapter 8 - Cash and Cash Equivalents

- receivable)
Note: if the problem is silent with reg ard to
comensating balance, it is assumed not legally restricted.
Effect of compensating balance on:
a. Yield rate {lender) - increase
b. Effective rate (borrower) - increase (Effective rate) = Net interest expense
Net �Jroceeds

Undelivered/unreleased
check

Stale checks/checks long

Reverted back to cash by a Dr Cash xx

Cr A/ P xx

outstanding Definition: Checks not encashed by the payee with a

relatively long period of time. Under
current banking practice, checks are considered stale if not encashed within 6
months from its date.
Postdated checks

Treabnent: Stale checks are reverted to cash by a

Dr Cash xx
Cr Accounts payable xx (if material) Misc. income xx -if not
material�
Definition: Checks dated after the reporting date
Treabnent:
a. For company own PDC - reverted to cash Dr Cash xx
Cr Accounts payable xx
b. Customer's check - will still remain as receivable

IOUs -1 owe �1ou� Included as Jart of receivable

Equity securities

Redeemable preference shares

Generally cannot be classified as cash equivalents because equity securities do not

have a maturity date (with the exception of redeemable 1reference shares�
Preference shares with specified redemption date
./ acquired three months before redemptfon
date _ cash equivalents

./acquired for morethanthree monthsbefore redemptiondate- current

Investment

157

Chapter 8 - Cash and Cash Equivalents . .

Callable

preference

Not classified as cash equivalents. It is Part

shareholder's equity on the part of issuer a of

shares

NSF/DAUD/DAI F

Expense advances (e.g. travel advances

Temporary investments in shares of stocks

art of Ion -terrn investment of the holder. nd

Definition:
NSF _ no sufficient funds
DAUD _ drawn against uncleared deposits DAIF - drawn against insufficient funds
Treatment: Reverted back as Part receivables.
Receivable or prepaid expense

Either FVTPL or FVTOCI but never to be

included as art of cash & cash e u ivalents

Unused credit line Definition: Differen ce between the amount of

line of credit applied for and approved by a
bank and the amount actually borrowed
Treatment:Disclosed in the notes
Treasury warrants Definition: A warrant for the payment of
mon ey into or from public treasury.
Treabnent:Included as art of cash.
Escrow deposit Definition: Restricted amount held in trust for
another party, e.g., a deposit required by a court of law for a pending case.
Treabnent: Part of other current/noncurrent asset and re orted as liabili

Unrecorded
disbursements
�
cash Record the disbursements by: Dr A/ P or other

Unrecorded cash

appropriate account xx
Cr Cash xx

collections/receipts Record the collection by:

xx
Cr Accounts receivable or

Certificate of deposit

other a ro riate account xx '�

(CD) for time deposits Definition: A savings certificate entitling the

bearer to receive interest. A CD bears 3
maturity date, a specified fixed interest rate and can be issued in any
denomination. CDs are generally issued by commercial banks and are insured by the
PDIC. The term of a CD generallY
ranges from one month to five years.
Treabnent:
a. Invested three months before maturitY .. cash e uivalents
158

Chapter 8 - Cash and Cash Equivalents

-
b. !nvested for more than three months -
investment �short or Ion -ter111�
postage stamps on hand Should.

be reported

as office suppli.es or as a

Jre oa1d e;,. Jense

Bank overdraft netted Bank overdraft that was netted or
deducted from cash in bank from cash in bank but should be
presented as
current liabil ity should be added back to
com Jute for the correct balance of cash in bank

Illustration 1:Cash Composition

On December 31, 2018, Wag Kang Aayaw Co's "cash and cash equivalents

account'' baI

ance Jer

1ed

er of PS,700,000 includes:

Mana er's checks p 70,000

Traveler's checks I 100,000
Treasur / note 50,000
Treasury shares, purchased on 12/1/2018, to be reissued on 150,000 3j' lj'2019
Escrow de :>osit 200,000
Bank drafts 20,000
Postal mone''orders 20,000
Demand de oosit 100,000
Treasury bills, purchased December 16, 2018 due March 15, 50,000
2019
160-day treasur 1bill I 30,000
Time deoosit - PCIB, one-1 1ear, due March 31, 2019 180,000
Time de oosit - PNB- 90 days 170,000
Time de oosit - BPI- 120 da-�1s 45,000
Mone�'market instrument-due 2/28j12019 40,000
Mone�'market instrument-due 6/1,'2019 70,000
Cash in bank - Metrobank, which includes a compensating
balance of PS0,000 for short-ter1n borrowing arrangement 1,050,000
The compensating balance is not legally restricted as to
withdrawal.
Cash in bank - Metroba n k �100,000�
Cash in bank - Firstbank, which includes a compensating
balance of PS0,000 for long-term borrowing arrangement 450,000
The compensating balance is legally restricted as to
Withdrawal.
Cash in bank - Secondbank "60,000'
Cash in bank - Seatacbank, which includes a compensating
balance of P40,000 for short-terxn borrowing arrangement 150,000
The compensating balance is legally restricted as to
- Withdrawal.

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Ctlnptcr 8 - Cnst1and CllSh Equiva lents

. ���-�-...--�1�� .. --u�- _.,.

s1 ti

� .. - ... .. -����--�..... .... ...,.,..,._ �...,u.-.� ��'..,. ' . � -�

b;111I< - Se;1"111lc,.wl1icl1 i11clt1cles ,.cc> mpcnsata ng250 1

(:;1 1 1
halaIIcc 0r I'40.OQO f0�- l. o. t:�'i;- 1_11J > .!>.. i."-_g_<";! !: "-
gl_!! '.!_s___ ---- Ooo
-Pcuy �caSh- li111d, which includes an unrcplc111shcd voucher 10 ;;- '

f.'t.>t� 1>1�r,()-.)0

.��-��-�-�-��--.-

...............--..-.....-....-..-...-�--��- ......---���-�"�-�-��-�-�-�..�--�.
-10-

'--o-o 1'

.f_ x.��2_1 11.11 c1.__ .._...-----���-���-�-....-- ---�----�-�.....-.. -

..-- --- J>!ooo ;

-'l'-r,�1v�""'l f�!1_1_ll_ _ ---�_�-��-_-�_ .._.....-.--��-

�--....-....... ..-..�-����-....--���---���-�- - �-�--�,-��-,-.

._...2..: 0 0J 0lJon 1

,!!. tf.'.I <; f!.111 �-�--"�-����---�--�-�--��-�--���--�----�.....-�

��-- 40I 00oh"

1 'l-';1x f1111-cl� -�--

_ _.. � -�----�-..--� -�-- _ ..... .... �- - 30,oo-o-,

si11king f�1111d .---�-..-���-���-�-.....-..........-..... -�-��--�---�---

.......... . --.. 420,0OQ :
-p iii � I!e�. .!p_tj_Ql)_f. . }- .......----������-���-
�............--..����-��..-...........-................-..----����---����---��
190,OOQ
c0!. .l!S. }). _ !!.. .,..�--������u�������u�u-���-
����"""'""""'"""""""_'_,_.,..,,_ __,,_,,_,.._., .,.,. �-- - 200I 0oo

111sl11�a11ce f1111cl _ .... .

_ . 500,000

- ed i 2019 ao oof
., .. , ��-��----�--�,.......-����"�-�-�..------�-
�...........---..-----�-�-���-�������--�----
cus. o111 r -P.9.. . . . . .9....�h. . . --....�--���..-�--��..-..
........-�--- .. _ 7o,ooo
Custo111e1�' ! - : rf?:ed by_l?.. .!lk marked NSF'' .
 20,000l
Redeen1able preferred shares - acquired 3 months before lS,OOO
matl11�i d ..!:.�--------------------t i

Unt1se-d cr

.e..

dit..

li...1.1e.....�-----��---���--�---"'"'''''"'-�-----------r-

200.,:00:_01

Revolvi11 fund 100,000

Visa Card-credit lim-

it---�-..-�--... -----------J--::==2==0.000=-1

. T_o_ta_l _________________...

.z otooo I

Required:Compute the cash and cash equivalents that should be shown in

the statement of financial position.
SOLUTION :
Mana. er's checks p 70,000
Traveler's checks 100,000
Bank drafts 20,000 �
Postal mone�r orders 20,000 I
Demand deoosit 100,000
Treasury bills, purchased December 16, 2018 due March 15, I so,ooo
2019 -I
Time de Josit-PNB- 90 da�1s 170,000_!
Money market instrument-due date 2/28j'2019 40,000_

Cash n bank-Metrobank including compensati .g_palance� Cash in bank-Metrobank

overdraft'

1,oso,000
�100,000

Cash in bank-Firstbank, net of compensating balance 400,000 I

�p4so,ooo-PSO,OOO" -

Cash in bank-Seatacbank, net of compensating balance

110,000
.....

"P150,000-P40,000.

2so,o

Cash in bank-Seaba nk, �inclu din z o pensating balan 6,ooo

Peil. 'cash fund, net of ex Jenses (Plo,oo'C) 4!090) - �
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.,,....

chapter 8 - Cash and Cash Equivalents

\
I
j I

Treasur1note Assu med investment

Treasur 'shares Deduction to SHE
Escrow deoosit Other noncurrent asset

160-da�/ treasur / bill

P30,000

-
- short term investment

Time deposit-PCIB, one-year, due Pl80,000 - short term investment Ma rch

31 , 20 1 9
Time deoosit - BPl- 120 da�1s P45,00 0 - sh ort terrn in vestmen t Money
market instrument-due date P70,000 - short term investment 6/1/2019
Cash in bank - Secondbank 'P60,000. - current liabilit
Sinkin fund P420,000 - n oncu rrent in vestm en t
--�--��..
Preferred redem otion fund Pl00,000 - noncurrent investment
Contin �ent fund P200,000 - noncurrent investment

Insurance fund PS00,000 - no

�-
ncurr
ent investment

Fund for ace uisition of PPE in 2019 PB00,000 - n-o-ncu-r-

rent investment

IOU from officers P20,000 - advances to officers

Customer's oost-dated checks P70,000 - acc-ounts receivable "NSF"customer's checks
P20,000 - accounts receivable
Unused credit line Disclosed in the notes
Visa Card-credit limit P20,000 (not yet cash, should the company withdraws
money from the bank then there will be a debit
to cash and credit to accounts oa 1able-bank�

DlustratJon 2:Cash Composition ,

On December 31, 2018, GAME K N BA? Compny s csh and
equivalents accou nt balance per ledger of P4,000,000 includes.
Dema d d P 2,200,000
n eposf t 300 000
?deposited collection soo:ooo
Nme deposft-30 days 20,000

cash

3SF check of customer

28 2019 300 ooo

s.. day money market placement due 11

1 ao'ooo

45�day commercial papers due 2/4/2019 '

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'
Chapter s - Cash and Cash Equivalents
Savings deposit in closed bank IOU from an employee Preferred redernption fund
Total
Additional information:
a) Included in the demand deposit of P2,200,000 was a custom
er Che
an1ounting to PS0,000 dated January 25, 2019. Ck
b) Also included in the demand deposit is a customer check amountln P90,000 dated
December 31, 2017. Game K N BA? neglected to encgastho the chec on December
1, 2?18, the customer was informed and he
was willing to replace this with a new one. New check is yet
to b
received from the customer. e
c) Check of P60,000 dated January 31, 2019 in payment of
accounts payable was recorded and mailed December 31, 2018.
d) Check of P70,000 in paym ent of accounts payable was
 recorded
0
December 31, 2018 but mailed to creditors on January 15, 2019. n
e) The company uses the calendar year.The cash receipts journal was held open until
January 15, 2019, during which time P80,000 was collected and recorded on December
31, 2018.
Req11ired:
1. Prepare the adjusting entries to correct the cash account
2. Compute the cash and cash equivalents to be shown on December 31,
2018 statement of financial position.
Solution:

Req��irement No.1:Adju sting Entries

Accounts receivable
Cash in closed bank (other non-current asset) Advances to employees
Preferred redemption fund Cash in bank
a) Accounts receivable Cash in bank
b) Accounts receivable Cash in bank
c) Cash in bank
Accounts payable
d) Cash in bank
Accounts payable
e) Accou nts receivable Cash J n bank

162

Debit Credit
20,000
50,000
150,000
400,000
620,000
50,000
50,000
90,000
� 90,000
60,000
10,000

70,000 70,000
80,000 so.ooo

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\
.ts - ca=sh an_d_C_a_s_h_Eq_u_iv_al_e_n_ts ---- -----------�
chaP r
�re01ent No.2

J{eQUdl �usted balance

una J
AJE# 1
AJE a AJE b AJE c AJE d AJE e
Adjusted balance

P4,000,000
(620,000)
(50,000)
(90,000)
60,000
70,000
(80.00Q)
P3,290,00Q

PETTY CASH FUND

imprest system is a syste of.control of cash which requires that all cash receipts
should be deposited intact and all cash disbursements should be made by means of
check. However, it is impractical for the company to make all payments thru
check.Therefore, a petty cashfund is established to cover small and miscellaneous
expenditures. Petty cash fund may be accounted for using the following two methods:
1. Imprest fund system
2. Fluctuating fund system
Comparison of journal entries:

Imprest Fund System

a. To establish the fund
I Petty cash fund XX
Cash in bank xx
b. Payntent of expenses

Fluctuating System
Petty cash fund XX
Cash in bank xx

Memo entry in the Expenses xx

petty cash journal Petty cash fund xx
c. Replenishment of petty cash payments
Expenses xx Petty cash fund xx
Cash in bank xx Cash in bank xx
d. To adjust the unreplenished expenses
Expenses xx No adjusting entry Petty cash fund xx
e. Increase in the fund
Petty cash fund xx Petty cash fund

Cash in bank xx
. f. Decrease inthe fund
Cash in bank xx
I Petty cash fund xx
I
163

Cash in bank xx
Cash in bank xx
Petty cash fund xx

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Chapter 8 - Cash and Cash Equivalents
* . miscellan
or miscellaneous revenue) when the petty out to be
satisfactory.
Replenishment check . h k �11
. b . d �cated in the replenishment c ec w1 be the t
The amount to e in 1 h I Ota)
expense plus the cash shortage an less the ca.s overage. t can
also be
determined by subtracting the bills and coins from the petty cash
accountability.
The Petty Cash Fund Count Sheet
The count sheet has basi cally four parts as follows:
1. Accounting for petty cash items
2. Accountabilities
3. Petty cashier's acknowledgment
4. Auditor's adjusti ng entries
Accounting for Petty Cash Items
All petty cash items, inclusive of the i?1.pu rities re.accounted in the working
papers as the presence of the impur1t1es may indicate some weaknesses in the
accounting control systems. A summary of the weaknesses in the accounting control
systems is prepared and subm itted to the management after the general audit of the
accounting records.
Petty Cash Impurities
Petty cash impurities are items which do not belong to the fund but for one
reason or another are neverth eless found in the petty cash box. Examplesof
petty cash impurities are:
a. Bills and coins and customers' check from the cashier's collections (as
these should have in the general cash)
b. Checks issued by the client in payment of utility bills (as these should
have been delivered to the payees)
c. Checks issued to the client in payment of personal advances (as these
should have been in the general cash)
Accountabilities
The accountabilities in the count sheet consist of the following:
1. Cash fund balance per general ledger
2. Petty cash impurities except checks issued to the client in settlement of
cash advanced from the petty cash fund
Computation of Petty cash shortage
Petty cash accounted XX
Less: Petty cash accountabilities xx
Overage (or shortage) XX

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 chapter 8 - Cash and Cash Equivalents

corn >U .

�f P

iy Cash Accounted and Peii 'Cash Accountabilities

on ei

Pe1.1.V cash accou n ted pe�- .v cash

accountab"I"ties

Coins and currencies xx PC Fund ledger balance xx

Unexpended employees xx Petty cash impurities except
contributions (e.g. contribu- checks issued in settlement of

tions

for Christmas

party, cash advanced from the PCF.

birthday oa11.V, etc.�

Cash collections of accounts xx Unexpended employees xx
receivable or sales. contributions (e.g. contribu-
tions for Christmas party, birthdav oa, i.v, etc."
Unclaimed salary xx Collections of accounts xx
receivable or sales (in cash or in check�
Checks for deoosits xx Unclaimed salarv xx
Stale checks xx Stale checks xx
Post-dated checks (checks that xx Company's check in paym ent of
xx
are dated after reporting date a liabil ity (e.g. utilities) (if

AND cash count date�

Unreplenish ed vouchers xx
(expenses, IOUs that are taken
from the PC Fund�

among the checks for deoos1ts

Note:For unexpended employees contributions, unclaimed salary and cash collections

of accounts receivable or sales, they should be included in the accounted only when
it is intact or the envelope is still closed on the cash count date. However, it is
included as part of cash accountabilities whether intact or not
Examples of Checks:
1. Employees' checks (good, NSF or PDC) in settlement of cash advanced
from the petty cash fund;
2. Check of the company as a replenishment of petty cash
fund
(replenishment check); and
3. Check of the company payable to the petty cash custodian
representing his/her salary.
Employees' checks or checks issued to the client in settlement of cash advanced
from the petty cash fund are not treated as accountabilities in the count sheet as
these checks simply serve as evidence that there were cash advances drawn from the
petty cash fund. These are accommodated checks or checks cash out from the fund.
Note:If the problem is silent, a check in which the payee is to "Cash" is assumed
to be an accommodated check
Examples of checks for deposits that are part of the petty cash impuritie5 and if
included in the petty cash accounted, must be included also in th
petty cash accountabilities : e

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Chapter 8 - Cash and Cash Equi val ents

-............

Perlita Company

December 28, 2018

Petty cash PCF replenishment Custodi'an

- 16 -.....

_Total ch ksror de sn ---------------------------- -=e-:io,

Vouchers:

Particulars Taxifare Gasoline

Office Supplies
Postage
Advances - employees Totalvoucher payment
Bills and coins Checks for deposit Stale checks Vouchers paid

Date December 15,2018 December 16,2018 December 22,2018

December 23,2018
December 24,2018
Amount
2,400
1,600
2,000
1,200
4,800

12,000

,, 8,000
20,000
9,600
12,000

TotalPetty Cash Accounted Less:Petty cash accountabilities Petty Cash Shortage

49,600
59,600

(10,000)

Petty cash accountabilitiesPetty cash imprest balance50,000Stale checks of

RadelOcon 9, 600 Petty cash accountabilities 59, 600
Acknowledgment
I hereby acknowledge that the above petty cash fund items were counted in rrrf
presence and the same were returned to me intact. Ifurther acknowtedge a petty caS1
short of ten thousand pesos (1910,000).Ihave no other fund accountabilities.
RodelOcon Petty Cash Custodian

Req11irement No.2 Bills and coins Checks for deposit Stale checks Vouchers paid
Total Petty Cash Acco11nted Less:Petty Cash Accountabilities Petty Cash Shortage
Reqn i1aement No.3 Coinsand currency Replenishment check
Petty cash fund, 12/31/2018

p 8,000
20,000
9,600
12,000

49,600
59,600

(10,000)

p 8,000
16.000
p 24,00Q

168

Chapter 8 - cash and Cash Equivalents

Requirement N.4:Adj��sting Enbies
) Transportation expense
3 Gasoline and oil expense
office supplies expense Postage expense
Advances to empl oyees
Petty cash fund
b) Unused postage stamps Postage expense
c) Advances to employees Petty cash fund
d) Receivable from custodian Petty cash fund

Debit Credit
2,400
1,600
2,000
1,200
4,800
12,000
400
400
4,000
4,000
10,000
10,000

Illustration 2: Petty Cash Fund

You are examining the accounts of ABC Co. Your count of the imprest cash
fund, made at 9:00 a.m. on January 4, 2019, in the presence
of Stef
Pangilinan petty cashier, revealed:

Quantity
2
3
5
1
5
15
6

Denomination
1,000

20
10
s

Total
2,000

100
150
30

ChecksDatePayeeAmountG.Na, Asst Manager12/12/2018ABC CoP1,000L. Thor, cashier

12/15/2018ABC Co500(L.Thor's check was returned by the bank because of
insufficiency of funds)
Unreimbursed vouchers
Amount
p 150
200
300
480

IOUsDateAmountE.Na12/12/2018P 550F.Ta12/15/2018400P.Cu12/18/2018250

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cha t er S - Cash and CashEqu ivalen ---- -------

..::
Additional info rn1atlon: ks � Pl 1000
The balance of the petty cash fund per boo is ' �
Required: th '
For each of the following independent cases, compute or e 10llowing:
1 Petty cash shortage or overage
2 Adjusted petty cash fund balance as of December 31, 2018.

CASE NO.1:Use the above data

Requirement No.1 Petty cash accounted: Coins and currencies Checks for deposits
Unreimbursed vouchers (150+200+300+480)
IOUs (550+400+250)
Less:Petty cash accountabilities Shortage
Requirement No.2
Coins and currencies 4,880
Check of G. Na 1,000
Adjusted petty cash fund 5,880
-- -- - ---

4,880
1,500
1,130
1,200 8,710
11,000
(2,290).
�

L Thor's check was not included because of insufficiency of fund.

CASE NO.2: With rep lenishment check, check of customers fo r collection

stale checks,p ost-dated checks
Assume instead that the checks included the following:

Maker
Stef PangilinanDate
02/15/2018Payee
ABC CoAmount
600J.Muel, customer12/15/ 2018ABC Co1,000G.Ma, bookkeeper12/ 15/ 2018ABC Co880ABC
Co12/ 15/2018Stef Pangilinan2,800ABC Co12/26/2018Utility Company1,200R.Hood,
employee01/ 15/2019ABC Co550Requirement No.1
Petty cash accounted:
Coins and currencies
Checks for deposits (1,000+880+2,800+1,200)
Postdated check of R Hood
Stale check of Stef Pangilinan
Unreimbursed vouchers (150 + 200 + 300 + 480)
IOUs (550 + 400 + 250). .
Less:Petty cash accountabilities Petty cash fund balance
Stale check of Stef Pangilinan
170

4,880
5,880
550
600
1,130
1,200 14,240
11,000
600

...

check for paym ent of utility company

overage
Requirement No ..2
Coins and currencies
G.Ma, bookkeeper
ABC Co- replenishment check
Adjusted petty cash fund

CASE NO. 3: With p ostage, unused stam

1,200 12,800
1,440

4,880
880
2,800
8,560

aft er reportin g period: ps and expe nses cash out of PCF

Go back to the original data information:

unreimbursed vouchers

and

assume the following additional

Payee Date
Bureau of Posts 12/12/2018
M. Gaddo 01/02/2019 Unused stamps, PSO Requiremen t No.1

Account charged
Postage
Supplies

Amount
p 800
300

(Unused stamps amounting to PSO is not included in the

unreimbursed vouchers since there is already disbursement for postage.)
Requirement No.2 .
Coins and currencies Check of G. Na
Payment of supplies after reporting date Adjusted petty cash fund

4,880
1,000
300

6,180

CAsE NO.4:Without p ostage, with unused stamps and exp enses cash out
of PCF afte r repo rting p eriod
back to the original data and assuming the following additional
"�0rm ation:

171

Chapter 8- c9ash andJCash Equival ents ---------- ----

Unrelmbursed vouchers

Payee
M. Gaddo
Unused starn ps, PSO
Requirement No.1

Date
01/02/2019

Account charged Supplies

Amount 300

Petty cash accounted: Coins and currenci� es

Checks for deposits *
Unreimbursed vouchers (1,130+300+ SO)
IOUs (550 + 400 + 250)
Less:Petty cash accountabilities
Shortage .
4,880
1,500
1,480
1,200 9,060
11,000
(1,940)
a

�unused stamps amounting to PSO is included in vouchers since

there is no disbursement for postage.
Requirement No.2

the

unreimbursed

Coins and currencies Check of G. Na

Payment of supplies after reporting date
Adjusted Petty cash fund

4,880
1,000
300

6,180

CASE NO. 5: With unexpended emp loyees contributions and unclaimed salary (amounts
are intact)
Go back to the original data and assume the following additional infor�1r1ation:
A sheet of paper with names of employees together with contribution for a birthday
gift of a co-employee amounting to PSOO was included in the pert)' cash.The
following employees' pay envelopes have not been opened and the money still intact
Each envelope was marked "unclaimed."
J. Masllyan P400
X. Humiwat 200
Requirement No.1 Petty cash accounted: Coins and currencies Checks for deposits
Unrelmbursed vouchers (150 + 200 + 300 + 480)
IOUs (550 + 400 + 250)
Unexpended employees contribution Unclaimed salary (400 + 200) Less:Petty cash
accou ntabilities
Petty cash fu nd balance

----

172

11,000
cha pter 8 - Cash and Cash Equivalents
unexpended employees contribution unclaimed salary
Shortage
Requirement No.2 Coins and currencies Check of G.Na
Adjuste d petty cash fund

500
600 12,100

(2,290)

4,880
1 ,000
5,880

CASE NO. 6: With unexpended employees contributions w1d unclaimed salary-amounts

arenot intact
Go back to the original data and assume the follo\ving additional infor111ation:
A sheet of paper with names of employees together \vith contribution for a
birthday gift of a co-employee amounting to P500 was included in the petty cash.
The following employees' pay envelopes have been opened and the money removed. Each
envelope was marked unclaim ed.�
J.Masliyan P400
X. Humiwat 200

Requirement No.1 Petty cash accounted: Coins and currencies Checks for deposits
Unreimbursed vouchers (150 + 200 + 300 + 480)
IOUs (550 + 400 + 250)
Unexpended employees contribution Less:Petty cash accountabil ities
Petty cash fund balance
Unexpended employees contribution Unclaimed salary
Shortage
Requirement No.2 Coins and currencies Less:Unclaimed salary Check of G.Na
Adjusted petty cash fund

4,880
1,500
1,130
1,200
500 9,210

11,000
500
600 12,100

(2,890)

4,880
600
1,000
5,280
---

CASE NO.7:With cash sales evidenced by sales invoice

Go back to the original data and assuming the following
additional infor1nation :
Sales invoices (for cash sales, all incash, no checks)
173

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rchater 8- Cash and Cash Equivalent:s=.----- -------

InvoicesDateAmount#14312/30/20182,ooo#14412/31/2018600#14501/02/20192,050Assume
that for the purpose of computing the_ ptty cash bance, avauab
cash applies to cash collections and any rema1n1ng amount is for the Petty
cash fund.

Requirement No.1 Petty cash accounted: Coins and currencies Checks for deposits
Unreimbursed vouchers (150 + 200 + 300 + 480)
IOUs (550 + 400 + 250)
Less:Petty cash accountabilities Petty cash fund balance
Cash sales Shortage

4,880
1,500
1,130
1,200 8,710

11,000
4,650 1 5,650
(6,940)

Requirement No.2 Coins and currencies Check of G. Na

Total cash
Less: Cash sales
Adjusted petty cash fund

4,880
1,000

5,880
4,650
1,230

CASE NO.8:With cash sales evidenced by sales records and deposit slips
Go back to the original data and assume the following
 addition
information:
Cash sales on January 2, 2019 amounted to P9,000 per sales records, w ile
cash receipts book and deposit slip showed that only P8,000 was deposited
in the bank on January 3, 2019.
Requirement No. 1
Petty cash accounted:

Less:Petty cash accountabilities Petty cash fund balance

11,000

8,710

Undeposited collection (9,000 - 8,000 deposited) Shortage

1,000 12,Q.QQ,
3,290

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Chapter 8 - Cash and Cash Equivalents

Requiremen t No. 2 Coins and currencies Check of G. Na
Total cash
Less:Un deposited collection
Adjusted Petty cash fund

BANK RECONCILIATION

4,880
1,000

5,880
1,000

4,880
Bank reconciliation is a schedule prepared that accounts for the differences

between cash balances per book and .per bank statement It i�s prepared

only

for checkin.g account/dem nd deposit and is prepared monthly because the

bank proVJd es the depositor with the bank statement at the
beginning (normal ly first week) of the following month.
Forms of Bank Reconciliation
1. Adjusted balance method
2. Book to bank method
3. Bank to Book �
Reconciling items:
1. Book reconciling items
a. Credit memos
b. Debit memos
c. Errors
2. Bank reconciling items
a. Deposits in transit
b. Outstanding checks
c. Errors
Deposits in Transit These are deposits already recorded in the cash books in one
period but were taken up by the bank only in the next period.
Examples:
a. Collections already forwarded to the bank for deposit but too late to
appear in the bank statement.
b. Undeposited collections awaiting delivery to the bank for deposit.
Outstanding Checks. These are checks written and released to payees and are already
recorded in the cash books but are not yet presented for encashment or deposit to
the bank
Certified Checks.These are checks that the bank already certified as having
sufficiency of (unds and thus technically are no longer outstanding checks.
Debit Memo.These are charges and deductions made by the bank to the account of the
entity but not yet recorded by the entity. Examples of debit memo:

175

Chapter 8 - cash and Cash Equivalents

collection checkbook and penalty. .

NSF/DAIF/ DAUD checks. These are check deposited and already
b. recorded by the bank but subsequently returned by the bank to the
entity because of insufficiency of fund.
c. Payment of loan. This peins to amount deducted.from the current
account of the depositor in payment for loan which the
depositor owes to the bank and which has already matured.
d. Final withholding tax on interest income.
Credit Memo. These are collections or deposits made by .the bank to the account of
the company but not yet recorded by the entity. Examples of credit memo:
a. Collections made by the bank on behalf of the entity. .
b. Proceeds of bank loan credited to the account of the entity.
c. Matured time deposits transferred by the bank to the current account
of the depositor.
d. Interest income credited to the account
Bank or Depositor (Book) Errors. Errors made by the company or the
bank that must be corrected for the reconciliation to bala nce.
The following are rules for errors assuming the company is using the

ad"usted baIance meth0d of

Jresentin

bank

reconciliation��

Effect of the errors Treabnent

1. Understatement of cash Add on the unadjusted cash in bank
recei Jts balance
2. Overstatement of cash Deduct from the unadjusted cash in receipts
bank balance
3. Understatement of cash Deduct from the unadjusted cash in
disbursements bank balance
4. Overstatement of cash Add on the unadjusted cash in bank
disbursements balance
Guidelinesin Bank Reconciliation and Proof of Cash:
Bank reconciliation is performed only after the company receives the bank statement
in the next month.For example, the bank statement for the month of January is
received in February, thus bank reconciliation of January will be prepared in
February. Hence, unless otherwise stated, book reconciling items for January is
assumed to be recorded in February after preparing the bank. Therefore, the
following assumptions should be observed:
v' Credit memo for January is assumed to have been debited (ie.increasing
cash receipts) in February
v' Debit memo for January is assumed to have been credited (ie.increasing
disbursement) in February

176

_ cash and Cash Equivalents

8
capter . b k . (' . .
tement in oo receipts le. debit) in January is assumed to be
1 oversdta d by credit (ie.increase in disbursement) in February.

recor e

ement

. b�0k . ts c� . .

onderstat

.inc� .

receip.

ie. debit) in January is assumed to be

/ corded by de 1t b1e. 1kncd ebase in receip) in February.

re tatement in oo is ursement (1e. credit) in January is assumed
I overs corded by debit (ie.increase inreceipts) in February. to be re
� b k d� b � �
understatement In �d IS .ursemet (I . credit) in January is assumed
I to be recorded by ere It 1e.increase in disbursement) in February.
th point of view of the bank, it will only record the transaction upon
fro eceipt of deposit and upon presentment of payee for check payment
actU :it Unless otherwise stated, bank errors are assumed to be recorded
?r ;next month foilowing the month it committed the error. Therefore,
10 Uowing should be observed:
e ieposit in transit at the end of January is assumed to have been credited
(ie.increase receipts) by the bank in February.
1 Outstanding checks at the end of January is assumed
to have been debited (ie.increase disbursements) by the bank in February.
1 overstatement in bank receipts (ie. credits) in January is assumed to be
recorded by debit (ie.increase in disbursement) in February.
1 Understatement in bank receipts (ie. credits) in January is assumed to be
recorded by credit (ie. increase in receipts) in February.
./ Overstatement in bank disbursement (ie. debits) in January is assumed
to be recorded by credit (ie. increase in receipts) in February.
./ Understatement in bank disbursement (ie. debit) in January is assumed
to be recorded by debit (ie.increase in disbursement) in February.
Illustration 1:One-month Bank Reconciliation
On October 31, 2018, the bank statement for the checking account Driftwood Company
shows a balance of P126,300, while the company's records show a balance of
P123,310. Information that might be useful in preparing a bank reconciliation is as
follows:
a) Outstanding checks are Pl4,300 which includes a certified check for
P2,000.
b) The October 31cash receipts of P7,850 are not deposited in the bank until
November 2.
c) One check written in payment of utilities for Pl,370
is correctly
recorded by the bank but is recorded by Driftwood as a disbursement of
,1,730
d) In accodance with prior authorization, the bank debited P6,?00 directly
from the checKing account as payment of interest amounting to PSOO te
principal amounting to P6,000. Driftwood has not yet recorded
e) 8 direct Withdrawal.
ank service charges of P240 are listed on the bank statement
177

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Chapter 8 - Cash and Cash Equivalents

t) A deposit of PS,670 is recorded by the bank on October 31, but it d

belong to Driftwood. The deposit should have been made to
flot checking account of Hollybuster Company, a separate company.
the
g) The bank statement includes a charge of P750 for an NSF check. l
check is returned with the bank sta tement and the company Will he

paym ent from the .

tomer.

see1.

Required:

cus I\

1. Prepare a bank reconciliation, using the adjusted balance method

fo
the month of October. t
2. Prepare the necessary adjusti ng journal entries.
SOLUTION:
Requirement No.1
Bank Book

Unadjusted balances
Outstanding check, net of certified checks Deposit in transit (undeposited
collections)

P126,300
(12,300)
7,850

P123,3tO-
-
-

Book error - disbursement for utilities

Note charged by the bank, including interest Bank service charge
Erroneous bank credit NSF check

- 360
- (6,500)
- (240)
(5,670) -
- ( ZSQ)
Adjusted balance

P116,180

Pt t6,18Q

Requirement No.2
The following are the adjusting entries to be recorded in
the company's books. Note that only book reconciling items are recorded.
ADJUSTING ENTRIES Debit Credit �
1) Cash in bank 360

Utilities expense
2) Notes payable Interest expense Cash in bank
3) Bank service charge Cash in bank
4) Accounts receivable Cash in bank

6,000
500

240

750

360

6,500

240

750

lllusb�ation 2:One-month Bank Reconciliation

You have gathered the following data in the preparation of bank
reconciliation on December 31, 2018 for Ar111elia Company:
a) Balance per bank statement, P2,000,000.
b) Balance per book, Pl,350,000.
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r jB:_--cas_h_a_n_d_C_a_s_h_E_qu_iv_a_le_n =------------------------�
Cha Pte
nk service charge, P5,000. �
c) outstanding checks,P300,000.
d) oeposit in transit, P237,500.
e) proceeds of bank loan, December 1, discounted for 6 months at 12%,
fJ not recorded on Armelia Company's books,p470,000
customer's NSF check charged back by bank, P25,000.
g) check of Joy Company charged by the bank against Armelia account,
hJ p1s,ooo.
i) customer's note collected by bank in favor of Armelia Company.

face amount200,000Interest20.000Total220,000Less:Service charge2.500217.500j)

Deposit of P50,000 incorrectly recorded by bank as, P5,000.
k) Erroneous debit memo of December 28, to charge Armelia account
with settlement of bank loan, Pl00,000.
I) Deposit of Joy Company credited to Armelia account,P150,000.
Required:
1. Prepare bank reconciliation as of December 31, 2018?
2. Prepare adjusting journal entries except for the amortization
of discount on loans payable.
SOLUTION:
Requirement No. 1

Balance per bank

Add: Deposit in transit
Understatement of deposit (50,000-5,000)
Erroneous bank charge

237,500
45,000
75,000

2,000,000

Erroneous debit memo

Total
Less:Outstandi ng check Erroneous bank credit
Adjusted bank balance
Balance per book
Add: Proceeds of bank loan Note collected by bank

100.000 457.500
2,457,500
300,000
150.000 450.000

Total
Less:Service charge
Customer's check charged back Adjusted book balance
Requirement No.2:Adjusting Entries
l) Cash in bank
Discount on loans payable
179

470,000
30,000

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Chapter 8 - Cash and Cash Equivalents

soo,ooo

Bank Joans payable . _ '( divide by (100% minus (12%

To record bank loan.Discount - t 1 '
x 6/12}] - 470,000 217,500
2) Cash in bank 2,500
Ba nk service charge 200,0oo
Interest income 20 oo
� ble I 0

ToNroetceosrdreccoell1vecat1.on

0.rnote

and interest income less service charg e.

3) Bank service charge Cash in bank

To record bank service charg e.
4) Accounts receivable Cash in bank
To record NSF check returned.

5,000

25,000

s,ooo

2s,ooo

PROOF OF CASH (TWO -DATE BANK RECONCILIATIO N)

Proof of cash or four-column bank reconciliation or two-date bank reconciliation is

an expand ed reconciliation that includes proof of receipts and disbursements.
Formulas:
Deposit in transit, beginning xx
Add: Deposit made by the company this month xx
Total deposits to be acknowledged by the bank xx
Less: Deposit acknowledged by the bank this month xx
Deposit in transit, end xx
Outstanding checks, beginning xx
Add: Checks issued by the company this month xx
Total checks to be paid by the bank xx
Less: Checks paid by the bank this month
Outstanding checks, end xx
Computation of the deposits made by the company and the deposlt5
acknowledged by the bank
Book receipts (Debits) XX Bank receipts (Credits) XX
Less: XX Les .
Credit Memo last month XX Crdit Memo this month XX
Book errors last month Bank errors last month XX
corrected this month� ct d th' th�
* corre e 1s mon .
Understatement of CR Understatement of CR Overstatement of CD xx
Overstatement of CD
Book errors this month: Bank errors this month:
Overstatement of CR xx Overstatement CR
180
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_ cash and Cash E ulvalents

apter 8 xx
xx

xx
xx
xx
xx
xx
Note:
l) Deposit in transit should exclude customer's post-dated checks. If these
were included and recorded as receipts for the month, the following treatment will
be required in the proof of cash or bank reconciliation assuming the adjusted
balance method is to be used:
Beg.ReceiptsDish.EndUnadjusted book balance(XX)(XX)
2) Outstanding checks should exclude the following:
a) Company's post-dated check.
b) Unreleased or undelivered company's checks. If these were included
and record ed as disbursements for the month, the following treatment will be
required in the proof of cash or bank reconciliation assuming the adjusted balance
method is to be used)
Beg.ReceiptsDish.EndUnadjusted book balance(XX)XX
Illustration 1:Comp utation of deposit in transit
The following data are available for the Cash in Bank of Ellen Company for
February of the current year:
A Deposit made by the company this February, P120,000.
B. Deposit in transit, January 31, P200,000 .
C. Customer's check representing receipts in January amol1nt111g
to
P21,000 was erroneously recorded by the con1pany as P12,000.
D. Check of the company in January amounting to P2,000
was
erroneously recorded by the company as P20,000.
R. Deposit acknowledged by the bank in February, Pl SO,OOO.
F. Erroneous bank charge in January, P13,000.
181
d cash Equivalents
Chapter 8 - cash an . . F bruary, P14,000.
Erroneous bank credit ind anuary 31, Pt0,000.
G. Custom er's note collected' February 28, P12,000.
H. er's note collecte ,
I Custom
. te for the following:
Required: Compu . . February 28.
1. Deposit in transit tn ei ts in February.
2. Unadjusted book rec .pts in February.
3. Unadjus ted bank rece1p
SOLUTION:
Requirement No. 1
Deposit in transit, Jan. 31 February Add: Deposit made by the company

Total d b the bank this month Less: Deposit acknowledge y

Deposit in transit, Feb.28
Requiremen t No. 2
Deposit made by the company - February
Add: Cred it Memo in January 31-Customer's notes c llected
Errors in January corrected in February's book receipts:
Understatement of cash receipts in January for customer's
check (P21,000 - P12,000)
Overstatement of cash disbursements in January for
customer's check (P20,000 - P2,000) Total unadjusted book receipts
Requirement No.3
Deposit acknowledged by the bank - February
Add: Credit memo in February (custom er's notes collected)
Errors in January corrected in February's bank receipts: Overstatement of cash
disbursements in January (erroneous bank charge January)
Error in February affecting bank receipts:
Overstatement of cash receipts in February (erroneous bank credit February)
Total unadjusted bank receipts
a

Illustration 2:Deposit In Transit

200,000
120,000
32o,oo0--- 1so,ooo
170,00Q-
120,000
10,000

9,000

18,000
157,000

150,000
12,000

13,000

In you audit of the cash account of Ann Company, you have ascertained tbf
foJloWing data relative to the debits per books and credits per bank
Book debits In February p 390,0
Bank credits in February 310,0
Interest earned on the deposits in January but taken up in the ooO
books in Februa ry S,

182

cnaPter

oS -C=ash an_d Ca_s_h_E_qu_lv_a_len ��---- -------�

-

terest

arned on the deposits in February but taken up .

Ill okS in Marc

0

6,000

the b

. 0 by the bank for the account of the depos't (th'

Co11ect10

was collected by

the

bank in January but

1 or is
was tak

a01o. utnhe books of the

depos1. tor I.n February

en
15,000

up '"granted by the bank to the depositor (this amount was

Loa �ted by the bank on February 27 but not yet taken up � ere b1 oks of the
depositor in February.) In the o . J
heck from customer in anuary amounting to P20,000 but
C taken up in the book as
was . . J
check issued to supp ter in anuary amou nting to Pl,000 but
5 taken up in the book as
E oneous bank credit-February
Erroneous bank cha.rge-Ja nuary
Undeposited collections as of January 31

30,000

2,000

10,000
18,000
10,000
250,000

Required: Compute for the undeposited collections at the end of February.

SOLUTION:

p 58 -

Total
Less:Deposits acknowledged by the bank
Bank Credits
Less:Interest earned in Feb.
Loan granted by the bank in Feb.
Erroneous bank credit - Feb.

p 310,000
6,000
30,000
18,000

3,000
Erroneous bank charge -Jan.
Undeposited collections, Feb.28

10.000 246.000
p 337�.000

Illustration 3:Outstanding Checks

The following data are available for the Cash in bank of Rizza Company for
February of the current year:
A. Checks issued by the company during February, P1SO,o.oo.
B. Outstanding checks, January 31, P52,000. .
C. Customer's check representing receipts in January amounting
to
Pl2,000 was erroneously recorded by the compny as P21,000.
D. Check of the company in January amounting to P20,000
was
erroneously recorded by the company as P2,000.
E. Checks paid by the bank in February,P130,000.
183

d cash Equivalents
Chapter 8 - cash an P10 000.
b k cred it i11 J anuary, , 00
F. Erroneous ank I a1�ge in Febrt1a1y, P12,0 .
G. Erroneotts ban crg1e J ant1a1.y, �- 2/ 000.

H� Bani< service c

1aa1�ge'

rebrtaaJ.y,

P3 000.

I. Bank se1
�
e cl , .

-v1c

te fo1�tl1e following:

Required: Con1pu on Februar�y 28.

1. Outstanding chec bursen1en ts in February.
2. U11adju sted boolk d sbursements in February.
3. Unadju sted ban < is
SOLUTION:
Requirement No.1
Outstanding checks, Ja11. 31
Add: Checks issued by the company - Feb,
Total
Less:Checks paid by the bank - Feb.
Outstanding checks, Feb. 28

52,000
150,000
202,000
130,000
72,000

Requirement No.2
Checks issued by the company - Feb.
Add: Debit memo in January (bank service charge)
Errors in Jan. corrected in February's book disbursements: , Overstatement of
cash receipts in January for customer s
check (P21,000 - P12,000)
Understatement of cash disbursements in January for
customer's check (P20,000 - P2,000)
Total unadjusted book disbursements
Requirement No.3
Checks paid by the bank - Feb.
Add: Debit memo in February (bank service charge)
Errors in January corrected in February's bank disbursements: Overstatement of cash
receipts in January (erroneous bank credit January 31) �
Error in February affecting bank disbursements
Overstatement of cash disbursements in February (erroneous bank charge)
Total unadjusted bank disbursements

Illustration 4:Outstanding Checks

9,000

18,000
179,000

130,000
3,000

10,000

12,000...
1ss,ooo,..
CZ

!n the udit of he cash account of the Prudylyn Inc., the following i

formation, relative to the credits per books and debits per bank, were disclosed by
the record s of the company and its bank statement with BPI:
Credits per books in February.p 200,oOODebits per bank statement in February1so,oOO

184

�B_-: cash an_d_Ca_sh E q _uiv_a_le__nt_s_�_�---- -----------------

rl3

Cna i,from customer i�n

C}leC" �n the book as

January amounti�ng to P2,000 but was

20,000

1a e11.u u1ed to supplier in January amounting to Pl0,000 but

Check 15 up in the book as
was t :ed to supplier in February amounting to P12,000
check taken up in the book a

1,000

21,000

bUt wasf tile company recorded

i.n the

bank in January as

check ; when the correct amount is

0
p10,o. ation of PAG-IBIG housing loan automatically debited

agre
februar}'� .
ization of PAG-IBIG housing loan automatically debited

15,000

15,000

Abmort� e bank on

February

28, as per automatic debit

aeement, but taken up in the books of the depositor in

March. .
Erroneous bank credit - January
Erroneous bank charge - February
Deposits in January properly recorded by the company as

15,000
18,000
�10,000

P15,000 but was recorded in the bank as 51,000

Outstanding checks, January 3115,000Bank service charge for January1,000Bank

service charge for February2,000
Required:Compute for the outstanding checks at the end of February.

SOLUTION:
Outstand ing checks, January 31
Add: Checks issued by the company this month
Book credits
Less:Overstatement of CR in Jan. (20,000-2,000)
Understatement of CD in Jan. (10,000-1,000)
Overstatement of CD in Feb.(21,000-12,000)
Amortization of PAG -IBIG housing loan in Jan.

p 200,000
18,000
9,000
9,000
15,000

p 15,000

Bank service charge January

Total
Less:Checks paid by the bank
Bank debits
Less: Understatement of CD in Jan.
(PlS,000 - Pl0,000)
Amortization of PAG-IBIG housing loan in Feb.
Erroneous bank credit - January Erroneous bank charge - February
Overstatement of deposit (P51,000-P15,000)
185

1,000 148.000
p 163,000

p 150,000

5,000

15,000
18,000
10,000
36,000
Cha pter 8- Cash and Cash Equivalents---------- -=--=-=--=--------.........

Bank service charge Feb.

Outstanding checks, Feb. 28
Summary of Treatment for Proof of Cash Adjusted Balance Beg.

2,QOO _ 64.QQQ

Ending

Method balance
Cash in bank per books XX
Credit Memo - last month XX
Credit Memo - this month

Receipts
xx
(XX)
xx

Dish.
xx

Balance
xx
xx

Debit Memo - last month Debit Memo - this month

Adjusted balance

(XX)
xx xx

(XX)
xx (XX)
xx xx -

-
-
Notes:
./ Ending cash balance is equal to beginning balance plus receipts minus
disbursements.
./ "Credit memo last month" was added to the beginning cash
balance
because the receipts last month were understa ted resulting to the understatement
of the beginning cash balance. Also, the book receipts during the current month
were overstated brought about by the addition of this "Credit Memo last month".
Thus, the "Credit Memo last month" was deducted from the book receipts this
month.
./ The book receipts for the current month and the cash ending balance
were understated because the "Credit Memo this month" was not yet recorded. Thus,
in the proof of cash presentation this amount was added both to the book receipts
and ending cash balance.
./ "Debit memo last month". was deducted from the beginning cash balance because
the disbursements last month were understated resulting to the overstatement of the
beginning cash balance. Also, the book disbursements during the current month
were overstated brought about by the addition of this amount Thus, this amount
was deducted from the
book disbursements this month.
�
./ The book disbursements for the current month was understated while
the cash ending balance was overstated because the "debit memo this month" was not
added to the book disbursements. Thus in the proof of cash presentation, this
amount was added to the book disbursements
and ded ucted from endine: cash bala nce.

Cash in bank per bank

DIT - last month DIT - this month OC - last month OC - this month
Adjusted balance

Beg. Disburs
balance Receipts ements
xx xx xx
xx (XX)
xx
(XX) (XX)
xx
xx xx xx

Ending
Balance
xx
xx

. 186

_ cash and Cash Equivalents

hapter . . .

...Notes :d �ng cash balance is equal to beginning balance plus receipts minus
I En 1
disbursements.
"Deposit in transit last month" was added to the beginning cash bala nce
1 b cause the receipts last month were understated
resulting to the derstatem ent of the beginning cash balance. Also,
the bank receipts
uring the current month were overstated brought about by the addition
of this "D eposit in tra nsit last month". Thus, the "Deposit in transit last
month" was deducted from the bank receipts this month.
1 The bank receipts for the current month and the cash ending balance were
understated because the "Deposit in transit this month" was not
yet recorded. Thus, in the proof of cash presentation, this amount was added both
to the ba nk receipts and ending cash balance.
1 "Outstanding check.s last month" was deducted from the beginning cash
balance because the disbursements last month were understated resulting to the
overstatement of the beginning cash balance. Also, the bank disbursements during
the current month were overstated brought about by the addition of this amount.
Thus, this amount was deducted from the bank disbursement this month.
./ The bank disbursements for the current month was understated while the cash
ending balance was overstated because the debit memo this month was not yet
recorded. Thus in the proof of cash presentation, this amount was added to the bank
disbursements and deducted from ending cash balance.

ERRORS (both on books and banks)

The amount to be presented herein is the DIFFERENCE between the correct amount and
the erroneous amount)

Beg.
1) Errors last month corrected this month:
a) Overstatement of CR (XX)
b) Understatemen t of CR XX
c) Overstatement of CD XX
d) Understatement of CD (XX)

Rec. Dish. End.

(XX)
(XX)
(XX)
(XX)

2) Errors last month not yet corrected this month:

a) Overstatement of CR (XX)
b) Understatement of CR XX
c) Overstatement of CD XX
d) Understatement of CD (XX)
3) Errors this month not yet corrected:

(XX)
xx xx
(XX)

a) Overstatement of CR (net amount)

b) Understatement of CR (net amount)
187

(XX)
xx

(XX)
xx
Chapter 8 - cash and cash Equivalents
c) Overstatement of CD (net amount)
d) Understatement of CD (net amount)
Legend: CR- Cash Receipts; CD-Cash Disbursements

(XX)
xx

FREQUENTLY ENCOU NTERED TRICKS IN PROOF OF CASH

Note: All amounts are assumed figures. Current month (end) is February
while orevious oeriod -beginnin t. is assumed anuar1.
Ad usted balance method � BOOK BOOKS Februarv BOOJ<S
End
1. NSF check amounting t0 (3,399) (3,399) P3,399 returned
in February.
This was deoosited in �anuar 1

�
2. NSF check amounting to PB,900 deposited in February and .retu rned in March.
(see
note
3. NSF check recorded as reduction of Cash Receiots

(8,900)

(8,900)-

a. Returned

I� n

January

& (300) 300

record ed
P300

I� n February,

b. Returned in February & 500 500

recorded Februarv, PSOO
4. Unrecorded disbursements of (800) (800)
January corrected in February
P800. I
5. Unrecorded receipts of 1,000 (1,000)
January corrected in February
Pl,000. I
6. Unrecorded disbursements of (1,200)
January not yet corrected in Februar 1, Pl,200.
7. Unrecorded receipts of 1,400

(1,200)

1,400

January not yet corrected

Februarv, P1,400.

I� n

a. Unrecorded disbursements fi

(1,600)

the month of Februar , Pl

or 1,600
600

9. Unrecorded receipts , fo; th 1,800 1,soo

month of Februar ,, Pl,800

10 Post-dated or � check of th unreleased

e company included
as outstanding checks for th month of Pcbruar , P2,000 e

2.000 .

11 Post-dated check from

cu�sto- (1,200) (1,200)

mer fn Februa 1-,i recorded as -

188
, ,8 -_;;c._a_sh a_nd C_a_sh

Eq_ul_v_alen ::_ .

ctiaptetr--:

balance method - BOOK

�--------------

Adius ed

BOOKS

Februa1Y

BOOK.S

tZ cancellations of company's hecks recorded by a reduc� on of cash

disbursements,
p2,600.
_ 1 check of the company issued
3 in January was mutilated and
retu rned by the payee. A replacement check was issued. Both checks were entered in
the check register but no entry was made to cancel the mutilated check, P2,700. (in
addition, this should not be included as part of outstanding checks in anuarv�

2,600 (2,600)

2,700 2,700

14 Check issued in January and was included in the out� standing checks in January
was recorded for P3,000 but when the bank statement was received in February the
correct amount of this check is P300. No correction was made in February. (P300
should be included as outstanding checks i�n anuarv�
15 The company issued a stop payment order to the bank in February for check issued
in February which was not received by the payee. A new check was written and
recorded in the check register in February.The old check was Written off by a
journal entry also in Februari{, P3,200.

2,700 2,700

(3,200) (3,200)
BANK

Ad�usted balance method - BANK

1. Customer's NSF check returned by bank in January and redeposited and cleared in
Februa no en in anua

BANK
Be
(3,400)

189

Rec. Dish.
3,400

End

c h and cash Equivalents -------------

Chapter 8 - as Februa y BA- N.,

Adju sted balance method � BANK BANK

Rec. Dish. E "

and February to record the

Bel?

nd'
-..............

LJ NS F chec k,'P3,400 ::::; "the+----4 1,o o-oOjL1,oforoO--\--..-............

2. Payment directly from tle collections (paid out in

currency), Pl,000. (see
exp la11ation below, .

(3,100) (3,100)
3. Erroneous bank credit made in February corrected by
Debit/ Disbursements also in Februan', P3,100.
4. Customer's dishonored checks in February are recorded as
reduction of cash receipts. The dishonored checks are redeposited also in February
and are recorded as regular receipts, P2,400.
5. NSF check amounting to P2,000 returned this month and redeposited this month (no
entry was made in the books both on the return and redeposit. - see note below

(2,400) (2,400)

(2,000) (2,000)

Note:This is the traditional treatment in the textbooks. However, as the check

received by the company was returned due to insufficiency of funds, effectively,
the company did not receive paym ent at all. Thus, the amount of returned check
should be deducted from the Book Balance End and from the Book Receipts (if
recorded) and added back to receivables as these are still collectible from the
customer.
PAID OUT IN CURRENCY (PAYME NT OUT OF COLLECTION)
According to imprest system, all cash collection received by the company
should be deposited intact to the bank, and all
disbursements should made through the use of check,
.except for payment of small nJ miscellaneous items.
Therefore payment directly out of the collection s
violation of this internal control. For purposes of accounting all the receip
and disbursements during a certain period, the following treatment sh:
be presented in the proof of cash starting from the unadjusted cash bala
bank: d

Beg. Rec.

Dish. E\1n1/ �

Unadjusted cash in bank - bank

Paid out of collection

xx xx xx JV'
xx xx

190

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Chapter

_ cash and Cash Equivatents 8 .

in the presentation, the payment out of collection is assumed to

Note tha deposited in the bank and a check was issued for the payment
have been
rrarion:ProofofCash
111us oncerning the cash records of Lyndon Company for the months
of
oata c ber and October 2018 follow:
septerll
unadjusted book balanc on September 30 amounted to P2,258,000
a)\ Total receipts per book in October, Pl,400,000.
b) Total disbursements per book in October, P2,400,000.
c) unadjusted bank balan.ce on September 30 amounted to P2,100,000.
d) Total credits per bank.in October amounted to Pl,200,000.
e) Total debits per bank in October amounted to P2,500,000.
) NSF checks on September 30 amounted to P60,000 while on October 31
amounted to P40,000.
h) Collection of accounts receivable not recorded by the
company on September 30, P30,000 and PS0,000 on October 31.
i) Erroneous bank charge on September 30, Pl0,000 and
P18,000 on October 31.
j) Erroneous bank credit on September 30, P7,000 and P9,000 on October
31.
k) Understatement of check in payment of rent payable on September 30, P90,000 and
P120,000 on October 31.
l) Deposit in transit on September 30, P130,000.
m) Outsta nding checks on October 31, P30,000.
Required: Based on the above data, answer the following questions:
1. How much is the deposit in transit October 31?
2. How much is the outstanding checks September 30?
3. How much is the adjusted cash in bank balance September 30?
4. How much is the adju sted cash receipts during October?
5. How much is the adjusted cash in bank balance October 31
6. Provide the adjusti ng journal entries.
SOLUTION:
Requirement No.1

Deposit in transit, beginning

Add: Deposits made by the company Book receipts

Pl,400,000

p 130,000

Less:Credit last month

Total
Less:Deposits acknowledged by the bank Bank receipts
Less:Credit memo this month Erroneous bank charge - September Erroneous bank credit
- October
191

30.000 1.370.000
Pl,500,000
Pl,200,000
50,000
10,000
9.000 1.131.000

Requirement No. 2
Outstanding checks, beginning (squ eeze)
Add: Checks issued by the company Book disbursements
Less:Debit last month
Understatement of check in
payment of rent-September
Add: Understatement of check in

PZ,400,000
60,000

90,000

P 9s,o00

Total

Payment of rent - October

120.000 2.370.00Q
P2,46s,000

Less:Checks paid by the bank

Bank disbursements
Less: Debit memo this month
Erroneous bank charge - October Erroneous bank credit - September
Outstanding checks, end
Requirement Nos.3-5

P2,500,000
40,000
18,000
7.000 2.435.00Q
p 30.00Q

Balance October Balance

Se t. 30 Receits Dish. Oct 31 Bank bal.
P2,100,000 Pl,200,000 P2,SOO,OOO p 800,000
Deposit in transit
Sept 30 130,000 ( 130,000)
Oct 31 369,000
Outstanding checks
Sept 30 ( 95,000) ( 95,000)

369,000

Oct 31
Erroneous bank charge
Sept 30 10,000 ( 10,000)
Oct 31

30,000 ( 30,000)

Erroneous bank (18,000) 18,000

credit
Sept 30 ( 7,000)
Oct 31 (7,000)

Adjusted bal.

- ( 9.00Q)

- ( 9.000)

P2,138,00Q

Pl,420,00Q 2ilO OOO Pl,148t-O.OQ

Balance October Balance

Sept 30

Book balance

P2,258,000

Receits Dish. Oct 31 -

NSF checks Pl,400,000 P2,400,000 p1,2sa.ooo

Sept 30 ( 60,000)
Oct 31 ( 60,000)

Credit Memo
Sept 30 30,000 (30,000)
192

40,000

( 40,000)

r cS - Cash an_d C_as_h_E_qu_iv_a_le_n_ts---------------- -------

chapte
act 31
derstatement of
Un �n payment checks 1
o:;t30 ( 90,000

50,000
( 90,000)

50,000

act 31 -
Adjusted bal. P2,138,000 f l,420,000

120.000
P2,410,000

( 120.000)
Pl,148,00Q

Req

�rement No.6:Adjusting Entries

Debit

Credit

) ulcounts

.
receivable

40,000

1 cash in bank
2) cash in bank
Accounts receivable
3) Rent payable
Cash in bank

50,000

120,000

40,000

50,000

120,000
193

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