Cash is the most liquid asset owned by Company. Negotiable instruments such as money orders, certified checks, casher’s checks, personal checks, and bank drafts are also classified as cash. Some negotiable instruments provide small investment with opportunity to earn interest such as money market funds, money market savings certificates, certificates of deposit (CDs) and similar types of deposits and short-term papers, those items are more properly classified as temporary investment. Cash and Cash equivalent can be presented and standardized by international Accounting Standard No. 7 and No. 1 (IAS 7 and IAS 1) and by US GAAP through old statements SFAS 95 and 102 that are now in Codification Topic 230 and 210.

There is no complicated accounting entries for cash. Cash is debit when the cash increased by receiving money from sales, proceeds of sold assets, proceeds of shares issued, other interest income, dividends from investments, or collections from receivables or other debitors, and it become credit when the cash decreased by paying some expenses, creditors, loan, taxes, dividends or other payments.

The Cash is increased or to be debited when the Company receive cash and to be credited when Cash is decreased or the Company pay cash, the accounting entry will be simply prepared as follow

Dr. Cash

Cr. Xxxxxx

Company receive cash in return of xxxxx

Dr. xxxxx

Cr. Cash

Company pay cash in return of xxxxx 

In this area, we are discussing about how the cash presented or disclosed in the financial statements. 

Cash on hand is a coin or banknotes of several currencies maintained in the Company’s safe. Petty Cash or imprest petty cash is funds of cash on hand maintain to pay minor office supplies.

Cash in the bank is a fund maintained in the bank and owned by Company. Both petty cash and cash in bank are defined as cash.

Cash equivalents are short-term and highly liquid investments that are both

a)    Rapidly convertible to known amount of cash,

b)     Their maturities are very near that they which have insignificant risk of changes to cash. In other word, the maturity of less than or equal 3 months.

If the above criteria are met by some short-term investments, these investments defined as cash equivalents such as Treasury bills that its maturity are less or equal 90 days, commercial paper, money market funds. But if the maturity of short-term investments is between 3 and 12 months, they should be classified under “Temporary Investments”

Also cash and cash equivalents should be disclosed in the notes of the financial statements in the significant accounting policies as follow:

“Cash and cash equivalent include cash and bank balances, call deposits, and other short-term and highly liquid investments that are rapidly convertible to known cash with maturities up to 3 months from date of the acquisition. For the purpose of the statement of cash flows, cash and cash equivalents are presented net of bank overdrafts if they the accounts are in the same currency and bank” 

Bank overdrafts occur when a company writes a check for more than the amount in its bank account.

If the company has two accounts of the same currency in the same finance institution, the bank overdraft account should be offset with the other account to present the net amount in the financial statement.

Bank overdraft account is neither as the same as non-overdraft account currency nor maintained in the same bank account, it should be either presented separately in the current liabilities on the face of balance sheet or in the related notes.

Bank overdrafts that should be offset with cash, should be disclosed in the notes of the financial statements as follow:

Cash and cash equivalents

In thousands of currency

 

20xx

 

20x-1

 

 

 

 

 

 

 

Bank balances

 

Xxx

 

Xxx

 

Call deposits

 

Xx

 

Xx

 

Cash and cash equivalents

 

Xxxx

 

Xxxx

 

Less: Bank overdrafts

 

(xx)

 

(xx)

 

         Restricted bank balances

 

(xx)

 

0

 

Cash and cash equivalents 

Xxx

 

Xxx

 

 

 Restricted cash is fund balance is set aside for a particular purpose such as payroll and dividends funds, plant expansion, retirement of long-term debt. If it is immaterial, it is not segregated from cash in the financial statement. But if it is material, it is classified based on the date of availability disbursements. Means, if the disbursements are due within operation cycle, it is presented separately from cash but under current asset, but if the disbursements are due longer than operation cycle, it is separately presented from cash but under long-term assets/noncurrent assets.

Also restricted cash should be disclosed in the notes of the financial statements as follow:

“At year end of 20xx, the Company had appropriately $xxxxxxx, which was classified as restricted cash/bank deposit and investments. These funds are primarily cash received from xxxxxx for nomination and entry fees for tender and amount held for unclaimed sales and amount of xxxxxx for obtaining bank guarantee for complete the work in condition of the conditions and terms stated in the service contract with client B”

Banks and other lending institutions often require customers to maintain minimum cash balances in checking or saving accounts which are defined as Compensating balances. SEC recommends that companies state separately legally restricted deposits held as compensating balances against short-term borrowing arrangements among the “cash and cash equivalent items” in current assets, and classify the compensating balances held against long-term borrowing arrangements as noncurrent assets in either the investments or other assets caption.

Also compensated balances should be disclosed in the notes of the financial statements as follow:

“At year end of 20xx, the Company had appropriately $xxxxxxx, which was classified as restricted cash and investments. These balances are primarily compensated to constitute support for existing borrowing arrangements and for obtaining letter of guarantee”

Letters of Credit and or bank guarantee for future commitments or contingent liability should be disclosed in the commitments and contingencies disclosures. But if the bank compensate or restrict part of cash in bank account for the letter of credit or the guarantee, the material compensated/restricted cash should be disclosed in the notes of financial statements under cash and cash equivalent