Lecture 01: Cash. [Intermediate Accounting]

The lecture begins by exploring the fascinating history of money, starting with the barter system. It details how the limitation of bartering led to the discovery and widespread acceptance of gold as a universal medium of exchange. The discovery of gold significantly simplified transactions and is considered one of the biggest discoveries in human history. The discussion highlights that this evolution was a natural process, not an imposed one, as gold became desirable due to its inherent value and acceptance by all, making it the informal cash of ancient times.

The transition from gold to paper money is explained, highlighting the problem of gold's weight in large transactions. Governments, through entities resembling early banks (goldsmiths), began to accept gold deposits and issue paper receipts as proof of deposit. These receipts, backed by gold, became accepted as a medium of exchange, giving birth to what we now know as paper money. The lecture defines money as the standard medium of exchange, explaining its role in facilitating transactions that would otherwise be impossible with bartering. It also clarifies that currency and coins, whether paper or metallic, are legal tender, meaning they are universally accepted for payments, though their legality may vary by country.

In intermediate accounting, cash is defined more broadly than in layman's terms. It includes not only currency and coins but also any other negotiable instrument payable in money and accepted by a bank for deposit and immediate credit. This definition stems from the historical development of banking, where institutions stored valuable assets and issued receipts that functioned as money. Key aspects of cash in accounting include its presentation as a current asset, unless restricted for more than 12 months, and its measurement at face value, with exceptions for impaired or foreign currencies which use estimated realizable value or current exchange rates, respectively.

Cash on hand refers to undeposited collections, including bills, coins, and various types of checks. The lecture differentiates between common checks, which may or may not have sufficient funds (like customer checks), and more secure checks like manager's checks, cashier's checks, and traveler's checks, which are approved by a bank and guaranteed to have funds. Bank drafts and money orders are also discussed as forms of cash due to their guaranteed value, offering convenience and security over physical cash. The concept of GCash as a modern equivalent of a money order is also briefly touched upon, highlighting the evolution of transaction methods.

Cash in bank involves two primary account types: savings deposits and checking accounts (demand deposits). Savings accounts are for accumulating funds and earn interest, while checking accounts are for frequent transactions using checks. The lecture then details various scenarios related to checks, including undelivered checks (prepared but not yet issued), post-dated checks (future-dated checks), and stale checks (checks that have expired or are too old to be honored). These scenarios emphasize that adjustments are needed in accounting to reflect the true cash balance until the check is actually delivered, honored, or becomes invalid.

A bank overdraft occurs when checks are drawn for an amount exceeding the deposited funds. In the Philippines, bank overdrafts are generally not legally allowed but can happen in practice, often due to strong banking relationships. An overdraft is classified as a current liability, not a negative cash balance, because it represents a short-term loan from the bank. The lecture stresses the general rule against offsetting bank overdrafts with positive cash balances in other bank accounts, except when the accounts are with the same bank or the amount is immaterial.

Cash funds are cash designated for specific purposes. While cash is generally considered unrestricted, some cash funds, like change funds, tax funds, payroll funds, and dividend funds, are treated as cash because their restriction is for current operations. However, long-term restrictions, such as for plant expansion or sinking funds for long-term debt, classify the funds as non-current assets or investments. Compensating balances, often required by banks as a condition for loans, are also discussed. These can be considered cash if the restriction is informal (meaning the funds can still be accessed), but they are classified otherwise if the restriction is formal and strictly enforced.