Cash

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Chapter 7

• Cash

2
Cash

• Coins, currency (paper money),
• checks, money orders, travelers
• checks, unrestricted deposits
• Anything that you can deposit in a bank account

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Cash Accounts How many?

• Many companies have only one
• Other companies have several why?
• Different currencies
• Different purposes
• Account Titles Cash in Bank First Bank
• Payroll Trust etc

4
Types of Controls over Cash

• Preventive Controls Controls over
• cash from time it is received until it is
• deposited
• e.g. Segregation of duties
• Detective Controls controls to
• detect theft or misuse of cash
• e.g. Bank Reconciliations

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Retailers Sources of Cash
Register records
Cash Receipts
CASHIERS DEPARTMENT
ACCOUNTINGDEPARTMENT
Remittance advices
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Retailers Sources of Cash
ACCOUNTINGDEPARTMENT
CASHIERS DEPARTMENT
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Internal Controls Over Cash

• Cash is the asset, most likely to be
• diverted and used improperly by
• employees because it can be easily
• transferred
• Controls must be put in place that
• safeguard Cash and control the
• authorization of cash transactions

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Controlling Cash Received from Cash Sales (1)

• Cash is received from over-the-counter sales or
  mail
• Cash Register used for control in
  over-the-counter sales
• Separation of Duties Used for control with
  incoming cash by mail
• Change Fund Funds used to make change for
  customers

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Controlling Cash Received from Cash Sales (2)

• If actual cash in cash register does not agree
• with cash register tape. WHY? Errors in
• recording cash sales or in making change
• Cash short and over account -used when cash
  actually received does not equal cash receipts
• A shortage is posted as a debt
• An overage is posted as a credit
• At the end of the accounting period
• Debit Balance Reported on Income Statement as a
  Misc. Admin. Expense
• Credit Balance Reported as Other Income

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Controlling Cash Received from Cash Sales
19 Cash 3 142 00 Cash Short and Over 8 00
Sales 3 150 00
To record cash sales and actual cash on hand.
Cash sales for March 19 totaled 3,150.00 per the
cash register tape. After removing the change
fund, only 3,142.00 was on hand.
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Internal Control of Cash Payments (1)

• Voucher System Set of procedures for
  authorizing and recording liabilities and cash
  payments. Aids management in planning cash
  disbursements and provides effective accounting
  controls.
• Voucher Systems uses
• Vouchers
• Unpaid Vouchers File
• Paid Vouchers Files

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Internal Control of Cash Payments (2)

• Electronic Funds Transfer (EFT) Companies may
  receive and pay money electronically
• Direct Deposit Payroll
• Payment of Suppliers and other vendors

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Business Bank Accounts

• Signature card (contract) used by the bank to
  confirm the terms of the account and to verify
  the authorized parties signature(s) on checks
  that are submitted for payment
• Deposit ticket details cash and checks of a
  deposit submitted by depositor

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Bank Statement

• A summary record of all checking accounts
  transactions that occurred during the month.
• Statement is mailed monthly
• It is important that accounts be reconciled
  monthly so that errors can be detected and
  corrected by bank or depositor.

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Bank Statement Reconciliation

• An analysis (detective control) that
• reconciles the differences between

Cash balance per Bank Statement
Cash balance per Accounting Records
Who prepares? An employee not involved in
handling, issuing or recording cash transactions
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Rules of Reconciliation

• Bank Side (common adjustments)
• Deposits in transit ()
• Outstanding checks (-)
• Bank errors (/-)
• Company Side (common adjustments)
• Collections interest ()
• NSF checks (-)
• Service charges (-)
• Company errors (/-)
• Note Both adjusted balances MUST balance!

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Depositors records
Banks books
Beginning balance 3,359.78
Beginning balance 2,549.99
Power Network prepares to reconcile the monthly
bank statement as of July 31, 2006
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Depositors records
Banks books
Beginning balance 3,359.78
Beginning balance 2,549.99
Add deposit not recorded by bank 816.20
4,175.98
A deposit of 816.20 did not appear on the bank
statement.
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Depositors records
Banks books
Beginning balance 2,549.99
Add note and interest collected by bank
408.00
2,957.99
The bank collected a note in the amount of 400
and the related interest of 8 for Power
Networking
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Depositors records
Banks books
Beginning balance 3,359.78
Beginning balance 2,549.99
Add deposit not recorded by bank 816.20
Add note and interest collected by bank
408.00
4,175.98
2,957.99
Deduct outstanding checks No.
812 1,061.00 No. 878 435.39 No. 883
48.60 1,544.99
A deposit of 637.02 did not appear on the bank
statement.
Three checks that were written during the period
did not appear on the bank statement 812,
1,061 878, 435.39, 883, 48.60.
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Depositors records
Banks books
Deduct outstanding checks No.
812 1,061.00 No. 878 435.39 No. 883
48.60 1,544.99
Deduct check returned because of
insufficient funds 300.00
The bank returned an NSF check from one of the
firms customers, Thomas Ivey, in the amount of
300. This was a payment on account.
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Deduct outstanding checks No.
812 1,061.00 No. 878 435.39 No. 883
48.60 1,544.99
Deduct check return because of
insufficient funds 300.00
Bank service charges 18.00
The bank service charges totaled 18.00.
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Depositors records
Banks books
Error recording Check No. 879 9.00
327.00
Check No. 879 for 732.26 to Taylor Co. on
account, erroneously recorded in journal as
723.26.
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Depositors records
Banks books
Beginning balance 3,359.78
Beginning balance 2,549.99
Add deposit not recorded by bank 816.20
Add note and interest collected by bank
408.00
4,175.98
2,957.99
Deduct outstanding checks No.
812 1,061.00 No. 878 435.39 No. 883
48.60 1,544.99
Deduct check return because of
insufficient funds 300.00
Bank service charges 18.00
Error recording Check No. 879 9.00
327
Adjusted balance 2,630.99
Adjusted balance 2,630.99
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Adjusting Journal Entries

• Bank side NO ADJUSTING JOURNAL ENTRIES REQUIRED
• Any items on the Company side (the second part of
  the account reconciliation REQUIRES journal
  entries to correct errors or adjustments
  (journalize and post like any other JE)

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Petty Cash Fund (1)

• A special on-site fund used to pay small amounts
  in cash
• Establish fund (estimated needs)
• Cash check for fund amount
• Entry to establish Petty Cash Fund
• Petty Cash Dr
• Cash Cr
• Give cash to PC Custodian (locked and
  safeguarded)
• Makes disbursements (restrictions on type and
  amount)

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Petty Cash Fund (2)

• PC Custodian records details on PC Cash Receipt
  forms (Cash receipts should amount of PC fund
  at all times)
• Replenish periodically (as needed at least once
  a month)
• Entry to replenish Petty Cash Fund
• Office Supplies Dr
• Store Supplies Dr
• Misc Admin Expense Dr
• Cash Cr
• Repeat process

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Presentation of Cash on Balance Sheet

• Cash presented first in Balance Sheet (most
  liquid asset)
• Cash equivalents short-term investments in
  highly liquid investments (U.S. Treasury Bills,
  commercial paper, money market funds) reported
  with cash
• Cash and Cash Equivalents one line item reported
  on Balance Sheet (summarizes all Cash and all
  Cash Equivalents)
• Compensating Balances Funds on deposit that may
  not be withdrawn usually due to a loan agreement
  (reported as a footnote on the financial
  statements)

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Financial Analysis and Interpretation

• Doomsday Cash and Cash Equivalents
• Ratio Current Liabilities
• If the business ceases to exist, can cash on hand
  meet creditor obligations?
• Ratio is usually less than one. A higher ratio
  indicates less risk.

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Homework Assignment

• Key Terms page 300 (quiz)
• Illustrative problem page 300-301
• Self-Examination Questions page 301
• Class Discussion Questions page 301-302
• Problems
• P 7-1A
• P 7-3A