college accounting

1
Chapter
9
Skyline College
2
Journal Flow Chart
Does the transaction involve cash?
YES
NO
Was cash RECEIVED?
Was inventory PURCHASED?
NO
NO
YES
YES
Record the transaction in the CASH RECEIPTS (CRs)
Journal
Record the transaction in the CASH DISBURSEMENTS (
CDs) Journal
Record the purchase in the PURCHASES Journal
(PJ)
Was it a credit SALE?
YES
NO
Use the CRs and CDs Journals to prepare the
monthly Bank Reconcilation
Record the Transaction in the SALES Journal (SJ)
Record the Transaction In the GENERAL Journal (GJ)
3
The Cash Receipts Journal
4
Cash Sales and Sales Taxes
Consider the cash sales entries for January 8 in
the cash receipts journal for The Style Shop.
5
CASH RECEIPTS JOURNAL
PAGE 1
8
Cash Sales
360.00
4,500.00
4,860.00
6
Cash Short Over

• Occasionally errors occur when making change.

When errors happen, the cash in the cash register
is either more or less than the cash listed on
the audit tape.

• When cash in the register is more than the audit
  tape, cash is over.

• When the cash in the register is less than the
  audit tape, cash is short.

7
Cash sales with cash short.
CASH RECEIPTS JOURNAL
PAGE 1
384 4,800 5,184
Debits are not the normal balance of the Other
Accounts Credit column, so the debit entry is
circled.
8
Cash Discounts on Sales

• The Style Shop does not offer cash discounts.
• However, many wholesale businesses offer cash
  discounts to customers who pay within a certain
  time period. These are sales discounts.
• Businesses with many sales discounts add a Sales
  Discounts Debit column to the cash receipts
  journal.

9
Additional Investment by the Owner
CASH RECEIPTS JOURNAL
PAGE 1
The account name and amount are entered in the
Other Accounts Credit section and the debit is
entered in the Cash Debit column.
10
Receipt of a Cash Refund
CASH RECEIPTS JOURNAL
PAGE 1
The name and amount are entered in the Other
Accounts Credit section. The debit is entered in
the Cash Debit column.
11
Promissory Note
Sometimes promissory notes are used to replace
an accounts receivable balance when the account
is overdue.
12

• On July 31 The Style Shop accepted a
  six-month promissory note from Stacee Fairley,
  who owed 800 on account.

13
On July 31 The Style Shop recorded a general
journal entry to increase notes receivable and to
decrease accounts receivable for 800.
The asset account, Notes Receivable, was debited.
The Accounts Receivable account was credited.
14
Interest rate 9 per year Time
six months Interest amount 800 x 9 x 6/12
36 P x i x t Total amount with
interest 836 (800 36)
Amount owed (principle) 800
15
Collection of a Promissory Note and Interest
CASH RECEIPTS JOURNAL
PAGE 1
The note and the interest are recorded in the
Other Accounts Credit section.
16
Posting the Column Totals
Posting the Cash Receipts Journal

• At the end of the month, the cash receipts
  journal is totaled and the equality of debits and
  credits is proved.

17
The column totals are posted to the general
ledger.
CASH RECEIPTS JOURNAL
PAGE 1
2,133 1,800 22,500 15,909 42,342
18
The amounts in the Other Accounts Credit section
are posted.
CASH RECEIPTS JOURNAL
PAGE 1
The (X) indicates that the individual amounts are
posted, and not the total.
19
Posting to the Accounts Receivable Ledger

• Post entries from the Accounts Receivable
  Credit column to the customers accounts in the
  accounts receivable subsidiary ledger daily.

On January 7, 432 was posted to Roy Andersons
account in the accounts receivable subsidiary
ledger.
20
CASH RECEIPTS
JOURNAL PAGE 1

SALES DATE DESCRIPTION POST.
ACCOUNTS TAX SALES OTHER
ACCOUNTS CREDIT CASH
REF. RECEIVABLE PAYABLE
CREDIT ACCOUNT TITLE POST. AMT. DEBIT

CREDIT CREDIT REF. 20--
Jan. 7 R. Anderson ? 432
.00

432.00
The CR1 indicates that the transaction appears
on page 1 of the cash receipts journal.
Name Roy Anderson

Terms n/30 Address 8913 S. Hampton
Rd, Dallas, Texas 75232-6002 DATE
DESCRIPTION POST. DEBIT
CREDIT BALANCE
REF. 20--
Jan. 1 Balance
?
432.00 3 Sales Slip
1101 S1 432.00
864.00
7
CR1 432.00
432.00 31 Sales Slip 1110
S1 267.50
699.50
21
Advantages of the Cash Receipts Journal

• The cash receipts journal

• Saves time and effort when recording and posting
  cash receipts
• Allows for the division of work among the
  accounting staff
• Strengthens the audit trail by recording all cash
  receipts transactions in one place

22
The Cash Payments Journal
23
Journal Flow Chart
Does the transaction involve cash?
YES
NO
Was cash RECEIVED?
Was inventory PURCHASED?
NO
NO
YES
YES
Record the transaction in the CASH RECEIPTS (CRs)
Journal
Record the transaction in the CASH DISBURSEMENTS (
CDs) Journal
Record the purchase in the PURCHASES Journal
(PJ)
Was it a credit SALE?
YES
NO
Use the CRs and CDs Journals to prepare the
monthly Bank Reconcilation
Record the Transaction in the SALES Journal (SJ)
Record the Transaction In the GENERAL Journal (GJ)
24
Payments for Expenses
Businesses write checks for a variety of expenses
each month. In January The Style Shop issued
checks for rent, electricity, telephone service,
advertising, and salaries. Consider the January
3 entry for rent expense.
25
20--
Jan. 3
111
January rent
Rent Expense
1500
1500
The account name and amount are entered in the
Other Accounts Debit section.
The credit is entered in the Cash Credit column.
26
Payments on Account
Merchandising businesses usually make numerous
payments on account for goods that were purchased
on credit. Consider the January 27 entry for
International Apparel Mart.
27
27
122
International Apparel Mart
2400.00
2400.00
If there is no cash discount, the entry in the
cash payments journal is a debit to Accounts
Payable and a credit to Cash.
28
Purchases Discounts
Purchases Discounts is a contra cost of goods
sold account. For an example of a payment with a
discount, refer to the January 13 entry for
Fashion Designs.
29
Debit Accounts Payable for the invoice amount,
2865
Credit Purchases Discounts for the amount of
the discount, 57.30.
Credit Cash for the amount of cash paid, 2807.70.
30
Cash Purchases of Equipment and Supplies
Businesses use cash to purchase equipment and
other assets. On January 10 The Style Shop
issued a check for store fixtures.
31
10
112
Store fixtures
Store Equip.
2400.00
2400.00
The account name and amount appear in the Other
Accounts Debit section.
The credit is recorded in the Cash Credit column.
32
Payment of Taxes
Retail businesses collect sales tax from their
customers. Periodically the sales tax is remitted
to the taxing authority. Consider the entry on
January 11.
33
The Style Shop issued a check for 749 to pay the
December sales tax.
11
113
Tax remittance
Sales Tax Pay.
756.00
756.00
Notice that the account name and amount appear in
the Other Accounts Debit section.
The credit is entered in the Cash Credit column.
34
Cash Purchases of Merchandise
Although most merchandising businesses buy their
goods on credit, occasionally purchases are made
for cash. Consider the January 31 entry for the
purchase of goods.
35
31
126
Purchase of goods
Purchases
3200.00
3200.00
Cash purchases are recorded in the cash payments
journal.
36
Freight In
175.00
175.00
Payment of freight-in and amount appear in the
Other Accounts Debit section.
The credit is in the Cash Credit column.
37
Cash Payments Journal
The Style Shop issued a check for 172.80 to a
customer who returned a defective item.
31
128
Cash refund
Sales Ret. Allow.
160.00
12.80
Sales Tax Payable
172.80
38
Payment of a Promissory Note and Interest
A promissory note can be issued to settle an
overdue account or to obtain goods, equipment, or
other property.
39
On August 2, The Style Shop issued a six-month
promissory note for 6,000 to purchase store
fixtures from Metroplex Equipment Company.
The note had an interest rate of 10 percent.
40
On January 31 The Style Shop issued a check for
6,300 in payment of the note (6,000) and the
interest (300). P x i x t
interest 6,000 x 10 x 6/12 300
41
Cash Payments Journal
Debit Notes Payable for 6,000
Debit Interest Expense for 300
Sales Ret. Allow.
160.00
31
128
Cash refund
Sales Tax Payable
12.80
172.80
31
129
Note paid to Metroplex
Notes Payable
6000.00
Equipment Company
Interest Exp.
300.00
6300.00
Credit Cash for 6,300
42
Posting from the Cash Payments Journal
During the month, the amounts recorded in the
Accounts Payable Debit column are posted to the
individual accounts in the accounts payable
subsidiary ledger.
The amounts in the Other Accounts Debit column
are also posted individually to the general
ledger accounts during the month.
Consider the January 3 entry in the cash payments
journal that was posted to Rent Expense account.
43
The CP1 indicates that the entry is recorded on
page 1 of the cash payments journal.
44
Posting to the Accounts Payable Ledger
Post entries from the Accounts Payable Debit
column of the cash payments journal to the vendor
accounts in the accounts payable subsidiary
ledger daily.
On January 13, 2,865 was posted to Fashion
Designs account in the subsidiary ledger.
45
The amount of 2,865 was posted to Fashion
Designs account in the subsidiary ledger.
46
Advantages of the Cash Payments Journal

• The cash payments journal
• Saves time and effort when recording and posting
  cash payments
• Allows for a division of labor among the
  accounting staff
• Improves the audit trail because all cash
  payments are recorded in one place and listed by
  check number

47
The Petty Cash Fund
Most businesses use a petty cash fund to pay for
small expenditures
The amount of the petty cash fund depends on the
needs of the business.
Usually the office manager, cashier, or
assistant is in charge of the petty cash fund.
48
Establishing the Fund
The Style Shops cashier is responsible for petty
cash. The Style Shop wrote a 175 check to the
cashier, who cashed the check and put the
currency in a locked cash box.
49
Debit Petty Cash Fund in the other Accounts Debit
section and enter the credit in the Cash Credit
column.
50
Petty Cash Voucher
The person receiving the funds signs the voucher.
The person who controls the petty cash fund
initials the voucher.
51
A petty cash voucher shows
52
Replenishing the Fund
The total vouchers plus the cash on hand should
always equal the amount of the fund175 for The
Style Shop.
Replenish the petty cash fund at the end of each
month or sooner if the fund is low. The fund
MUST be replenished at the end of the period.
53
The following internal control procedures apply
to petty cash

• Use the petty cash fund only for small payments
  that cannot conveniently be made by check.
• Limit the amount set aside for petty cash to the
  approximate amount needed to cover one month's
  payments from the fund.
• Write petty cash fund checks to the person in
  charge of the fund, not to the order of "Cash."

54
The following internal control procedures apply
to petty cash

• Assign one person to control the petty cash fund.
  This person has sole control of the money and is
  the only one authorized to make payments from the
  fund.

• 5. Keep petty cash in a safe, a locked cash
  box, or a locked drawer.
• 6. Obtain a petty cash voucher for each
  payment. The voucher should be signed by the
  person who receives the money and should show the
  payment details. This provides an audit trail for
  the fund.

55
Internal Control over Cash
The internal control over cash should be tailored
to the needs of a business.
Accountants play a vital role in designing,
establishing, and monitoring the cash control
system.
56
Essential Cash Receipt Controls

• Have only designated employees receive and
  handle cash. In some businesses employees
  handling cash are bonded.
• Bonding is the process by which will insure the
  business against losses through employee theft or
  mishandling of funds.

57
Essential Cash Receipt Controls

• Keep cash receipts in a cash register, a locked
  cash drawer, or a safe while they are on the
  premises.
• 3. Make a record of all cash receipts as the
  funds come into the business.
• 4. Check the funds to be deposited against the
  record made when the cash was received. The
  employee who checks the deposit is someone other
  than the one who receives or records the cash.

58
Essential Cash Receipt Controls

• Deposit cash receipts in the bank promptly.
  Deposit the funds intact. The person who makes
  the bank deposit is someone other than the one
  who receives and records the funds.

• Enter cash receipt transactions in the accounting
  records promptly. The person who records cash
  receipts is not the one who receives or deposits
  the funds.
• Have the monthly bank statement sent to and
  reconciled by someone other than the employees
  who handle, record, and deposit the funds.

59
Essential Cash Payment Controls

• Make all payments by check except for payments
  from special purpose cash funds such as a petty
  cash fund.
• Issue checks only with an approved bill, invoice,
  or other document that describes the reason for
  the payment.
• Have only designated personnel approve bills and
  invoices.
• Have checks prepared and recorded in the
  checkbook or check register by someone other than
  the person who approves the payments.

60
Essential Cash Payment Controls

• Have still another person sign and mail the
  checks to creditors.

• Use prenumbered check forms.
• During the bank reconciliation process, compare
  the canceled checks to the checkbook or check
  register. The person responsible for this should
  be someone other than the person who prepares or
  records the checks.
• Enter promptly in the accounting records all cash
  payment transactions. The person who records cash
  payments should not be the one who approves
  payments or the one who writes the checks.

61
Bank Statement
62
Bank Reconciliation Statement
63
(No Transcript)
64
(No Transcript)
65
The Bank Reconciliation Process An Illustration
When the bank statement is received, it is
reconciled with the financial records of the
business. The ending bank balance on January 31
was 21,838.50.
On January 31 the Cash account, called the book
balance of cash, is 14,390.70.
66
Bank Statement
First Dallas National Bank
The Style Shop Dallas, TX 75268
38-19-98867
12,025.50
The ending cash balance according to the bank is
21,838.50.
21,838.50
67
Sometimes the difference between the bank balance
and the book balance is due to errors.
Arithmetic errors
Arithmetic errors
Giving credit to the wrong depositor
Not recording a check or deposit
Recording a check or deposit for the wrong
amount
Charging a check against the wrong account
Many banks require that errors in the bank
statement be reported within a short period of
time, usually 10 days.
68
Other than errors, there are four reasons why the
book balance of cash may not agree with the
balance on the bank statement.
1. Outstanding checks. 2. Deposit in transit.
3. Service charges and other deductions not
recorded in the business records. 4.
Deposits, such as the collection of promissory
notes, not recorded in the business records.
69
(No Transcript)
70
Format of a bank reconciliation statement
Bank statement balance
Book balance
deposits in transit
deposits not recorded
outstanding checks
deductions
or bank errors
or errors in books

71
Steps to reconcile bank balance
First Section

• Enter the bank balance on the bank statement.
• Compare the deposits in the checkbook with the
  deposits on the bank statement.
• List the outstanding checks.
• List any bank errors.
• Compute the adjusted bank balance.

72
The Style Shop
Bank statement balance
21,838.50
Step 1 Enter the balance on the bank statement,
21,838.50
73
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Step 2 Compare the deposits in the checkbook
with the deposits on the bank statement. On
January 31 receipts of 5,940 were placed in the
bank's night deposit box.
The bank recorded the deposit on February 1. The
deposit will appear on the February bank
statement.
74
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
15,537.80
Step 3 List the outstanding checks. The Style
Shop has seven outstanding checks totaling
15,537.80.
75
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Step 4 List any bank errors.
15,537.80
A 1,600 check was incorrectly deducted from The
Style Shops account.
76
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
15,537.80
Adjusted bank balance
13,840.70
Step 5 Compute the adjusted bank balance.
77
Steps to reconcile book balance
Second Section

• Enter the balance in books from the Cash account.
• Record any deposits made by the bank that have
  not been recorded in the accounting records.
• Record deductions made by the bank.
• Record any errors in the accounting records that
  were discovered during the reconciliation
  process.
• Compute the adjusted book balance.

78
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Step 1 Enter the balance in books from the Cash
account, 14,390.70.
15,537.80
Adjusted bank balance
13,840.70
14,390.70
Book balance
79
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Step 2 Record any deposits made by the bank that
have not been recorded in the accounting
records. The Style Shop did not have any.
15,537.80
Adjusted bank balance
13,840.70
14,390.70
Book balance
80
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50

• Step 3 Record deductions made by the bank. There
  are two items
• The NSF check for 525
• The bank service charge for 25

15,537.80
Adjusted bank balance
13,840.70
81
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Step 4 Record any errors in the accounting
records that were discovered during the
reconciliation process. The Style Shop did not
have any errors in January.
15,537.80
Adjusted bank balance
13,840.70
82
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Step 5 Compute the adjusted book balance.
15,537.80
Adjusted bank balance
13,840.70
13,840.70
Adjusted book balance
83
The Style Shop
Bank statement balance
21,838.50
Additions
Deposit of January 31 in transit
5,940
Check incorrectly charged to account
7,540
1,600
29,378.50
Notice that the adjusted bank balance and the
adjusted book balance agree.
15,537.80
Adjusted bank balance
13,840.70
13,840.70
Adjusted book balance
84
For The Style Shop, two entries must be made.

• The first entry is for the NSF check from David
  Newhouse, a credit customer.

• The second entry is for the bank service charge.

The effect of the two items is a decrease in the
Cash account balance.