CHAPTER SEVEN ACCOUNTING FOR CASH. CASH Includes: –Currency, coins, and checking accounts...

CHAPTER SEVEN

ACCOUNTING FOR CASH

CASH

• Includes:– Currency, coins, and checking accounts– Checks received from customers– Money orders – Bank cashier’s checks

• Because cash plays such a central role in operating a business, it must be carefully managed and controlled.

INTERNAL CONTROL

• A set of procedures designed to ensure proper accounting for transactions

• Good internal control for cash transactions:– All cash received should be deposited DAILY

in a bank.– All disbursements, except for payments from

petty cash, should be made by CHECK.

OPENING A CHECKING ACCOUNT

• Each person authorized to sign checks must complete and sign a SIGNATURE CARD.– This card is used to verify the depositor’s

signature on any banking transactions.

MAKING DEPOSITS

• Deposit Ticket is a form showing– A detailed listing of items being deposited– Currency, coins, and checks are listed separately.– Each check should be identified by its ABA

number.• American Bankers Association number• Found in upper right hand corner of check• Also shown in MICR code on the lower left side of

front of each check• ABA number is used to sort and route checks.

MAKING DEPOSITS

• Endorsements--each check being deposited must be endorsed by the depositor.– Blank endorsement--the depositor simply signs

the back of the check.• Check becomes payable to any bearer.

– Restrictive endorsement--depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Mary Adams only.”

AUTOMATED TELLER MACHINES

• Each depositor has a plastic card and a personal identification number (PIN).

• Most ATMs are on a system that allows non-customers to use their ATMs.

• It is important for depositor to keep an accounting record of ATM withdrawals and deposits.

WRITING CHECKS

• Check is a document ordering a bank to pay cash from a depositor’s account.

• Three parties to every check:– Drawer--the depositor who orders the bank to

pay the cash – Drawee--the bank on which the check is drawn– Payee--the person being paid the cash

• Business checks often have a check stub.

3 STEPS IN PREPARING A CHECK

• Step #1 Complete the check stub or register.

• Step #2 Enter the date, payee name, and amount on the check.

• Step #3 Sign the check.The check should not be signed

until the check signer has verified that all aspects of the check

are correct.

BANK STATEMENT

• Includes:– The balance at the BEGINNING of the period– Deposits and other amounts ADDED during the

period– Checks and other amounts SUBTRACTED

during the period– The balance at the END of the period

BANK STATEMENT

• Sent with bank statement– Canceled checks, “imaged” sheets of check

faces, or a listing of checks– Any other forms representing items added to or

subtracted from the account

EXAMPLE

Bank statement shows a balance of $4,350. But the general ledger account has a balance of $3,800. We need to prepare a

BANK RECONCILIATION.

Mary Adams Consulting Bank Reconciliation

October 31, 2000

Heading includes:Name of Company

Bank ReconciliationDate


October 31, 2000Bank statement balance, October 31

Reconciliation begins with balance according to the

bank statement.

$4,350



Reconciling items are listedas additions or subtractions

from the bank balance.

$4,350Add:

Deduct:



Once all reconciling itemsare listed, the

“Adjusted Bank Balance” is computed.

$4,350Add:

Deduct:

Adjusted Bank Balance



Now the reconciliation turns to adjusting the BOOK balance.

$4,350Add:

Deduct:

Adjusted Bank BalanceBook balance, October 31 $3,800



Additions and subtractions will be made to the

book balance.

$4,350Add:

Deduct:

Adjusted Bank BalanceBook balance, October 31Add:

Deduct:

$3,800



“Adjusted book balance” is computed.

$4,350Add:

Deduct:


Deduct:

$3,800

Adjusted Book Balance



We say it is “reconciled” when the Adjusted BANK and Adjusted BOOK

balances agree.

$4,350Add:

Deduct:


Deduct:

$3,800

Adjusted Book Balance

REASONS FOR DIFFERENCES

• Outstanding checks– Checks that have not been presented to the bank

for payment• Deposits in transit

– Deposits that have not reached the bank or been recorded by the bank before the statement is prepared

• Service charges– E.g., check printing and processing, account fees

REASONS continued

• Collections– Made by the bank on behalf of the depositor

• Not sufficient funds (NSF) checks– Checks deposited but not paid because drawer

did not have sufficient funds• Errors

– Made by bank or by the depositor in recording cash transactions

BANK RECONCILIATION

THREE STEPS:

STEP #1

Identify deposits in transit and related errors.Compare bank statement with:Last month’s deposits in transit

• They should all be on the bank statement.Deposits listed in the accounting records

•If not found on the bank statement, the deposit is considered a deposit in transit.

$ amounts for deposits in the accounting records•If they differ, the error needs to be corrected.

STEP #1 EXAMPLE

A deposit in the accounting records of $635, dated October 31, had not been received by the bank.

DEPOSITIN

TRANSIT



DEPOSITS IN TRANSIT areadded to the bank balance.

$4,350Add:

Deduct:


Deduct:

$3,800

Adjusted book balance

Deposit in transit $635

STEP #2

Identify outstanding checks and related errors.Compare canceled checks with bank statement and accounting records: If they differ, error needs to be corrected.

STEP #2 EXAMPLE

Check # 862 payable to XYZ Telephone Company was written for $46.25 but was entered on the check stub and on the books as $64.25.

$18.00 ERROR



$18.00 is added back tothe book balance.

$4,350Add:

Deduct:


Deduct:

$3,800



Error on check #862 18

STEP #2

Identify outstanding checks and related errors.Compare canceled checks with bank statement and accounting records:

Check mark the stub or accounting records to indicate check has cleared. Checks written but not cleared are OUTSTANDING CHECKS.

•Subtracted from the bank balance on the reconciliation

. If they differ, the error needs to be corrected.

STEP #2 EXAMPLE

Check numbers 890, 892, and 893 do not appear on the bank statement.

OUTSTANDINGCHECKS



Outstanding checksare deducted fromthe bank balance.

$4,350Add:

Deduct:


Deduct:

$3,800




Outstanding checksNo. 890No. 892No. 893

$598334795 1,727

STEP #3

Identify additional reconciling items.Compare any additions and deductions on the bank statement that are not deposits or checks with the accounting records.Items ADDED to the account by the bank are CREDIT MEMOS.Items DEDUCTED from the account by the bank are DEBIT MEMOS.

STEP #3 EXAMPLE

Mary used an ATM machine to make a withdrawal from her account of $200 for personal use. However, she forgot to record this withdrawal on the books.

Deduct $200from the

book balance.


October 31, 2000Bank statement balance, October 31 $4,350Add:

Deduct:


Deduct:

$3,800





$598334795 1,727

Unrecorded ATM withdrawal $200

STEP #3 EXAMPLE

The bank returned an NSF check of $350 written by one of Mary’s clients.

Deduct $350from the

book balance.



Deduct:


Deduct:

$3,800





$598334795 1,727

Unrecorded ATM withdrawal $200NSF check 350

STEP #3 EXAMPLE

The bank deducted $10 from Mary’s account for service charges.

Deduct $10from the

book balance.



Deduct:


Deduct:

$3,800





$598334795 1,727

Unrecorded ATM withdrawal $200NSF check 350Bank service charge 10



Deduct:


Deduct:

$3,800





$598334795 1,727


The Bank section of thereconciliation is totaled.

$4,985

$3,258



Deduct:


Deduct:

$3,800





$598334795 1,727


Then the Booksection is totaled.

$4,985

$3,258

$3,818

$560$3,258

EXAMPLE

We now know that the actual amount of cash is $3,258. But the General Ledger Cash account still shows $3,800.

JOURNAL ENTRIESNEEDED

BANK RECONCILIATIONJOURNAL ENTRIES

• Only two kinds of items appearing on a bank reconciliation require journal entries:– Errors in the books– Bank additions and deductions that do not

already appear in the accounting records• ALL items in the BOOK section of the

reconciliation



Deduct:


Deduct:

$3,800





$598334795 1,727


These 4 items will require journal entries.

$4,985

$3,258

$3,818

$560$3,258

GENERAL JOURNALDATE DESCRIPTION PR DEBIT CREDIT

Cash1234

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When check #862 was written, the Cash account was credited for $18.00 more

than the check amount of $46.25.This entry puts back $18.00

in the Cash account.

18 002000Oct. 31


Cash1234

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Telephone Expense was originallydebited for $64.25. This was $18.00 more than the actual telephone bill of $46.25.

This entry removes the extra $18.00.

Telephone Expense18 00

18 00Error on Check #862

2000Oct. 31


Cash1234

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Since the ATM withdrawal wasfor “personal expenses,”

Drawing should be debited.



M.A., Drawing 200 00

Oct.200031

31


Cash1234

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The $200 withdrawal was never recorded.This entry will remove the $200 from

the Cash account.




Oct.200031

31Cash 200 00


Cash1234

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Oct.200031

31Cash 200 00

Unrecorded ATM

withdrawal

GENERAL JOURNAL cont.DATE DESCRIPTION PR DEBIT CREDIT

Accounts Receivable101112131415

16

17181920

Cash350 00

350 00NSF check

31

The amount of the bounced checkis placed into Accounts Receivable

and Cash is reduced.

GENERAL JOURNAL cont.DATE DESCRIPTION PR DEBIT CREDIT

Accounts Receivable101112131415

16

17181920

Cash350 00

350 00NSF check

Miscellaneous Expense 10 00

31

31Cash 10 00

Bank service charge

Service charges are usually small.Often they are put into Misc. Expense.

PETTY CASH

• A fund set up to pay for small items with cash– Checks for very small amounts are cumbersome.

• To establish the fund:– Check is written to the petty cash custodian.– Check is cashed. – Money is placed into secure box/drawer.

• Custodian is the only person authorized to pay out petty cash.

EXAMPLE

Mary wants to establish a $50 Petty Cash fund to be used to make small purchases

CASH

$50 $50 is withdrawn (by check)from the Cash account.

EXAMPLE

Mary wants to establish a $50 Petty Cash fund to be used to make small purchases.

CASH

$50

Petty Cash is an ASSET account.

$50

PETTY CASH


Petty Cash1234

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50 0020--Nov. 15Cash 50 00

Establish Petty Cash fund

PETTY CASH VOUCHER

• A receipt prepared for every payment from Petty Cash

• Voucher includes:– Name of Payee– Purpose and amount of payment– Account to be charged (e.g., Postage Expense)– Signature of custodian and payee

PETTY CASH PAYMENTS RECORD

• Multi-column record that supplements the regular accounting records

• Provides record of each Petty Cash payment– Broken down by account,

• E.g.: Travel/Entertainment Expense, Postage Exp., etc.

– Used to prepare Replenishment journal entry

REPLENISHING PETTY CASH• Fund is replenished:

– When funds run low, and– End of each accounting period

• Journal Entry is made:– Debiting the accounts charged (e.g., Postage

Expense)– Crediting Cash for amount needed to replenish

the fund – Petty Cash account is not debited or credited.

EXAMPLEAfter two weeks, Mary notices it contains the following vouchers and only $5.65 cash:

Voucher # 1 $15.00 for expenses incurred while on a business trip (Travel/Entertainment Expense)

Voucher # 2 $11.45 for express mailing a report to a client (Postage Expense)

Voucher # 3 $17.90 for oil change on company van (Vehicle Maintenance Expense)


1234

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15 0020--Nov. 3011 45

Travel/Entertainment Exp.Postage ExpenseVehicle Maintenance Exp. 17 90

Cash 44 35

Cash should be credited for the amount needed to restore the fund to its established amount.

$50.00 fund - $5.65 in box = $44.35 needed


1234

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15 0020--Nov. 3011 45


Cash 44 35

Journal Entry balances!!!Vouchers (amounts debited)

equal the amount needed to

replenish the box (credit).


1234

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15 0020--Nov. 3011 45


Cash 44 35Replenishment of PC fund

CHANGE FUND

• A supply of currency and coins kept in the cash register or cash drawer – Allows business to make change when

customers pay in cash• At the end of the day, cash received

during the day is deposited,– But the Change Fund is held back for use on

the following day

EXAMPLEHarlow’s Coffee Shop is opening for business tomorrow. They need to establish a $150 change fund.

CASH

$150

Just like the Petty Cashfund, a Change Fund

starts by withdrawing from Cash.

EXAMPLEHarlow’s Coffee Shop is opening for business tomorrow. They need to establish a $150 change fund.

CASH

$150

Change Fund isan ASSET.

$150

CHANGE FUND


Change Fund1234

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150 0020--Dec. 1Cash 150 00

Establish Change Fund

EXAMPLEAt the close of their first day of business, Harlow’s had $1,384.50 in the cash register.

CASH IN DRAWER $1,384.50Less: CHANGE FUND 150.00

$1,234.50CASH FROM SALES

The CASH from sales shouldagree with the sales recorded

on the cash REGISTER TAPE.




Sales from Cash Register tapeare also $1,234.50!!!


Cash1234

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1,234 5020--Dec. 2

Only the $1,234.50 is debited to Cash and deposited.

The Change fund is not deposited.


Cash1234

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1,234 5020--Dec. 2Sales 1234 50

Cash Sales 12/2/20--

What would have happened if the cash register tape didn’t agree with

the cash from sales?




What if the Cash Register tape had shown Sales of $1,236.50?

EXAMPLE


$1,234.50CASH FROM SALES$1,236.50CASH REGISTER

$ 2.00SHORTAGE

Overages and Shortages are recorded in an account called “CASH SHORT AND OVER.”


Cash1234

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1,234 5020--Dec. 2

Cash is debited for the amount deposited.


Cash1234

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1,234 5020--Dec. 2

Cash Short and Over is debited for shortages

and credited for overages.

Cash Short and Over 2 00


Cash1234

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1,234 5020--Dec. 2

Sales is credited for the amount on the Cash Register tape

even though this was not the amount collected.

Cash Short and Over 2 00Sales 1,236 50

CHAPTER SEVEN ACCOUNTING FOR CASH. CASH Includes: –Currency, coins, and checking accounts...

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Transcript of CHAPTER SEVEN ACCOUNTING FOR CASH. CASH Includes: –Currency, coins, and checking accounts...