Week 10

Accounting for cash

Bank Reconciliations
Petty Cash

LEARNING OBJECTIVES
1. Define the term cash as it is used in
accounting
2. Identify the purpose and control
features in maintaining a bank account
and prepare a bank reconciliation
statement
3. Explain the purpose of a petty cash
fund, understand how one operates, and
account for petty cash
4. Explain the essential features of cash
management

CASH DEFINED
Cash includes
Money
Duplicates of credit card and EFTPOS sales
Negotiable instruments
cheque
postal note

that a financial institution will accept

CONTROL OF CASH
Cash is the asset most subject to theft
Need good internal control systems for
handling cash and recording cash
transactions
Three important principles
1. Separation of responsibility for handling and
custodianship of cash from maintaining records
for cash
2. Banking intact each days cash receipts
3. Making all payments by electronic transfer or
by cheque

BANK ACCOUNTS AND

RECONCILIATION

Cheque accounts
Essential element of internal control
Source documents

Use of Electronic Funds Transfer

Gradually replacing cheques
Reduces processing costs

The Bank Statement

Record of transactions from the bank

Reconciliation of the cash account

A report known as a Bank Reconciliation is used to compare (or
reconcile) the balances of cash:

Shown in the
Business records
(ie GL Cash at Bank a/c )

to

Shown in the
Banks records
(ie on the bank statement)

This is necessary because they rarely agree, due to:

Timing differences
Outstanding deposits, unpresented cheques
Direct deposits eg interest, direct charges eg bank
fees
Errors (made by either the business or the bank)
6

BANK RECONCILIATION
Cash at Bank account balance rarely
agrees with balance as per bank
statement
Mainly due to timing differences
Common reasons:
Items in journals not on bank statement
Unpresented (outstanding) cheques
Outstanding or late deposits

Items originated by the bank

Service and bank charges, interest, EFT transactions
etc.

Errors either by bank or entity

Reconciliation
Procedure
To prepare a bank reconciliation
you require:
Last bank reconciliation
Cash receipts and cash payments journals
Cash at bank ledger balance
Bank statement for the period since last
reconciliation

Reconciliation
Procedure
Step 1: Check all items and errors from last
reconciliation have cleared
Any items still not cleared roll over into current
reconciliation

Step2: Compare
Cash receipts journal with credits (deposits) on bank
statement
Cash payments journal with debits (withdrawals) on
bank statement
Mark entries that appear in both and identify any
differences
Unmarked entries will explain difference

Reconciliation
Procedure
Step 3: Update cash journals for
items captured by bank statement.
Step 4: Deal with errors
Adjust cash journals for any errors made
by entity
Notify bank of any errors in statement
Note these errors on reconciliation until
corrected.

Step 5: Total cash journals and

post to ledgers

Bank rec format

Cathys Consulting
Bank Reconciliation Statement
as at 30/6/ 2013
Balance as per bank statement Cr (or Dr) $ 000
Add outstanding deposits 000
000
Deduct unpresented cheques 00
00
00 000
Balance as per Cash at Bank account Dr or (Cr)
$ 000

11

EXAMPLE OF
A BANK RECONCILIATION
R.ROBSON AND SON
Bank Reconciliation Statement
As at 31 July 2013
Balance as per bank statement

399.10 Cr

Add: Outstanding Deposit

219.40
618.50

Less: Unpresented cheques

1922

$10.00

1923

77.40

1924

22.05

1925

82.56

Balance as per Cash at Bank

account

192.01
426.49 Dr

EXAMPLE OF
A BANK RECONCILIATION with
bank error
R.ROBSON AND SON
Bank Reconciliation Statement
As at 31 July 2013
Balance as per bank
statement

Any
error
by the
bank
appea
rs
here

5,923.5 Cr
5

Add: Outstanding
Deposit

642.90
6,566.4
5

Less: Unpresented
cheques
248

$406.
50

257

174.0 (781.90
0
)
13

EXAMPLE OF
A BANK RECONCILIATION with
Debit opening balance
R.ROBSON AND SON
Bank Reconciliation Statement
As at 31 July 2013
Balance as per bank
statement

(5923.55) Dr

Add: Outstanding
Deposit

642.90
(5280.65)

Less: Unpresented
cheques
248

$406.
50

257

174.0
0

(781.90)

14

Now try Exercise 11.9

Cathys Consulting
Bank Reconciliation Statement
as at 30/6/ 2016
Balance as per bank statement Cr (or Dr) $
000
Add outstanding deposits 000
000
Deduct unpresented cheques 00
00
00 000
Balance as per Cash at Bank account Dr or
(Cr) $ 000
15

Second part of
Reconciliation process CR

Debit and CPJ

Postings
to CRJ
J
Da
te
31/
7
31/
7
31/
7

Account

Post

Bill Rec
Interest
Rev
Dish
ChqR.Song

CPJ
Dat Account
e
31/7 Bank
Fees
31/7 Our
Error adj

Bank

Credit

GST
Coll

Sal
es

Acc Rec

125

Disc
all
3,000

Other

GST
Coll
3,000

415

50.00

50.00

120

(456.0
0)

(456.00)

2,594

(456.00
)

3,050

Chq Post
No

520

Purc
h

9.00

9.00

9.00 40.0
0

49.0
0

Debit

Acc
Pay

Othe GST
r
Out
40.00

Credit

Bank Disc
Rec
40.00

GST
Out

16

THE PETTY CASH FUND

To avoid the expense and
inconvenience of writing many
cheques to cover minor expenses
many entities have a petty cash
fund
General Journal
Establishing
the fund
Jan 2 Petty Cash (Asset)
100
Cash at Bank
(Petty cash fund established)

100

THE PETTY CASH FUND

To avoid the expense and
inconvenience of writing many
cheques to cover minor expenses
many entities have a petty cash
fund
CPJ

Debit
Credit
Establishing
the
fund
Dat Accou Ch Pos Purc Acc Othe GST
Bank Disc GST
e

nt

Petty
Cash

q
No
12
3

2/1

111

100.
00

100.0
0

Pa
y

Out

Rec

Out

18

THE PETTY CASH FUND

Making payments from the fund
Use a petty cash voucher or receipt

Reimbursing the fund

Note that Petty Cash account is not
touched
General Journal
Jan 31 Stationery Expense

15.22

Office Supplies Expense

12.30

Postage Expense

56.47

GST Outlays
Cash at Bank
(Petty cash fund reimbursed)

8.40
92.39

Now attempt the following:

Establish the petty cash fund for the amt of
$300 (Chq 432)
Show the transactions in the CPJ (show GST)
Record the following transactions:
1. Jul 7 Office supplies $99.00
2. Jul 18 Stationery $55.00
3. Jul 20 Newspapers $33.00
4. Jul 23 Advertising expense $44.00
5. Jul 28 Taxi Fare $22.00transactions 1 to 5.
. Reimburse the fund after transaction 5 and
increase it to $400. (Chq 894)
20

Solution
Cash Payments Journal
Account
A.

Petty Cash

B.

Stationery Exp.

Cheque
No.
432

Advertising Exp.
Sundry Exp.

Petty Cash

Accts
GST
Pay Outlays

Other
300.00

5.00
9.00

Office Supplies Exp.

C.

Post
Ref.

Disc
Rec

Cash at
Bank
300.00

50.00
90.00

883

4.00 40.00
5.00 50.00
23.00 230.00

253.00

894

100.00

100.00

21

Solution
Cash Payments Journal
Account
A.

Petty Cash

B.

Stationery Exp.

Cheque
No.
432

Advertising Exp.
Sundry Exp.

Petty Cash

Accts
GST
Pay Outlays

Other
300.00

5.00
9.00

Office Supplies Exp.

C.

Post
Ref.

Disc
Rec

Cash at
Bank
300.00

50.00
90.00

883

4.00 40.00
5.00 50.00
23.00 230.00

253.00

894

100.00

100.00

22

CASH MANAGEMENT
Principles of cash management
Reduce collection time for accounts
receivable
Postpone payments to accounts payable
Keep inventory levels to a minimum
Invest surplus cash
Plan for capital expenditures

Analysing adequacy of cash flows

Short-term cash flow adequacy ratio
Cash flow adequacy ratio