Chapter 7

Cash
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting Pepperdine University

Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

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Objectives
1. Describe the nature of cash and the importance After studying of internal control over cash.this 2. Summarize chapter, you should achieving basic procedures for internal control overable to: be cash receipts. 3. Summarize basic procedures for achieving internal control over cash payments, including the use of a voucher system. 4. Describe the nature of a bank account and its use in controlling cash.

Objectives
5. Prepare a bank reconciliation and journalize any necessary entries. 6. Account for small cash transactions using a petty cash fund. 7. Summarize how cash is presented on the balance sheet. 8. Compute and interpret the ratio of cash to current liabilities.

Control Over Cash

Many companies need several cash accounts to account for different cash categories and funds. Most companies have multiple bank accounts. The title for each bank account should be: Cash in Bank(Name of Bank) Preventive controls protect cash from theft and misuse of cash. Detective controls are designed to detect theft or misuse of cash and are also preventive in nature.

Retailers Sources of Cash

Cash Receipts
CASHIERS DEPARTMENT

Register records
ACCOUNTING DEPARTMENT

Remittance advices

Mail Receipts

Retailers Sources of Cash

CASHIERS DEPARTMENT ACCOUNTING DEPARTMENT

Deposit ticket

Deposit receipt

Bank

Controlling Cash Received from Cash Sales

19 Cash
Cash Short and Over Sales To record cash sales and actual cash on hand.

3 142 00
8 00 3 150 00

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.

Controlling Cash Received in the Mail

Most companies invoices are designed so that customers return a portion of the invoice, call a remittance advice.

Controlling Cash Received in the Mail

1. The employee who opens the mail should initially compare the amount received with the amount on the remittance advice. 2. The employee opening the mail stamps checks and money orders For Deposit Only in the bank account of the business. 3. All cash is sent to the Cashiers Department where checks and money orders are combined with receipts from cash sales and a bank deposit ticket is prepared.

Controlling Cash Received in the Mail

4. The remittance advices and their summary totals are delivered to the Accounting Department where a clerk prepares the records of the transactions and posts them to the customer account. 5. The stamped duplicate copy of the deposit ticket is returned to the Accounting Department where a clerk compares the receipt with the total amount that should have been deposited.

Internal Control of Cash Payments

1. Cash controls must provide assurance that
payments are made for only authorized transactions.
2. Cash controls should ensure that cash is used efficiently. 3. A voucher system provides assurance that what is being paid for was properly ordered, received, and billed by the supplier.

13

A voucher system is a set of procedures for authorizing and recording liabilities and cash payments.

Basic Features of the Voucher System

Basic Features of the Voucher System

A voucher system normally uses vouchers. The system normally has a file for unpaid vouchers and a file for paid vouchers. Usually prepared by the Accounting Department after all necessary supporting documents are received (purchase order, suppliers invoice, and a receiving report). In preparing the voucher, the accounts payable clerk verifies the quantity, price, and mathematical accuracy of the supporting documents and files the paid voucher.

A summary received from the bank of all account transaction is called a statement of account.

A bank reconciliation is a listing of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger.

Reasons for Differences Between Depositors Records and the Bank Statement
Outstanding checks

Deposits in transit
Service charges Collections Not-sufficient-funds (NSF)

checks Errors

Steps in a Bank Reconciliation

1. Compare each deposit listed on the bank statement Add deposits not recorded by the bank to the with unrecorded deposits appearing on the preceding balance according to with deposit receipts. periods reconciliation andthe bank statement. 2.Deduct checks outstanding that have been paid Compare paid checks with outstanding checks appearing on the preceding periods reconciliation and by the bank from the balance according to the with recorded checks. bank statement. 3. Add credit memorandums that haveentries in the Compare bank credit memorandums to not been journal.

recorded to the balance according to the depositors records.

Steps in a Bank Reconciliation

4. Compare bank debit memorandums have not been Deduct debit memorandums that to entries recording cash payments. recorded from the balance according to the 5. List any errors discovered during the preceding steps.

depositors records.

BANK

Banks books
Beginning balance $3,359.78

Depositors records
Beginning balance $2,549.99

Power Network prepares to reconcile the monthly bank statement as of July 31, 2006

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99

A deposit of $816.20 did not appear on the bank statement.

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 408.00 $2,957.99

Add note and interest collected by bank

The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99

Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99

A deposit that were did not during Three checks of $637.02 writtenappear the on the bank statement. period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60.

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99

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.

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $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

The bank service charges totaled $18.00.

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $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

327.00

Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.

BANK

Banks books
Beginning balance Add deposit not recorded by bank $3,359.78
816.20 $4,175.98

Depositors records
Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99

Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99

Adjusted balance

$2,630.99

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

Now, if desired, we can prepare a formal statement for Power Networking.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement Add: Deposit not recorded by bank Deduct: Outstanding checks No. 812 No. 878 No. 883 Adjusted balance Balance per depositors records Add: Note and interest collected by bank $3,359.78 816.20 $4,175.98 $1,061.00 435.39 48.60

1,544.99 $2,630.99
$2,549.99 408.00 $2,957.99

Deduct: NSF check (Thomas Ivey) returned$300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99

Journal entries must be prepared for those items that affected the depositors side of the reconciliation.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement Add: Deposit not recorded by bank Deduct: Outstanding checks No. 812 No. 878 No. 883 Adjusted balance Balance per depositors records Add: Note and interest collected by bank Deduct: NSF check (Thomas Ivey) returned Bank service charges Error in recording Check No. 879 Adjusted balance $300.00 18.00 9.00 $3,359.78 816.20 $4,175.98 $1,061.00 435.39 48.60

1,544.99 $2,630.99
$2,549.99 408.00 $2,957.99 327.00 $2,630.99

Entries Related to a Bank Reconciliation

July 31 Cash 408 00

Notes Receivable
Interest Revenue Note collected by bank.

400 00
8 00

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement Add: Deposit not recorded by bank Deduct: Outstanding checks No. 812 No. 878 No. 883 Adjusted balance Balance per depositors records Add: Note and interest collected by bank Deduct: NSF check (Thomas Ivey) returned Bank service charges Error in recording Check No. 879 Adjusted balance $300.00 18.00 9.00 $3,359.78 816.20 $4,175.98 $1,061.00 435.39 48.60

1,544.99 $2,630.99
$2,549.99 408.00 $2,957.99 327.00 $2,630.99

Entries Related to a Bank Reconciliation

July 31 Cash 408 00

Notes Receivable
Interest Revenue Note collected by bank. 30 Accounts ReceivableThomas Ivey Miscellaneous Administrative Exp. Accounts PayableTaylor Co. Cash NSF check, bank service charges, and error in recording Check no. 879. 300 00 18 00 9 00

400 00
8

327 00

Petty Cash

On August 1, issued Check No. 511 for $100 to established a petty cash fund.

Aug. 1 Petty Cash Cash Established petty cash fund.

100 00 100 00

At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $28, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $3.
Aug. 31 Office Supplies 50 00

Store Supplies
Miscellaneous Administrative Exp. Cash Replenished petty cash fund.

35 00
3 00 88 00

Financial Analysis and Interpretation

Solvency is the ability of a business to meet its financial obligations (debts) as they are due. Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities. This ability is normally assessed by examining balance sheet relationships.

Financial Analysis and Interpretation

Doomsday Ratio
Laettner Co. Oakley Co.

A. Cash and equivalents B. Current liabilities Doomsday ratio A / B

$100,000 $ 120,000 400,000 1,500,000 0.25 0.08

Use: To indicate the companys used? to How are these ratios ability meet creditors obligations in the worst case assumption that should the business cease to exist.

Chapter 7

The End