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Chapter 5

1. The document discusses internal controls over cash, including controlling cash receipts and payments, using bank accounts, reconciling bank statements, petty cash accounts, and voucher systems. 2. Maintaining adequate records, separating duties, and regularly reviewing transactions are some key principles of internal control discussed. 3. Bank accounts help control cash by reducing on-hand amounts, independently recording transactions, and facilitating electronic funds transfers. Regular bank reconciliations compare recorded balances.

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258 views5 pages

Chapter 5

1. The document discusses internal controls over cash, including controlling cash receipts and payments, using bank accounts, reconciling bank statements, petty cash accounts, and voucher systems. 2. Maintaining adequate records, separating duties, and regularly reviewing transactions are some key principles of internal control discussed. 3. Bank accounts help control cash by reducing on-hand amounts, independently recording transactions, and facilitating electronic funds transfers. Regular bank reconciliations compare recorded balances.

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Abrha636
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We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 5

ACCOUNTING FOR CASH

Key Terms and Concepts to Know


Cash: includes coins, currency (paper money), checks, and money orders. Money on deposit with a
bank or other financial institution that is available for withdrawal is also considered cash. Normally,
you can think of cash as anything that a bank would accept for deposit in your account.For example,a
check made payable to you could normally be deposited in a bank and, thus, is considered cash.
Purpose of Internal Controls:
Internal controls are a system of policies and procedures used by companies to safeguard assets and
ensure that transactions are recorded properly and in a timely manner.

Principles of Internal Control:


 Establish responsibilities
 Maintain adequate records
 Separation of recordkeeping from custody of assets
 Divide responsibility for related transactions
 Apply technological control
 Perform regular and independent review
Cash is the asset most likely to be stolen or used improperly in a business. For this reason, businesses
must carefully control cash and cash transactions.
Control of Cash Receipts
To protect cash from theft and misuse, a business must control cash from the time it is received until it
is deposited in a bank.
Control of Cash Payments
The control of cash payments should provide reasonable assurance that:
1. Payments are made for only authorized transactions.
2. Cash is used effectively and efficiently. For example, controls should ensure that all available
purchase discounts are taken.
Bank Accounts
A major reason that companies use bank accounts is for internal control. Some of the control
advantages of using bank accounts are as follows:
1. Bank accounts reduce the amount of cash on hand.
2. Bank accounts provide an independent recording of cash transactions. Reconciling the balance
of the cash account in the company’s records with the cash balance according to the bank is an
important control.
3. Use of bank accounts facilitates the transfer of funds using EFT systems.
Bank Statement
Banks usually maintain a record of all checking account transactions. A summary of all transactions,
called a bank statement, is mailed to the depositor or made available online, usually each month. The
bank statement shows the beginning balance, additions, deductions, and the endingbalance.

1
Bank Reconciliation:
Identifies and explains the differences or reconciling items between the cash balance in the
depositor’s general ledger and the cash balance according to the bank’s records.
Reconciling items are transactions which have been recorded by either the depositor or the
bank, but not both, AND transactions which were not properly recorded by the depositor
and/or the bank.
Adjusting entries are recorded by the depositor for all reconciling items on the depositor’s side
of the bank reconciliation. If the adjusting entries are not recorded, these items will continue to
appear on the reconciliation if subsequent months until the adjusting entries have been made.

The balance according to the bank statement and the balance according to the depositor’s records
must be adjusted on the reconciliation properly determine the cash balance that should be in the
general ledger. Both the bank balance and the ledger balance are adjusted for items not
previously recorded as follows:

Bank Balance Ledger Balance


Add: Deposits in Transit Notes collected by the bank
Errors Errors

Deduct: Outstanding Checks Service Charges


Errors NSF checks
Errors

** All adjustments to the ledger balance MUST be journalized in order for the cash account
in the ledger to agree with the adjusted cash balance. **
Example #1
The cash account for ABC Co. on August 31, 2004, indicated a balance of $9,420. The bank
statement indicated a balance of $12,785 on August 31, 2004. The following reconciling items
were discovered.
a) Checks outstanding totaled $6,240.
b) A deposit of $5,375, representing cash receipts of August 31, had been made too late
to appear on the bank statement.
c) A check for $240 had been incorrectly charged by the bank as $420.
d) A check for $658 returned with the statement had been recorded by ABC as $568.
The check was for the payment of an obligation to Cahill Co. on account.
e) The bank had collected for ABC $2,800 on a note left for collection. The face of the
note was $2,000.
f) Bank service charges for August amounted to $30.

Required: Prepare the bank reconciliation and journalize the necessary entries.

2
Solution #1
Cash balance according to bank statement $12,785
Add: Deposit of August 30 not recorded by bank $5,375
Bank error 180 5,555
$18,340
Deduct: Outstanding checks 6,240
Adjusted balance $12,100
Cash balance according to depositor’s records $9,420
Add: Proceeds of note and interest collected by bank 2,800
12,220
Deduct: Error in recording check $90
Bank service charges 30 120
Adjusted balance $12,100

Journal entries

Cash………………2800
Notes Receivable……………… 2,000
Interest Revenue……………...... 800
A/P-Cahill Co………….. 90
Misc. Adm. Expense……30
Cash…………………..……120

Practice Problem #1
The cash account for Kahn Inc. on November 30, 2003, indicated a balance of $5,699. The
bank statement indicated a balance of $13,167 on November 30, 2003. The following
reconciling items were discovered.

a) Checks outstanding totaled $5,175.


b) A deposit of $3,842, representing cash receipts of November 30, had
been made too late to appear on the bank statement.
c) The bank had collected for Kahn $4,800 on a note left for collection.
The face of the note was $4,200.
d) Kahn had recorded a check for $2,040 returned with the statement as
$2,400. The check was for the payment of a 3-year insurance policy.
e) A check for $1,176 had been incorrectly charged by the bank as $176.
f) Bank service charges for November amounted to $25.

Required: Prepare the bank reconciliation and journalize the necessary entries.

3
Petty Cash Account:
A Petty Cash fund is used to provide small amounts of cash for common expenditures for which
the company does not write a check or purchase on account. The petty cash account always has
an entry to establish the fund and perhaps a subsequent entry to increase or decrease the fund’s
balance. Replenishment entries are not recorded using the petty cash account. Any differences
between the total of the receipts for funds expended and the amount necessary to replenish the
fund balance are debited or credited to the Cash Short and over account.
The replenishment entry can be prepared in three steps:
 Debit each expense account for the amount spent from the receipt
 Credit Cash for the difference between the imprest balance and actual cash Remaining in
the fund
 If the entry does not balance debit or credit the difference to Cash Over and Short as
appropriate
Example #2:In June, the Filbert Company established a petty cash account with a $200
balance.During June, the following expenditures were made from petty cash: supplies
$95,delivery $42, and miscellaneous other receipts $38. When counted, there was $25 of cash
remaining in the petty cash fund. Journalize the entries for June.

Solution #2:
Petty Cash………200
Cash…………..200 To establish the fund

Supplies 95 to replenish the fund and record all the expenses paid for in cash.
Delivery Expense 42
Misc. Adm. Expense 38
Cash………………….. 175

4
Voucher System:
A set of control procedures designed to ensure the cash disbursements have been properly
approved and are supported by the appropriate documents.

If the above example was in the case of voucher system


Petty cash …………..200
Account payable……………200 for petty cash establishment
Account payable………200
Petty cash…………………...200
Supplies………………95
Delivery Expense…….42
Misc. Adm. Expense…38
A/P…………175
A/P………………….175
Cash at bank………..175

The Cash Over and Short account has two purposes:


 It will be debited or credited for the difference between the total of the receipts and the
cash required to replenish the petty cash account. If there are missing receipts, the
account is debited and if there is too much cash in the account, the account is credited.
 It is used to record shortages or overages in the cash register. The cash in the drawer
represents a debit to cash. The cash register tape represents the credit to sales. If there is a
shortage, it is debited Cash Short and Over. If there is an overage, it is credited Cash
Short and Over.

Example #3:
In July, the Filbert Company made the following expenditures from petty cash: repairs $85,
delivery $60 and postage $13. When counted, there was $40 of cash remaining in the petty cash
fund. Journalize the entries for July.
Solution #3:
Supplies …………….. 85
Delivery Expense…….60 from receipts
Misc. Adm. Expense…13
Cash Over and Short….2 160 – 85 – 60 – 13 = 2
Cash…………….160

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