Chapter Five

Accounting For Cash

5.1 Controls over Cash
Definition of Cash: is a medium of exchange that a bank accepts for deposit and used
immediately. As per this definition, cash includes the following items: coins, currencies, change
fund, petty cash fund, balances in the unrestricted savings account and checking account, bank
debit cards, bank credit cards such as master and visa cards which are acceptable by the
commercial banks, money orders (postal or bank), travelers checks, CPO, personal checks, bank
drafts, undeposited cash receipt (cash on hand).
Non-Cash Items: Even if all items other than cash are non-cash ones some non cash items are
confusing with cash and they are worth discussing at this point in time. Included in this category
are: NSF check-receivable, Post dated check-receivable, postage stamps-supplies or inventory,
IOUs-receivable, treasury bills-receivables, certificate of deposits-short term investments,
compensating balances-some other asset, travel advances-receivable, bank balance in the blocked
account-some other asset, saving account balances-some other asset, if it has got some sort of
restrictions such as not be able to withdraw, say, Birr 5,000 unless prior notice of 10 days are
served. However, savings accounts are usually classified as cash although the bank has the right
to demand notice before withdrawal in that banks rarely exercise the privilege of prior notice.
Objectives of Cash management and control: there must be strong control over cash because:
 Cash enters many transactions in the form of paying and receiving and it is vulnerable to
misappropriation and embezzlement
 Cash lacks identification of ownership.
To maintain the optimal amount of cash i.e. the amount of cash should be carefully regulated so
that neither too much nor too little is available at any time. If there is excess it has to be invested
temporarily to secure dividends, interest or other form of revenue. If shortage is predicted
relevant sources of financing should be envisaged well in advance failure of which disrupts the
operation of the business organization, cases of ill-liquidity in the short term and insolvency in
the long term which might lead, at times, to liquidation.
Cash is the asset most likely to be used improperly by employees so it must be effectively
safeguarded by special control. Businesses use different techniques to control cash. Some these
controls are useful to control over cash receipts while some are useful to control over cash
payments.
Internal controls over cash receipts
 Use of cash register machine
 Use of pre-numbered and consecutive sales tickets
 Two or more persons should open and record the cash receipts through the mail
 Use of Electronic scanning equipment
 Use of Change fund
 Use of Bank System
 Use of Cash Short and Over Account
Internal Controls over Cash Payments
 Use of Petty Cash Fund
 Use of Voucher System
 Use of Bank System
 The Net Method of recording Purchases as opposed to Gross method
A) Cash Register: Cash received over the counter should be rung up on a cash register so that
the customer would see the amount recorded. On the other hand the cashier records the amount
simultaneously on a cash register tape, which is not accessible. At the end of business or at the
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end of the day, the controller in whose hand the key for the cash register tape is kept unlocks the
cash register and compares the actual cash count with the tape.
B) Pre-numbered Sales Tickets: At the time of control if number(s) is (is) missing, it might be
an indicator that some sort of misappropriation is made and the corrective measure should be
taken in the proper time. Any page be it defective, void etc. should be kept in the pad.
C) Two or more employees should open the mail together: this control technique reduces the
likelihood of a single dishonest employee stealing cash undetected. They prepare a schedule
showing the name of the customers sending money, the purpose for which the money was sent
and the amount received. One copy is sent to the cashier with cash and the second copy is sent to
the accounting department for recording purpose and the third copy is filed. The cashier deposits
the cash in the bank as soon as possible daily, if not possible the next day morning. The
accounting department credits customers account and make other appropriate entries. Later
another individual compares the amount deposited by the cashier with the total amount credited
to various accounts. Theft and errors will be revealed whenever these two amounts are not the
same.
D) Electronic Scanning Equipment: Many large super markets have achieved faster check out
lines and stronger internal control by this equipment to read and record the price of all groceries
passing the check out counters.
E) Change Fund: It is a fund set up to make changes so that the cashier receives neither above
nor below the sales. It is usually kept with the daily sales receipt. At the close of a business day
the amount of change fund is re-kept in different denominations of currency and coins. The daily
sales receipt along with any cash overage is banked in tact, daily
F) Bank System
 All cash received must be deposited in the bank and all payments must be made by checks
drawn on the bank unless the amount is small.
 In some cases, a bank may require a business to maintain in a bank account a minimum cash
balance, called a compensating balance.
 The requirement of compensating balance is imposed by the bank as a part of loan
agreement.
 In Banking System different forms are used by depositors. The forms used in connection
with a bank accounts are:-
1. Signature Card
When an account is opened, an identifying number is assigned to the account, and each person
authorized to sign checks drawn on the account must sign a signature card. The card is used by
the bank to determine the authenticity of the signature on the checks presented for payment.
2. Deposit Ticket/Slip
Deposit Slip/ Ticket is prepared in duplicate, in which case the copy is stamped or initialed by
the bank’s teller and given to the depositor as a receipt.
3. Check
A check is a written instrument signed by the depositor, ordering the bank to pay a certain sum
of money to the order of a designated person.
There are three parties regarding check:
1. Drawer: The one who signs the check
2. Drawee: the bank on which the check is drawn
3. Payee: - the one to whose order the check is drawn
 The name and the address of the depositor are printed on each check and the check is
usually numbered in sequence to facilitate the depositor’s internal control
 Business firms may prepare a copy of each check drawn and they use it as a basis for
recoding the transaction in the cash payment journals.
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4. Records of Checks Drawn: this cash payment journal in which all cash payment in check is
recorded up on.
5. Remittance Advice: Checks issued to a creditor on account are accompanied by a
notification called a remittance advice. This form notifies the creditor to record the
appropriate credit and is sent along with checks.
6. Stop Payment Order: the form that forbids the bank not to make for checks presented
because of lost checks or cheated checks.
5.2. Bank System: Bank Account; Bank Statement and Bank Reconciliation
Statement
Bank Account
 Cash in bank account in the depositor’s ledger is the reciprocal of the account with the
depositor in the bank’s ledger.
 Cash in bank in the depositor’s ledger is an asset with a debit balance, and the account
with the depositor in the bank’s ledger is a liability with a credit balance.
Bank Statement
The bank statement shows the beginning balance, checks and other credits (addition by the
banks), checks and other debits (deduction by the bank from the depositor’s account) and the
balance at the end of the period. The bank credits the depositor’s account for:
 Deposits by customer
 Receipts from notes receivable left for collection
 Loans to the depositor
The bank debits the depositor’s account for:
 Paid or cancelled checks
 Service Charges
 Deposited Checks but returned because of insufficient funds (NSF)
Bank Reconciliation Statement
Why Bank Reconciliation Statement? As we discussed, there are double records for the same
cash, one of which is maintained by the Bank and the other is maintained by the Depositor. The
two records should have equal balance, but they are not likely to be equal on any specific date
because of:
1. Delay by either party in recording transactions
2. Errors by either party in recording transactions
Thus, to determine the reasons for any difference and to correct any errors that may have been
made by the bank or the depositor, the depositor records should be reconciled with the bank
statement using bank reconciliation statement. Bank Reconciliation Statement is prepared once
each month.
Elements of Bank Reconciliation
1. Delay in Recording Transactions by the Bank
A) Outstanding Deposits:
A time lag between the date of the deposit and the date it is recorded by the bank. E.g. the
depositor may mail deposits to the bank or use the night depository.

B) Outstanding Checks:
A time lag of one day or more between the date a check is written and the date it is presented to
the bank for payment. E.g. on the business account, checks are recorded on the date on which
they are issued by crediting cash though the bank does not yet pay it.
Accounts Payable xxx
Cash in Bank Xxx

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2. Delay in Recording Transactions by the Depositors
A) Bank Debit Memo
This decrease the cash in bank balance of the depositor and includes items such as:
 Not Sufficient Fund (NSF)
 Service Charge
 Check Printing
Not sufficient Fund (NSF)
It refers to an amount of money collected form a customer in the form of check and deposited to
the depositors bank checking account while the customer did not have adequate balance to cover
the amount written on the check. Example
Sales on Account:
Accounts Receivables – X Co. Xxx
Sales xxx
Money Collected Form X-Company in the Form of Check
Cash xxx
Accounts Receivables – X Co xxx
Unfortunately, no adequate balance of cash in customers account
Accounts Receivables – X Co. xxx
Cash in Bank xxx
B) Bank Credit Memo
It increases the cash in bank balance of the depositor since cash in bank has a credit balance in
banks ledger. Example: Proceeds of notes receivable and interest
3. Errors committed either by the Bank or the Depositor
Any error that has been made by the bank or by the depositor affects the two records. Thus, it
should be considered in the Bank Reconciliation Statement.
Format of Bank Reconciliation Statement
Name of The Company
Bank Reconciliation Statement
Date: Usually Month of Reconciliation
Balance as per Bank Statement Xxx
Add: Deposit in Transit xxx
Bank Errors xxx Xxx
Sub-Total Xxx
Less: Outstanding Checks xxx
Bank Errors xxx (xxx)
Adjusted Cash Balance Xxx
Balance per Depositor Records Xxx
Add: Notes And Interest Collected By Bank xxx
Depositor Error xxx Xxx
Sub Total Xxx
Less: NSF (Not Sufficient Fund) xxx
Bank Service Charge xxx
Depositor Errors xxx (xxx)
Adjusted Cash Balance Xxx

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Example 5.1: the reconciling items on February 28, Year 5, bank reconciliation of XYZ
Company were as follows:
1. Balance in the bank statement, Feb 28, year 5 is Br 16,600
2. Balance in cash ledger account, Feb 28, year 5 is Br 11,060
3. Bank service charges for February, year 5 is Br 50
4. Deposit-in-transit, Feb 28, year 5 in Br 1,200
5. Error in XYZ Co. recording of Check No. 654 to vendor, ABC company (Br 400 check
recorded by XYZ as Br 40)
6. Interest on note receivable collected by bank for XYZ Co. on Feb 28, year 5 was Br 300
7. NSF checks for customer, Bell Company, charged back by bank on Feb 28, year 5 was Br
250.
8. Outstanding checks (total) Feb 28, year 5 is Br 4,100
9. Principal of notes receivable collected by bank for XYZ Co. on Feb 28 year 5 was Br
3,000
Required: Prepare Bank Reconciliation Statement for XYZ Company and journalize the
necessary entries

XYZ Company
Bank Reconciliation
February 28, Year 5
Balance as per Bank Statement Br 16,600
Add: Deposit in Transit 1,200
Sub-Total 17,800
Less: Outstanding Checks (4,100)
Adjusted Cash Balance 13,700
Balance per the Depositor Record 11,060
Add: Notes Collected By Bank 3,000
Interest on Note Collected By Bank 300 3,300
Sub-Total 14,360
Less: NSF (Not Sufficient Fund) 250
Bank Service Charge 50
Error in Recording Ck. No. 654 (400 – 40) 360 (660)
Adjusted Cash Balance 13,700
The Journal Entries Based on The Bank Reconciliation is as follows:
Feb. 28, Year 5: Cash-in-Bank 3,300
Notes Receivable 3,000
Interest Income 300

Feb. 28, Year 5: Miscellaneous Administration Expense 50

Accounts Receivable - Bell Co 250
Accounts Payable – ABC Co. 360
Cash-in-Bank 660
Note: The data needed for adjusting entries are provided under the depositor section of bank
Reconciliation Statement.

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5.3. Internal Control over Cash Receipts and Payments
Internal Control Procedures
The following factors should be taken into consideration in internal control
 Is the pool of cash protected from theft?
 Is the pool of cash managed efficiently to avoid both shortage and idle cash?
 Is there close control over cash disbursements for the true payee and correct amount?
Internal Control over Cash Payments
1. All disbursement should be made by checks or from petty cash.
2. All checks should be serially numbered, and accesses for check should be limited to
employee authorized to write checks.
3. The employee who authorized payment of bill should not be allowed to sign cheeks.
4. Approved documents should be required to supports all cheek issues.
5. The employee authorizing cash disbursements should certify that payment is for legitimate
purpose and is made out for the exact amount and to the proper aim.
6. The bank reconciliation should be prepared monthly.
7. The employee who will signed checks should not have access to canceled checks and
should not prepare the bank reconciliation.
8. The voucher system should be used.
9. The net price method of recording purchases should be used.
10. When liabilities are paid the documents supporting it should be stumped “paid” under quotes
and the date number of checks issued should be indicated.
Internal Control Procedures over Cash Receipts
1. Prompt recording of all sorts of cash receipts
2. Depositing all cash receipts in bank promptly
3. Separation of the responsibility for handling cash receipts and recording in the accounting
system.
Cash Short and Over
The amount of cash actually received during a day often does not agree with the record of cash
receipts.
Example 5.2: Total amount of coins and paper money in the cash register drawer is Br 4,997.60.
Total amount of sales shown on the cash register tape is Br 5,000.
 Sales as per Cash Register Tapes.............5,000.00
 Cash in a Drawer......................................4,997.60
 Cash Shortage.......................................... 2.40
Journal Entry:
Cash-in-Bank 4,997.60
Cash Short & Over 2.40
Sales 5,000.00
Note: If there is a debit balance in the cash short & over account at the end of the period, it is
treated as expense and included in “Miscellaneous Expenses”. If there is a credit balance, it is
revenue and listed in “Other Income Section”. If the balance becomes larger than the expected
minor errors, management should take corrective measures.
Cash Change Fund
Business that receives cash directly from customers must maintain a fund of currency and coins
in order to make change. Example 5.3: Suppose the change fund amount to be Br 500 at the time
of establishment. Therefore, the record will be:
Cash on hand 500
Cash in Bank 500

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Assume at the end of business day the amount in the cashier drawer and on the cash register tape
is 7,680, so the amount of sales should be:
 Cash in a Drawer............................................... 7,680.00
 Change Fund..................................................... (500.00)
 Sales.................................................................. 7,180.00
Cash in Bank 7,180
Sales 7,180
Assume at the end of business day the amount in the cashier drawer is 7,677.40 and the amount
on the cash register tape is 7,180. The amount of cash received from sales = 7,677.40 – 500.00 =
Br 7,177.40
 Sales as Per the Register................................... 7,180.00
 Cash in a Drawer...............................................(7,177.40)
 Cash Shortage................................................... 2.60

Cash in Bank 7,177.40

Cash Short & Over 2.60
Sales 7,180.00

The Voucher System

Voucher is a special form on which is recorded relevant data about a liability and the details of
its payment. It is prepared by accounting department on the basis of invoice or a memorandum
that serves as proof of expenditure. This is done after the following comparisons:
1. Comparison of the invoice with a copy of the purchase order to verify quantities, prices
and terms.
2. Comparison of the invoice with the receiving report to verify receipt of the items billed
3. Verification of the arithmetic accuracy of the invoice.
The Voucher System and Management
The voucher system not only provides effective accounting controls but also aids management in
discharging other responsibilities. It gives greater assurance that all the payments are made on
valid liabilities. In addition, current information is always available for use in determining future
cash requirements which results in:
 Effective cash management
 Maintaining a favorable credit standing by taking cash discount and other invoices can be
paid on the final day of credit period.
Purchase Discounts: Net Method of Recording Purchases
In previous chapters, purchase of merchandise were recorded at the invoice price (gross amount) and cash
discount is taken at the time of payment but this method does not measure the cost of failing to take
discounts (management efficiency). If purchase of merchandise is recorded at net amount, it measures the
cost of failure to cash discounts and gives management an opportunity to take remedial actions.

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 Example 5.4: On Nov 1, ABC Company purchases merchandise with an invoice price of birr 15000
subject to terms of 2/10, n/30 FOB shipping point. Required:-pass the journal entries to be made by the
purchaser at a time of purchase and payment under the gross and net price method of recording purchase
assuming:
1. Payment was made on Nov. 11( Within the Discount Period)
2. Payment was made on Nov. 30( Outside the Discount Period)
I) At the Invoice Price (Gross Method) II) At Net Amount
Nov.1 A) At the time of purchase A) At the time of purchase
Purchases 15,000 Purchases 14,700
A/Payable 15,000 A/Payable 14,700
Nov. B) At the Time of Payment B) At the Time of Payment
11 1) Within the Discount Period 1) Within the Discount Period
A/Payable 15,000 A/Payable 14,700
Cash 14,700 Cash 14,700
Pur. Discount 300
2) Outside the Discount Period 2) Outside the Discount Period
Nov. A/Payable 15,000 A/Payable 15,000
30 Cash 15,000 Discount Lost 300

Cash 15,000

Note: Any discounts not taken are then recorded in an expense account called Discount lost.
Petty Cash
It is a fund of money that is set for the purpose of making payments for small expenditure occurring very
frequently and that do not justify the use of checks, since checks has printing costs and delay for approval
of checks. In establishing a petty cash fund, the first step is to estimate the amount of cash needed for
disbursements of relatively small amounts during a certain period such as a week or a month.
Petty Cash xxxxx
Cash in Bank xxxxx
 If voucher system is used:
Petty Cash xxxxx
Accounts Payable xxxxx
Accounts Payable xxxxx
Cash in Bank xxxxx
The fund is replenished when the amount of money in the petty cash fund is reduced to the
predetermined minimum amount and at the end of an accounting period.
Example 5.5: On December 1, 1993, ABC Co. established a petty cash fund of Br 450.
Petty Cash 450.00
Cash in Bank 450.00
December 19, 1993, because the money in the fund is reduced to Br 93.60, the fund is
replenished. The disbursements are as follows.
 Delivery Expense.............................................. 112.50
 Office Supplies.................................................. 62.28
 Utility Expense.................................................. 180.00
 Total.................................................................. 354.78

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Compute Cash Shortage and Over:
 Petty Cash Balance .......................................... 450.00
 Total Expenditure ............................................. 354.78
 Expected Cash to be on Hand........................... 95.22
 Less: Actual cash on hand................................. (93.60)
 Cash Shortage................................................... 1.62
Journal Entry:
Delivery Expense 112.50
Office Supplies 62.00
Utility Expense 180.00
Cash Short & Over 1.62
Cash in Bank 356.40
Dec 31, 1993, the cash in fund is Br 240.75. The fund is replenished to include petty cash payment of :
 Delivery Expense.............................................. 85.50
 Office Supplies.................................................. 123.75
 Total.................................................................. 209.25
Compute Cash Short and Over
 Petty Cash Fund................................................ 450.00
 Less: Total Expenditure.................................... 209.25
 Expected Cash................................................... 240.75
 Actual Cash on Hand........................................ 240.75
 Cash Short and Over......................................... ___0__
Journal Entry is as follows:
Delivery Expense 85.50
Office Supplies 123.75
Cash in Bank 209.25
January 1, management decides the petty cash fund must be increased to Br 675.00
 New Petty Cash ................................................ 675.00
 Already Established.......................................... 450.00
 Incremental Petty Cash..................................... 225.00
Then the journal entry is debiting Petty Cash and Crediting Cash in Bank by Br 225.00. If petty
cash is increased by Br 675, the journal entry will be debiting Petty Cash by Br 675.00 and
Crediting Cash in Bank by the same amount