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Lecture 10 Current Assets and Cash

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35 views25 pages

Lecture 10 Current Assets and Cash

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oybekjon2701
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We take content rights seriously. If you suspect this is your content, claim it here.
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Lecture 10

Current assets and


Cash
What is Cash?

Cash
 Most liquid asset
 Standard medium of exchange
 Basis for measuring and accounting for all items
 Current asset
 Examples: coin, currency, available funds on deposit at
the bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.

LO 1 Identify items considered cash.


Reporting Cash

Cash Equivalents
Short-term, highly liquid investments that are both

(a) readily convertible to cash, and


(b) so near their maturity that they present insignificant
risk of changes in interest rates.

Examples: Treasury bills, Commercial paper, and Money


market funds.

LO 2 Indicate how to report cash and related items.


Physical Protection of Cash Balances

Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as
practicable.
 Periodically prove (reconcile) the balance shown in the general
ledger.

LO 10 Explain common techniques employed to control cash.


Internal Control of Cash
Bank
Reconciliations

Daily Purchase
Deposits Approval
Cash
Controls
Payment Check
Approval Signatures
Prenumbered
Checks
Basic definitions
• A BANK STATEMENT is a monthly report from a bank that shows
deposits recorded, checks cleared, other debits and credits, and a
running bank balance.
• A BANK RECONCILIATION is the process of verifying the accuracy of
both the bank statement and the cash accounts of a business.
Bank reconciliation
Bank reconciliation
• The objective of a bank reconciliation is to reconcile the difference between:
• the cash book balance, i.e. the business’ record of their bank account,
• the bank statement balance, i.e. the bank’s record of their bank
account.

• The cash book is the double entry record of cash and bank balances contained
within the nominal ledger accounting system. It is, in effect, the cash control
account.

• Note that debits and credits are reversed in bank statements because the
bank will be recording the transaction from its point of view, in accordance
with the business entity concept.
Reasons for differences
Unrecorded items
• These are items which arise in the bank statements before they are
recorded in the cash book:
• Interest accrued by bank
• bank charges which bank withdraws directly from account based on the
agreement
• dishonored cheques - is a check that a bank refuses to pay or
honor when it is presented for payment. Reasons – insufficient
funds, signature mismatch, stop payment orders
• They are not recorded in the cash book simply because the business
does not know that these items have arisen until they see the bank
statement.
• The cash book must be adjusted to reflect these items.
Timing differences
• These items have been recorded in the cash book, but due to the bank
clearing process have not yet been recorded in the bank statement:

• Outstanding/unpresented cheques – payments (cheques sent to


suppliers but not yet cleared/processed by the bank).

• Outstanding/uncleared lodgments – receipts (cheques received by the


business but not yet cleared/processed by the bank).
Example:
• Outstanding/Unpresented Check:
• Company ABC issues a check to Supplier XYZ for services rendered.
• The check is written for KGS 5,000 and was dated October 1, 2024.
• As of the bank reconciliation date (October 15, 2024), Supplier XYZ has
not yet presented the check for cashing or deposit.
• Outstanding/Uncleared Lodgments:
1.Company XYZ receives a payment of KGS 15,000 from Client ABC via a
money transfer from a different bank (Bank C) on October 10, 2024.
2.The payment is initiated on the same day by Client ABC but goes through an
interbank settlement process.
3.As of October 12, 2024, the funds show in Company XYZ's account, but
they are marked as “pending” and not yet available for use. The payment
will be fully cleared by October 15, 2024.
Errors
Reconciliation procedure
Solution
• Direct debit. The bank has directly debited the account of company, but it was
not reflected in cash book
• Lodgement not credit for USD 1200 – in cash book the transaction has been
recognized, but the bank has not received the cash
• Cheque paid by the company but dishonored by the bank – in cash book the
company recognized the payment, but actually the payment was not made by
the bank as the cheque as dishonored
• Outstanding cheques for USD 977 – the payment under these cheques has
been recognized in cash book , but the bank has yet paid
• Bank charges are reflected in bank statement, but not in cash book
• Error by the bank – the bank statement has to be corrected for this error
Homework
• Chapter 6 pp. 295-301
• Exercises provided in this lecture
• Exercises from Libby textbook P6-7, P 6-8, AP 6-5

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