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Chapter 9: Accounting for Cash

9.1 Accounting For Cash Receipts Pages 338 ­ 348

cash = cheques, bank balances, credit card vouchers, money orders, electronic funds, etc.

(anything that can be deposited into a bank account)

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cash receipts ­ funds taken in from business operations and activities.

Two types:

1) electronic

2) physical

Electronic:1. Credit Cards

­ Involve three parties: holder of the card, the vendor, the issuer of the card.

­ The issuer of the card (Ex: Visa) takes a percentage (usually around 2 ­ 4%) of each credit card sale.The percentage depends upon the volume of sales; the higher the sales, the smaller the %.

­ Journal entry for credit card use:

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2. Debit Cards

­ These transactions are more common than credit cards.

­ Businesses are charged a fee for this privilege or convenience, usually around 12 cents per transaction.

­ Journal entry fro this fee is very similar to credit card fees with the debit usually made to Bank Charges.

3. Electronic Transfers

­ One system goes by the name of Large Value Transfer System (LVTS) which is overseen by the Bank of Canada.

­ Over 50% of Canadians use on line banking.

­ Another common from of electronic payment is Pay Pal.

­ Cell phones have apps that will perform electronic transfers.

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Physical:­ Accounting safeguards are needed to maintain any cash, coins, cheques, money orders, and bank drafts that arrive at a place of business.

1. Mail Receipts

­ Cheques received by customers that purchased goods/services on account.

­ Mail clerk separates any cheques received by the business and prepares a list of them.

­ Cheques are given to the accounting department who prepares a cash receipts daily summary and deposits the cheques in the bank.

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2. Cash Register Receipts

­ Any money received at POS terminals.

­ Deposited in the business' bank account.

3. Over­the­Counter Sales

­ Some businesses collect money and place it in a cash box.

­ A sales slip is used to record cash received in this manner.

­ The total of the cash in teh cash box should equal the total of the cash receipts.

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Preparing Cash Proofs:cash proof ­ an accounting procedure that compares the total of the cash received with the total according to the source documents such as a cash register tape; usually involves two people.

float (change fund) ­ the amount of cash with which a

business starts its day.

Example: Business acquires a float of $200 by writng a cheque to cash.

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Example (con't): Cash register tape at the end of the day indicates the following:

Example (con't): The following cash proof would be prepared:

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Example (con't): The following journal entry would be prepared:

cash short ­ occurs when the cash received is less than the amount indicated on the source document.

­ Could result from a cashier giving more money back to a customer or from employee dishonesty.

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Journal Entry:

cash over ­ occurs when the cash received is more than the amount indicated on the source document.

­ Could result from a cashier giving less money back to a customer.

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Journal Entry:

­ The balance in the Cash Short or Over account represents and expense (Short) or income (Over).

­ Since there is more commonly a debit balance, the account is place din the expense section of the chart of accounts.

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Current Bank Account ­ a bank account designed especially for use by business owners in which no interest is earned, a minimum monthly charge, monthly bank statements are provided, copies of cheques made on the account are included with the bank statement, and a deposit book is provided.

Preparing a Business Deposit:

­ Bills sorted by denomination.

­ Coins are rolled.

­ Cheques are endorsed (restrictive endorsement ­ places conditions on cashing a cheque)

­ Completed deposit slip agrees with cash proof and accounting entries.

­ Duplicate deposit slip stamped by the bank is obtained.

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9.2 Accounting for Cash Payments Pages 349 ­ 355

­ Cheques are still a very common method of payment.

­ Businesses are given time to pay for goods/services bought on account and the easiest way to settle the account is by cheque.

petty cash ­ a small quantity of cash kept on hand for small business expenditures.

­ A cheque is made out to petty cash, is cashed at the bank, and given to the person responsible for maintaining the fund.

imprest method for petty cash ­ a system for handling small expenditures in which a certain amount of money is entrusted to an individual.

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petty cash voucher ­ a form filled out when money is paid out of the petty cash fund and no other bill for the expenditure is available.

­ Every amount paid out of the fund must be replaced by a bill

or voucher.

­ At any time, the total of the bills, vouchers, and cash should equal the amount of the petty cash fund.

­ When a minimum amount of cash is reached, the fund is replenished.

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Procedure for Replenishing Petty Cash:

1. The keeper of the fund prepares a summary by account of the charges from the bills and vouchers in the box.

2. The summary, bills, and vouchers is submitted to the department that issues cheques.

3. A cheque equally the total of the bills and vouchers is made out to Petty Cash.

4. The cheque is cashed and the money is added to the petty cash box.

5. Accounting entry is made that corresponds to the summary and cheque made to replenish the fund.

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internal control ­ the set of accounting procedures established to protect the assets of a business from theft and waste, ensure accurate accounting data, encourage efficiency, and adhere to company policies.

9.3 Accounting Controls for Cash Pages 355 ­ 367

Fundamental Rules of Good Internal Control:

1. Two different people should be processing and preparing accounting documents independently and their work must agree.

2. The person who records transactions or prepares accounting records should not also control or handle the physical assets.

3. All assets should be kept in a safe place.

4. Only a few key employees should be allowed to approve and authorize transactions.

5. An independent public accountant should periodically carry out an audit to ensure that the accounting system is being followed correctly.

6. Responsibilities should be clearly established.

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Internal Control Measures Designed to Protect the Cash of a Business:

1. The same people should not handle the cash and keep the records for cash.

2. Deposit funds daily.

3. Deposit funds intact ­ cash should not be used to make payments or for borrowing by employees.

4. Make all payments by cheque or through electronic transfer.

5. Endorse cheques "For Deposit Only" so that they cannot be cashed in any other way.

6. Prepare deposit slips in duplicate.

7. Reconcile bank accounts monthly.

Bank Reconciliation­ a routine procedure to determine why the bank balance does not agree with the balance of the bank account in the books of the company.

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Steps to Prepare a Bank Reconciliation:

1. Ensure the bank statement, the bank reconciliation from the previous month, and the print out of the general ledger bank account are available.

2. Write the appropriate heading and divide a page into two columns: one headed "Bank's Record" and one headed "Company's Record".

3. Place the balance from the bank statement below the Bank's Record and the balance from the Bank account in the General Ledger below the Company's Record.

Example:

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4. Identify all discrepancy items(outstanding cheques, late deposits, service charges, debit/credit memos, etc.).outstanding cheques ­ a cheques issued by the company but has not been processed through the bank.late deposit ­ a deposit made by the business at the very end of the month and does not appear on the bank statement.

5. Record the discrepancy items: adding and/or subtracting amounts as

necessary until the Bank Account agrees with the company's Bank

account in the General Ledger.

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Handling Errors:

1. The bank records must be compared item by item with the company records. When items match, mark them with a certain colored pen/pencil.

2. Deal with items from the previous bank reconciliation. Be sure to include any discrepancy items from the previous month.

3. Repeat the steps, using a different color each time until the balances agree.

Note: Both the bank and business can easily make errors so when one is found the appropriate individual must be contacted to correct the error.

­ Once the reconciliation is complete, accounts need to be brought up to date by making appropriate journal entries.

Example:

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Special Considerations:

certified cheque ­ a cheque in which the bank takes funds out of the issuers account in advance.

­ This will not appear as a discrepancy item since both the business and the back are aware of the cheque before it is cashed and both have deducted the amount from their cash balances.

non­sufficient funds cheque (NSF) ­ a cheque written on a bank account which does not contain enough funds to cover the amount of the cheque.

­ A journal entry has to be made opposite to the one that was recorded when the cheque was received.

Example:

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Entry made when cheque was received:

Entry made after it was determined it was an NSF cheque:

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Note ­ additional charges are usually charged to cover the cost the bank may have charged for processing the NSF cheque.