principles of accounting chapter 7

Chapter Chapter 77CashCash

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. Describe the nature of cash and the importance of internal control over cash.

2. Summarize basic procedures for achieving internal control over 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.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

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.

ObjectivesObjectivesObjectivesObjectives

Control Over CashControl 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 CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash

Cash Receipts

CASHIER’S DEPARTMENT

ACCOUNTINGDEPARTMENT

Register records

Mail Receipts

Remittance advices

1

ACCOUNTINGDEPARTMENT

Deposit ticket

Bank

CASHIER’S DEPARTMENT

Deposit receipt

Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash

Controlling Cash Received Controlling Cash Received from Cash Salesfrom Cash Sales

Controlling Cash Received Controlling Cash Received from Cash Salesfrom Cash Sales

19 Cash 3 142 00

Cash Short and Over 8 00

To record cash sales and actual

cash on hand.

Sales 3 150 00

Cash sales for March 19 totaled $3,150.00 per Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the the cash register tape. After removing the change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand.

Cash sales for March 19 totaled $3,150.00 per Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the the cash register tape. After removing the change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand.

Controlling Cash Received Controlling Cash Received in the Mailin the Mail


Most companies’ invoices are designed so that

customers return a portion of the invoice, call a remittance advice.

Most companies’ invoices are designed so that

customers return a portion of the invoice, call a remittance advice.



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 Cashier’s Department where checks and money orders are combined with receipts from cash sales and a bank deposit ticket is prepared.



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.

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.

Internal Control of Cash Internal Control of Cash PaymentsPayments

A voucher system is a set of procedures for authorizing

and recording liabilities and cash payments.

A voucher system is a set of procedures for authorizing

and recording liabilities and cash payments.

Basic Basic Features of Features of the Voucher the Voucher

SystemSystem

1313

Basic Features of the Basic Features of the Voucher SystemVoucher System

Basic Features of the Basic Features of the Voucher SystemVoucher 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, supplier’s 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 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.

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 Depositor’s Reasons for Differences Between Depositor’s Records and the Bank StatementRecords and the Bank Statement

Reasons for Differences Between Depositor’s Reasons for Differences Between Depositor’s Records and the Bank StatementRecords and the Bank Statement

Outstanding checksDeposits in transitService chargesCollectionsNot-sufficient-funds (NSF)

checksErrors

Outstanding checksDeposits in transitService chargesCollectionsNot-sufficient-funds (NSF)

checksErrors

Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation

1. Compare each deposit listed on the bank statement with unrecorded deposits appearing on the preceding period’s reconciliation and with deposit receipts.

2. Compare paid checks with outstanding checks appearing on the preceding period’s reconciliation and with recorded checks.

Add deposits not recorded by the bank to the Add deposits not recorded by the bank to the balance according to the bank statement.balance according to the bank statement.

Add deposits not recorded by the bank to the Add deposits not recorded by the bank to the balance according to the bank statement.balance according to the bank statement.

Deduct checks outstanding that have been paid Deduct checks outstanding that have been paid by the bank from the balance according to the by the bank from the balance according to the

bank statement.bank statement.

Deduct checks outstanding that have been paid Deduct checks outstanding that have been paid by the bank from the balance according to the by the bank from the balance according to the

bank statement.bank statement.3. Compare bank credit memorandums to entries in the

journal.Add credit memorandums that have not been Add credit memorandums that have not been

recorded to the balance according to the recorded to the balance according to the depositor’s records.depositor’s records.

Add credit memorandums that have not been Add credit memorandums that have not been recorded to the balance according to the recorded to the balance according to the

depositor’s records.depositor’s records.

Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation

4. Compare bank debit memorandums to entries recording cash payments.

5. List any errors discovered during the preceding steps.

Deduct debit memorandums that have not been Deduct debit memorandums that have not been recorded from the balance according to the recorded from the balance according to the


Deduct debit memorandums that have not been Deduct debit memorandums that have not been recorded from the balance according to the recorded from the balance according to the


BANK

Bank’s books

Beginning balance $3,359.78

Depositor’s records


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

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

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


BANK

Bank’s books

Beginning balance $3,359.78Add deposit not

recorded by bank

816.20$4,175.9

8



BANK

Bank’s books


recorded by bank

816.20$4,175.9

8



Add note and interest collected by bank

408.00$2,957.9

9

The bank collected a note in the amount of $400 and the related

interest of $8 for Power Networking

The bank collected a note in the amount of $400 and the related

interest of $8 for Power Networking



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

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

BANK

Bank’s books


recorded by bank

816.20Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99

$4,175.98




408.00$2,957.9

9

BANK

Bank’s books

Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99


Deduct check returnedbecause of insufficientfunds $300.00


recorded by bank

816.20$4,175.9

8



408.00$2,957.9

9

The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of

$300. This was a payment on account.

The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of

$300. This was a payment on account.

Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99

Deduct check returnbecause of insufficientfunds $300.00

Bank service charges 18.00

BANK

Bank’s books


recorded by bank

816.20$4,175.9

8




408.00$2,957.9

9

The bank service charges totaled $18.00.The bank service charges totaled $18.00.

BANK

Bank’s books



recorded by bank


No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99

$4,175.98



408.00Deduct check return

because of insufficientfunds $300.00


$2,957.99

Error recording Check No. 879 9.00

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

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

327.00

BANK

Bank’s books


recorded by bank


No. 812 $1,061.00No. 878 435.39No. 883 48.60

1,544.99

$4,175.98

Adjusted balance $2,630.99




408.00Deduct check return

because of insufficientfunds $300.00


$2,957.99


Error recording Check No. 879 9.00 327

Now, if desired, we can prepare a formal

statement for Power Networking.

Now, if desired, we can prepare a formal

statement for Power Networking.

Balance per bank statement $3,359.78Add: Deposit not recorded by bank 816.20

$4,175.98Deduct: Outstanding checks

No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99


Balance per depositor’s records $2,549.99Add: Note and interest collected by bank 408.00

$2,957.99Deduct: NSF check (Thomas Ivey) returned$300.00

Bank service charges 18.00Error in recording Check No. 879 9.00 327.00


Power NetworkingBank Reconciliation

July 31, 2006

Journal entries must be prepared for those items that

affected the depositor’s side of the reconciliation.

Journal entries must be prepared for those items that

affected the depositor’s side of the reconciliation.



No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99



$2,957.99Deduct: NSF check (Thomas Ivey) returned $300.00




July 31, 2006

July 31 Cash 408 00

Note collected by bank.

Notes Receivable 400 00

Interest Receivable 8 00

Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation



No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99



$2,957.99Deduct: NSF check (Thomas Ivey) returned $300.00




July 31, 2006

Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation

July 31 Cash 408 00

Note collected by bank.

Notes Receivable 400 00

Interest Receivable 8 00

30 Accounts Receivable—Thomas Ivey 300 00

Miscellaneous Administrative Exp. 18 00

Accounts Payable—Taylor Co. 9 00

Cash 327 00

NSF check, bank service charges, and error in recording Check no. 879.

Petty Cash

Aug. 1 Petty Cash 100 00

Established petty cash fund.

Cash 100 00

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

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

Aug. 31 Office Supplies 50 00

Replenished petty cash fund.

Cash 88 00

At the end of August, the petty cash receipts At the end of August, the petty cash receipts indicated expenditures for the following items: indicated expenditures for the following items: office supplies, $28, postage (office supplies), office supplies, $28, postage (office supplies),

$22; store supplies, $35, and miscellaneous $22; store supplies, $35, and miscellaneous administrative items, $3.administrative items, $3.

At the end of August, the petty cash receipts At the end of August, the petty cash receipts indicated expenditures for the following items: indicated expenditures for the following items: office supplies, $28, postage (office supplies), office supplies, $28, postage (office supplies),

$22; store supplies, $35, and miscellaneous $22; store supplies, $35, and miscellaneous administrative items, $3.administrative items, $3.

Store Supplies 35 00

Miscellaneous Administrative Exp. 3 00

Financial Analysis and InterpretationFinancial 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.

A. Cash and equivalents $100,000 $ 120,000

B. Current liabilities 400,000 1,500,000

Doomsday ratio A / B 0.25 0.08

Doomsday RatioDoomsday RatioDoomsday RatioDoomsday RatioLaettner Co. Oakley Co.

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

Use: To indicate the company’s ability to meet creditors obligations in the worst case assumption that should the business cease to exist.

Financial Analysis and InterpretationFinancial Analysis and Interpretation

The EndThe End

Chapter 7Chapter 7

principles of accounting chapter 7

Documents

cash controls

nature of cash

cash accounts

misuse of cash

cash sales19cash3

cash short

ratio of cash

actual cash