| Accounting for Cash

| Cash Objective of the Session – Discuss the composition, management, and control of cash, including the use of a bank reconciliation.

| Items Classified as Cash Coins and currency, Petty cash, Certain negotiable instruments accepted by financial institutions for immediate deposit and withdrawal e.g., – Ordinary cheques, – Personal cheques, – Money orders etc. The balance of the cash control account reflects all items included in cash.

| Cash Equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. They include: – Treasury bills, – Commercial paper, – Money market funds. An overdraft - a negative bank account balance reported as a current liability.

| Compensating Balances In connection with financing arrangements, it is common practice for a company to agree to maintain a minimum or average balance on deposit with a bank. Compensating balance is the minimum balance that must be maintained in a depositor’s account as support for funds borrowed. Not included in the cash account.

| Example 1 Assume that a firm borrows Shs. 1.5 million for one year at 10% but must maintain a Shs. 50,000 compensating balance in an account with the bank. – The compensating balance increases the effective interest rate to 10.34% (Shs. 150,000/1,450,000) – The compensating balance is an example of a restricted cash balance. 6

| Restricted cash This refers to cash held for a specific purpose and not intended for general payment use. Examples include: – Compensating balance, – Minimum account balance for savings account – Sinking fund – an amount set aside for debt settlement. 7

| EABL Cash & cash equivalents disclosure Below are the cash and cash equivalents for EABL for the periods ending 2005 & 2004 respectively: 8

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| Management and Control of Cash Basic characteristics of a cash control system are: 1. Specifically assigned responsibilities for handling cash receipts, 2. Separation of handling and recording cash receipts, 3. Daily deposit slips of all cash received, 4. Voucher system to control cash payments, 5. Internal audits at irregular intervals, 6. Double record of cash—bank and books, with reconciliations performed by someone outside the accounting function.

| Controls over cash There should be controls and budgeting procedures for monitoring cash balances and estimating future cash needs. Effective cash management can be achieved by striking a delicate balance between;  risk and  profitability. There are two important specific controls for cash 1.Maintenance of the petty cash fund 2.Through bank accounts

| Petty cash funds It is a type of an imprest fund, which provides ready currency for routine disbursments. A large company can have petty cash fund in a number of offices and production facilities. The fund caters for small payments e.g., – Employee transportation, – Postage, – Office supplies, – Delivery charges. 12

| Example 2 Assume that a Shs. 100,000 petty cash fund is established in company Y in May – The journal entry will be: Dr: Petty cash100,000 Cr: Cash100,000 During the month of May 2011, the following individual vouchers accompany the fund: – Postage: Shs. 10,000; office supplies: Shs. 25,000; Taxi fares: Shs. 12,000; Other petty expenses: Shs. 50,000 – Prepare the journal entry to capture these disbursements. 13

| Cash control through bank accounts Bank accounts are advantageous because: – Cash is physically protected by the bank, – A separate record of cash is maintained by the bank, – Cash handling and theft is minimized, – Customers may remit payments directly to the bank, – Financial institutions provide cash management services e.g. investment advice, interest revenue on accounts 14

| Bank Reconciliation A comparison of the bank balance with the book balance is usually made monthly by means of a summary known as a bank reconciliation. 15 Bank balance Book balance

| Why bank Reconciliation? Determine whether bank account and the company’s cash balance are in agreement after taking into consideration unrecorded items. Isolate recording errors and other problems in the bank records or company’s recording system, Establish the correct ending cash balance, Supply information for adjusting entries.

| Bank Reconciliation Statement Reasons for differences: – Unpresented cheques – Uncredited cheques – Dishonoured cheques. – Standing orders/Direct debits – Bank charges – Direct credits – Accounting Errors

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