CHAPTER SIX ACCOUNTING FOR CASH

CASH Includes: Currency, coins, and checking accounts Checks received from customers Money orders Bank cashier’s checks Because cash plays such a central role in operating a business, it must be carefully managed and controlled.

INTERNAL CONTROL A set of procedures designed to ensure proper accounting for transactions Good internal control for cash transactions: All cash received should be deposited DAILY in a bank. All disbursements, except for payments from petty cash, should be made by CHECK.

OPENING A CHECKING ACCOUNT Each person authorized to sign checks must complete and sign a SIGNATURE CARD. This card is used to verify the depositor’s signature on any banking transactions.

Do you have a deposit form filled out sir? MAKING DEPOSITS Deposit Slip is a form showing A detailed listing of items being deposited Currency, coins, and checks are listed separately. Do you have a deposit form filled out sir?

MAKING DEPOSITS Endorsements--each check being deposited must be endorsed by the depositor. Blank endorsement--the depositor simply signs the back of the check. Check becomes payable to any bearer. Restrictive endorsement--depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Mary Adams only.”

AUTOMATED TELLER MACHINES Each depositor has a plastic card and a personal identification number (PIN). Most ATMs are on a system that allows non-customers to use their ATMs. It is important for depositor to keep an accounting record of ATM withdrawals and deposits.

WRITING CHECKS Check is a document ordering a bank to pay cash from a depositor’s account. Three parties to every check: Drawer--the depositor who orders the bank to pay the cash Drawee--the bank on which the check is drawn Payee--the person being paid the cash Business checks often have a check stub.

BANK STATEMENT Includes: The balance at the BEGINNING of the period Deposits and other amounts ADDED during the period (CM or credit memos) Checks and other amounts SUBTRACTED during the period (DM or debit memos) The balance at the END of the period

BANK STATEMENT Sent with bank statement Canceled checks, “imaged” sheets of check faces, or a listing of checks Any other forms representing items added to or subtracted from the account

EXAMPLE of Bank Reconciliation Hey, our bank statement shows a balance of $4,350. But our general ledger account has a balance of $3,800. How much cash do we really have?! We better get back to work and prepare a BANK RECONCILIATION and find out before the boss calls and asks us!!

Mary Adams Consulting Bank Reconciliation October 31, 2013 Heading includes: Name of Company Bank Reconciliation Date

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Reconciliation begins with balance according to the bank statement.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deduct: Reconciling items are listed as additions or subtractions from the bank balance.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Once all reconciling items are listed, the “Adjusted Bank Balance” is computed.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Now the reconciliation turns to adjusting the BOOK balance.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book (Ledger) balance, October 31 $3,800 Add: Additions and subtractions will be made to the book balance. Deduct:

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: “Adjusted book balance” is computed. Deduct: Adjusted Book Balance

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: We say it is “reconciled” when the Adjusted BANK and Adjusted BOOK balances agree. Deduct: Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Deduct: Adjusted Book Balance

Reasons for differences: Outstanding checks Checks that have not been presented to the bank for payment Deposits in transit Deposits that have not reached the bank or been recorded by the bank before the statement is prepared Service charges E.g., check printing and processing, account fees

REASONS continued Collections Not sufficient funds (NSF) checks Errors Made by the bank on behalf of the depositor Not sufficient funds (NSF) checks Checks deposited but not paid because drawer did not have sufficient funds Errors Made by bank or by the depositor in recording cash transactions

Here we go with steps again. . . BANK RECONCILIATION THREE STEPS: Here we go with steps again. . .

STEP #1 Identify deposits in transit and related errors. Compare bank statement with: Last month’s deposits in transit They should all be on the bank statement. Deposits listed in the accounting records If not found on the bank statement, the deposit is considered a deposit in transit. $ amounts for deposits in the accounting records If they differ, the error needs to be corrected.

STEP #1 EXAMPLE A deposit in the accounting records of $635, dated October 31, had not been recorded by the bank yet because the deposit was made after 2pm.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 Deduct: DEPOSITS IN TRANSIT are added to the bank balance. Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Deduct: Adjusted book balance

Oh my gosh! If found an error in a check I recorded!! STEP #2 Identify outstanding checks and related errors. Compare canceled checks with bank statement and accounting records: If they differ, error needs to be corrected. Oh my gosh! If found an error in a check I recorded!!

STEP #2 EXAMPLE Check # 862 payable to Office Depot in O’Fallon, was written for $46.25 but was entered on the check stub and in the general ledger as $64.25. $18.00 ERROR

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 $18.00 is added back to the book balance. Deduct: Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) + 18 $ 64.25 -46.25 = $18.00 Deduct: Adjusted book balance

STEP #2 Identify outstanding checks and related errors. Compare canceled checks with bank statement and accounting records: If they differ, the error needs to be corrected. Check mark the stub or accounting records to indicate check has cleared. Checks written but not cleared are OUTSTANDING CHECKS. Subtracted from the bank balance on the reconciliation

STEP #2 EXAMPLE Check numbers 890, 892, and 893 do not appear on the bank statement. These are OUTSTANDING CHECKS

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit + $635 Deduct: Outstanding checks No. 890 -$598 No. 892 -334 No. 893 -795 - 1,727 Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) + 18 Outstanding checks are deducted from the bank balance. Deduct: Adjusted book balance

STEP #3 Identify additional reconciling items. Compare any additions and deductions on the bank statement that are not deposits or checks with the accounting records. Items ADDED to the account by the bank are CREDIT MEMOS. Items DEDUCTED from the account by the bank are DEBIT MEMOS.

STEP #3 EXAMPLE Deduct $200 from the book balance. Mary used an ATM machine to make a withdrawal from her account of $200 for a pre-weekend manicure and pedicure. However, she forgot to record this withdrawal on the books. Deduct $200 from the book balance.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 1,727 Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) 18 Deduct: Unrecorded ATM withdrawal - $200 Adjusted book balance

I can’t believe Mel Gibsom’s check bounced! STEP #3 EXAMPLE The bank returned an NSF check of $350 written by Mel Gibsom, a customer. I can’t believe Mel Gibsom’s check bounced! Deduct $350 from the book balance.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 1,727 Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) 18 Deduct: Unrecorded ATM withdrawal $200 NSF check (Mel Gibsom) - 350 Adjusted book balance

STEP #3 EXAMPLE The bank deducted $10 from Mary’s account for monthly service charges. Deduct $10 from the book balance.

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 1,727 Adjusted Bank Balance Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) 18 Deduct: Unrecorded ATM withdrawal $200 NSF check (Mel Gibsom) 350 Bank service charge 10 Adjusted book balance

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 $4,985 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 1,727 Adjusted Bank Balance $3,258 Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (Office supplies) The Bank section of the reconciliation is totaled. 18 Deduct: Unrecorded ATM withdrawal $200 NSF check (Mel Gibsom) 350 Bank service charge 10 Adjusted book balance

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit + $635 $4,985 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 - 1,727 Adjusted Bank Balance $3,258 Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (office supplies) + 18 These two totals must equal each other! $3,818 Then the Book (ledger) section is totaled. Deduct: Unrecorded ATM withdrawal - $200 NSF check (Mel Gibsom) - 350 Bank service charge - 10 $560 Adjusted Book Balance $3,258

EXAMPLE We now know that the actual amount of cash is $3,258. But the General Ledger Cash account still shows $3,800. Oh Oink!! We get to make some journal entries to update the Cash account! Yippee. (Journalizing is better than melted M&Ms in tuna fish!)

BANK RECONCILIATION JOURNAL ENTRIES Only items in the BOOK (ledger) section of the reconciliation need to be journalized. Certainly Could we see some examples Mr. Pig?

Mary Adams Consulting Bank Reconciliation October 31, 2013 Bank statement balance, October 31 $4,350 Add: Deposit in transit $635 $4,985 Deduct: Outstanding checks No. 890 $598 No. 892 334 No. 893 795 1,727 Adjusted Bank Balance $3,258 Book (ledger) balance, October 31 $3,800 Add: Error on check #862 (Office supplies) These 4 items will require journal entries!! 18 $3,818 Deduct: Unrecorded ATM withdrawal $200 NSF check (Mel Gibsom) 350 Bank service charge 10 $560 Adjusted Book Balance $3,258

GENERAL JOURNAL This entry puts $18.00 back in the Cash account. Cash DATE DESCRIPTION DEBIT PR CREDIT 2013 1 Cash 31 18 00 Oct. 2 3 When check #862 was written, the Cash account was credited for $18.00 more than the check amount of $46.25. This entry puts $18.00 back in the Cash account. 4 5 6 7 8 9 10 11

GENERAL JOURNAL This entry removes the extra $18.00. Cash DATE DESCRIPTION DEBIT PR CREDIT 2013 1 Cash Oct. 31 18 00 2 Office Supplies Expense 18 00 3 Error on Check #862 4 5 6 7 Office Supplies Expense was originally debited for $64.25. This was $18.00 more than the actual Office Depot receipt total of $46.25. This entry removes the extra $18.00. 8 9 10 11

GENERAL JOURNAL Cash 18 00 18 00 M.A., Drawing 200 00 DATE DESCRIPTION DEBIT PR CREDIT 2013 1 Cash 18 00 Oct. 31 2 Office Supplies Expense 18 00 3 Error on Check #862 4 5 M.A., Drawing 200 00 31 6 7 Since the ATM withdrawal was for “personal expenses,” Drawing should be debited. 8 9 10 11

GENERAL JOURNAL This entry will remove the $200 from the Cash account. DATE DESCRIPTION DEBIT PR CREDIT 2013 1 Cash 18 00 Oct. 31 2 Office Supplies Expense 18 00 3 (Error on Check #862) 4 5 M.A., Drawing 200 00 31 6 Cash 200 00 7 The $200 ATM withdrawal was never recorded. This entry will remove the $200 from the Cash account. 8 9 10 11

GENERAL JOURNAL Cash 18 00 18 00 M.A., Drawing 200 00 Cash 200 00 DATE DESCRIPTION DEBIT PR CREDIT 2013 1 Cash 18 00 Oct. 31 2 Office Supplies Expense 18 00 3 (Error on Check #862) 4 5 M.A., Drawing 200 00 31 6 Cash 200 00 7 (Unrecorded ATM withdrawal) 8 9 10 11

GENERAL JOURNAL cont. Accounts Receivable 350 00 Cash 350 00 DATE DESCRIPTION DEBIT PR CREDIT 2013 Accounts Receivable 350 00 10 Oct 31 11 Cash 350 00 12 (NSF check from Mel Gibsom) 13 14 Yeah! The loser! He still owes us the money! 15 The amount of the bounced check is placed into Accounts Receivable and Cash is reduced. 16 17 18 19 20

GENERAL JOURNAL cont. 350 00 Accounts Receivable Cash 350 00 DATE DESCRIPTION DEBIT PR CREDIT 350 00 10 Oct 31 Accounts Receivable 11 Cash 350 00 12 (NSF check from Mel Gibsom) 13 14 31 Miscellaneous Expense 10 00 Cash 15 10 00 16 (Bank service charge) 17 Service charges are usually small. Often they are put into Misc. Expense. Hint..These journal entries will be on our last exam… 18 19 20

A PETTY CASH FUND A fund set up to pay for small items with cash Checks for very small amounts are cumbersome. To establish the fund: Check is written to the petty cash custodian. Check is cashed. Money is placed into secure box/drawer. Custodian is the only person authorized to pay out petty cash.

$50 is withdrawn (by check) EXAMPLE Mary wants to establish a $50 Petty Cash fund to be used to make small purchases $50 is withdrawn (by check) from the Cash account. CASH For: Petty Cash $50 Fifty dollars--- $50

Petty Cash Fund is an ASSET account. EXAMPLE A new account will be established called Petty Cash. PETTY CASH FUND CASH $50 $50 Petty Cash Fund is an ASSET account.

GENERAL JOURNAL Petty Cash Fund Cash DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Petty Cash Fund Nov. 15 50 00 2 Cash 50 00 3 Establish Petty Cash fund 4 5 After the $50 check is cashed, the money will be placed in a box for future disbursements by the petty cash custodian. . . 6 7 8 9 10 11

PETTY CASH VOUCHER A receipt prepared for every payment from Petty Cash Voucher includes: Name of Payee Purpose and amount of payment Account to be charged (e.g., Postage Expense) Signature of custodian and payee

PETTY CASH PAYMENTS RECORD Multi-column record that supplements the regular accounting records Provides record of each Petty Cash payment Broken down by account E.g.: Travel/Entertainment Expense, Postage Exp., etc. Used to prepare Replenishment journal entry

REPLENISHING PETTY CASH Fund is replenished: When funds run low, and End of each accounting period Journal Entry is made: Debiting the accounts charged (e.g., Postage Expense) Crediting Cash for amount needed to replenish the fund Petty Cash Fund account is not debited or credited.

EXAMPLE-Petty cash After two weeks, Mary notices the petty cash box contains the following vouchers and only $5.65 cash: Voucher # 1 $15.00 for expenses incurred while on a business trip (Travel/Entertainment Expense) Voucher # 2 $11.45 for express mailing a report to a client (Postage Expense) Voucher # 3 $17.90 for oil change on company van (Maintenance Expense)

GENERAL JOURNAL $50.00 fund - $5.65 in box = $44.35 needed DATE DESCRIPTION DEBIT PR CREDIT 20-- Travel/Entertainment Exp. 1 Nov. 30 15 00 2 Postage Expense 11 45 3 Maintenance Expense 17 90 4 Cash 44 35 5 Cash should be credited for the amount needed to restore the fund to its established amount. $50.00 fund - $5.65 in box = $44.35 needed 6 7 8 9 10 11

GENERAL JOURNAL Travel/Entertainment Exp. Postage Expense DATE DESCRIPTION DEBIT PR CREDIT 20-- Travel/Entertainment Exp. 1 Nov. 30 15 00 2 Postage Expense 11 45 3 Maintenance Expense 17 90 4 Cash 44 35 5 = $50 fresh balance + $44.35 check 6 7 $5.65 left 8 9 10 11

Don’t forget an explanation GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- Travel/Entertainment Exp. 1 Nov. 30 15 00 2 Postage Expense 11 45 3 Maintenance Expense 17 90 4 Cash 44 35 5 (Replenishment of PC fund) 6 Don’t forget an explanation 7 8 9 10 11

CHANGE FUND A supply of currency and coins kept in the cash register or cash drawer Allows business to make change when customers pay in cash At the end of the day, cash received during the day is deposited But the Change Fund is held back for use on the following day The Change Fund is debited only once! When it is established!

Just like the Petty Cash EXAMPLE SCC’s Student Cafe is opening for business tomorrow. They need to establish a $150 change fund. Just like the Petty Cash fund, a Change Fund starts by withdrawing from Cash. CASH $150

EXAMPLE CASH CHANGE FUND $150 $150 SCC’s Student Cafe is opening for business tomorrow. They need to establish a $150 change fund. CASH CHANGE FUND $150 $150 Change Fund is an ASSET.

GENERAL JOURNAL Change Fund Cash DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Change Fund Dec. 1 150 00 2 Cash 150 00 3 (Establish Change Fund) 4 5 6 7 8 9 10 11

EXAMPLE At the close of their first day of business, SCC’s Student Cafe had $1,384.50 in the cash register. CASH IN DRAWER $1,384.50 Less: 150.00 CHANGE FUND CASH FROM SALES $1,234.50 The CASH from sales should agree with the sales recorded on the cash REGISTER TAPE.

Sales from Cash Register tape EXAMPLE At the close of their first day of business, SCC’s Student Cafe had $1,384.50 in the cash register. CASH IN DRAWER $1,384.50 Less: 150.00 CHANGE FUND CASH FROM SALES $1,234.50 Sales from Cash Register tape are also $1,234.50!!!

debited to Cash and deposited. The Change fund is not deposited. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Dec. 2 1,234 50 2 3 4 Only the $1,234.50 is debited to Cash and deposited. The Change fund is not deposited. 5 6 7 8 9 10 11

What would have happened if the cash register tape didn’t agree with GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Dec. 2 1,234 50 2 Sales 1234 50 3 Cash Sales 12/2/20-- 4 5 What would have happened if the cash register tape didn’t agree with the cash from sales? 6 7 8 9 10 11

What if the Cash Register tape EXAMPLE At the close of their first day of business, SCC’s Student Cafe had $1,384.50 in the cash register. CASH IN DRAWER $1,384.50 Less: 150.00 CHANGE FUND CASH FROM SALES $1,234.50 What if the Cash Register tape had shown Sales of $1,236.50?

EXAMPLE $ 2.00 $1,384.50 150.00 $1,234.50 $1,236.50 Less: SHORTAGE CASH IN DRAWER $1,384.50 Less: CHANGE FUND 150.00 CASH FROM SALES $1,234.50 $1,236.50 CASH REGISTER $ 2.00 SHORTAGE Overages and Shortages are recorded in an account called “CASH SHORT AND OVER.”

Cash is debited for the amount GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Dec. 2 1,234 50 2 3 4 Cash is debited for the amount deposited. 5 6 7 8 9 10 11

and credited for overages. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Dec. 2 1,234 50 2 Cash Short and Over 2 00 3 4 Cash Short and Over is debited for shortages and credited for overages. 5 6 7 8 Cash Short and Over is a miscellaneous expense account which shows up on the Income Statement. 9 10 11

GENERAL JOURNAL Cash Cash Short and Over Income from Services DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Dec. 2 1,234 50 2 Cash Short and Over 2 00 3 Income from Services 1,236 50 4 5 6 Income from Services is credited for the amount on the cash register tape even though this was not the amount collected. 7 8 9 10 11