7 Accounting for Cash. 7 Accounting for Cash Cash Includes: Currency, coins, and checking accounts Checks received from customers Money orders Bank.

7 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

1 Describe how to open and use a checking account.

USA Patriot Act Primary purpose of this act was to help detect and prevent terrorism. As a result, banks must have a Customer Identification Program, or (CIP) that provides clear identification of every account holder of the bank.

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.

Signature Card Example

Making Deposits A deposit ticket is a form showing a detailed listing of items being deposited Currency, coins, and checks are listed separately Each check should be identified by its ABA (American Bankers Association) number Found in upper right-hand corner of each check Also shown in magnetic ink character recognition (MICR) code on the lower left side of the front of each check The code is used to sort and route checks

Endorsements Each check being deposited must be endorsed by the depositor Consist of stamping or writing the depositor’s name and sometimes other information on the back of the check

Endorsements (cont.) Blank endorsement Restrictive endorsement
The depositor simply signs the back of the check This makes the check payable to any bearer Restrictive endorsement The depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Daryl Beck only” for payment restriction

Automated Teller Machines (ATM’s)
Each depositor has a plastic card and a personal identification number (PIN). Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs. It is important for the depositor to keep an accounting record of ATM withdrawals and deposits.

Writing Checks A check is a document ordering a bank to pay cash from a depositor’s account. There are 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.

Three Steps in Preparing a Check
Complete the check stub or register. Enter the date, payee name, and amount on the check. Sign the check. The check should not be signed until the check signer has verified that all aspects of the check are correct.

Bank Statement The statement shows:
The balance at the BEGINNING of the period Deposits and other amounts ADDED during the period Checks and other amounts SUBTRACTED during the period 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

2 Prepare a bank reconciliation and related journal entries.

Bank Reconciliation Example
Bank statement shows a balance of $1, But the general ledger account has a balance of $2, We need to prepare a BANK RECONCILIATION.

Maple Consulting Bank Reconciliation November 21, 20--
Heading includes: Name of Company Bank Reconciliation Date

Bank statement balance, November 21 $1,748.09 The bank reconciliation begins with the balance according to the bank statement.

Bank statement balance, November 21 $1,748.09 Add: Deduct: Reconciling items are listed as additions or subtractions from the bank balance.

Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Once all reconciling items are listed, the adjusted bank balance is computed.

Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Now the reconciliation turns to adjusting the BOOK balance.

Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Additions and subtractions will be made to the book balance. Deduct:

Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: The adjusted book balance is computed. Deduct: Adjusted book balance

Bank statement balance, November 21 $1,748.09 Add: We say it is “reconciled” when the adjusted BANK and adjusted BOOK balances agree. Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Deduct: Adjusted book balance

Differences Between Bank and Book Balances
Deposits in transit Deposits that have not reached the bank or been recorded by the bank before the statement is prepared Outstanding checks Checks that have not been presented to the bank for payment before the statement is prepared Service charges Bank charges for services such as check printing and processing

Differences Between Bank and Book Balances (cont.)
Collections Collections of promissory notes or charge accounts made by the bank on behalf of the depositor Not sufficient funds (NSF) checks Checks deposited but not paid because the drawer did not have sufficient funds Errors Errors made by the bank or by the depositor in recording cash transactions

Bank Reconciliation THREE STEPS:
STEP #1 Identify deposits in transit and related errors. STEP #2 Identify outstanding checks and related errors. STEP #3 Identify additional reconciling items.

STEP #1: Identify deposits in transit and related errors.
Compare the 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 $637.02, dated November 21, had not been received by the bank. DEPOSIT IN TRANSIT

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct: DEPOSITS IN TRANSIT are added to the bank balance. Adjusted bank balance Book balance, November 21 $2,393.23 Add: Deduct: Adjusted book balance

STEP #2: Identify outstanding checks and related errors.
Compare canceled checks with the bank statement and accounting records. If they differ, the error needs to be corrected.

STEP #2 Example Check no. 214 was written for $18.98 but was entered on the check stub and on the books as $19.88. $0.90 ERROR

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $0.90 is added back to the book balance. Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Adjusted book balance

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

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 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 Maple used an ATM machine to make a withdrawal from his account of $ for personal use. However, he forgot to record this withdrawal on the books. Deduct $100.00 from the book balance.

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 Adjusted book balance

STEP #3 Example The bank returned an NSF check of $ written by one of Maple’s clients. Deduct $200.00 from the book balance.

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Adjusted book balance

STEP #3 Example The bank deducted $1.80 from Maple’s account for service charges. Deduct $1.80 from the book balance.

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 Add error on check no. 214 The bank balance section of the reconciliation is totaled. 0.90 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: Then the book balance section is totaled. No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33

Example We now know that the actual amount of cash is $2,092.33, but the general ledger cash account still shows $2, JOURNAL ENTRIES ARE NEEDED!!!

Bank Reconciliation Journal Entries
Only two kinds of items appearing on a bank reconciliation require journal entries: Errors in the depositor’s books Bank additions and deductions that do not already appear in the books ALL items in the book balance section of the reconciliation require a journal entry.

Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 These 4 items will require journal entries. Deduct outstanding checks: No. 219 $200.00 No. 224 25.00 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33

BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Nov. 21 0 90 2 3 When check no. 214 was written, the cash account was credited for $0.90 more than the check amount of $18.98. This entry puts $0.90 back in the Cash account. 4 5 6 7 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash Nov. 21 0 90 2 Accounts Payable 0 90 3 Error in recording check 4 5 Accounts Payable was originally debited for $ This was $0.90 more than the actual telephone bill of $18.98. This entry removes the extra $0.90. 6 7 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Nov. Cash 21 0 90 2 Accounts Payable 0 90 3 Error in recording check 4 5 J. M., Drawing 21 6 Since the ATM withdrawal was for “personal expenses,” the drawing account should be debited. 7 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Nov. 21 Cash 0 90 2 Accounts Payable 0 90 3 Error in recording check 4 5 J. M., Drawing 21 6 Cash 100 00 7 The $100 withdrawal was never recorded. This entry will remove the $100.00 from the cash account. 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash 0 90 Nov. 21 2 Accounts Payable 0 90 3 Error in recording check 4 5 J. M., Drawing 21 6 Cash 100 00 7 Unrecorded ATM withdrawal 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 10 Accounts Receivable 21 11 Cash 200 00 12 Unrecorded NSF check 13 14 The amount of the bounced check is placed into Accounts Receivable and Cash is reduced. 15 16 17 18 19

DATE DESCRIPTION DEBIT PR CREDIT 10 21 Accounts Receivable 11 Cash 200 00 12 Unrecorded NSF check 13 14 21 Miscellaneous Expense 1 80 15 Cash 1 80 16 Bank service charge 17 Service charges are usually small; often they are put into Misc. Expense. 18 19

STEP #2 Example Check numbers 219, 224, and 227 do not appear on the bank statement. OUTSTANDING CHECKS

Electronic Banking Both deposits and payments can be made with electronic funds transfer (EFT), using a computer rather than paper checks. Businesses also are making increasing use of EFT in handling cash transactions. Bills from suppliersalso can be paid by EFT. Payments from customers frequently are in electronic form. Funds can be transferred electronically among multiple accounts at different banks.

3 Establish and use a petty cash fund.

The 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: A check is written to the petty cash custodian for the amount to be set aside in the fund The custodian cashes the check and places the money in a petty cash box The custodian should be the only person authorized to make payments from the fund.

Example Maple wants to establish a $200 petty cash fund to be used to make small purchases. CASH $200 is withdrawn (by check) from the cash account. 200

Petty Cash is an ASSET account.
Example Maple wants to establish a $200 petty cash fund to be used to make small purchases. CASH PETTY CASH 200 200 Petty Cash is an ASSET account.

JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Petty Cash Dec. 1 2 Cash 3 Establish petty cash fund 4 5 6 7 8 9 10

Petty Cash Voucher A receipt prepared for every payment from the petty cash fund. Voucher shows the: Name of the payee Purpose of the payment Account to be charged for the payment (e.g., Postage Expense) Signatures of the custodian and payee

Petty Cash Payment Records
A special multi-column record that supplements the regular accounting records Provides a record of each petty cash payment Broken down by account e.g.: Travel/Entertainment Expense, Postage Expense, etc. Used to prepare the replenishment journal entry

Replenishing the Petty Cash Fund
The petty cash fund should be replenished whenever the fund runs low and at the end of each accounting period. Once the fund is established by debiting Petty Cash and crediting Cash, no further entries are made to Petty Cash.

Replenishing the Petty Cash Fund (cont.)
To replenish the fund, debits are made to appropriate expense accounts and Cash is credited. Only if the amount of the fund itself is being changed would there be a debit or credit to Petty Cash.

Example At the end of the month, the petty cash fund contains eight vouchers and only $21.20 in cash. The fund needs to be replenished. To replenish the fund: A check is written for $178.80, which is the total of the eight vouchers A journal entry is made to recognize: The expenses shown on the vouchers The outflow of cash via the check

DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Automobile Expense Dec. 31 40 80 2 Postage Expense 39 50 3 Travel & Entertain. Exp. 30 25 4 Miscellaneous Expense 38 25 5 James Maple, Drawing 30 00 6 Cash 7 Cash should be credited for the amount needed to restore the fund to its established amount. ($ fund – $21.20 in box = $ needed) 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- Automobile Expense 1 Dec. 31 40 80 2 Postage Expense 39 50 3 Travel & Entertain. Exp. 30 25 4 Miscellaneous Expense 38 25 5 James Maple, Drawing 30 00 6 Cash The journal entry balances!!! Vouchers (amounts debited) equal the amount needed to replenish the fund (credit). 7 8 9 10

DATE DESCRIPTION DEBIT PR CREDIT 20-- Automobile Expense 1 Dec. 31 40 80 2 Postage Expense 39 50 3 Travel & Entertain. Exp. 30 25 4 Miscellaneous Expense 38 25 5 James Maple, Drawing 30 00 6 Cash 7 Replenishment of petty 8 cash fund 9 10

4 Establish a change fund and use the cash short and over account.

Change Fund A supply of currency and coins kept in the cash register or cash drawer Allows businesses 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

Just like the petty cash
Example Sporty’s Cleaners is opening for business on June 1. Sporty needs to establish a $200 change fund. CASH Just like the petty cash fund, a change fund starts by withdrawing from the cash account. 200

Example Sporty’s Cleaners is opening for business on June 1. Sporty needs to establish a $200 change fund. CASH CHANGE FUND 200 200 Change Fund is an ASSET.

JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Change Fund June 1 2 Cash 3 Establish change fund 4 5 6 7 8 9 10

Example At the close of its first day of business, Sporty’s had $1, in the cash register. CASH IN DRAWER $1,450.00 Less: – CHANGE FUND CASH FROM SALES $1,250.00 The CASH from sales should agree with the sales recorded on the cash REGISTER TAPE.

Sales from the cash register tape
Example At the close of its first day of business, Sporty’s had $1, in the cash register. CASH IN DRAWER $1,450.00 – Less: CHANGE FUND CASH FROM SALES $1,250.00 Sales from the cash register tape are also $1,250.00!!!

JOURNAL ENTRY FOR RECORDING CASH FROM SALES
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 3 4 Only the $1, is debited to Cash and deposited. The change fund is not deposited. 5 6 7 8 9 10

JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.)
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 Sales 1,250 00 3 Cash received from sales 4 5 What would have happened if the cash register tape didn’t agree with the cash from sales? 6 7 8 9 10

What if the cash register tape
Cash Shortage Example At the close of its first day of business, Sporty’s had $1, in the cash register. CASH IN DRAWER $1,450.00 Less: CHANGE FUND – $1,250.00 CASH FROM SALES What if the cash register tape had shown sales of $1,252.00?

Cash Shortage Example (cont.)
CASH IN DRAWER $1,450.00 Less: CHANGE FUND – $1,250.00 CASH FROM SALES $1,252.00 CASH REGISTER TAPE $ SHORTAGE Overages and shortages are recorded in an account called “CASH SHORT AND OVER.”

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 3 4 Cash is debited for the amount deposited. 5 6 7 8 9 10

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 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 9 10

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 Cash Short and Over 2 00 3 Sales 1, 4 5 6 Sales is credited for the amount on the cash register tape even though this was not the amount collected. 7 8 9 10

What if the cash register tape
Cash Overage Example At the close of its first day of business, Sporty’s had $1, in the cash register. CASH IN DRAWER $1,450.00 Less: CHANGE FUND – $1,250.00 CASH FROM SALES What if the cash register tape had shown sales of $1,247.00?

Cash Overage Example (cont.)
At the close of its first day of business, Sporty’s had $1, in the cash register…but the cash register tape showed $1,247.00 CASH IN DRAWER $1,450.00 Less: CHANGE FUND – $1,250.00 CASH FROM SALES $1,247.00 CASH REGISTER TAPE $ OVERAGE

JOURNAL ENTRY FOR RECORDING A CASH OVERAGE
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 Cash Short and Over 3 00 3 4 5 Cash Short and Over is debited for shortages and credited for overages. 6 7 8 9 10

JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.)
DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash June 1 1, 2 Cash Short and Over 3 00 3 Sales 1,247 00 4 5 6 Sales is credited for the amount on the cash register tape even though this was not the amount collected. 7 8 9 10

Your Perspective-Cashier

7 Accounting for Cash. 7 Accounting for Cash Cash Includes: Currency, coins, and checking accounts Checks received from customers Money orders Bank.

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7 Accounting for Cash. 7 Accounting for Cash Cash Includes: Currency, coins, and checking accounts Checks received from customers Money orders Bank.

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