1. 7-1 COLLEGE ACCOUNTING COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. HEINTZ & PARRY 19th EDITION

2. 7-2 CHAPTER 7 ACCOUNTING FOR CASH

3. 7-3 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

4. 7-4 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

5. 7-5 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

6. 7-6 AUTOMATED TELLER MACHINES  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

7. 7-7 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

8. 7-8 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

9. 7-9 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

10. 7-10 LEARNING OBJECTIVE 2 PREPARE A BANK RECONCILIATION AND RELATED JOURNAL ENTRIES.

11. 7-11 BANK RECONCILIATION EXAMPLE Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23. We need to prepare a BANK RECONCILIATION.

12. 7-12 Maple Consulting Bank Reconciliation November 21, 20-- Heading includes: Name of Company Bank Reconciliation Date

13. 7-13 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 Once all reconciling items are listed, the adjusted bank balance is computed. $1,748.09 Add: Deduct: Adjusted bank balance

14. 7-14 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 The adjusted book balance is computed. $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 Add: Deduct: $2,393.23 Adjusted book balance

15. 7-15 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 We say it is “reconciled” when the adjusted BANK and adjusted BOOK balances agree. $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 Add: Deduct: $2,393.23 Adjusted book balance

16. 7-16 REASONS FOR 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

17. 7-17 REASONS FOR 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

18. 7-18 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 $1,748.09 Add Deduct Adjusted bank balance Book balance, November 21 Add Deduct: $2,393.23 Adjusted book balance deposit in transit637.02 error on check no. 214 0.90 outstanding checks: No. 219 No. 224 No. 227 $200.00 25.00 67.78 292.78 Unrecorded ATM withdrawal$100.00 NSF check 200.00 Bank service charge1.80 $2,385.11 $2,092.33 $2,394.13 301.80 $2,092.33

19. 7-19 EXAMPLE We now know that the actual amount of cash is $2,092.33, but the general ledger cash account still shows $2,393.23. JOURNAL ENTRIES ARE NEEDED

20. 7-20 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

21. 7-21 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 $1,748.09 Add Deduct Adjusted bank balance Book balance, November 21 Add Deduct: $2,393.23 Adjusted book balance deposit in transit637.02 error on check no. 214 0.90 outstanding checks: No. 219 No. 224 No. 227 $200.00 25.00 67.78 292.78 Unrecorded ATM withdrawal$100.00 NSF check 200.00 Bank service charge1.80 $2,385.11 $2,092.33 $2,394.13 301.80 $2,092.33

22. 7-22 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 When check no. 214 was written, the cash account was credited for $0.90 more than the check amount of $46.25. This entry puts $0.90 back in the Cash account. 0 90 20-- Nov.21

23. 7-23 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 Accounts Payable 0 90 Error in recording check 20-- Nov.21 Add error on check Accounts Payable was originally debited for $19.88. This was $0.90 more than the actual telephone bill of $18.98. This entry removes the extra $0.90.

24. 7-24 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Accounts Payable 1 2 3 4 5 6 7 8 9 10 11 Cash 0 90 Error in recording check 20-- Nov.21 Deduct error on check

25. 7-25 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 $1,748.09 Add Deduct Adjusted bank balance Book balance, November 21 Add Deduct: $2,393.23 Adjusted book balance deposit in transit637.02 error on check no. 214 0.90 outstanding checks: No. 219 No. 224 No. 227 $200.00 25.00 67.78 292.78 Unrecorded ATM withdrawal$100.00 NSF check 200.00 Bank service charge1.80 $2,385.11 $2,092.33 $2,394.13 301.80 $2,092.33

26. 7-26 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 Since the ATM withdrawal was for “personal expenses,” the drawing account should be debited. Accounts Payable 0 90 Error in recording check J. M., Drawing 200 00 Nov. 20-- 21

27. 7-27 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 The $200 withdrawal was never recorded. This entry will remove the $100.00 from the cash account. Accounts Payable 0 90 Error in recording check J. M., Drawing 100 00 Nov. 20-- 21 Cash 100 00

28. 7-28 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 $1,748.09 Add Deduct Adjusted bank balance Book balance, November 21 Add Deduct: $2,393.23 Adjusted book balance deposit in transit637.02 error on check no. 214 0.90 outstanding checks: No. 219 No. 224 No. 227 $200.00 25.00 67.78 292.78 Unrecorded ATM withdrawal$100.00 NSF check 200.00 Bank service charge1.80 $2,385.11 $2,092.33 $2,394.13 301.80 $2,092.33

29. 7-29 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Accounts Receivable 10 11 12 13 14 15 16 17 18 19 20 Cash 200 00 Unrecorded NSF check 21 The amount of the bounced check is placed into Accounts Receivable and Cash is reduced.

30. 7-30 Maple Consulting Bank Reconciliation November 21, 20-- Bank statement balance, November 21 $1,748.09 Add Deduct Adjusted bank balance Book balance, November 21 Add Deduct: $2,393.23 Adjusted book balance deposit in transit637.02 error on check no. 214 0.90 outstanding checks: No. 219 No. 224 No. 227 $200.00 25.00 67.78 292.78 Unrecorded ATM withdrawal$100.00 NSF check 200.00 Bank service charge1.80 $2,385.11 $2,092.33 $2,394.13 301.80 $2,092.33

31. 7-31 BANK RECONCILIATION JOURNAL ENTRIES DATEDESCRIPTIONPRDEBITCREDIT Accounts Receivable 10 11 12 13 14 15 16 17 18 19 20 Cash 200 00 Unrecorded NSF check Service Fee Expense 1 80 21 Cash 1 80 Bank service charge

32. 7-32 LEARNING OBJECTIVE 3 ESTABLISH AND USE A PETTY CASH FUND.

33. 7-33 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

34. 7-34 JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND DATEDESCRIPTIONPRDEBITCREDIT Petty Cash 1 2 3 4 5 6 7 8 9 10 11 200 00 20-- Dec. 1 Cash 200 00 Establish petty cash fund

35. 7-35 PETTY CASH PAYMENTS RECORD  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

36. 7-36 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  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

37. 7-37 EXAMPLE  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 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.

38. 7-38 JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 40 80 20-- Dec.24 39 50 Automobile Expense Postage Expense Travel & Entertain. Exp. 30 25 Cash 178 80 Cash should be credited for the amount needed to restore the fund to its established amount. ($200.00 fund – $21.20 in box = $178.80 needed) Miscellaneous Expense James Maple, Drawing 30 00 38 25

39. 7-39 JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 40 80 20-- Dec. 31 39 50 Automobile Expense Postage Expense Travel & Entertain. Exp. 30 25 Cash 178 80 Miscellaneous Expense 30 00 38 25 James Maple, Drawing Replenishment of petty cash fund

40. 7-40 LEARNING OBJECTIVE 4 ESTABLISH A CHANGE FUND AND USE THE CASH SHORT AND OVER ACCOUNT.

41. 7-41 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

42. 7-42 EXAMPLE Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund. CASH 200 Just like the petty cash fund, a change fund starts by withdrawing from the cash account.

43. 7-43 EXAMPLE Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund. CASH 200 Change Fund is an ASSET. 200 CHANGE FUND

44. 7-44 JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND DATEDESCRIPTIONPRDEBITCREDIT Change Fund 1 2 3 4 5 6 7 8 9 10 11 200 00 20-- June1 Cash 200 00 Establish change fund

45. 7-45 EXAMPLE At the close of its first day of business, Sporty’s had $1,450.00 in the cash register. CASH IN DRAWER $1,450.00 Less: CHANGE FUND – 200.00 $1,250.00 CASH FROM SALES The CASH from sales should agree with the sales recorded on the cash REGISTER TAPE.

46. 7-46 EXAMPLE At the close of its first day of business, Sporty’s had $1,450.00 in the cash register. CASH IN DRAWER $1,450.00 Less: CHANGE FUND – 200.00 $1,250.00 CASH FROM SALES Sales from the cash register tape are also $1,250.00!!!

47. 7-47 JOURNAL ENTRY FOR RECORDING CASH FROM SALES DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June3 Only the $1,250.00 is debited to Cash and deposited. The change fund is not deposited.

48. 7-48 JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.) DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June3 Service Fees 1,250 00 Cash received from services What would have happened if the cash register tape didn’t agree with the cash from sales?

49. 7-49 CASH SHORTAGE EXAMPLE At the close of its first day of business, Sporty’s had $1,450.00 in the cash register. CASH IN DRAWER $1,450.00 Less: CHANGE FUND – 200.00 $1,250.00 CASH FROM SALES What if the cash register tape had shown sales of $1,252.00 or $1,247.00?

50. 7-50 CASH SHORTAGE EXAMPLE CASH IN DRAWER $1,450.00 Less: CHANGE FUND – 200.00 $1,250.00 CASH FROM SALES $1,252.00 CASH REGISTER TAPE $ 2.00 SHORTAGE Overages and shortages are recorded in an account called “CASH SHORT AND OVER.”

51. 7-51 JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June 3 Cash is debited for the amount deposited.

52. 7-52 JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.) DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June 3 Cash Short and Over is debited for shortages and credited for overages. Cash Short and Over 2 00

53. 7-53 JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.) DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June3 Service Fees is credited for the amount on the cash register tape even though this was not the amount collected. Cash Short and Over 2 00 Service Fees 1,252 00

54. 7-54 CASH OVERAGE EXAMPLE CASH IN DRAWER $1,450.00 Less: CHANGE FUND – 200.00 $1,250.00 CASH FROM SALES $1,247.00 CASH REGISTER TAPE $ 3.00OVERAGE At the close of its first day of business, Sporty’s had $1,450.00 in the cash register… But the cash register tape showed $1,247.00

55. 7-55 JOURNAL ENTRY FOR RECORDING A CASH OVERAGE DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June 3 Cash Short and Over 3 00 Cash Short and Over is debited for shortages and credited for overages.

56. 7-56 JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.) DATEDESCRIPTIONPRDEBITCREDIT Cash 1 2 3 4 5 6 7 8 9 10 11 1,250 00 20-- June 3 Service Fees is credited for the amount on the cash register tape even though this was not the amount collected. Cash Short and Over 3 00 Service Fees 1,247 00