Study Unit 1
Introduction
What are cash and cash equivalents?
• Cash:
– Legal means of payment that can be immediately used as a
means to pay someone else
• Cash equivalents:
– Short-term, highly liquid investments which are
convertible into cash, with very low risks of the value
thereof
What do we need to know about it?
• Internal controls over cash
– As a very active, risky part of the business, we need to
know how to control transactions relating to cash
• Using the bank account
• Reconciling the bank account
• Petty Cash journal
Internal Controls over cash
What do we need to control?
• Cash Receipts
– All cash that should be paid to the business should be
received and recorded
– Everything that should be in the bank account should be
deposited
• Cash Payments
– No payments should be made without the proper
authorisation
Cash Receipts: Sources
• Sources:
– Cash Sales
– Debtors paying their accounts
– Rentals received
– Loans,
– Proceeds from sale of assets etc
Cash Receipts: Controls
• Determination of responsibility
– Only specified people should deal with cash
• Allocation of duties
– Functions of receiving, recording and custody of assets
should be allocated to different people
• Documentation procedures
– The process should include daily reviews, checking actual
cash against what was supposed to be received
Cash Receipts: Controls
• Physical, mechanical and electronic controls
– Keep cash in safes, locked away
• Independent internal verification
– Cash counts after shifts, deposited daily, checked
against documentation
• Other controls
– Insurance, leave cycles
Cash Payments: Controls
• Determination of responsibilities
– Only specified people should be authorised to make
payments
• Allocation of duties
– Requesting the payment or incurring the expense should
be separated from the payment
Cash Payments: Controls
• Documentation procedures
– The process should include daily reviews, checking actual
cash against what was supposed to be received
– Pre-numbered documents, always with supporting
documentation, keeping the cheques safe
Cash Payments: Controls
• Independent internal verification
– Check payments against supporting documents BEFORE
releasing.
– Reconcile the bank accounts regularly
• Other controls
– Mark cheques as paid once issued
Use of the Bank Account
Opening an account
• Current account
– Cheques
– Debit orders
– Electronic Funds Transfers
• Overdraft facilities
– Current Liability
Depositing money
• Nature of deposits
– Cash deposits by the entity
• Deposit slips
– Interest on favourable accounts
• Done by the bank, picked up from the bank statements
– Payments by third parties directly into the bank account
• Picked up from the bank statements
Depositing money
• Nature of deposits
– Electronic Transfers
• Debit orders, EFT’s
• Directly into the bank account, picked up from the bank statements
Since all of these are cash, they should all be brought in through
the CRJ
Issuing of cheques
• Unconditional order in writing, signed by the signatory, to his banker
to pay the beneficiary a certain sum of money on their demand
• Pre-numbered
• Cheque counterfoils
– Source document for the recording in the CPJ
The bank statement
• A statement reflecting all the transactions for the period (usually
done monthly) and the daily balance
• This will be used by the entity to make sure that the bank balance in
their records matches the balance that the bank has
Debit and credit memos
• The bank charges a fee for their services. They won’t send an invoice
and wait for payment, they simply take the money out your bank
account
• The source of these transactions will be the bank statements. You
will have to use them to do the recording of these transactions
The Bank Reconciliation
What is the bank reconciliation?
• The bank is holding the entity’s cash. Whatever they have represents
how much cash your business has. You need to ensure you know
how much there is, and take into account any transactions that have
been done directly with the bank that you are not aware of yet
• This is best done by reconciling what your records say you have in
the bank with the bank statement
What does it look like?
Bank Reconciliation Statement at XXXX
Fol Debit Credit
Favourable balance per bank statement
1 000
Favourable balance per Bank Account
1 000
1 000 1 000
Reconciling Items
• The differences between the bank statement and the
bank account in the records should be as a result of
reconciling items
• These can be timing issues, or just transactions only
shown on the bank statements
• We can use this to record the transactions we
need to
Timing differences
• You issue a cheque to someone. When you issue it, you record it as a
payment, since the person can take that to the bank immediately
and deposit it in their account
• If they only deposit the cheque in a few days time, and you get a bank
statement that day, your records will show a payment, but the bank
won’t
Timing differences
• This is a reconciling item. It doesn’t represent an error, since there
are no adjustments that need to be made. As soon as the person
deposits the cheque in their account, your bank will pay the money,
and the payment will reflect off of your account… and then you and
the bank will have the same balance again
What does it look like?
Example 1: Outstanding cheques
Bank statement (28 February 2013) reflects a E1 000 favourable
balance. The records reflect a balance of E800. Cheque 04 for
E200 was made out to M Smith on 26 February and hasn’t been
presented for payment yet
Bank Reconciliation Statement at 28 February 2013
Fol Debit Credit
Favourable balance per bank statement
Cheque not yet presented for payment: 1 000
Chq04 – 26 Feb (M Smith)
Favourable balance per Bank Account
200
800
1 000 1 000
What does it look like?
Example 2: Outstanding deposits
Bank statement (28 February 2013) reflects a E1 200 favourable
balance. The records reflect a balance of E1 500. R Bill paid their
account, E300 on 28 February and we deposited the payment in
the bank on 1 March
Bank Reconciliation Statement at 28 February 2013
Fol Debit Credit
Favourable balance per bank statement
Deposit not yet credited : R Bill, 28 Feb 1 200
Favourable balance per Bank Account
300
1 500
1 500 1 500
Transactions recorded from the Bank
Statements
Bank charges
• The bank takes their fees straight from your account, without sending
any documentation, thus there will be no recording of these
transactions in the CPJ unless you take them from the bank
statement
• These transactions are recorded in the CPJ once you’ve picked them
up from the bank statement
Record in the CPJ before doing the reconciliation
Interest Paid and Received
• The bank charges interest on overdue accounts (if you have an
overdraft that you are using) and the interest that you receive on a
favourable bank balance is also debited / credited straight to your bank
account. These should be recorded in the CPJ & CRJ respectively, from
the bank statements
Record in the CPJ & CRJ before doing the reconciliation
Stop orders & Debit Orders
• Stop orders and Debit orders are instructions to the bank, and again
are done straight from the bank account. In most cases, these are
monthly transactions that don’t change, and there is no monthly
documentation for this
• They should be recorded in the CPJ, from the bank
statements Record in the CPJ before doing the
reconciliation
Bank Reconciliation – Example
(TO BE DONE IN NEXT CLASS)