CHAPTER Five

Accounting for cash

Cash is any medium of exchange that a bank will accept at face value. It includes bank
deposit, currency checks, bank drafts and money orders.
Control over cash: Due to the reason that cash is the most likely transportable, easily
hidden and used improperly by employees, it is therefore necessary that cash be
effectively safeguarded by a special control. The two controlling devices for controlling
cash are:
a) The bank account &
b) Petty cash
a) The bank account
It is one of the major devices for maintaining control over cash. To get the most benefit
from the bank account, all cash received must be deposited in the bank and all payments
must be made by checks drawn on the bank or from special cash funds. When such
system is strictly followed, there is a double record of cash, one maintained by the
business and the other by the bank. In some cases a bank may require a business to
maintain a minimum cash balance called compensating balance.
Forms used in a bank account
A) Signature card: An identifying number is assigned to the account which is used for
verification. The depositor will sign on. It is a written check.
B) Deposit ticket (slip): Used by the business as a receipt to record the cash deposit.
C) Check: is a written document signed by the depositor, ordering the bank to pay a sum
of money to an individual or business entity.
Three parties involved in a check:
1) Maker (drawer): One who signs on the check.
2) Payer (drawee): the bank on which the check is drawn.
3) Payee: the party to whom payment is made. Is the party to whose order the check
is drawn. Check register: A modified form of the cash payment journal used to
record all transaction paid by check. Usually in a check the address and the name
of the depositor are printed.

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D) Record the checks drawn: A memorandum record of the basic details of a check
should be prepared at the time the check is written. Business firms may prepare a copy of
each check drawn and then use it as a basis for recording the transaction in the cash
payment journal.
Checks issued to a creditor on account are usually accompanied by a notification of the
specific invoice that is being paid. The purpose of such notification, some times called a
remittance advice, is to make sure that proper credit is recorded in the accounts of the
creditor.
Bank statement-Is the monthly statement send by the bank to the depositor. The bank
statement usually indicates the beginning and ending cash balance of the depositor in the
bank and the monthly transaction(additions and deductions) .It also includes cancelled
checks (paid checks).and which the bank has make payment on behalf of the depositor. It
also includes the deposits made by the depositor and other thing.
Bank reconciliation: Is the schedule that accounts for any of the difference between the
bank statement balance and the company (depositor) book balance. It is listing of items
and amounts that cause the cash balance reported in the bank statement and the cash
ledger of the depositor.
It might seem that the two balances should be equal but they are not likely to be equalon
any specific date because of the following:
a) Items recorded by the company but not yet recorded by the bank.
1) Deposit in transit: is the deposit that the company has recorded but not
recorded by the bank.
2) Outstanding checks: These have been issued by the company and recorded
on its book but have not yet been paid by the bank.
b) Items recorded by the bank only.
1) Bank collection: notes receivable and interest accrued on notes receivable
may be collected by the bank. The bank will notify (remind) the amount of
collection whenever the bank is sending the bank statement to the depositor.
2) Service charge: the amount of banks fee for processing check. When the bank
provides the bank statement to the depositor.

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C) Not sufficient fund (NSF) received from customer..
3) Error by either the company or the bank or both.
E.g. 1) A check written for $225 is drawn by the bank as $252.
2) A check written for$225 is journalized by the depositors as $522 their will understate
the cash ledger balance of the depositor.
A/p-------------------522
Cash-----------------------------------522
To record the balance of cash
Cash------------------------------297
A/p----------------------------------297
Bank credit memorandums: are additions by bank not recorded by depositor. They are
traced to the cash receipt journal that can be added to the balance according to depositor’s
record.
Bank debit memorandums: are the deductions by bank not recorded by the depositor.
They are traced to the cash payment journals that have to be deducted from the balance
according to depositor’s record.
Format for bank reconciliation
Xx Company
Bank Reconciliation
Sep.30, xx
Bank balance according to bank record --------------------------------------------------xxx
Add: Additions of depositor note on bank statement (deposit in transit) ----xx
Bank error that under state bank balance ---------------------------------xx xxx
Ded: deduction by the depositor not by bank (outstanding Checks) --------xx
Bank error that overstate bank balance ------------------------------------xx xxx
Adjusted cash balance -------------------------------------------------------------------- xxx
Bank balance according to depositor records---------------------------------------------xxx
Add: additions by bank not recorded by depositor (credit memorandum :
Notes &interest collection, interest revenue on checking accounts)--------xx
Depositor error that understate the depositor cash ledger balance-------xx xxx
Subtotal---------------------------------------------------------------------------------------xxx

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Ded: Deduction by bank not recorded by the depositor
(Debit memorandum: NSF checks, service charges) --------------------------xx
Depositor error that overstate cash ledger balance------------------------xx xxx
Adjusted cash balance----------------------------------------------------------------------xxx
Example : The bank statement for ABC Company indicates a balance of $3359.78 as of
July [Link] balance in cash in ABC Company ledger of same date is $2549.99.
Additional information:-Deposit of July 31, not recorded on bank statement --------816.20
Outstanding checks: #812-------------------1061.00
#878------------------435.39
#883-------------------48.60
Note plus interest of $8 collected by bank (credit memorandum) not recorded in cash
receipt journal -------408.00.
Bank service charge (debit memorandum)not recorded in cash payment journal ……18.
Check #879 for $732.26 to “X” company on account, recorded in cash payment journal
as $723.26 and NSF checks $300.
Instruction
a) Prepare bank reconciliation
b) Journalize the necessary journal entries

ABC Company
Bank reconciliation
July 31, 2000
Cash balance according to bank record -------------------------------------------------3359.78
Add: Additions of depositor not on bank statement (deposit in transit) ------ 816.20
Subtotal…………………………………………………………………………4,175.98
Ded: Outstanding Checks
#812-------------------1061.00
#878------------------ 435.39
#883------------------- 48.60 (1544.99)
Adjusted cash balance -----------------------------------------------------------------2630.99
Cash balance according to depositor records---------------------------------------------2549.99

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Add: additions by bank not recorded by depositor (Note plus interest collection) ---408
Sub total------------------------------------------------------------------------------------2957.99
Ded: NSF checks-----------------------------------------------300
Service charge---------------------------------------------18
Depositor error that overstate cash ledger balance------------9.00 (327)
Adjusted cash balance-----------------------------------------------------------------------2630.99
B) Journal entries
July 31/ Cash-----------------------408
Notes receivable-----------400
Interest revenue---------------8
Accounts payable-------------300
Cash -----------------300
Miscellaneous administrative expense-----18
Cash-----------------18
Accounts payable ---------9
Cash-------------------9
Petty cash fund
It Is the small fund used to make payment for small expenditures. There are three steps
involved in the operation of the petty cash.
1) Establishing the petty cash
2) Making payment from the petty cash.
3) Replenishing (reimbursing) the petty cash.
1) Establishing the petty cash: In establishing the petty cash fund, the first step is to
estimate the amount of cash needed for disbursement of relatively small amounts during
certain period, such as week or a month and appointing the petty cash custodian, the one
who is responsible for the operation of the petty cash fund and for making disbursements
from the petty cash fund. Checks payable to the petty cash fund custodian will be issued.
Petty cash----------------------------xx
Cash in bank----------------------------xx
No entrée will be made to the petty cash account unless the petty cash fund is changed
(increased or decreased).

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2) Making payment from the petty cash:
Petty cash receipt: The employee who request for payment and the petty cash custodian
will sign on it. The petty cash custodian will make payment for the specified employee
who request disbursement.
NB: No journal entry will be made at the time of disbursement (payment) from the petty
cash fund
3)Replenishing (reimbursing ) the petty cash: When the money in the petty cash fund
reaches a minimum level the fund is replenished (reimbursed).replenishing the petty cash
fund restores to its original amount. The request for this is initiated by the petty cash
custodian. The custodian will provide the summery of the petty cash payment with the
petty cash receipt to the treasurer .Then the treasurer approves the request and check is
prepared to restore the fund to its established amount.
Journal entry will be made to restore the petty cash fund to previously established amount
and to record all expenditures.
Example: If “X” company desires to establish a $100 fund on August 1, the entry will be
August 1/ Petty cash-------------100
Cash in bank---------------100
Assume that on August 31, the petty cash custodian request check number 3 for $87. The
fund contains $13 cash and petty cash receipt for postage expense $44, freight in, $38 and
miscellaneous expense, $5.
The entry to record the replenishment on August 31 will be
August 31/ Postage expense--------------------44
Freight in---------------------------38
Miscellaneous expense------------5
Cash in bank----------------------------87

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