Cash
Chapter 3
Learning Objectives
After studying this chapter, you should be able to:
1. Define cash.
2. Explain the applications of internal control principles to cash receipts.
3. Explain the applications of internal control principles to cash
disbursements.
4. Describe the operation of a petty cash fund.
5. Indicate the control features of a bank account.
6. Prepare a bank reconciliation.
7. Explain the reporting of cash.
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CASH
CASH
Cash includes coins, currency, cheques,
money orders, and money on hand or on
deposit at a bank or similar depository.
Internal control over cash is imperative in
order to safeguard cash and assure
the accuracy of the accounting records for
cash.
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Control over cash is important because:
Cash is the one asset that is readily convertible in to
any other type of assets.
It is easily conceded and transported
It is highly desired
It affects large volume of transaction.
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Cash Controls
Cash Receipts Controls
Illustration 4-4
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Cash Controls
Cash Receipts Controls
Illustration 4-4
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Cash Controls
Cash Receipts
Controls
Over-the-Counter
Receipts
Important internal
control principle—
segregation of record-
keeping from physical
custody.
Illustration 4-5
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Retail stores of other business that receive cash directly
from customers must keep some currency & coins on
hand in order to make change. This cash is recorded in a
cash change fund account.
Accounting procedures in relation to change fund:
A- Check is drawn for the required amount
B. Journal entry is made to record the change fund
Cash on hand ----------------------xxx
Cash in Bank-----------------------xxx
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The amount of cash actually received during a day
often does not agree with the record of cash receipts.
Whenever there is difference between the record and
the actual cash and no error can be found in the record,
it must be assumed that the mistake occurred in making
change.
The cash shortage or overage is recorded in an account
entitled cash short & over.
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Cash Controls
Cash Disbursements Controls
Generally, internal control over cash disbursements is more
effective when companies pay by check, rather than by
cash.
Applications:
Voucher system
Petty cash fund
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Cash Controls
Cash Disbursements
Controls
Illustration 4-6
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Cash Controls
Cash Disbursements
Controls
Illustration 4-6
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Cash Controls
Cash Disbursements Controls
Voucher System
Network of approvals, by authorized individuals, to ensure all
disbursements by check are proper.
A voucher is an authorization form prepared for each
expenditure. It consists
Preparation of a voucher
Approval of the voucher
Recording the voucher
Filing the unpaid voucher
Paying the voucher
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Cash Controls
Cash Disbursements Controls
Petty Cash Fund - Used to pay small amounts.
Involves:
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
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Cash Controls
Illustration: If Laird Company decides to establish a $100 fund
on March 1, the journal entry is:
Mar. 1 Petty cash 100
Cash
100
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Cash Controls
Illustration: Assume that on March 15 Laird’s petty cash
custodian requests a check for $87. The fund contains $13 cash
and petty cash receipts for postage $44, freight-out $38, and
miscellaneous expenses $5. The general journal entry to record the
check is:
Mar. 15 Postage expense 44
Freight-out 38
Miscellaneous expense 5
Cash
87
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Cash Controls
Illustration: Occasionally, the company may need to recognize a
cash shortage or overage. Assume that Laird’s petty cash
custodian has only $12 in cash in the fund plus the receipts as
listed. The request for reimbursement would, therefore, be for $88,
and Laird would make the following entry:
Mar. 15 Postage expense 44
Freight-out 38
Miscellaneous expense 5
Cash over and short 1
Cash
88
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Control Features: Use of a Bank
Contributes to good internal control over cash.
Minimizes the amount of currency on hand.
Creates a double record of bank transactions.
Bank reconciliation.
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One of the major devices for maintaining
control over cash is the bank account.
Banks also provide customers with detailed
records of their transactions.
To take full advantage, the business should
deposit all cash receipts in the bank and
make all cash payments through the bank.
The documents used to control a bank
account includes signature card, deposit
ticket, check, bank Statement, bank
reconciliation.
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Banks send monthly statements to
customers. A bank statement is the document
on which the bank reports what it did with the
customer’s cash.
The statement shows the account’s beginning
and ending balances and lists the cash
receipts and payments transacted through
the bank. Included with the statement are the
maker’s canceled checks (or photocopies of
the paid checks). The statement also lists
deposits and other changes in the account.
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Control Features: Use of a Bank
Writing Checks
Written order signed by depositor directing bank to pay a
specified sum of money to a designated recipient.
Illustration 4-9
Maker
Payee
Payer
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Control Features: Use of a Bank
Bank Statements Illustration 4-10
Debit Memorandum
Bank service charge.
NSF (not sufficient
funds).
Credit Memorandum
Collect notes
receivable.
Interest earned.
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Control Features: Use of a Bank
Reconciling the Bank Account
Reconcile balance per books and balance per bank to
their adjusted (corrected) cash balances.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks. Time Lags
3. Bank memoranda.
4. Errors.
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Control Features: Use of a Bank
Reconciliation Procedures Illustration 4-11
+ Deposit in Transit + Notes collected by bank
- Outstanding Checks - NSF (bounced) checks
+/- Bank Errors - Check printing or other
service charges
+/- Book Errors
CORRECT BALANCE CORRECT BALANCE
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Illustration: Prepare a bank reconciliation at April 30.
Cash balance per bank statement $15,907.45
Add Deposit in transit 2,201.40
Outstanding checks (5,904.00)
Adjusted cash balance per bank $12,204.85
Cash balance per books $11,589.45
Error in check No. 443 36.00
NSF check (425.60)
Bank service charge (30.00)
Collection of notes receivable 1,035.00
Adjusted cash balance per books $12,204.85
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Entries From Bank Reconciliation
Collection of Note Receivable: Assuming interest of $50 has
not been accrued and collection fee is charged to Miscellaneous
Expense, the entry is:
Apr. 30 Cash 1,035.00
Miscellaneous expense 15.00
Notes receivable
Interest revenue 1,000.00
50.00
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Book Error: The cash disbursements journal shows that check
no. 443 was a payment on account to Andrea Company, a
supplier. The correcting entry is:
Cash 36.00
Apr. 30
Accounts payable
36.00
NSF Check: As indicated earlier, an NSF check becomes an
account receivable to the depositor. The entry is:
Apr. 30 Accounts receivable 425.60
Cash
425.60
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Bank Service Charges: Depositors debit check printing
charges (DM) and other bank service charges (SC) to
Miscellaneous Expense. The entry is:
Apr. 30 Miscellaneous 30.00
Cash
30.00
Illustration 7-13
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THE END
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