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Part I: 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
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Internal control over cash
• Internal control is the methods that an organization
uses to protect against the theft of assets, assets
enhance the reliability of accounting
information
• Internal control is especially needed to prevent
fraud and theft relating to cash transaction
• Internal control is necessary to assure that the cash
is used for proper purpose
• Thus, it is necessary to safeguard cash effectively
because of the ease with which it can be
transferred
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Need for cash controls
It is highly liquid than other assets
It can be misappropriate easily
It is easily transferable to individuals without any
legal document
It 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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Internal control of cash receipts
The cash receipts may result from a
variety of sources such as cash sales,
collection on account receivable, the
receipt of interest, rents, and dividends,
investment by owners, bank loans, and
proceeds from the sale of noncurrent
assets.
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Internal control of cash payment
•Payments may be made for a variety of
reasons such as to pay expenses,
liabilities and dividends, or to purchase
assets.
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Control over Cash
The two controlling devices for controlling
cash are:
1. The Bank Account and
2. Petty Cash Fund
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1. 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
• In some cases a bank may require a business
to maintain a minimum cash balance called
compensating balance
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Forms used in a Bank Account
Signature card: An identifying number is assigned
to the account which is used for verification
–The depositor will sign on
Deposit ticket (slip): Used by the business as a
receipt to record the cash deposit
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:
–Maker (drawer): One who signs on the check
–Payer (drawee): the bank on which the check is
drawn
–Payee: the party to whom payment is made. 9Is
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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
Bank Statement: It’s a monthly statement
sent 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), i.e.,
cancelled checks (paid checks) and which the
bank has make payment on behalf of the
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Bank Reconciliation
•A bank reconciliation is the process of
matching the balances in an entity’s accounting
records for a cash account to the corresponding
information on a bank statement
•It’s the schedule that accounts for any of the
difference between the bank statement balance
and the company’s (depositor’s) book balance.
•It might seem that the two balances should be
equal but they are not likely to be equal on any
specific date because of the following:
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• Items recorded by the company but not
yet recorded by the bank
– Deposit in transit: is the deposit that the
company has recorded but not recorded by
the bank
– Out standing checks: These have been
issued by the company and recorded on its
book but have not yet been paid by the
bank
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• Items recorded by the bank only
– 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
when ever the bank is sending the bank statement to
the depositor.
– Service charge: the amount of banks fee
for processing check.
– When the bank provides the bank statement to the
depositor, the depositor will be notified of the charge.
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Not sufficient fund (NSF) received from
customer.
Interest revenue on checking account.
Checks collected, deposited and
returned to payee by the bank for
reason other than NSF
Accounting for all returned checks is
the same with NSF.
The cost of printing check
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• Error by either the company or the bank or
both.
– E.g. 1) A check written for Br 225 is drawn by the
bank as Br 252.
• 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:
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
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depositor’s record.
Format for Bank Reconciliation
XX Company
Bank Reconciliation
Sep. 30, 20XX
Bank balance according to bank record……………………………………………………... xxx
Add: Additions of depositor not in the bank (deposit in transit) ………… xx
Bank error that understate 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 plus interest collection, interest revenue on checking accounts) ….... xx
Depositor error that understate the depositor cash ledger balance------------- xx
xxx
Sub-total ………………………………………………………………………………………. xxx
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
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B) Journal Entries
July 31/ Cash ………. …….408
Notes receivable …………. ………..400
Interest revenue ………………………. 8
Accounts Receivable .………300
Cash………….............300
Misc. expense……………………18
Cash…………………18
Accounts payable … ………………………….9
Cash ………………………………………. 9
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B) Journal Entries
July 31/ Cash ………. …….1030
Notes receivable …………. ………..1000
Interest revenue ………………………. 30
Misc. expense……………………18.20
Cash…………………18.20
Cash … ………………………….210
Accounts payable ………………. 210
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Petty Cash Fund
• It’s the small fund used to make
payment for small expenditures.
• There are three steps involved in the
operation of the petty cash.
• Establishing the petty cash
• Making payment from the petty cash
• Replenishing (reimbursing) the petty cash
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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
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Cash in bank ……………….. xx 27
2. Making payment from the petty cash:
• Petty cash receipt: The employee, who
requests 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
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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 summary 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.
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Example: If “X” company desires to establish a Br 100
petty cash 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
requests check number 3 for Br 87. The fund contains
Br 13 cash and petty cash receipt for postage expense
Br 44, freight in, Br 38 and miscellaneous expense, Br
5.
The entry to record the replenishment on August 31
will be: August 31/ Postage expense ……….…
44
Freight in ……………….... 38
Miscellaneous expense ….. 5
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Cash in bank ………………… 8730
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ACCOUNTING FOR RECEIVABLES
Receivables are all claims against
individuals, organization or other
debtors
They are acquired by business
enterprises in various types of
transactions common being the sale of
merchandise or services on a credit
basis
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Receivables that are based on oral
agreements are known as open
accounts
Receivables that are based on formal
(written) instruments are called
promissory notes
Receivables based on open accounts are
known as accounts receivables
Receivables based on promissory notes
are known as Notes receivables
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Control over Receivables
•The management of a business enterprise installs
the means of internal control over their receivables
•These controls include the separation of the
business operations and the accounting for
receivables,
receivables so that the accounting records can
serve as an independent check on options.
•Thus, the employee who handles the accounting
for notes and account receivables should not be
involved with credit approvals or collection
of receivables Separation of these functions
reduces the possibility of errors and
embezzlement.
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Characteristics of Notes Receivables
•A note is a written promise to pay a sum of
money on a demand or at a definite time.
•A note must be signed by the person who
makes it.
•The one to whose order the note is payable is a
payee and the one making the promise is a
maker
•Notes have several characteristics that have
accounting implications as described as follows:
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Due date/ maturity date:
•Is the date on which a note is to be
paid.
•The period of time between the issuance
date and the due date of a short term note
may be stated in either days or months
•When the term of a note is stated in days,
the due date is the specified number of
days after its issuance
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• September-30 days
• April-30 days
• June-30 days
• November-30 days
• February- 28 days
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Example:
Zamra construction makes a note receivable from
sunshine construction on October 2, 2018 of 60
days Br 2,500 payable at Dashen bank with
interest at 7%. The due date for the note is
– Term of the note 60 days
– October (days) ------------------------ 31
– Date of note----------------------------- 2 29
– Number of days remaining----------------- 31
– November (days) ----------------------------- 30
– Due date (December) ------------------------ 1
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• When the term of a note is stated as certain
number of months after the issuance date,
the due date is determined by counting the
number of months from the issuance date.
Example:
A 3 month note dated June 5 would be due on
September 5.
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There are the two types of notes.
– Interest bearing note: a note that provides for
the payment of interest for the period between
the issuance date and the due date
– Non-interest bearing note: a note that does
not provide for the payment of interest
Maturity Value: it is the amount that is due
on a note on date of maturity or due date
Maturity value= Principal (face value) +
Interest
= 2500 + (2500x 7% x 60/360)
= 2,500 + 29.17 = Br 2,529.17
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Accounting for Notes Receivable
•The typical retail enterprise makes most of its sales
for cash or on account
•If the account of a customer becomes delinquent, the
creditor may insist that the account be converted
into a note
Example: assume that the account of BM co., which has
a debit balance of Br 900, is past due. A 20 day, 8% note
for that amount, dated April 23, is accepted in settlement
of the account.
The entry for the acquisition of the note is as follows
April 23 Notes Receivable -------------- 900
Accounts Receivable
---------------900
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After 20 days, on May 13, the note matures. The
necessary entry on this date is:
Maturity value= Principal (face value) + Interest
= 900 + (900x 8% x 20/360)
= 900 + 4 = Br 904
May 13 Cash -----------904
Notes Receivable ------------900
Interest Income --------------- 4
•If the above information is non-interest bearing note
the entry on maturity date is
May 13 Cash ----------- 900
Notes receivable -------
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Example: A 30 day, 12% note dated Dec. 21,
2008, is accepted in settlement of the
account of AMBASSEL Company which has a
balance of Br 4000.
The entry to record the transaction on
– December 21 settlement of the account
– Adjusting entry for accrued ones, Dec.31,2008
– Reversing entry Jan. 1,2009
– The necessary entry on the maturity date
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Dec. 21 Note Receivable -------- 4,000
Account Receivable------------4000
Dec. 31 Interest Receivable ----- 13.3
Interest Income -----------------13.3
(4000 x 10/360 x 12%)
Jan. 1 Interest Income ----------13.3
Interest Receivable --------------
13.3
Jan. 20 Cash ------------------------- 4,040
Note Receivable ---------------
4,000
Interest Income ---------------- 40
MV= 4000+ 4000 x 30/360 x 12%
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MV= 4000+40= 4040
Discounting Notes Receivable
•Discounting means selling or pledging a customer’s
notes receivable to the bank at some point prior
to the note’s maturity date
•A business may keep the note it has received till
the due date or transfer it to a bank by
endorsement
•If a note is transferred to a bank, it is said to be
discounted and bank charges interest for
discounting the note
•The amount paid to the endorser is the excess of
the maturity value over the discount or interest
charged by the bank
•This amount is known as proceeds
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Example: assume that a 90 day non-
interest bearing note for Br 1,350, dated
august 21 is discounted at Lion Bank on
September 20 at the rate of 7%.
– What is the maturity value of the note?
– What is the number of days in the discount
period?
– What is the amount of the discount?
– What is the amount of the proceeds?
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Face value of the note dated aug.21 --------------------------- Br
1,350
Maturity value of the note due Nov.19 ----------------------- 1,350
Discount period (sep.20-Nov.19) ----------------------- 60 days
Discount on maturity value (1,350 x 7% x 60/360) ----------15.75
Proceeds -------------------------------------------------------------Br
1,334.25
The entry for the transaction is:
Sep. 20 Cash -------------------------- 1,334.25
Interest expenses…………...15.75
Notes Receivable ---------------------- 1,350
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Example 2:
Naif enterprise’s a 90 day, 9% notes receivable
for Br 2,000, dated Nov. 8 is discounted at a
bank on Dec. 3 at the rate of 10%.
– What is the maturity value of the note?
– What is the number of days in the discount
period?
– What is the amount of the discount?
– What is the amount of the proceeds?
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Face value of the note dated Nov.8---------------------------Br
2,000
Interest on note (2000x90/360x9%)---------------------------- 45
Maturity value of the note due Feb 6-------------------------2,045
Discount period (Dec 3-Feb 6)----------------------------------65days
Discount on maturity value
(2045x65/360x10%)----------------------------------------------- 36.92
Proceeds --------------------------------------------------------Br
2,008.08
The entry for the transaction is:
Dec. 3 Cash---------------- 2,008.08
Notes Receivable-----------2000
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Interest Income-------------8.08 52
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Dishonored Notes Receivable
•If the maker of the note fails to pay the obligation on
the due date, the note is said to be dishonored.
Example:
If the Br 900, 20 day, 8% note received and recorded
on April 23 had been dishonored at maturity, the
entry to charge the note, including the interest, back
to the customers’ account would have been as
follows:
May 13 Account receivable BM co.---- 904
Notes Receivable-----------
900
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Interest Income-------------- 454
• When the discounted N/R is dishonored,
the holder usually notifies the endorser of
such fact and asks for payment.
Example: assume that the Br 2000, 90 day,
9% note discounted on Dec. 3 is
dishonored at maturity by the maker, the
entry to record the payment by the
endorser, in general journal form, would
be as follows:
Feb. 6 A/R---------- 2,045
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Uncollectible Receivables
•When merchandise or services are sold without the
immediate receipt of cash, a portion of claims
against customers usually proves to be
uncollectible.
•There are generally accepted methods of
accounting for receivables that are deemed to be
uncollectible.
– The allowance method or the reserve method.
– The direct write off method or direct charge off
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Allowance Method of Accounting for
Uncollectible
Example:
A business enterprise has a balance of
receivables Br 45,000 at the end of the year. Br
2,500 is estimated to be uncollectible. The
adjusting entry at the end of the year is:
(bad debt expense) Uncollectible Accounts
Expense--2,500
Allowance for Doubtful
Accounts------2,500
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Write–offs to the Allowance Account
•When an account is believed to be uncollectible, it is
written off against the allowance account as in the following
entry:
Allowance for Doubtful Account-----------Br 2,500
Accounts Receivable
------------------------------Br 2,500
•An account receivable that has been written off against the
allowance account may later be collected.
Account Receivable------------xxx
Allowance for Doubtful Account--------------
xxx
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Direct Write-off Method of Accounting for
Uncollectible
•The entry to write-off an account when it is believed to
be uncollectible is as follows:
May 10 Uncollectible Accounts Expense……42
A/Receivable-Horn
Co………………..42
•The entry to reinstate the account would be as follows:
Nov. 21 Accounts Receivable-Horn Co….….42
Uncollectible Account
Expense………42
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End of
Chapter 3
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