CHAPTER
3
CURRENT ASSETS
What is Current Asset?

A current asset is an item on an entity's
balance sheet that is either cash, a cash
equivalent, or which can be converted
into cash within one year.
What are financial assets of
businesses?

Financial Assets are an assets that can
be readily converted into cash.

These include cash and bank accounts,
account receivable plus securities and
short term investment accounts.

These assets can be converted into cash
in a reasonably short period of time - one
year at most, but less time in many
cases.
1. What is cash?



Cash is a medium of exchange which a
bank will accept for deposit and
immediate credit to the depositor’s
account.
It is the most liquid of all assets and the
most readily available to pay debts.
It is central to the operating cycle
because all operating transactions
eventually use or generate cash.
 The
criteria generally used to define cash
are

it should be a medium of exchange,
 it
should be available immediately for the
payment of current debts, and
 It
should be
restriction
management
from using
obligations.
 Because
free from any contractual
which
would
prevent
of the business enterprise
it to meet any and all
of the role of cash plays in
financial transactions, internal control
of cash is needed.
Account Receivable



Account receivables are relatively liquid assets, usually
converting into cash within a period of 30 to 360 days.
Account receivables are current assets. The period used to
defined Current assets is typically one year or the company’s
operating cycle, which ever is longer.
The operating cycle which defined the normal period required to
convert cash into inventories, inventories into account receivable
and account receivables into cash.
Cash Control Methods

The following ways are used as controlling
method of cash:
 Bank
statement
 Imprest systems
Petty cash
 Change Fund

Bank Statements
 It Shows the beginning bank balance, deposits made, checks paid,
other debits and credits in the month, and the ending bank
balance.
 The cash balance indicated on the monthly bank statement seldom
agrees with the cash balance indicated by the depositor’s ledger
account for cash.
Bank Reconciliations

A bank reconciliation is a necessary step in internal control.

A bank reconciliation is the process of accounting to reconcile
the difference between the balance on a company’s bank
statement and the balance in its Cash account.

This process involves making additions to and subtractions from
both balances to arrive at the adjusted cash balance.

The following are the transactions that most commonly appear in a
company’s records but not on its bank statement:
1.Outstanding checks: These are checks that a company has
issued and recorded but that do not yet appear on its bank
statement.
2.Deposits in transit: These are deposits a company has sent to
its bank but that the bank did not receive in time to enter on the
bank statement.

Transactions that may appear on the bank statement but
not in the company’s records include the following:
1. Service charges (SC): Banks often charge a fee, or service charge,
for the use of a checking account.
2. NSF (nonsufficient funds) checks: An NSF check is a check that a
company has deposited but that is not paid when the bank presents
it to the issuer’s bank.
3. Miscellaneous debits and credits: Banks also charge for other
services, such as printing checks.
The bank notifies the depositor of each deduction by including a
debit memorandum with the monthly statement.
A bank also sometimes serves as an agent in collecting on
promissory notes for the depositor. When it does, it includes a credit
memorandum in the bank statement, along with a debit
memorandum for the service charge.
Reconciling the Bank Statement
Balance per Bank
Balance per Depositor
+ Deposits in Transit
+ Deposits by Bank
(credit memos)
- Outstanding Checks
- Service Charge
- NSF Checks
± Bank Errors
± Book Errors
= Adjusted Balance
= Adjusted Balance
Reconciling the Bank Statement
Example
Instruction:- Prepare a July 31 bank reconciliation
statement and the resulting journal entries for the
Simmons Company using the given information below.
Given:- The July 31 bank statement indicated a cash
balance of $9,610, while the cash ledger account on that
date shows a balance of $7,430.
Additional information that are necessary
reconciliation are shown on the next slide.
for the
CONT..
 Outstanding checks totaled $2,417.
 A $500 check mailed to the bank for deposit had not
reached the bank at the statement date.
 The bank returned a customer’s NSF check for $225
received as payment ofan account receivable.
 The bank statement showed $30 interest earned on the bank
balance for the month of July.
 Check 781 for supplies cleared the bank for $268 but was
erroneously recorded in our books as $240.
 A $486 deposit by Simian Company was erroneously
credited to our account by the bank.
Reconciling the Bank Statement
Example
Balance per bank statement, July 31
Additions:
Deposit in transit
Deductions:
Bank error
$
486
Outstanding checks
2,417
Adjusted cash balance
$ 9,610
Balance per depositor's records, July 31
Additions:
Interest
Deductions:
Recording error
$
28
NSF check
225
Adjusted cash balance
$ 7,430
500
2,903
$ 7,207
30
253
$ 7,207
Imprest Systems

Imprest system is a kind of financial accounting system,
and is most commonly used for petty cash.

It consists of a cash balance which is replenished at the
end of the period or when circumstances require it

Most companies need to keep some currency and coins
on hand for small payments.

These currency and coins are needed for paying
expenses that are impractical to pay by check,

Thus, this helps to control a cash fund and cash
advances.
PETTY CASH FUND

a petty cash fund is established at a fixed amount. It is
a common form of imprest system.

The fund is periodically reimbursed, based on the
documented expenditures, by the exact amount
necessary to restore its original cash balance.
Example:
Assume that on January 1, 2011 ABC company
established a petty cash of Birr 250. On January 20,
2011 the Cashier requested replenishment for the
bills paid during the period. The following itemized list
of payments from petty cash was presented on January
20 for replenishment and on January 31, 2011 in
connection with the month end audit.
List
Cash in fund
Jan. 20
Jan.31
Birr 9.00
Birr 150.00
Office sup. Exp.
171.00
77.00
Miscl. Expenses
65.00
25.00
5.00
(2.00)
Birr 250.00
Birr 250.00
Cash (over) & short
Total


What should be the entry on January 1, January
20 and December 31, 2011?
January 1
 Establishment of petty cash
Debit
Credit
Petty cash
250.00
Cash at Bank
250.00
To record the establishment of petty cash fund

To record the replenishment of petty cash
Jan. 20, 2011
Office supplies expenses
171
Miscellaneous expenses
65
Cash over and short
5
Cash
241
To record expenses incurred since Jan. 1
replenish petty cash

The cash over and short account is classified as
revenue when it has a credit balance and expense
when it has a debit balance.

Cash Over and Short is debited for shortages and
credited for overages.



Jan. 31, 2011
Office supplies expanses
77
Miscellaneous Expenses
25
Cash over and short
2
Cash
100
To record expenses incurred since Jan. 20 and to replenish petty
cash
The petty cash fund should be replenished at the end of the
accounting period so that the expenses paid from the fund are
recorded in the proper period and the end cash balance is stated
correctly.
CHANGE FUND
 Change Fund:- A change fund is an
imprest fund used to facilitate the collection
of money from customers.
 The amount of the change fund is deducted
from the total cash on hand at the close of
business each day to determine the daily
cash collection.
 The cash should be counted and checked
against the cash register tape daily.
……….
END