COLLEGE ACCOUNTING
HEINTZ & PARRY
19th EDITION
COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation.
Thomson, the Star logo, and South-Western are trademarks used herein under license.
7-1
CHAPTER 7
ACCOUNTING FOR CASH
7-2
CASH
 Includes:




Currency, coins, and checking accounts
Checks received from customers
Money orders
Bank cashier’s checks
 Because cash plays such a central role
in operating a business, it must be
carefully managed and controlled
7-3
INTERNAL CONTROL
 A set of procedures designed to
ensure proper accounting for
transactions
 Good internal control for cash
transactions:
 All cash received should be deposited
DAILY in a bank
 All disbursements, except for payments
from petty cash, should be made by
CHECK
7-4
MAKING DEPOSITS
 A deposit ticket is a form showing a
detailed listing of items being
deposited
 Currency, coins, and checks are listed
separately
 Each check should be identified by its
ABA (American Bankers Association)
number
– Found in upper right-hand corner of each
check
– Also shown in magnetic ink character
recognition (MICR) code on the lower left
side of the front of each check
– The code is used to sort and route checks
7-5
AUTOMATED TELLER MACHINES
 Each depositor has a plastic card and
a personal identification number (PIN)
 Most automated teller machines
(ATMs) are on a system that allows
noncustomers to use their ATMs
 It is important for the depositor to
keep an accounting record of ATM
withdrawals and deposits
7-6
WRITING CHECKS
 A check is a document ordering a bank
to pay cash from a depositor’s account
 There are three parties to every check:
 Drawer—the depositor who orders the
bank to pay the cash
 Drawee—the bank on which the check is
drawn
 Payee—the person being paid the cash
 Business checks often have a check
stub
7-7
BANK STATEMENT
 The statement shows:
 The balance at the BEGINNING of the
period
 Deposits and other amounts ADDED
during the period
 Checks and other amounts
SUBTRACTED during the period
 The balance at the END of the period
7-8
BANK STATEMENT
 Sent with bank statement
 Canceled checks, “imaged” sheets of
check faces, or a listing of checks
 Any other forms representing items added
to or subtracted from the account
7-9
LEARNING OBJECTIVE 2
PREPARE A BANK RECONCILIATION
AND RELATED JOURNAL ENTRIES.
7-10
BANK RECONCILIATION EXAMPLE
Bank statement
shows a balance of
$1,748.09. But the
general ledger
account has a
balance of
$2,393.23.
We need to prepare a
BANK
RECONCILIATION.
7-11
Maple Consulting
Bank Reconciliation
November 21, 20--
Heading includes:
Name of Company
Bank Reconciliation
Date
7-12
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add:
$1,748.09
Deduct:
Adjusted bank balance
Once all reconciling items
are listed, the
adjusted bank balance
is computed.
7-13
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add:
$1,748.09
Deduct:
Adjusted bank balance
Book balance, November 21
Add:
Deduct:
$2,393.23
The adjusted book balance
is computed.
Adjusted book balance
7-14
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add:
Deduct:
$1,748.09
We say it is “reconciled” when the
adjusted BANK and adjusted BOOK
balances agree.
Adjusted bank balance
Book balance, November 21
Add:
$2,393.23
Deduct:
Adjusted book balance
7-15
REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES
 Deposits in transit
 Deposits that have not reached the bank
or been recorded by the bank before the
statement is prepared
 Outstanding checks
 Checks that have not been presented to
the bank for payment before the
statement is prepared
 Service charges
 Bank charges for services such as check
printing and processing
7-16
REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES (CONT.)
 Collections
 Collections of promissory notes or
charge accounts made by the bank on
behalf of the depositor
 Not sufficient funds (NSF) checks
 Checks deposited but not paid because
the drawer did not have sufficient funds
 Errors
 Errors made by the bank or by the
depositor in recording cash transactions
7-17
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add deposit in transit
Deduct outstanding checks:
No. 219
No. 224
No. 227
Adjusted bank balance
Book balance, November 21
Add error on check no. 214
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$1,748.09
637.02
$2,385.11
$200.00
25.00
67.78
$100.00
200.00
1.80
292.78
$2,092.33
$2,393.23
0.90
$2,394.13
301.80
$2,092.33
7-18
EXAMPLE
We now know that the actual amount of cash is
$2,092.33, but the general ledger cash account
still shows $2,393.23.
JOURNAL ENTRIES
ARE NEEDED
7-19
BANK RECONCILIATION JOURNAL ENTRIES
 Only two kinds of items appearing on a
bank reconciliation require journal
entries:
 Errors in the depositor’s books
 Bank additions and deductions that do
not already appear in the books
 ALL items in the book balance section
of the reconciliation require a journal
entry
7-20
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add deposit in transit
Deduct outstanding checks:
No. 219
No. 224
No. 227
Adjusted bank balance
Book balance, November 21
Add error on check no. 214
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$1,748.09
637.02
$2,385.11
$200.00
25.00
67.78
$100.00
200.00
1.80
292.78
$2,092.33
$2,393.23
0.90
$2,394.13
301.80
$2,092.33
7-21
BANK RECONCILIATION JOURNAL ENTRIES
1
2
3
4
5
6
7
8
DATE
DESCRIPTION
20-Nov. 21 Cash
PR DEBIT CREDIT
0 90
When check no. 214 was written, the
cash account was credited for $0.90 more
than the check amount of $46.25.
This entry puts $0.90 back
in the Cash account.
9
10
11
7-22
BANK RECONCILIATION JOURNAL ENTRIES
1
2
3
DATE
DESCRIPTION
20-Nov. 21 Cash
PR DEBIT CREDIT
0 90
Accounts Payable
0 90
Error in recording check
4
5
6
7
8
9
10
11
Add error on check
Accounts Payable was originally
debited for $19.88. This was $0.90 more
than the actual telephone bill of $18.98.
This entry removes the extra $0.90.
7-23
BANK RECONCILIATION JOURNAL ENTRIES
1
2
3
DATE
DESCRIPTION
20-Nov. 21 Accounts Payable
PR DEBIT CREDIT
0 90
Cash
0 90
Error in recording check
4
5
6
7
8
Deduct error on check
9
10
11
7-24
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add deposit in transit
Deduct outstanding checks:
No. 219
No. 224
No. 227
Adjusted bank balance
Book balance, November 21
Add error on check no. 214
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$1,748.09
637.02
$2,385.11
$200.00
25.00
67.78
$100.00
200.00
1.80
292.78
$2,092.33
$2,393.23
0.90
$2,394.13
301.80
$2,092.33
7-25
BANK RECONCILIATION JOURNAL ENTRIES
DATE
DESCRIPTION
PR DEBIT CREDIT
20-0 90
1 Nov. 21 Cash
2
0 90
Accounts Payable
3
Error in recording check
4
5
21 J. M., Drawing
200 00
6
7
8
9
10
11
Since the ATM withdrawal was
for “personal expenses,” the
drawing account should be debited.
7-26
BANK RECONCILIATION JOURNAL ENTRIES
1
2
3
DATE
DESCRIPTION
20-Nov. 21 Cash
PR DEBIT CREDIT
0 90
Accounts Payable
0 90
Error in recording check
4
5
6
21 J. M., Drawing
100 00
Cash
100 00
7
8
9
10
11
The $200 withdrawal was never recorded.
This entry will remove the $100.00
from the cash account.
7-27
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add deposit in transit
Deduct outstanding checks:
No. 219
No. 224
No. 227
Adjusted bank balance
Book balance, November 21
Add error on check no. 214
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$1,748.09
637.02
$2,385.11
$200.00
25.00
67.78
$100.00
200.00
1.80
292.78
$2,092.33
$2,393.23
0.90
$2,394.13
301.80
$2,092.33
7-28
BANK RECONCILIATION JOURNAL ENTRIES
DATE
10
11
12
DESCRIPTION
21 Accounts Receivable
PR DEBIT CREDIT
200 00
Cash
200 00
Unrecorded NSF check
13
14
15
16
17
18
19
20
The amount of the bounced check
is placed into Accounts Receivable
and Cash is reduced.
7-29
Maple Consulting
Bank Reconciliation
November 21, 20-Bank statement balance, November 21
Add deposit in transit
Deduct outstanding checks:
No. 219
No. 224
No. 227
Adjusted bank balance
Book balance, November 21
Add error on check no. 214
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$1,748.09
637.02
$2,385.11
$200.00
25.00
67.78
$100.00
200.00
1.80
292.78
$2,092.33
$2,393.23
0.90
$2,394.13
301.80
$2,092.33
7-30
BANK RECONCILIATION JOURNAL ENTRIES
DATE
10
11
12
DESCRIPTION
21 Accounts Receivable
PR DEBIT CREDIT
200 00
Cash
200 00
Unrecorded NSF check
13
14
15
16
17
18
19
20
21 Service Fee Expense
Cash
1 80
1 80
Bank service charge
7-31
LEARNING OBJECTIVE 3
ESTABLISH AND USE A PETTY CASH
FUND.
7-32
THE PETTY CASH FUND
 A fund set up to pay for small items
with cash
 Checks for very small amounts are
cumbersome
 To establish the fund:
 A check is written to the petty cash
custodian for the amount to be set aside
in the fund
 The custodian cashes the check and
places the money in a petty cash box
 The custodian should be the only
person authorized to make payments
from the fund
7-33
JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND
1
2
3
DATE
DESCRIPTION
20-1 Petty Cash
Dec.
Cash
PR DEBIT CREDIT
200 00
200 00
Establish petty cash fund
4
5
6
7
8
9
10
11
7-34
PETTY CASH PAYMENTS RECORD
 A special multi-column record that
supplements the regular accounting
records
 Provides a record of each petty cash
payment
 Broken down by account
– e.g.: Travel/Entertainment Expense,
Postage Expense, etc.
 Used to prepare the replenishment
journal entry
7-35
REPLENISHING THE PETTY CASH FUND
 The petty cash fund should be
replenished whenever the fund runs
low and at the end of each accounting
period
 Once the fund is established by
debiting Petty Cash and crediting
Cash, no further entries are made to
Petty Cash
 To replenish the fund, debits are made
to appropriate expense accounts and
Cash is credited
 Only if the amount of the fund itself is
being changed would there be a debit or
credit to Petty Cash
7-36
EXAMPLE
At the end of the month, the petty cash
fund contains eight vouchers and only
$21.20 in cash. The fund needs to be
replenished.
 To replenish the fund:
 A check is written for $178.80, which is
the total of the eight vouchers
 A journal entry is made to recognize:
– The expenses shown on the vouchers
– The outflow of cash via the check
7-37
JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND
1
2
3
4
5
6
DATE
DESCRIPTION
20-Dec. 24 Automobile Expense
Postage Expense
Travel & Entertain. Exp.
Miscellaneous Expense
James Maple, Drawing
Cash
PR DEBIT CREDIT
40 80
39 50
30 25
38 25
30 00
178 80
7
Cash should be credited for the amount needed
to restore the fund to its established amount.
9
10 ($200.00 fund – $21.20 in box = $178.80 needed)
8
11
7-38
JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND
1
2
3
4
5
6
7
8
DATE
DESCRIPTION
20-Dec. 31 Automobile Expense
Postage Expense
Travel & Entertain. Exp.
Miscellaneous Expense
James Maple, Drawing
Cash
PR DEBIT CREDIT
40 80
39 50
30 25
38 25
30 00
178 80
Replenishment of petty
cash fund
9
10
11
7-39
LEARNING OBJECTIVE 4
ESTABLISH A CHANGE FUND AND USE
THE CASH SHORT AND OVER ACCOUNT.
7-40
CHANGE FUND
 A supply of currency and coins kept in
the cash register or cash drawer
 Allows businesses to make change when
customers pay in cash
 At the end of the day, cash received
during the day is deposited
– But the change fund is held back for use
on the following day
7-41
EXAMPLE
Sporty’s Cleaners is opening for
business on June 3. Sporty needs to
establish a $200 change fund.
CASH
200
Just like the petty cash
fund, a change fund
starts by withdrawing
from the cash account.
7-42
EXAMPLE
Sporty’s Cleaners is opening for
business on June 3. Sporty needs to
establish a $200 change fund.
CASH
200
CHANGE FUND
200
Change Fund is
an ASSET.
7-43
JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND
DATE
DESCRIPTION
20-1 June
1 Change Fund
2
Cash
3
Establish change fund
4
PR DEBIT CREDIT
200 00
200 00
5
6
7
8
9
10
11
7-44
EXAMPLE
At the close of its first day of business,
Sporty’s had $1,450.00 in the cash
register.
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
$1,450.00
– 200.00
$1,250.00
The CASH from sales should
agree with the sales recorded
on the cash REGISTER TAPE.
7-45
EXAMPLE
At the close of its first day of business,
Sporty’s had $1,450.00 in the cash
register.
$1,450.00
CASH IN DRAWER
Less: CHANGE FUND – 200.00
CASH FROM SALES
$1,250.00
Sales from the cash register tape
are also $1,250.00!!!
7-46
JOURNAL ENTRY FOR RECORDING CASH FROM SALES
1
2
3
4
5
6
DATE
DESCRIPTION
20-June
3 Cash
PR DEBIT CREDIT
1,250 00
Only the $1,250.00 is
debited to Cash and deposited.
The change fund is not deposited.
7
8
9
10
11
7-47
JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.)
DATE
DESCRIPTION
PR DEBIT CREDIT
20-1 June
1,250 00
3 Cash
2
Service Fees
1,250 00
3
Cash received from services
4
5
6
7
8
What would have happened if the
cash register tape didn’t agree with
the cash from sales?
9
10
11
7-48
CASH SHORTAGE EXAMPLE
At the close of its first day of business,
Sporty’s had $1,450.00 in the cash
register.
$1,450.00
CASH IN DRAWER
Less: CHANGE FUND – 200.00
CASH FROM SALES
$1,250.00
What if the cash register tape
had shown sales of $1,252.00
or $1,247.00?
7-49
CASH SHORTAGE EXAMPLE
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
CASH REGISTER TAPE
SHORTAGE
$1,450.00
– 200.00
$1,250.00
$1,252.00
$
2.00
Overages and shortages are recorded in an
account called “CASH SHORT AND OVER.”
7-50
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE
1
2
3
4
5
6
DATE
DESCRIPTION
20-June
3 Cash
PR DEBIT CREDIT
1,250 00
Cash is debited for the amount
deposited.
7
8
9
10
11
7-51
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
DATE
DESCRIPTION
20-1 June
3 Cash
2
Cash Short and Over
3
4
5
6
PR DEBIT CREDIT
1,250 00
2 00
Cash Short and Over is
debited for shortages
and credited for overages.
7
8
9
10
11
7-52
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
1
2
3
DATE
DESCRIPTION
20-June
3 Cash
Cash Short and Over
PR DEBIT CREDIT
1,250 00
2 00
Service Fees
1,252 00
4
5
6
7
8
9
10
11
Service Fees is credited for the
amount on the cash register tape
even though this was not
the amount collected.
7-53
CASH OVERAGE EXAMPLE
At the close of its first day of business,
Sporty’s had $1,450.00 in the cash
register…
But
the cash register tape showed $1,247.00
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
CASH REGISTER TAPE
OVERAGE
$1,450.00
– 200.00
$1,250.00
$1,247.00
$
3.00
7-54
JOURNAL ENTRY FOR RECORDING A CASH OVERAGE
1
2
3
DATE
DESCRIPTION
20-June
3 Cash
PR DEBIT CREDIT
1,250 00
Cash Short and Over
3 00
4
5
6
7
8
Cash Short and Over is
debited for shortages
and credited for overages.
9
10
11
7-55
JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.)
1
2
3
DATE
DESCRIPTION
20-June
3 Cash
PR DEBIT CREDIT
1,250 00
Cash Short and Over
Service Fees
3 00
1,247 00
4
5
6
7
8
9
10
11
Service Fees is credited for the
amount on the cash register tape
even though this was
not the amount collected.
7-56