Chapter Seven Cash Receipts Journal and Cash Payments Journal
(including Supplement II Bank Accounts and Cash Funds)
I.
Learning objectives
After completing this session, students should be able to
1. Journalize and post transactions involving cash receipts and payments;
2. Define cash and describe the objectives of cash management;
3. Explain means of achieving internal control over cash transactions;
4. Handle a checking account;
5. Prepare a bank reconciliation and explain its usefulness;
6. Establish a petty cash fund a change fund;
7. Account for cash short and over.
II. Lecture Notes
1. Purpose of the use of cash journals
 To protect and control the most liquid and “vulnerable” asset of a business.
2. Cash receipts and payments journals
(1) Sources of cash receipts
 Cash investment by the owner(s)
 Cash sales
 Collection of accounts receivable
 Borrowing from banks and other financial institutions
 Disposal of assets for cash
(2) Explain the cash journals to the students (p.155 & p.159)
(3) Posting entries from cash journals
 Posting from the cash receipts journal
(i)
Posting individual amounts in the Accounts Receivable Credit column
to the accounts receivable ledger every day;
(ii)
Posting individual amounts in the Sundry columns to the general
ledger every day;
(iii) Posting the totals of special columns (Sales, Sales Discount, Cash) to
the general ledger at the end of month.
 Posting from the cash payments journal
(i) Posting individual amounts in the Accounts Payable Debit column to the
accounts payable ledger every day;
(ii) Posting individual amounts in the Sundry columns to the general ledger
every day;
(iii)Posting the totals of special columns (Purchases Discount, Cash) to the
general ledger at the end of month.
3. Review the use of different types of journals (p.162)
4. Definition of cash
 Money on deposit in banks and any items that banks will accept for deposit,
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5.
6.
7.
8.
including coins, paper money, checks, money orders, bank drafts, and
traveler’s check.
Basic objectives of cash management
 To provide accurate accounting for cash receipts, cash disbursements, and cash
balances;
 To prevent or minimize losses from theft or fraud;
 To anticipate the need for borrowing and assure the availability of adequate
amounts of cash for conducting business operations;
 To prevent unnecessarily large amount of cash from sitting idle in bank
accounts that produce no revenue.
Means of achieving internal control over cash transactions
 Separate the function of handling cash from the maintenance of accounting
records;
 Use cash journals;
 Require that all cash receipts be deposited daily in the bank;
 Make large payments by check.
 Require that the validity and amount of every expenditure be verified before a
check is issued in payment;
 Promptly reconcile bank statements with the accounting records;
 Establish cash funds
Checking account
(1) Checks are orders for banks to pay.
(2) Filling out a signature card
(3) Practicing writing a check (handouts --- sample checks)
 Filling in the check stub first (in case you forget the amount and the
payee because of a rush)
 Illustrating to the students how to write a check
 No errors or alterations should be allowed.
 Write the check in ink
 Endorsing a check
Bank statement
(1) Bank statements are usually sent to the clients every month together with
cancelled checks and the Debit or Credit Memos.
(2) Explain the debit/credit memos
 Deposits are the banks’ liabilities
Liabilities (Deposits Payable)
+
 When the bank collects payment on behalf of its clients
Liabilities (Deposits Payable)
+
1000
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 When the bank charges fees for services
Liabilities (Deposits Payable)
+
100
(3) Bank statement
 Beginning balance + deposits/additions – checks/deductions = ending
balance
9. Reconciling the bank statement
(1) A bank reconciliation is a schedule explaining any differences between the
balance shown in the bank statement and the balance shown in the
accounting records of the depositors.
(2) For strong internal control, the employee who reconciles the bank statement
should not have any other responsibilities for physically handling cash.
(3) Reconciling the bank statement
 Theoretically speaking, the book balance of depositor’s cash account
should equal the bank statement balance. However, they are usually
different from each other due to the following factors:
 Illustrate the normal differences between bank records and depositor’s
records.
Bank balance:
different
+ Late deposits / Deposits in transit
- Outstanding checks
+/- Errors
Adjusted balance
Book balance:
equal
+ Collections (credit memos)
- Service charge
- NSF checks (Debit memos)
+/- Errors
Adjusted balance
 Explain NSF checks
When the business receives a check from its credit customer:
Cash
1000
Accounts receivable
1000
When the business is informed of the existence of an NSF check
Accounts receivable 1000
Cash
1000
(4) journalizing the reconciliation and updating the accounting records (p.175)
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10. Establishing cash funds
(1) Petty cash fund
 The need to establish the petty cash fund (to make small immediate cash
payments, such as paying stamps, postage, etc)
 How to establish petty cash fund
 Payment from and reimbursement of the petty cash fund (explain the
petty cash payments record on p.178)
(2) Change fund
(3) Dealing with cash short and over
 The account entitled Cash Short and Over is debited with shortages and
credited with overages.
 If the account has a debit balance, it appears in the income statement as a
miscellaneous expense; if it has a credit balance, it is shown as a
miscellaneous revenue.
11. Assignment
Problem 3 (p.185, students are required to use an A4-size paper to do the bank
reconciliation)
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