Chapter 7
Cash
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Describe the nature of cash and the importance
After over
studying
of internal control
cash.this
you should
2. Summarize chapter,
basic procedures
for achieving
internal control over
cashto:
receipts.
be able
3. Summarize basic procedures for achieving
internal control over cash payments, including
the use of a voucher system.
4. Describe the nature of a bank account and its
use in controlling cash.
Objectives
5. Prepare a bank reconciliation and
journalize any necessary entries.
6. Account for small cash transactions
using a petty cash fund.
7. Summarize how cash is presented on
the balance sheet.
8. Compute and interpret the ratio of cash
to current liabilities.
Control Over Cash
 Many companies need several cash
accounts to account for different cash
categories and funds.
 Most companies have multiple bank
accounts. The title for each bank account
should be: Cash in Bank—(Name of Bank)
 Preventive controls protect cash from theft
and misuse of cash.
 Detective controls are designed to detect
theft or misuse of cash and are also
preventive in nature.
Retailers’ Sources of Cash
Cash
Receipts
CASHIER’S
DEPARTMENT
Register
records
ACCOUNTING
DEPARTMENT
Remittance
advices
Mail Receipts
Retailers’ Sources of Cash
CASHIER’S
DEPARTMENT
ACCOUNTING
DEPARTMENT
1
Deposit ticket
Deposit receipt
Bank
Controlling Cash Received
from Cash Sales
19 Cash
3 142 00
Cash Short and Over
Sales
8 00
3 150 00
To record cash sales and actual
cash on hand.
Cash sales for March 19 totaled $3,150.00 per
the cash register tape. After removing the
change fund, only $3,142.00 was on hand.
Controlling Cash Received
in the Mail
Most companies’ invoices
are designed so that
customers return a portion
of the invoice, call a
remittance advice.
Controlling Cash Received
in the Mail
1. The employee who opens the mail should initially
compare the amount received with the amount on the
remittance advice.
2. The employee opening the mail stamps checks and
money orders “For Deposit Only” in the bank account
of the business.
3. All cash is sent to the Cashier’s Department where
checks and money orders are combined with receipts
from cash sales and a bank deposit ticket is prepared.
Controlling Cash Received
in the Mail
4. The remittance advices and their summary totals are
delivered to the Accounting Department where a clerk
prepares the records of the transactions and posts them
to the customer account.
5. The stamped duplicate copy of the deposit ticket is
returned to the Accounting Department where a clerk
compares the receipt with the total amount that should
have been deposited.
Internal Control of Cash
Payments
1. Cash controls must provide assurance that
payments are made for only authorized
transactions.
2. Cash controls should ensure that cash is used
efficiently.
3. A voucher system provides assurance that
what is being paid for was properly ordered,
received, and billed by the supplier.
13
A voucher system is a set of
procedures for authorizing
and recording liabilities and
cash payments.
Basic
Features of
the Voucher
System
Basic Features of the
Voucher System
 A voucher system normally uses vouchers.
 The system normally has a file for unpaid
vouchers and a file for paid vouchers.
 Usually prepared by the Accounting
Department after all necessary supporting
documents are received (purchase order,
supplier’s invoice, and a receiving report).
 In preparing the voucher, the accounts
payable clerk verifies the quantity, price, and
mathematical accuracy of the supporting
documents and files the paid voucher.
A summary received from
the bank of all account
transaction is called a
statement of account.
A bank reconciliation is a listing
of the items and amounts that
cause the cash balance reported
in the bank statement to differ
from the balance of the cash
account in the ledger.
Reasons for Differences Between Depositor’s
Records and the Bank Statement
 Outstanding checks
 Deposits in transit
 Service charges
 Collections
 Not-sufficient-funds (NSF)
checks
 Errors
Steps in a Bank Reconciliation
1. Compare each deposit listed on the bank statement
Add deposits not recorded by the bank to the
with unrecorded deposits appearing on the preceding
balance
according and
to the
statement.
period’s
reconciliation
withbank
deposit
receipts.
2.Deduct
Compare
paid checks
with outstanding
checks
outstanding
that havechecks
been paid
appearing on the preceding period’s reconciliation and
by
the
bank
from
the
balance
according
to
the
with recorded checks.
bank statement.
3. Add
Compare
bank
credit memorandums
to entries
in the
credit
memorandums
that have
not been
journal.
recorded to the balance according to the
depositor’s records.
Steps in a Bank Reconciliation
4.Deduct
Compare
bankmemorandums
debit memorandums
to entries
debit
that have
not been
recording cash payments.
recorded from the balance according to the
5. List any errors discovered during the preceding steps.
depositor’s records.
BANK
Bank’s
books
Beginning balance
$3,359.78
Depositor’s
records
Beginning balance
$2,549.99
Power Network prepares to reconcile the
monthly bank statement as of July 31, 2006
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
Depositor’s
records
Beginning balance
816.20
$4,175.98
A deposit of $816.20 did not
appear on the bank statement.
$2,549.99
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Depositor’s
records
Beginning balance
Add note and interest
collected by bank
The bank collected a note in the
amount of $400 and the related
interest of $8 for Power Networking
$2,549.99
408.00
$2,957.99
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
deposit of
$637.02
did not appear
ThreeAchecks
that
were written
during the
on appear
the bankon
statement.
period did not
the bank statement:
#812, $1,061; #878, $435.39, #883, $48.60.
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check returned
because of insufficient
funds
$300.00
The bank returned an NSF check from one of the
firm’s customers, Thomas Ivey, in the amount of
$300. This was a payment on account.
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
The bank service charges totaled $18.00.
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
Error recording
Check No. 879 9.00
327.00
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Adjusted balance
$2,630.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
Error recording
Check No. 879
9.00
327
Adjusted balance
$2,630.99
Now, if desired, we can
prepare a formal
statement for Power
Networking.
Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
Balance per depositor’s records
Add: Note and interest collected by bank
$1,061.00
435.39
48.60
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned$300.00
Bank service charges
18.00
Error in recording Check No. 879
9.00
327.00
Adjusted balance
$2,630.99
Journal entries must be prepared
for those items that affected the
depositor’s side of the
reconciliation.
Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
$1,061.00
435.39
48.60
Balance per depositor’s records
Add: Note and interest collected by bank
Deduct: NSF check (Thomas Ivey) returned
Bank service charges
Error in recording Check No. 879
Adjusted balance
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
$300.00
18.00
9.00
327.00
$2,630.99
Entries Related to a Bank Reconciliation
July 31 Cash
Notes Receivable
Interest Receivable
Note collected by bank.
408 00
400 00
8 00
Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
$1,061.00
435.39
48.60
Balance per depositor’s records
Add: Note and interest collected by bank
Deduct: NSF check (Thomas Ivey) returned
Bank service charges
Error in recording Check No. 879
Adjusted balance
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
$300.00
18.00
9.00
327.00
$2,630.99
Entries Related to a Bank Reconciliation
July 31 Cash
408 00
Notes Receivable
400 00
Interest Receivable
Note collected by bank.
30 Accounts Receivable—Thomas Ivey
Miscellaneous Administrative Exp.
Accounts Payable—Taylor Co.
Cash
NSF check, bank service
charges, and error in
recording Check no. 879.
8 00
300 00
18 00
9 00
327 00
Petty
Cash
On August 1, issued Check No. 511 for $100
to established a petty cash fund.
Aug. 1 Petty Cash
Cash
Established petty cash fund.
100 00
100 00
At the end of August, the petty cash receipts
indicated expenditures for the following items:
office supplies, $28, postage (office supplies),
$22; store supplies, $35, and miscellaneous
administrative items, $3.
Aug. 31 Office Supplies
Store Supplies
Miscellaneous Administrative Exp.
Cash
Replenished petty cash fund.
50 00
35 00
3 00
88 00
Financial Analysis and Interpretation
Solvency is the ability of a business to meet
its financial obligations (debts) as they are
due.
Solvency analysis focuses on the ability of
a business to pay or otherwise satisfy its
current and noncurrent liabilities.
This ability is normally assessed by
examining balance sheet relationships.
Financial Analysis and Interpretation
Doomsday Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents
B. Current liabilities
Doomsday ratio A / B
$100,000 $ 120,000
400,000 1,500,000
0.25
0.08
Use: To indicate
thethese
company’s
ability to
How are
ratios used?
meet creditors obligations in the
worst case assumption that should
the business cease to exist.
Chapter 7
The End