Chapter 7
Cash
Learning Objectives
1. Cash and Cash Controls
2. Internal Control of Cash Receipts
3. Internal Control of Cash Payments
4. Bank Accounts: A Cash Control
5. Bank Reconciliation
6. Petty Cash
7. Balance Sheet Cash Presentation
8. Financial Analysis and Interpretation
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Cash Accounts and Internal Controls

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.
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Internal Control of Cash Receipts
p.281
Cash is normally received from two sources:
1. Over the counter from cash customers.
Use of a cash register is an important control.
2. Received in the mail from credit customers.
Cash is in the form of checks.
All cash is sent to the Cashier’s Department.
An employee prepares a bank deposit ticket and
makes a bank deposit.
The bank deposit record is sent to the Accounting
Department where it is recorded.
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Cash Short and Over
Date
Description
May 08 Cash
Cash Short and Over
Sales
Debit
Credit
3,142.00
8.00
3,150.00
To record day’s cash sales. Actual cash
received is less than cash register receipts.
Cash Short and Over account is included in the
income statement:
•Miscellaneous Administrative Expenses
•Other Income
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Cash Short and Over
Date
Description
May 08 Cash in Bank
Cash Short and Over
Sales
Debit
Credit
3,142.00
8.00
3,150.00
To record day’s cash sales. Actual cash
received is less than cash register receipts.
A debit in the Cash Short and Over
account represents an expense.
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Cash Receipts From Credit Customers
Sales
Accts. Receivable
Cash
PURCHASE
ORDER
1
1
SALES
ORDER
A purchase order is received and a sales order is prepared.
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Cash Receipts From Credit Customers
Sales
Accts. Receivable
Cash in Bank
PURCHASE
ORDER
1
SALES
ORDER
2
SHIPPING
REPORT
1
A purchase order is received and a sales order is prepared.
2
Merchandise is shipped and a shipping report is prepared.
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Cash Receipts From Credit Customers
Sales
Accts. Receivable
Credit
SALES
ORDER
Debit
SALES
INVOICE
PURCHASE
ORDER
1
Cash
3
2
SHIPPING
REPORT
1
A purchase order is received and a sales order is prepared.
2
Merchandise is shipped and a shipping report is prepared.
3
A sales invoice is prepared and sent to customer.
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Cash Receipts From Credit Customers
Sales
Accts. Receivable
Credit
SALES
INVOICE
PURCHASE
ORDER
1
SALES
ORDER
Debit
Credit
4
Cash
Debit
DEPOSIT
RECORD
3
2
SHIPPING
REPORT
1
A purchase order is received and a sales order is prepared.
2
Merchandise is shipped and a shipping report is prepared.
3
A sales invoice is prepared and sent to customer.
4
Cash is received from customer, deposited, and recorded.
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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.
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Cash Payments to Suppliers
Cash
Accts. Payable
Merchandise
PURCHASE
ORDER
1
1
A purchase order is sent to a supplier.
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Cash Payments to Suppliers
Cash
Accts. Payable
Merchandise
PURCHASE
ORDER
RECEIVING
REPORT
1
2
1
A purchase order is sent to a supplier.
2
Merchandise is received and a receiving report is prepared.
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Cash Payments to Suppliers
Cash
Accts. Payable
Merchandise
Credit
Debit
VOUCHER
3
PURCHASE
ORDER
PURCHASE
RECEIVING
INVOICE
REPORT
1
2
1
A purchase order is sent to a supplier.
2
Merchandise is received and a receiving report is prepared.
3
A purchase invoice is received and a voucher is prepared.
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Cash Payments to Suppliers
Cash
Credit
Accts. Payable
Debit
CHECK
Merchandise
Credit
Debit
VOUCHER
4
3
PURCHASE
ORDER
PURCHASE
RECEIVING
INVOICE
REPORT
1
2
1
A purchase order is sent to a supplier.
2
Merchandise is received and a receiving report is prepared.
3
A purchase invoice is received and a voucher is prepared.
4
Cash is paid to the supplier and recorded.
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Cash Receipts and Payments
Selling Side of Business
Accts. Receivable
Credit
1
1
Buying Side of Business
Cash
Debit
Accts. Payable
Credit
DEPOSIT
RECORD
Cash received on
account from
customers.
Debit
CHECK
2
2
Cash paid on
account to
suppliers.
C7 - 15
Bank Reconciliation
Special terms:
1. Signature
2. Deposit ticket
3. A check
4. Drawer
5. Drawee
6. Payee
7. Bank reconciliation
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Bank Reconciliation
• Exhibit 4 Bank statement
• Exhibit 5 recordings
• To prepare the bank reconciliation
– The reconciling items (p.290)
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Total
Bank
3,359.78
816.20
Company
2,549.99
408.00
-1,061.00
-435.39
-48.60
2,630.99
-300.00
-18.00
-9.00
2,630.99
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Power Networking
Bank Reconciliation
July 31, 2003
Balance per bank statement
Add deposit of July 31, not recorded by bank
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
$3,359.78
816.20
$4,175.98
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
Deduct: Check NSF check returned
$300.00
Bank service charges
18.00
Error in recording Check No. 879
9.00
Adjusted balance
$2,630.99
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Power Networking
Bank Reconciliation
July 31, 2003
Balance per bank statement
Add deposit in transit
Deduct outstanding checks:
No. 812
No. 878
No. 883
Adjusted balance
$3,359.78
816.20
$4,175.98
$1,061.00
435.39
48.60
Balance per depositor’s records
A Add note and interest collected by bank
B Deduct: Customer NSF check
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
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p.291
Bank Reconciliation Journal Entries
Date
Description
Jul. 31 Cash
A
Debit Credit
408
Notes Receivable
Interest Revenue
400
8
To record note collected by bank.
Jul. 31 Accounts Receivable - T. Ivey
B
Miscellaneous Expense
Accounts Payable - Taylor Co.
Cash
300
18
9
327
To record customer’s NSF check, bank service
charges, and error in recording Check No. 879.
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Bank Reconciliation - Journal and Ledger
General Journal
Date
A
7/31
7/31
B
Page 1
Description
P.R.
Cash
Notes Receivable
Interest Revenue
Accts. Receivable - T. Ivey
Miscellaneous Expense
Accts. Payable - Taylor Co.
Cash
11
Debit
Credit
408.00
400.00
8.00
300.00
18.00
9.00
11
327.00
General Ledger
Account: Cash
Date
7/31
7/31
7/31
Item
Account No. 11
P.R.
Debit
Credit
Balance
J1
J1
408.00
327.00
Balance
Debit
Credit
2,549.99
2,957.99
2,630.99
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Petty Cash Accounting
• Petty Cash
– A special cash fund is called a petty cash fund
• Example:
– Travel expenses for salesperson
• Set up the fund for $100
• Total the expenses $88
• Refund
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Petty Cash Accounting
Date
Aug. 1
Description
Petty Cash
Cash
Debit
Credit
100.00
100.00
To establish a petty cash fund.
Aug. 31 Office Supplies
Store Supplies
Misc. Admin. Expense
Cash
50.00
35.00
3.00
88.00
To replenish the petty cash fund.
Note: No entry in Petty Cash account when the fund
is replenished.
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Solvency Analysis
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.
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Solvency Measures — The Short-Term Creditor
Doomsday Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents
B. Current liabilities
Doomsday ratio A / B
$100,000
400,000
0.25
$ 120,000
1,500,000
0.08
How are these ratios used?
C7 - 26
Solvency Measures — The Short-Term Creditor
Doomsday Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents
B. Current liabilities
Doomsday ratio A / B
$100,000
400,000
0.25
$ 120,000
1,500,000
0.08
Use: To indicate the worst case assumption that
should the business cease to exist, only
the cash on hand is available to meet
creditor obligations.
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HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise:
2. Problem : 7-3A
Discussion: Activity 7-5
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This is the end of Chapter 7.
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