CHAPTER SEVEN
ACCOUNTING FOR
CASH
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.
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.
OPENING A CHECKING
ACCOUNT
• Each person authorized to sign checks
must complete and sign a SIGNATURE
CARD.
– This card is used to verify the depositor’s
signature on any banking transactions.
MAKING DEPOSITS
• 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
number.
• American Bankers Association number
• Found in upper right hand corner of check
• Also shown in MICR code on the lower left side of
front of each check
• ABA number is used to sort and route checks.
MAKING DEPOSITS
• Endorsements--each check being
deposited must be endorsed by the
depositor.
– Blank endorsement--the depositor simply signs
the back of the check.
• Check becomes payable to any bearer.
– Restrictive endorsement--depositor adds words
such as “For deposit,” “Pay to any bank,” or
“Pay to Mary Adams only.”
AUTOMATED TELLER
MACHINES
• Each depositor has a plastic card and a
personal identification number (PIN).
• Most ATMs are on a system that allows
non-customers to use their ATMs.
• It is important for depositor to keep an
accounting record of ATM withdrawals
and deposits.
WRITING CHECKS
• Check is a document ordering a bank to
pay cash from a depositor’s account.
• 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.
3 STEPS IN PREPARING A
CHECK
• Step #1 Complete the check stub or
register.
• Step #2 Enter the date, payee name, and
amount on the check.
• Step #3 Sign the check.
The check should not be signed
until the check signer has verified
that all aspects of the check
are correct.
BANK STATEMENT
• Includes:
– 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
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
EXAMPLE
Bank statement
shows a balance of
$4,350. But the
general ledger
account has a
balance of $3,800.
We need to prepare a
BANK
RECONCILIATION.
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Heading includes:
Name of Company
Bank Reconciliation
Date
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Reconciliation begins with
balance according to the
bank statement.
$4,350
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
Deduct:
Reconciling items are listed
as additions or subtractions
from the bank balance.
$4,350
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
Deduct:
Adjusted Bank Balance
Once all reconciling items
are listed, the
“Adjusted Bank Balance”
is computed.
$4,350
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
$4,350
Deduct:
Adjusted Bank Balance
Book balance, October 31
Now the reconciliation turns to
adjusting the BOOK balance.
$3,800
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
$4,350
Deduct:
Adjusted Bank Balance
Book balance, October 31
Add:
Deduct:
Additions and subtractions
will be made to the
book balance.
$3,800
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
$4,350
Deduct:
Adjusted Bank Balance
Book balance, October 31
Add:
Deduct:
Adjusted Book Balance
$3,800
“Adjusted book balance”
is computed.
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add:
Deduct:
$4,350
We say it is “reconciled” when the
Adjusted BANK and Adjusted BOOK
balances agree.
Adjusted Bank Balance
Book balance, October 31
Add:
Deduct:
Adjusted Book Balance
$3,800
REASONS FOR DIFFERENCES
• Outstanding checks
– Checks that have not been presented to the bank
for payment
• Deposits in transit
– Deposits that have not reached the bank or been
recorded by the bank before the statement is
prepared
• Service charges
– E.g., check printing and processing, account fees
REASONS continued
• Collections
– Made by the bank on behalf of the depositor
• Not sufficient funds (NSF) checks
– Checks deposited but not paid because drawer
did not have sufficient funds
• Errors
– Made by bank or by the depositor in recording
cash transactions
BANK RECONCILIATION
THREE STEPS:
STEP #1
Identify deposits in transit and related errors.
Compare bank statement with:
Last month’s deposits in transit
• They should all be on the bank statement.
Deposits listed in the accounting records
•If not found on the bank statement, the deposit
is considered a deposit in transit.
$ amounts for deposits in the accounting records
•If they differ, the error needs to be corrected.
STEP #1 EXAMPLE
A deposit in the accounting records of $635,
dated October 31, had not been received by
the bank.
DEPOSIT
IN
TRANSIT
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
$4,350
$635
Deduct:
DEPOSITS IN TRANSIT are
added to the bank balance.
Adjusted Bank Balance
Book balance, October 31
Add:
Deduct:
Adjusted book balance
$3,800
STEP #2
Identify outstanding checks and related errors.
Compare canceled checks with bank statement
and accounting records:
• If they differ, error needs to be corrected.
STEP #2 EXAMPLE
Check # 862 payable to XYZ Telephone
Company was written for $46.25 but was
entered on the check stub and on the books
as $64.25.
$18.00
ERROR
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct:
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Adjusted book balance
$4,350
$635
$18.00 is added back to
the book balance.
$3,800
18
STEP #2
Identify outstanding checks and related errors.
Compare canceled checks with bank statement
and accounting records:
 If they differ, the error needs to be corrected.
 Check mark the stub or accounting records to
indicate check has cleared.
 Checks written but not cleared are OUTSTANDING
CHECKS.
•Subtracted from the bank balance on the
reconciliation
STEP #2 EXAMPLE
Check numbers 890, 892, and 893 do not
appear on the bank statement.
OUTSTANDING
CHECKS
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
No. 890
No. 892
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Adjusted book balance
$4,350
$635
$598
334
795
Outstanding checks
are deducted from
the bank balance.
1,727
$3,800
18
STEP #3
Identify additional reconciling items.
Compare any additions and deductions on the
bank statement that are not deposits or checks
with the accounting records.
Items ADDED to the account by the bank are
CREDIT MEMOS.
Items DEDUCTED from the account by the bank are
DEBIT MEMOS.
STEP #3 EXAMPLE
Mary used an ATM machine to make a
withdrawal from her account of $200 for
personal use. However, she forgot to
record this withdrawal on the books.
Deduct $200
from the
book balance.
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
No. 890
No. 892
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Unrecorded ATM withdrawal
Adjusted book balance
$4,350
$635
$598
334
795
1,727
$3,800
18
$200
STEP #3 EXAMPLE
The bank returned an NSF check of $350
written by one of Mary’s clients.
Deduct $350
from the
book balance.
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
No. 890
No. 892
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Unrecorded ATM withdrawal
NSF check
Adjusted book balance
$4,350
$635
$598
334
795
1,727
$3,800
18
$200
350
STEP #3 EXAMPLE
The bank deducted $10 from Mary’s
account for service charges.
Deduct $10
from the
book balance.
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
No. 890
No. 892
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$4,350
$635
$598
334
795
1,727
$3,800
18
$200
350
10
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
No. 890
No. 892
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
The Bank section of the
reconciliation is totaled.
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$4,350
$635
$4,985
$598
334
795
$200
350
10
1,727
$3,258
$3,800
18
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
Then the Book
No. 890
No. 892
section is totaled.
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$4,350
$635
$4,985
$598
334
795
$200
350
10
1,727
$3,258
$3,800
18
$3,818
$560
$3,258
EXAMPLE
We now know that the actual amount of
cash is $3,258. But the General Ledger
Cash account still shows $3,800.
JOURNAL ENTRIES
NEEDED
BANK RECONCILIATION
JOURNAL ENTRIES
• Only two kinds of items appearing on a
bank reconciliation require journal
entries:
– Errors in the books
– Bank additions and deductions that do not
already appear in the accounting records
• ALL items in the BOOK section of the
reconciliation
Mary Adams Consulting
Bank Reconciliation
October 31, 2000
Bank statement balance, October 31
Add: Deposit in transit
Deduct: Outstanding checks
These 4 items will
No. 890
No. 892
require journal entries.
No. 893
Adjusted Bank Balance
Book balance, October 31
Add: Error on check #862
Deduct:
Unrecorded ATM withdrawal
NSF check
Bank service charge
Adjusted book balance
$4,350
$635
$4,985
$598
334
795
$200
350
10
1,727
$3,258
$3,800
18
$3,818
$560
$3,258
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
DESCRIPTION
2000
Oct. 31 Cash
PR DEBIT CREDIT
18 00
When check #862 was written, the
Cash account was credited for $18.00 more
than the check amount of $46.25.
This entry puts $18.00 back
in the Cash account.
GENERAL JOURNAL
1
2
3
DATE
DESCRIPTION
2000
Oct. 31 Cash
PR DEBIT CREDIT
18 00
Telephone Expense
Error on Check #862
4
5
6
8
Telephone Expense was originally
debited for $64.25. This was $18.00 more
than the actual telephone bill of $46.25.
9
This entry removes the extra $18.00.
7
10
11
18 00
GENERAL JOURNAL
1
2
3
DATE
DESCRIPTION
2000
Oct. 31 Cash
PR DEBIT CREDIT
18 00
18 00
Telephone Expense
Error on Check #862
4
5
31 M.A., Drawing
200 00
6
7
8
9
10
11
Since the ATM withdrawal was
for “personal expenses,”
Drawing should be debited.
GENERAL JOURNAL
1
2
3
DATE
DESCRIPTION
2000
Oct. 31 Cash
PR DEBIT CREDIT
18 00
18 00
Telephone Expense
Error on Check #862
4
5
6
31 M.A., Drawing
200 00
Cash
200 00
7
8
The $200 withdrawal was never recorded.
9
This entry will remove the $200 from
the Cash account.
10
11
GENERAL JOURNAL
1
2
3
DATE
DESCRIPTION
2000
Oct. 31 Cash
PR DEBIT CREDIT
18 00
18 00
Telephone Expense
Error on Check #862
4
5
6
7
8
9
10
11
31 M.A., Drawing
Cash
200 00
200 00
Unrecorded ATM
withdrawal
GENERAL JOURNAL cont.
DATE
10
11
12
DESCRIPTION
31 Accounts Receivable
PR DEBIT CREDIT
350 00
Cash
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.
350 00
GENERAL JOURNAL cont.
DATE
10
11
12
DESCRIPTION
31 Accounts Receivable
PR DEBIT CREDIT
350 00
350 00
Cash
NSF check
13
14
15
16
17
18
19
20
31 Miscellaneous Expense
10 00
Cash
Bank service charge
Service charges are usually small.
Often they are put into Misc. Expense.
10 00
PETTY CASH
• A fund set up to pay for small items with
cash
– Checks for very small amounts are cumbersome.
• To establish the fund:
– Check is written to the petty cash custodian.
– Check is cashed.
– Money is placed into secure box/drawer.
• Custodian is the only person authorized to
pay out petty cash.
EXAMPLE
Mary wants to establish a $50 Petty Cash
fund to be used to make small purchases
CASH
$50
$50 is withdrawn (by check)
from the Cash account.
EXAMPLE
Mary wants to establish a $50 Petty Cash
fund to be used to make small purchases.
CASH
$50
PETTY CASH
$50
Petty Cash is an ASSET account.
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
DESCRIPTION
20-Nov. 15 Petty Cash
Cash
Establish Petty Cash fund
PR DEBIT CREDIT
50 00
50 00
PETTY CASH VOUCHER
• A receipt prepared for every payment
from Petty Cash
• Voucher includes:
–
–
–
–
Name of Payee
Purpose and amount of payment
Account to be charged (e.g., Postage Expense)
Signature of custodian and payee
PETTY CASH PAYMENTS
RECORD
• Multi-column record that supplements
the regular accounting records
• Provides record of each Petty Cash
payment
– Broken down by account
• E.g.: Travel/Entertainment Expense, Postage Exp.,
etc.
– Used to prepare Replenishment journal entry
REPLENISHING PETTY CASH
• Fund is replenished:
– When funds run low, and
– End of each accounting period
• Journal Entry is made:
– Debiting the accounts charged (e.g., Postage
Expense)
– Crediting Cash for amount needed to replenish
the fund
– Petty Cash account is not debited or credited.
EXAMPLE
After two weeks, Mary notices it contains the following
vouchers and only $5.65 cash:
Voucher # 1 $15.00 for expenses incurred while on a
business trip (Travel/Entertainment
Expense)
Voucher # 2 $11.45 for express mailing a report to a
client (Postage Expense)
Voucher # 3 $17.90 for oil change on company van
(Vehicle Maintenance Expense)
GENERAL JOURNAL
1
2
3
4
DATE
DESCRIPTION
PR DEBIT CREDIT
20-15 00
Nov. 30 Travel/Entertainment Exp.
Postage Expense
Vehicle Maintenance Exp.
Cash
11 45
17 90
5
6
7
8
9
10
11
Cash should be credited for the amount needed
to restore the fund to its established amount.
$50.00 fund - $5.65 in box = $44.35 needed
44 35
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
DESCRIPTION
PR DEBIT CREDIT
20-15 00
Nov. 30 Travel/Entertainment Exp.
Postage Expense
Vehicle Maintenance Exp.
Cash
Journal Entry balances!!!
Vouchers (amounts debited)
equal
the amount needed to
replenish the box (credit).
11 45
17 90
44 35
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
DESCRIPTION
PR DEBIT CREDIT
20-15 00
Nov. 30 Travel/Entertainment Exp.
Postage Expense
Vehicle Maintenance Exp.
Cash
Replenishment of PC fund
11 45
17 90
44 35
CHANGE FUND
• A supply of currency and coins kept in
the cash register or cash drawer
– Allows business 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
EXAMPLE
Harlow’s Coffee Shop is opening for business
tomorrow. They need to establish a $150 change
fund.
CASH
$150
Just like the Petty Cash
fund, a Change Fund
starts by withdrawing
from Cash.
EXAMPLE
Harlow’s Coffee Shop is opening for business
tomorrow. They need to establish a $150 change
fund.
CASH
$150
Change Fund is
an ASSET.
CHANGE FUND
$150
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
20-Dec. 1
DESCRIPTION
Change Fund
Cash
Establish Change Fund
PR DEBIT CREDIT
150 00
150 00
EXAMPLE
At the close of their first day of business,
Harlow’s had $1,384.50 in the cash register.
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
$1,384.50
150.00
$1,234.50
The CASH from sales should
agree with the sales recorded
on the cash REGISTER TAPE.
EXAMPLE
At the close of their first day of business,
Harlow’s had $1,384.50 in the cash register.
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
$1,384.50
150.00
$1,234.50
Sales from Cash Register tape
are also $1,234.50!!!
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
20-Dec. 2
DESCRIPTION
Cash
PR DEBIT CREDIT
1,234 50
Only the $1,234.50 is
debited to Cash and deposited.
The Change fund is not deposited.
GENERAL JOURNAL
1
2
3
DATE
20-Dec. 2
DESCRIPTION
Cash
Sales
PR DEBIT CREDIT
1,234 50
Cash Sales 12/2/20--
4
5
6
7
8
9
10
11
What would have happened if the
cash register tape didn’t agree with
the cash from sales?
1234 50
EXAMPLE
At the close of their first day of business,
Harlow’s had $1,384.50 in the cash register.
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
$1,384.50
150.00
$1,234.50
What if the Cash Register tape
had shown Sales of $1,236.50?
EXAMPLE
CASH IN DRAWER
Less: CHANGE FUND
CASH FROM SALES
CASH REGISTER
SHORTAGE
$1,384.50
150.00
$1,234.50
$1,236.50
$
2.00
Overages and Shortages are recorded in an
account called “CASH SHORT AND OVER.”
GENERAL JOURNAL
1
2
3
DATE
20-Dec. 2
DESCRIPTION
Cash
PR DEBIT CREDIT
1,234 50
4
5
6
7
8
9
10
11
Cash is debited for the amount
deposited.
GENERAL JOURNAL
1
2
3
4
5
6
7
8
9
10
11
DATE
20-Dec. 2
DESCRIPTION
Cash
Cash Short and Over
PR DEBIT CREDIT
1,234 50
Cash Short and Over is
debited for shortages
and credited for overages.
2 00
GENERAL JOURNAL
1
2
3
DATE
20-Dec. 2
DESCRIPTION
Cash
Cash Short and Over
PR DEBIT CREDIT
1,234 50
2 00
Sales
4
5
6
7
8
9
10
11
Sales is credited for the amount
on the Cash Register tape
even though this was
not the amount collected.
1,236 50