Ch. 7 Accounting For Cash

Front 1

Cash includes

Back 1

Currency, coins and checking accounts

Checks recieved from customers

Money orders

Bank cashier's check

Front 2

Internal control

Back 2

Set of procedures to ensure proper accounting for transactions.

Good internal control for cash transactions:

* All cash rec'd should be deposited daily in a bank.

* All disbursements, except for payments from petty cash should be made by check.

Front 3

2 types of endorsements

Back 3

1. Blank endorsement - depositor simply signs the back of the check.

2. Restrictive endorsement- the depositor adds words such as 'for deposit' 'pay to any bank' or 'pay to (name) only' to restrict payment of the check.

Front 4

3 parties to every check

Back 4

1. Drawer- the depositor who orders the bank to pay the cash.

2. Drawee- the bank on which the check is drawn.

3. Payee- The person being paid the cash.

Front 5

Check

Back 5

A document ordering a bank to pay cash from a depositor's account.

Front 6

3 steps in preparing a check

Back 6

1. Complete the check stub or register.

2. Enter the date, payee name, and amount on the check.

3. Sign the check.

Front 7

Voiding a check

Back 7

Tear off or deface the signature box and file the voided check numerically with the cancelled checks.

Front 8

Bank statement

Back 8

A statement of account issued by a bank to each depostior once a month. Shows the following:

1. The balance at the beginning of the period.

2. Deposits and other amounts added during the period.

3. Checks and other amounts subtracted during the period.

4. The balance at the end of the period.

Front 9

Bank reconciliation

Back 9

Heading includes: Name of company, Bank reconciliation, and the date.

Begins with the balance according to the bank statement.

Reconciling items are listed as additions or subtractions from the bank balance.

Once all reconciling items are listed, the adjusted bank balance is computed.

Now the reconciliation turns to adjusting the book balance. Additions and subtractions will be made to the book balance.

The adjusted book balance is computed.

We say 'reconciled' when the adjusted bank and adjusted book balances agree.

Front 10

Differences between bank and book balances

Back 10

1. Deposits in transit- deposits that have not reached the bank or been recorded by the bank before the statement is prepared.

2. Outstanding checks- Checks that have not been presented to the bank for payment before the statement is prepared.

3. Service charges- bank charges.

4. Collections - Collections of promissory notes or charge accounts made by the bank on behalf of the depositor.

5. NSF checks- Checks deposited but not paid because the drawer did not have sufficient funds.

6. Errors- Errors made by the bank or by the depositor in recording cash transactions.

Front 11

Steps in preparing the bank reconciliation

Back 11

1. Identify deposits in transit and any related errors.

2. Identify outstanding checks and any related errors.

3. Identify additional reconciling items.

Front 12

Deposits in transit and related errors

Back 12

Compare the bank statement with:

1. Last month's depostits in transit, they should all be on the bank statement.

2. Deposits listed in the accounting records. If not found on the bank statement the deposit is considered in transit.

3. Individual deposit amounts on the bank statements and in the accounting records need to match, if not the error needs to be corrected.

Front 13

Outstanding checks and related errors

Back 13

1. Compare canceled checks with the bank statement and the accounting records. If the amount differs it needs to be corrected.

2. Check mark the stub or accounting records to indicate that the check has cleared.

3. Checks written but not cleared are outstanding checks. These are subtracted from the bank balance on the reconciliation.

Front 14

Additional reconciling items

Back 14

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.

Front 15

Bank reconciliation journal entries

Back 15

Only two kinds of items appearing on a bank reconciliation require journal entries.

1. Errors in the depositor's books

2. Bank additions and deductions that do not already appear in the books.

Front 16

Bank reconciliation items that require journal entries: Additions to cash balance

Back 16

1. Unrecorded deposits (Including atm)

2. Note collected by bank

3. Interest earned

4. Errors:

* Added too little as a deposit

* Deducted too much as a check

Front 17

Bank reconciliation items that require journal entries: Deducations from cash balance

Back 17

1. Unrecorded ATM withdrawls

2. NSF checks

3. Bank service charges

4. Deposits recorded twice

5. Unrecorded checks

6. Loan payments

7. Interest payments

8. Errors:

* Added too much as a deposit

* Deducted too little as a check

Front 18

Electronic banking

Back 18

Deposits and payments can be made using EFT's electronic fund transfer. Using a computer rather than paper checks.

Businesses are also making increasing use of EFT in handling cash transactions. Bills, payments, and fund transfers.

Front 19

Petty cash fund

Back 19

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 cust-

odian 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.

Front 20

Petty cash voucher

Back 20

A receipt, should be prepared for every payment from the fund.

Voucher shows:

Name of the payee, purpose of the payment, account to be charged for the payment, signatures of the custodian and the payee.

Front 21

Petty cash payment records

Back 21

A speical multi-columned record that supplements the regular accounting records. It is not a journal The headings may vary depending on the types of expenditures.

Provides a record of each petty cash payment, broken down by account and is used to prepare the replenishment journal entry.

Front 22

Replenishing the Petty cash fund

Back 22

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 furhter 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.

Front 23

Change fund

Back 23

A suppy 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 changed fund is held back for use on the following day.

Change fund is an asset, the cash from sales should agree with the sales recorded on the cash register tape.

Like petty cash fund, once the change fund is established an entry is made only if the amount of the fund is being changed.

Front 24

Cash short and over

Back 24

Overages and shortages are recorded in an account called 'cash short and over'

Account is debited if a shortage, and credited if there is an overage.

Journal entry: debit to cash, credit to service fees, and then the debit/credit to cash short and over. Dependant if over or short.

At the end of the period, a debit balance is a net shortage and treated as an expense. A credit balance is an overage and treated as a revenue.

Front 25

Importance of internal control

Back 25

Sarbanes-Oxley Act (SOX) Applies to all publicly held companies. Requires annual reporting on the effectiveness of internal control over financial reporting. Has resulted in many non-publicly held companies evaluating their internal control.

Good internal control helps ensure: Reliable and timely records, asset management and protection, Rules and procedures followed by employees, and accurate reporting of information.

Front 26

Internal control

Back 26

A system developed by a company to provide reasonable assurance of achieving: effective and efficient operations, reliable financial reporting and compliance with laws and regulations.

Front 27

Key components of internal control

Back 27

1. Control enviornment

2. Risk assessment

3. Control activities

4. Information and communications system

5. Monitoring processes

Front 28

Control enviornment

Back 28

The organization structure

Management's philosophy and operating style

Integrity and ethcial values

Commitment to competent, trustworthy employees

Front 29

Risk assessment

Back 29

The process for identifying, analyzing, and responding to business risks.

Examples: Errors, fraud, obsolete inventory, and high employee turnover

Front 30

Control activities

Back 30

Policies and procedures established to helpd management meet int control objectives.

Four types of control activities:

Segregation of duties

Authorization procedures and related responsibilies.

Adequate documents and records

Protection of assets and records

Front 31

Segregation of duties

Back 31

Different employees should be responsible for different parts of a transaction

Employees who account for transactions should not have custody of the assets.

Front 32

Authorization procedures and related responsibilities

Back 32

Every business activity should be properly authorized.

It should be possible to identify who is responsible for every activity that has occured.

Front 33

Adequate documents and records

Back 33

Accounting documents and records should be used so that all business transactions are recorded.

These documents should be: prenumbered, used in sequence, and subsequently accounted for.

Front 34

Protection of assets and records

Back 34

Assets generally need physical protection.

Records need both physical and logical protection.

Front 35

Information and communication system

Back 35

Set of procedures, processes and records established to: initiate, process, record, and report business transactions.

Accounts for related assets and liabilities

Includes journals and ledgers

Sales, cash receipts, purchases and cash payments

Front 36

Monitoring processes

Back 36

Methods used by management to determine that controls are operating properly.

Front 37

Internal controls for cash receipts

Back 37

Protect cash directly:

Securing cash is most important goal of internal controls.

The use of a cash register or terminal with a printed receipt is essential. Only authorized employees should operate registers. The registers generate internal records of all transactions. Cash and register records are reconciled and difference investigated. Cash recipts deposited daily.

The total deposted and total cash receipts according to the register should be reconciled and any difference investigated.

To protect cash/checks received on account:

The mail room should be supervised, employees handling the cash/check should have no access to the accounting records. A remittance list should be prepared when mail is opened. The list shows all amounts received and from whom. The list is sent to the accounting department for use in recording collections.

Front 38

Internal controls for cash receipts (cont.)

Back 38

Checks should be immediately endorsed for deposit to the business bank account.

Cash/checks are sent to the cash receipts department to deposit in the business bank account.

The totals of the remittance list and the amount of the bank deposit should be independently verified and and differences investigated.

An independent bank reconciliation should be done monthly.

Front 39

Voucher system

Back 39

A control technique requiring that every acquisition and subsequent payment be supported by an approved voucher.

A voucher is a document that shows an acquisition is proper and that payment is authorized.