Lesson 7: Managing Cash

Transcription

1 7.1 Introduction Lesson 7: Managing Cash For everyday individuals, whether it is the money in your wallet or coins in your pocket, the term cash means how much physical money one has on hand. However, from an accounting perspective, the term cash is much more broad. Cash encompasses not only the physical money on hand, but also, money deposited in banks as well as other cash equivalents. Cash usually means the currency and coins on hand as well as the money placed in checking and savings accounts. Cash equivalents are money instruments that are short term investments that can be readily converted into cash. Examples include treasury bills, short term bonds, and marketable securities. These investments are highly liquid, which is a term meaning easily converted into cash. Most often, a company s cash is deposited in a bank. In today s age, most transactions such as payments or receipt of payments are automated; it is very seldom you see companies dealing with only physical cash. Thus, it is important to understand the relationship between the balance on hand at the bank and balance on hand per your books in order to appropriately manage cash. 7.2 Gathering Information for Bank Reconciliations A bank reconciliation is a process that compares the balance via the bank records with the balance via a company s own accounting books. Most of the time, the balances won t agree right off the bat. This can happen for a variety of reasons most notably being checks received or written not being cleared. Furthermore, there may be fees, interest, or service charges that are reflected on the banks records, but not on your own. In order to effectively reconcile, each deposit and withdrawal must be verified individually. Thus, it is generally recommended that these reconciliations happen periodically such as monthly in order to reduce the workload. There are two main methods we will discuss to reconcile cash: Book to Bank Reconciliation and Bank to Book Reconciliation. Depending on the starting point, you will have to add and subtract certain adjustments. However, regardless of what method you use, the items you adjust will be the same. In order to perform a reconciliation, you will need a few items of information. From the banks end, you will need a monthly bank statement showing the activity in a certain account. From your end, you will need the company s ending cash balance, a list of outstanding checks, and a list of deposits in transit. We will demonstrate the methods mentioned above using the following data:

2 Ending Cash Balance The ending cash balance per your company records is the starting point. For the purpose of our examples, we will assume the ending balance as of 12/31/2013 is 3,685. Outstanding Checks Outstanding checks are checks that have been written by the company and recorded in the company s cash account, however, not yet cleared by the bank. Most often, checks written during the last few days of the month are outstanding checks. Outstanding Checks Date Payee Check Number Amount ($) 12/27/2013 Southside Utilities /27/2013 Southside Insurance /27/2013 SuperCo /28/2013 Bakery Essentials /28/2013 Southside Phone Company /28/2013 Southside Machines /28/2013 Southside Rent-a-Car /30/2013 Express Cleaners Deposits in Transit Deposits in transit are amounts received by the company and recorded in the company s account, but not yet by the bank. Most often, these amounts are deposited on the last few days of the month, but the bank doesn t process it until the following week, the start of a new month. Deposits in Transit Date Payor Amount ($) 12/28/2013 Dexter Morgan /28/2013 Jackson Teller /30/2013 John Snow /30/2013 Walter White /30/2013 Jesse Pinkman

3 Bank Statement A bank statement is a summary of transactions which have occurred over a given period of time. They will usually have a summary followed by a detail listing of each transaction. Bank Of California Account Summary for the Month Ending 12/31/2013 Beginning Balance 5,000 +Deposits 1,200 -Checks Drawn (2,340) -Service Charges (50) Ending Balance 3,810 Transactions Summary: Posting Date Description Debit Credit Balance 12/1/2013 Beginning Balance 5, , /27/2013 Check , /27/2013 Check , /27/2013 Check , /28/2013 Check , /28/2013 Check , /28/2013 Check D. Morgan , /28/2013 Check J. Teller , /28/2013 Check , /30/2013 Check , /30/2013 Check J. Snow , /30/2013 Check J. Pinkman , /31/2013 Service Charge 50 3, Now that you have the relevant information, the first step is to find the differences between the outstanding checks/deposits in transit and the bank statement s debits/credits. Comparing each item individually, you will find that there are three discrepancies: one outstanding check, one deposit in transit not yet recorded by the bank, and a service charge from the bank: Outstanding Check 2128 for Southside Machines Deposit in Transit Check from Walter White Service Charge

4 With these differences identified, we are now ready to prepare a bank reconciliation. 7.3 Preparing a Bank Reconciliation Using this method, you would start with the beginning cash balance per books and work towards the ending balance per the bank: Book Balance Cash 3,685 Add: Outstanding Checks 325 Less: Deposits in Transit 150 Service Charge 50 Bank Balance Cash 3,810 The outstanding check is added to our book balance because we have already accounted for those checks in our books, but the bank has not yet cleared it. On the other hand, the deposits in transit are subtracted from our book balance because we have already recorded the deposits in our books, but it has not yet been reflected in the bank. Lastly, the service charge is subtracted from the book balance because the bank balance has already accounted for it, but our book balance has not. Keep in mind that this example is fairly straight forward. There are other adjustments such as bank errors, interest collections, or non-sufficient fund checks that will lead to differences in book and bank balances. Now that you have effectively reconciled cash, the next step is to determine which discrepancies need to be recorded on the books. The outstanding checks and deposits in transit are merely timing differences. They have already been recorded on the books and once cleared will appear on the bank statement. The service charges, however, have not been recorded on the books and thus will require the following entry to reduce cash: Account Debit Credit Bank Charges Expense 50 Cash 50

5 Bank to Book Reconciliation Instead of starting with cash balance per books, the bank to book reconciliation starts with the cash per bank balance: Bank Balance Cash 3,810 Add: Deposits in Transit 150 Service Charge 50 Less: Outstanding Checks 325 Book Balance Cash 3,685 The same adjustments appear, however, we add the deposits in transit because they have not been recorded in the bank balance. We also add the service charge because it has already been recorded in the bank balance, but not the book. Lastly, we subtract outstanding checks because those have not been recorded in books yet. Also, the same journal entry to book the service charge would appear again.