Accounting for Cash. College Accounting. Heintz & Parry CASH INTERNAL CONTROL OPENING A CHECKING ACCOUNT

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1 Heintz & Parry 0 th Edition Chapter 0 th Edition College Accounting Accounting for Cash CASH INTERNAL CONTROL 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. 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 Describe how to open and use a checking account. 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.

2 MAKING DEPOSITS ENDORSEMENTS A 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 (American Bankers Association) number Found in upper right-hand corner of each check Also shown in magnetic ink character recognition (MICR) code on the lower left side of the front of each check The code is used to sort and route checks Each check being deposited must be endorsed by the depositor Consist of stamping or writing the depositor s name and sometimes other information on the back of the check Blank endorsement The depositor simply signs the back of the check This makes the check payable to any bearer Restrictive endorsement The depositor adds words such as For deposit, Pay to any bank, or Pay to Daryl Beck only for payment restriction AUTOMATED TELLER MACHINES WRITING CHECKS Each depositor has a plastic card and a personal identification number (PIN). Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs. It is important for the depositor to keep an accounting record of ATM withdrawals and deposits. A check is a document ordering a bank to pay cash from a depositor s account. There are 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. THREE STEPS IN PREPARING A CHECK Complete the check stub or register. Enter the date, payee name, and amount on the check. 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 The statement shows: 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

3 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 Prepare a bank reconciliation and related journal entries. BANK RECONCILIATION EXAMPLE Bank statement shows a balance of $,.0. But the general ledger account has a balance of $,.. November, 0-- Heading includes: Name of Company Date We need to prepare a BANK RECONCILIATION. November, 0-- Bank statement balance, November $,.0 November, 0-- Bank statement balance, November $,.0 The bank reconciliation begins with the balance according to the bank statement. Reconciling items are listed as additions or subtractions from the bank balance.

4 November, 0-- Bank statement balance, November $,.0 November, 0-- Bank statement balance, November $,.0 Once all reconciling items are listed, the adjusted bank balance is computed. Book balance, November $,. Now the reconciliation turns to adjusting the BOOK balance. November, 0-- Bank statement balance, November $,.0 November, 0-- Bank statement balance, November $,.0 Book balance, November Additions and subtractions will be made to the book balance. $,. Book balance, November The adjusted book balance is computed. $,. November, 0-- Bank statement balance, November Book balance, November We say it is reconciled when the adjusted BANK and adjusted BOOK balances agree. $,.0 $,. REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES Deposits in transit Deposits that have not reached the bank or been recorded by the bank before the statement is prepared Outstanding checks Checks that have not been presented to the bank for payment before the statement is prepared Service charges Bank charges for services such as check printing and processing

5 REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES (CONT.) Collections Collections of promissory notes or charge accounts made by the bank on behalf of the depositor Not sufficient funds (NSF) checks Checks deposited but not paid because the drawer did not have sufficient funds Errors Errors made by the bank or by the depositor in recording cash transactions BANK RECONCILIATION THREE STEPS: STEP # Identify deposits in transit and related errors. STEP # EXAMPLE Compare the 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. A deposit in the accounting records of $.0, dated November, had not been received by the bank. DEPOSIT IN TRANSIT November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 Book balance, November DEPOSITS IN TRANSIT are added to the bank balance. $,. STEP # Identify outstanding checks and related errors. Compare canceled checks with the bank statement and accounting records. If they differ, the error needs to be corrected.

6 STEP # EXAMPLE Check no. was written for $. but was entered on the check stub and on the books as $.. $0.0 ERROR November, 0-- Bank statement balance, November Add deposit in transit $0.0 is added back to the book balance. $,.0.0 Book balance, November $,. Add error on check no. 0.0 STEP # Identify outstanding checks and related errors. Compare canceled checks with the bank statement and accounting records. If they differ, the error needs to be corrected. Check mark the stub or accounting records to indicate that the check has cleared. STEP # EXAMPLE Check numbers,, and do not appear on the bank statement. OUTSTANDING CHECKS Checks written but not cleared are OUSTANDING CHECKS. These are subtracted from the bank balance on the reconciliation. November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 Deduct outstanding checks: No. No. No. Book balance, November Add error on check no. $ $,. 0.0 STEP # 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. Outstanding checks are deducted from the bank balance.

7 STEP # EXAMPLE Maple used an ATM machine to make a withdrawal from his account of $0.00 for personal use. However, he forgot to record this withdrawal on the books. Deduct $0.00 from the book balance. November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 Deduct outstanding checks: No. $00.00 No..00 No... Book balance, November Add error on check no. $,. 0.0 Unrecorded ATM withdrawal $0.00 STEP # EXAMPLE The bank returned an NSF check of $00.00 written by one of Maple s clients. Deduct $00.00 from the book balance. November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 Deduct outstanding checks: No. $00.00 No..00 No... Book balance, November Add error on check no. $,. 0.0 Unrecorded ATM withdrawal $0.00 NSF check STEP # EXAMPLE The bank deducted $.0 from Maple s account for service charges. Deduct $.0 from the book balance. November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 Deduct outstanding checks: No. $00.00 No..00 No... Book balance, November Add error on check no. $,. 0.0 Unrecorded ATM withdrawal $0.00 NSF check Bank service charge.0

8 November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 $,. Deduct outstanding checks: No. $00.00 No..00 No... Book balance, November Add error on check no. The bank balance section of $,0. $,. 0.0 the reconciliation is totaled. Unrecorded ATM withdrawal $0.00 NSF check Bank service charge.0 November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 $,. Deduct outstanding checks: No. $00.00 No. Then the book balance.00 No. section is totaled... $,0. Book balance, November $,. Add error on check no. 0.0 $,. Unrecorded ATM withdrawal $0.00 NSF check Bank service charge $,0. EXAMPLE We now know that the actual amount of cash is $,0., but the general ledger cash account still shows $,.. JOURNAL ARE NEEDED!!! Only two kinds of items appearing on a bank reconciliation require journal entries: Errors in the depositor s books Bank additions and deductions that do not already appear in the books ALL items in the book balance section of the reconciliation require a journal entry. November, 0-- Bank statement balance, November $,.0 Add deposit in transit.0 $,. Deduct outstanding checks: No. These items will $00.00 No. require journal entries..00 No... Book balance, November Add error on check no. $,0. $,. 0.0 $,. Unrecorded ATM withdrawal $0.00 NSF check Bank service charge $, Nov. Cash 0 0 When check no. was written, the cash account was credited for $0.0 more than the check amount of $.. This entry puts $0.0 back in the Cash account.

9 0-- Nov. Cash 0 0 Accounts Payable Error in recording check 0 0 Accounts Payable was originally debited for $.. This was $0.0 more than the actual telephone bill of $.. This entry removes the extra $ Nov. Cash 0 0 Accounts Payable 0 0 Error in recording check J. M., Drawing 0 00 Since the ATM withdrawal was for personal expenses, the drawing account should be debited. 0-- Nov. Cash 0 0 Accounts Payable 0 0 Error in recording check J. M., Drawing 0 00 Cash 0 00 The $0 withdrawal was never recorded. This entry will remove the $0.00 from the cash account. 0-- Nov. Cash 0 0 Accounts Payable 0 0 Error in recording check J. M., Drawing 0 00 Cash 0 00 Unrecorded ATM withdrawal 0 Accounts Receivable Cash Unrecorded NSF check The amount of the bounced check is placed into Accounts Receivable and Cash is reduced. 0 Accounts Receivable Cash Unrecorded NSF check Miscellaneous Expense 0 Cash 0 Bank service charge Service charges are usually small; often they are put into Misc. Expense.

10 Establish and use a petty cash fund. THE PETTY CASH FUND 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 custodian 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. EXAMPLE Maple wants to establish a $00 petty cash fund to be used to make small purchases. CASH 00 $00 is withdrawn (by check) from the cash account. EXAMPLE Maple wants to establish a $00 petty cash fund to be used to make small purchases. CASH PETTY CASH Petty Cash is an ASSET account. JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND PETTY CASH VOUCHER 0-- Dec. Petty Cash Cash Establish petty cash fund A receipt prepared for every payment from the petty cash fund. Voucher shows the: Name of the payee Purpose of the payment Account to be charged for the payment (e.g., Postage Expense) Signatures of the custodian and payee

11 PETTY CASH PAYMENTS RECORD A special multi-column record that supplements the regular accounting records Provides a record of each petty cash payment Broken down by account e.g.: Travel/Entertainment Expense, Postage Expense, etc. Used to prepare the replenishment journal entry REPLENISHING THE PETTY CASH FUND The petty cash fund 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 further 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. EXAMPLE. At the end of the month, the petty cash fund contains eight vouchers and only $.0 in cash. The fund needs to be replenished. To replenish the fund: A check is written for $.0, which is the total of the eight vouchers A journal entry is made to recognize: The expenses shown on the vouchers The outflow of cash via the check JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND 0-- Dec. Automobile Expense 0 0 Postage Expense 0 Travel & Entertain. Exp. 0 Miscellaneous Expense James Maple, Drawing 0 00 Cash 0 Cash should be credited for the amount needed to restore the fund to its established amount. ($00.00 fund $.0 in box = $.0 needed) JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND 0-- Dec. Automobile Expense 0 0 Postage Expense Travel & Entertain. Exp. Miscellaneous Expense James Maple, Drawing Cash 0 The journal entry balances!!! Vouchers (amounts debited) equal the amount needed to replenish the fund (credit). JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND 0-- Dec. Automobile Expense 0 0 Postage Expense 0 Travel & Entertain. Exp. 0 Miscellaneous Expense James Maple, Drawing 0 00 Cash 0 Replenishment of petty cash fund

12 Establish a change fund and use the cash short and over account. CHANGE FUND A supply 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 change fund is held back for use on the following day EXAMPLE EXAMPLE Sporty s Cleaners is opening for business on June. Sporty needs to establish a $00 change fund. Sporty s Cleaners is opening for business on June. Sporty needs to establish a $00 change fund. CASH 00 Just like the petty cash fund, a change fund starts by withdrawing from the cash account. CASH Change Fund is an ASSET. CHANGE FUND JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND EXAMPLE 0-- June Change Fund Cash Establish change fund At the close of its first day of business, Sporty s had $,0.00 in the cash register. CASH IN DRAWER $,0.00 Less:CHANGE FUND CASH FROM SALES $,0.00 The CASH from sales should agree with the sales recorded on the cash REGISTER TAPE.

13 EXAMPLE At the close of its first day of business, Sporty s had $,0.00 in the cash register. CASH IN DRAWER $,0.00 Less:CHANGE FUND CASH FROM SALES $,0.00 Sales from the cash register tape are also $,0.00!!! JOURNAL ENTRY FOR RECORDING CASH FROM SALES 0-- June Cash,0 00 Only the $,0.00 is debited to Cash and deposited. The change fund is not deposited. JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.) 0-- June Cash,0 00 Sales Cash received from sales,0 00 What would have happened if the cash register tape didn t agree with the cash from sales? CASH SHORTAGE EXAMPLE At the close of its first day of business, Sporty s had $,0.00 in the cash register. CASH IN DRAWER $,0.00 Less:CHANGE FUND CASH FROM SALES $,0.00 What if the cash register tape had shown sales of $,.00? CASH SHORTAGE EXAMPLE CASH IN DRAWER $,0.00 Less: CHANGE FUND CASH FROM SALES $,0.00 CASH REGISTER TAPE $,.00 SHORTAGE $.00 Overages and shortages are recorded in an account called CASH SHORT AND OVER. JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE 0-- June Cash,0 00 Cash is debited for the amount deposited.

14 JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.) 0-- June Cash,0 00 Cash Short and Over 00 Cash Short and Over is debited for shortages and credited for overages. JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.) 0-- June Cash,0 00 Cash Short and Over 00 Sales, 00 Sales is credited for the amount on the cash register tape even though this was not the amount collected. CASH OVERAGE EXAMPLE At the close of its first day of business, Sporty s had $,0.00 in the cash register. CASH IN DRAWER $,0.00 Less:CHANGE FUND CASH FROM SALES $,0.00 What if the cash register tape had shown sales of $,.00? CASH OVERAGE EXAMPLE At the close of its first day of business, Sporty s had $,0.00 in the cash register But the cash register tape showed $,.00 CASH IN DRAWER $,0.00 Less: CHANGE FUND CASH FROM SALES $,0.00 CASH REGISTER TAPE $,.00 OVERAGE $.00 JOURNAL ENTRY FOR RECORDING A CASH OVERAGE 0-- June Cash,0 00 Cash Short and Over 00 Cash Short and Over is debited for shortages and credited for overages. JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.) 0-- June Cash,0 00 Cash Short and Over 00 Sales, 00 Sales is credited for the amount on the cash register tape even though this was not the amount collected.