1. 1 Chapter 10 Cash and cash equivalents

2. Overview 2 What we will be looking at: - What are “cash and cash equivalents”? - The bank account - Means of payment - Bank reconciliation

3. Definition 3 Cash and cash equivalents comprise the most liquid assets found in SFP They are assets that are: readily convertible into cash, Which means?? can be converted into cash immediately Its of a short-term nature (maturity of 3 months or less at time of purchase) Compared to a short-term investments which have a maturity of 12 months or less, and long-term investments are any investments that mature in excess of 12 months

4. Examples 4 Currency (Coins and notes) Bank balances Call deposits Petty cash Savings accounts Other money market holdings Treasury bills Short-term government bonds Commercial paper Not NB

5. Presentation 5 The amount of cash and cash equivalents will be presented in the statement of financial position under current assets. Analyzing the change in cash flows? The change in the amount of cash and cash equivalents during a reporting period is explained in the statement of cash flows.

6. 6 Bank account

7. Description 7 A cheque/bank account is an account that the entity holds with the bank in which the funds of the entity are stored and from which they are administered. The bank will make payments into and from the account on behalf of the entity and will charge a fee for doing so (Bank Charges).

8. Contracts between the bank and entity 8 Agreements made between the entity and the bank will be contained in a contract, which can provide for the following: Interest earned on a favourable bank balance where the bank pays the entity interest. If an overdraft facility was agreed upon, it is possible for the entity to overdraw the bank account (i.e. make more payments than the amount of cash actually available therein). Interest will be charged on this overdrawn bank balance.

9. Recording: Entity vs Bank 9 The entity will record all transactions that affect bank in the bank account in the entity’s records. The bank will also keep a record of these transactions made by the entity in the form of a a bank/cheque account statement. The bank account in the entity’s records and the bank statement in the bank’s records contain comparable entries on opposite sides.

10. Recording: Entity vs Bank 10 EntityBank Record of bank transactions Bank accountBank statement Receipts by the entityDebitCredit Payments by the entityCreditDebit Dr balance on bank account in entity’s records Financial asset Financial liability Cr balance on bank account in entity’s records Financial liability Financial asset

11. Bank statement 11 The entity will receive a bank statement from the bank on a daily-, weekly- or monthly basis and can also access this statement electronically. Since the bank account and bank statement should reflect the same balances, the entity will compare this bank statement to the bank account in the entity’s records to ensure that the entity and the bank have correctly accounted for all the cash transactions.

12. Bank statement 12 The bank statement and bank account may differ due the following reasons: Items in the bank account not yet be reflected on the bank statement Mistakes made by the entity or the bank To identify these differences, first need to obtain understanding of how the bank and the entity account for certain cash transactions.

13. Cash payments 13 Debit Card payments Notes and coins Cheques Stop orders EFT payments Familiarise yourself with the meaning of each.

14. General process 14 The entity will receive on a daily basis, notes and coins, cheques and payments made with debit- and credit cards from cash sales or payments made by receivables. When these receipts are “received”, the employees will capture the details thereof onto the accounting system which will then process the relevant journals on that day.

15. Card payments 15 The Entity: A card payment is “received” once the card is swiped and approved by the BANKSERVE (NAMCLEAR) system -the receipt is debited to the bank account in the entity’s records. The Bank: During the evening of the relevant day, all the card payments received during the day will be cleared between banks by the BANKSERVE system and credited in one total amount onto the bank statement.  No timing difference, it happens on the same day

16. Notes, coins and cheques 16 The Entity: A payment made by notes, coins or cheques will be “received” as it is handed over to entity. During the evening of that day, a deposit slip will be completed for all the notes, coins and cheques received. The Bank: Only during the following morning, will the entire amount (for the previous day) actually be deposited into the entity’s bank account. This physical deposit however, does not require another journal.

17. Notes, coins and cheques 17  Timing difference arises: On the relevant day - the receipt will be debited to the bank account of the entity’s records. (AS the transaction occurs) On the following morning – the receipt will be credited onto the bank statement.

18. Cheques 18 The cheques deposited in the morning will then be cleared between banks by the ACB system that night. Clearance = no problem If not cleared due to insufficient funds in the cheque account of the cheque issuer (Receivable of the entity)– the cheque is sent back. The Bank This is known as a dishonored cheque and will be marked “refer to drawer(RD) – insufficient funds”. The Entity The entity will than have to credit the bank account – but will only do so when they receive the cheque back.  Timing difference.

19. Stop orders 19 Stop order agreements allow the entity’s bank to recover, on certain date of every month, the stop order amount from the customer’s bank – which will be debited to bank account in the entity’s records. The stop orders will then be cleared between banks by the ACB system at night and credited onto the bank statement.  No timing difference, done on the same day The beneficiary of the stop order gives the bank the instruction to recover the cash and so they will know about it before the payer will.

20. EFTs 20 Electronic transfer of funds are payments made by making use of the bank’s electronic banking services. These payments are made directly from one cheque account to another. Therefore EFTs made into the entity’s bank account will be reflected on the bank statement but wont be recorded in the bank account since the entity will not have knowledge of these direct payments until receipt of the bank statement.

21. Payments 21 Cheques Stop orders EFT payments Familiarise yourself with the meaning of each.

22. Cheques 22 Since cheque payments are initiated by the entity, the cheques made out by the entity as payments are recognised in the bank account on the date that it is delivered to the beneficiary. This cheque will then be deposited by the beneficiary and then cleared between the banks. Thus this cheque payment will only reflect on the bank statement a few days after it was presented to the beneficiary  timing difference.

23. EFTs 23 A payment made by way of EFT from the entity’s bank account are also initiated by the entity. They are done online and will be recognised in the bank account on the payment date specified. EFT payments will usually be processed within the same day and will therefore also reflect on the bank statement on the same day.  No timing difference

24. Direct debits or credits 24 Transactions that take place directly between the entity’s bank and third parties. Therefore they will initially be reflected on the bank statement but not yet recognised in the bank account. The entity will have to recognised them from the bank statement.

25. Direct debits or credits 25 Examples of direct deposits into the entity’s cheque account: Receivable can pay their account by means of EFT or by depositing into the entity’s bank account at a branch of the entity’s bank. Receipts from other customers by EFT Credit by the bank for interest on favourable bank balance Reflected as credits on bank statement

26. Direct debits or credits 26 Examples of direct payments from the entity’s cheque account: Charging of bank charges and interest on overdrawn bank balances by the bank chapter 5 Stop orders Reflected as debits on bank statement

27. 27 Bank reconciliation

28. 28 Document used to reconcile two related amounts that should be the same on a specific date. Here the two amounts are the balance on bank account in the entity’s records and the balance on the bank statement. The Bank recon is an internal control.

29. Steps 29 1.Record transactions in the bank account as cash transactions occur mentioned earlier 2.Compare the bank account to the bank statement and vice versa and tick off corresponding amounts – can be done electronically 3.Recognise in the entity’s records on date of bank statement, entries reflected on the bank statement that aren’t ticked off and then tick off 4.Take items that are not ticked off on the bank account and recon entries of previous period to the bank reconciliation = timing differences mentioned eariler 5.Follow up on any errors in bank statement or bank account – point out to the bank or correct in records. 6.Repeat next period.

30. Steps 30 These steps can either be performed on a daily or monthly basis – depending on how often the entity has access to the bank statements as well as the cost vs benefit of this process.