Chapter 7 Cash Accounting, 21st Edition Warren Reeve Fess © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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After studying this chapter, you should be able to: Objectives 1. Describe the nature of cash and the importance of internal control over cash. 2. Summarize basic procedures for achieving internal control over cash receipts. 3. Summarize basic procedures for achieving internal control over cash payments, including the use of a voucher system. 4. Describe the nature of a bank account and its use in controlling cash. After studying this chapter, you should be able to:

Objectives 5. Prepare a bank reconciliation and journalize any necessary entries. 6. Account for small cash transactions using a petty cash fund. 7. Summarize how cash is presented on the balance sheet. 8. Compute and interpret the ratio of cash to current liabilities.

Control Over Cash Many companies need several cash accounts to account for different cash categories and funds. Most companies have multiple bank accounts. The title for each bank account should be: Cash in Bank—(Name of Bank) Preventive controls protect cash from theft and misuse of cash. Detective controls are designed to detect theft or misuse of cash and are also preventive in nature.

Retailers’ Sources of Cash ACCOUNTINGDEPARTMENT Register records Cash Receipts CASHIER’S DEPARTMENT ACCOUNTINGDEPARTMENT Mail Receipts Remittance advices

Retailers’ Sources of Cash ACCOUNTINGDEPARTMENT CASHIER’S DEPARTMENT ACCOUNTINGDEPARTMENT Deposit ticket 1 Bank Deposit receipt

Controlling Cash Received from Cash Sales Cash Short and Over 8 00 Sales 3 150 00 To record cash sales and actual cash on hand. Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the change fund, only $3,142.00 was on hand.

Controlling Cash Received in the Mail Most companies’ invoices are designed so that customers return a portion of the invoice, call a remittance advice.

Controlling Cash Received in the Mail 1. The employee who opens the mail should initially compare the amount received with the amount on the remittance advice. 2. The employee opening the mail stamps checks and money orders “For Deposit Only” in the bank account of the business. 3. All cash is sent to the Cashier’s Department where checks and money orders are combined with receipts from cash sales and a bank deposit ticket is prepared.

Controlling Cash Received in the Mail 4. The remittance advices and their summary totals are delivered to the Accounting Department where a clerk prepares the records of the transactions and posts them to the customer account. 5. The stamped duplicate copy of the deposit ticket is returned to the Accounting Department where a clerk compares the receipt with the total amount that should have been deposited.

Internal Control of Cash Payments 1. Cash controls must provide assurance that payments are made for only authorized transactions. 2. Cash controls should ensure that cash is used efficiently. 3. A voucher system provides assurance that what is being paid for was properly ordered, received, and billed by the supplier.

Basic Features of the Voucher System 13 A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. Basic Features of the Voucher System

Basic Features of the Voucher System A voucher system normally uses vouchers. The system normally has a file for unpaid vouchers and a file for paid vouchers. Usually prepared by the Accounting Department after all necessary supporting documents are received (purchase order, supplier’s invoice, and a receiving report). In preparing the voucher, the accounts payable clerk verifies the quantity, price, and mathematical accuracy of the supporting documents and files the paid voucher.

A summary received from the bank of all account transaction is called a statement of account.

A bank reconciliation is a listing of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger.

Reasons for Differences Between Depositor’s Records and the Bank Statement Outstanding checks Deposits in transit Service charges Collections Not-sufficient-funds (NSF) checks Errors

Steps in a Bank Reconciliation 1. Compare each deposit listed on the bank statement with unrecorded deposits appearing on the preceding period’s reconciliation and with deposit receipts. Add deposits not recorded by the bank to the balance according to the bank statement. 2. Compare paid checks with outstanding checks appearing on the preceding period’s reconciliation and with recorded checks. Deduct checks outstanding that have been paid by the bank from the balance according to the bank statement. 3. Compare bank credit memorandums to entries in the journal. Add credit memorandums that have not been recorded to the balance according to the depositor’s records.

Steps in a Bank Reconciliation 4. Compare bank debit memorandums to entries recording cash payments. Deduct debit memorandums that have not been recorded from the balance according to the depositor’s records. 5. List any errors discovered during the preceding steps.

Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Power Network prepares to reconcile the monthly bank statement as of July 31, 2006

A deposit of $816.20 did not appear on the bank statement. Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 A deposit of $816.20 did not appear on the bank statement.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

A deposit of $637.02 did not appear on the bank statement. Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60. A deposit of $637.02 did not appear on the bank statement.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check returned because of insufficient funds $300.00 The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of $300. This was a payment on account.

The bank service charges totaled $18.00. Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 The bank service charges totaled $18.00.

Depositor’s records Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $4,175.98 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 $2,957.99 Error recording Check No. 879 9.00 327.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.

Depositor’s records Bank’s books Beginning balance $3,359.78 Beginning balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 Error recording Check No. 879 9.00 327 Adjusted balance $2,630.99 Adjusted balance $2,630.99

Now, if desired, we can prepare a formal statement for Power Networking.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Journal entries must be prepared for those items that affected the depositor’s side of the reconciliation.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Entries Related to a Bank Reconciliation July 31 Cash 408 00 Notes Receivable 400 00 Interest Receivable 8 00 Note collected by bank.

Power Networking Bank Reconciliation July 31, 2006 Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00

Entries Related to a Bank Reconciliation July 31 Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Receivable 8 00 30 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Administrative Exp. 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00 NSF check, bank service charges, and error in recording Check no. 879.

Petty Cash

On August 1, issued Check No On August 1, issued Check No. 511 for $100 to established a petty cash fund. Aug. 1 Petty Cash 100 00 Cash 100 00 Established petty cash fund.

At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $28, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $3. Aug. 31 Office Supplies 50 00 Store Supplies 35 00 Miscellaneous Administrative Exp. 3 00 Cash 88 00 Replenished petty cash fund.

Financial Analysis and Interpretation Solvency is the ability of a business to meet its financial obligations (debts) as they are due. Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities. This ability is normally assessed by examining balance sheet relationships.

Financial Analysis and Interpretation Doomsday Ratio Laettner Co. Oakley Co. A. Cash and equivalents $100,000 $ 120,000 B. Current liabilities 400,000 1,500,000 Doomsday ratio A / B 0.25 0.08 Use: To indicate the company’s ability to meet creditors obligations in the worst case assumption that should the business cease to exist. How are these ratios used?

Chapter 7 The End