Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 8 Cash and Cash Controls

8-2 Learning Objective 1 Define cash and describe three guidelines for control of cash.  Cash includes currency and coins along with the amounts on deposit in bank accounts. Control of cash focuses on three areas: 1.Those who handle cash should be separate from those who keep records of cash. 2.Cash receipts should be deposited daily in the bank. 3.Cash disbursements should be made by check. LO1

8-3 Learning Objective 2 Describe controls for cash receipts. Cash sheets Cash Sales Cashier Department Clerk Supervisor Cash Cash sheets Register sheets Cash Deposit Slip Journal Entry LO2

8-4 Cash Over and Short Due to human error, the cash in the cash register might not be equal to the record of cash receipts. Assume that daily sales were shown to be $550 but the cash count at the end of the day indicated cash in the register of $555. The journal entry for an overage would look like this. Now let’s assume that the register’s record shows $625 but the count in the register is $621.The journal for a shortage would look like this. LO2

8-5 Learning Objective 3 Describe controls for cash disbursements A common internal control policy is to require that all disbursements be made by check. Other controls include the separation of the following duties:  Authorization for the disbursement  Check signing  Recordkeeping  Using a voucher system LO3

8-6 Learning Objective 4 Explain and record petty cash fund transactions. 1) The company cashier processes a check for the petty cash amount and gives it to the petty cashier. 2) Next the accountant makes an entry to debit Petty Cash and credit Cash for the amount of the check. 3) Then the petty cashier takes the check to the bank and cashes it. The cash is brought back and placed in a secure location. 4) As petty cash is needed, the petty cashier supplies the cash for the purchases. 5) Receipts supporting the petty cash disbursements are given to the petty cashier. 6) When the petty cash fund is low, the petty cashier takes the receipts to the company cashier and requests a check in that amount to replenish the petty cash fund. LO4

8-7 Petty Cash Example Journal entry to replenish petty cash fund LO4

8-8 Learning Objective 5 Identify banking activities as controls of cash. Bank Accounts Signature Cards Deposit Tickets ChecksChecks Electronic Funds Transfer Bank Statements Offer certain protections for your cash. For example, use of a bank account is a more secure place for your cash than a safe at the office. Are used so the bank knows whose signature is approved for use on checks. Limit the number of people who have their hands on the cash, thus reducing the chance of theft and fraud. Enable the customers the ability to reconcile their accounts in a timely manner and notice any unusual or unauthorized activity. Provide support for deposits to your account. Provide authorization for disbursements from your account. LO5

8-9 Learning Objective 6 Describe a bank statement The bank sends each depositor a bank statement showing the activity in the account. Bank statements usually include: 1.Beginning-of-period balance of the depositor’s account. 2.Checks and other debits decreasing the account during the period. 3.Deposits and other credits increasing the account during the period. 4.End-of-period balance of the depositor’s account. LO6

8-10 Learning Objective 7 Prepare and explain a bank reconciliation. A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on a company’s books. A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on a company’s books. * LO7

8-11 Bank Reconciliation Two sections: 1.Reconcile bank statement balance to the adjusted bank balance. 2.Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. Two sections: 1.Reconcile bank statement balance to the adjusted bank balance. 2.Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. LO7

8-12  ‘     The July 31 bank statement indicated a balance of $9,610. The cash general ledger account on that date shows a balance of $7, Outstanding checks totaled $2, A $500 check mailed to the bank for deposit had not reached the bank at the statement date. 3.The bank returned a customer’s NSF check for $225 received as payment on account receivable. 4.The bank statement showed $30 interest earned during July. 5.Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $ A $486 deposit by Mary, Inc. was erroneously credited to our account by the bank. LO7

8-13 Adjusting Entries from a Bank Reconciliation Only amounts shown on the book portion of the reconciliation require an adjusting entry. Only amounts shown on the book portion of the reconciliation require an adjusting entry. LO7

8-14 End of Chapter 8