1. 6 Cash and Receivables Accounting School · Zhongnan University of Economics & Law ntermediate Accounting ntermediate Accounting I 中级会计学

2. 1. Accounting for cash Intermediate Accounting 6 Cash and Receivables Cash is the resources on hand to meet planned expenditures and emergency situations.

3. Components of Cash vs. non-components Intermediate Accounting 6 Cash and Receivables Cash Included in CashExcluded from Cash Coins and currency Checking accounts Savings accounts Negotiable checks Bank drafts Certificates of deposit Bank overdrafts Postdated checks Travel advances Postage stamps

4. Cash and Cash Equivalents Many companies report investments in very short-term, interest-earning securities as cash equivalents in the balance sheet. Intermediate Accounting 6 Cash and Receivables

5. Cash Management Intermediate Accounting 6 Cash and Receivables Control Over Receipts  Immediately count the receipts (by the person opening the mail or the sales person using the cash register).  Record daily all cash receipts in the accounting records.  Deposit daily all receipts in the company ’ s bank account.

6. Cash Management Intermediate Accounting 6 Cash and Receivables Control Over Payments  Make all payments by check (except petty cash items) so that a record exists for every company expenditure.  Authorize and sign all checks only after an expenditure is verified and approved.  Periodically reconcile the cash balance in the bank statements with the company’s accounting records.

7. Petty Cash A petty cash system is a cash fund created to allow a company to pay for small amounts that might be impractical or impossible to pay by check.  The entry to record the establishment of the fund is: Petty Cash 500 Cash 500  The petty cash account is neither debited nor credited again unless the fund size is to be increased or decreased. Intermediate Accounting 6 Cash and Receivables

8. Petty Cash  As money is paid from the fund, prenumbered vouchers are prepared to document the expenditures but no journal entries are made until the fund is reimbursed.  At the time of reimbursement, appropriate expense accounts are debited and the cash account is credited as follows : Office Supplies Expense 120 Postage Expense 150 Cash 370 Intermediate Accounting 6 Cash and Receivables

9. 2. Bank Reconciliation A company prepares a monthly bank reconciliation in order to analyze and reconcile the differences between the cash balance on the monthly bank statement and the company's accounting record of the proper cash balance. Intermediate Accounting 6 Cash and Receivables

10. Common causes of differences Intermediate Accounting 6 Cash and Receivables  Outstanding checks  Deposits in transit  Charges made by the bank  Deposits made directly by the bank  Errors

11. Procedures in preparing a bank reconciliation Intermediate Accounting 6 Cash and Receivables  Compare the deposits listed on the company's records with the deposits on the bank statement;  Compare the checks listed in the company's records with the checks shown on the bank statement;  Identify any deposits or charges made directly by the bank that are not included in the company's records;  Determine the effect of any errors;  Complete the bank reconciliation

12. Balance per books.............. $3,950 Additions to book balance: Direct deposit...................… 450 Interest.............................… 71 Total............................… $4,471 Deductions from book balance: Service charge...........…$ 7 NSF check.................… 100 Error in recording check 180 287 Adj. book balance $4,184 Balance per bank.... $4,135 Additions to bank balance: Deposits in transit.... 500 Total................... $4,635 Deductions from bank balance: Outstanding checks: 191....... $251 192....... 125 195....... 75 451 Adj. bank balance$4,184 Intermediate Accounting 6 Cash and Receivables Lee Corporation Bank Reconciliation July 31, 2005

13. 3. Special topics Electronic funds transfer systems The use of computer systems to transfer funds between parties without the use of checks, is increasingly being used by banks to process the large number of cash transactions generated by large companies. Because fewer physical source documents (in the form of checks) are available to substantiate such transactions, the importance of internal controls, such as bank reconciliations, is even greater. The use of computer systems to transfer funds between parties without the use of checks, is increasingly being used by banks to process the large number of cash transactions generated by large companies. Because fewer physical source documents (in the form of checks) are available to substantiate such transactions, the importance of internal controls, such as bank reconciliations, is even greater. Intermediate Accounting 6 Cash and Receivables

14. Special topics Compensating balances Banks may require a portion of any amount loaned to remain on deposit with the bank for the duration of the loan period. These required deposits are called compensating balances. SEC requires that compensating balances be separately reported on a company's balance sheet if the compensating balances are legally restricted. If they are not legally restricted, they are disclosed in the notes to the financial statements. Banks may require a portion of any amount loaned to remain on deposit with the bank for the duration of the loan period. These required deposits are called compensating balances. SEC requires that compensating balances be separately reported on a company's balance sheet if the compensating balances are legally restricted. If they are not legally restricted, they are disclosed in the notes to the financial statements. Intermediate Accounting 6 Cash and Receivables

15. 4. Receivables Receivables are all claims against other entities. They are usually settled in cash. Trade receivables: Receivables arising from normal operating activities. Nontrade receivables: All receivables arising from activities other than normal operations. Intermediate Accounting 6 Cash and Receivables

16. Trade Receivables Revenue Recognition and Valuation Normal circumstances Right of return Valuation Cash discounts Sales returns and allowances Uncollectible accounts Financing arrangements Recording and Reporting Accounts Receivable Interest-bearing Non-interest- bearing Discounted Recording and Reporting Notes Receivable Intermediate Accounting 6 Cash and Receivables

17. Accounts receivable Intermediate Accounting 6 Cash and Receivables Cash (sales) discounts. A cash (sales) discount is offered to customers to encourage prompt payment of bills

18. Accounting for Cash (sales) discounts Intermediate Accounting 6 Cash and Receivables Gross price method Assume on March 15, $1,000 of merchandise is sold on account. The terms of the agreement are 2/10, n/30. The firm uses the gross method for record sales on account. Entry on date of sale: Accounts Receivable 1,000 Sales 1,000 ContinuedContinued

19. Accounting for Cash (sales) discounts Intermediate Accounting 6 Cash and Receivables Gross price method If paid within the discount period: Cash 980 Sales Discounts 20 Accounts Receivable 1,000 If not paid within the discount period: Cash 1,000 Accounts Receivable 1,000

20. Accounting for Cash (sales) discounts Intermediate Accounting 6 Cash and Receivables Net price method ContinuedContinued This time, assume that all sales on account are recording using the net method. Again, the terms of the agreement are 2/10, n/30. At the point of sale (March 15): Accounts Receivable980 Sales 980

21. Accounting for Cash (sales) discounts Intermediate Accounting 6 Cash and Receivables Net price method If paid within the discount period: Cash980 Accounts Receivable 980 If not paid within the discount period: Cash1,000 Sales Discounts Not Taken20 Accounts Receivable 980

22. Sales Returns and Allowances Intermediate Accounting 6 Cash and Receivables Felton Company sold $1,000 of merchandise. When delivered, it was determined that the wrong color had been sent. The customer agrees to keep the merchandise for a reduction in price of $100. What are the journal entries? Sales entry: Accounts Receivable (Cash)....… 1,000 Sales..................................…. 1,000 Sales allowance entry: Sales Returns and Allowances..… 100 Accounts Receivable (Cash).. 100

23. Sales Returns and Allowances Intermediate Accounting 6 Cash and Receivables Sales entry: Accounts Receivable (Cash)....… 1,000 Sales..................................…. 1,000 Felton Company sold $1,000 of merchandise. One week later, when it was delivered, $100 in merchandise (cost, $60) was the wrong color. With Felton’s approval, it was returned. What are the journal entries? Sales return entry: Sales Returns and Allowances..… 100 Accounts Receivable (Cash).. 100 Inventory………………………… 60 Cost of Goods Sold…………. 60

24. 6. Valuation of accounts receivable for uncollectible accounts Intermediate Accounting 6 Cash and Receivables  Bad debt occur when customers do not pay for items or services purchased on credit.  Bad debts are uncollectible accounts receivable.  Bad Debt Expense is reported as a selling or general and administrative expense.  Accounts receivable are reported on the balance sheet at their net realizable value.

25. Accounting for Uncollectible Receivables (Direct Method) Intermediate Accounting 6 Cash and Receivables Write Off: Bad Debts Expense…………….400 Accounts Receivable………. 400 To write off an uncollectible account. This entry is made when the account has been determined uncollectible. Since this determination was made after the period in which the sale takes place, the matching principle is violated. This method is not accepted under GAAP.

26. Accounting for Uncollectible Receivables (Estimated Bad Debts Method) Intermediate Accounting 6 Cash and Receivables Bad debts can be estimated based on sales or on accounts receivable.

27. Estimated Bad Debts Method Intermediate Accounting 6 Cash and Receivables 1.Relationship to sales (income statement approach): a. Percentage of sales b.Percentage of net credit sales 2.Relationship to accounts receivable (balance sheet approach): a.Percentage of outstanding accounts receivable b.Aging of accounts receivable

28. Estimated Bad Debts Method Intermediate Accounting 6 Cash and Receivables In this method, an estimate of the total uncollectible accounts is made at the end of the period, and an expense is recognized. Bad Debts Expense………………….. 2,000 Allowance for Doubtful Accounts.. 2,000 To record estimated uncollectible accounts. When the account is then determined to be uncollectible, the write-off entry is: Allowance for Doubtful Accounts……... 400 Accounts Receivable……………… 400 To write off an uncollectible account.

29. 7. Generating immediate cash from accounts receivable Intermediate Accounting 6 Cash and Receivables There are three basic forms of financing agreements to obtain cash from accounts receivable. Pledging Assigning Factoring Pledging Assigning Factoring

30. Accounts Receivable Financing Agreements Retain Risks and Benefits of Ownership Pledge (Collateral for Loans) Transfer Some Risks and Benefits of Ownership Assign (Specific Receivables with Recourse) Transfer Risks and Benefits of Ownership Factor (Sale without Recourse) Intermediate Accounting 6 Cash and Receivables

31. Pledging When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing activities remain its responsibility. Intermediate Accounting 6 Cash and Receivables

32. When a company assigns its accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts. Assignment of Accounts Receivable Intermediate Accounting 6 Cash and Receivables

33. When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor). Factoring of Accounts Receivable Intermediate Accounting 6 Cash and Receivables

34. Sale of Accounts Receivable Accounts Receivable Established Goods and Services Provided CustomersCompany FactorFactor Cash from Factoring Accounts Receivable Payment of Accounts Receivable Factoring of Accounts Receivable Intermediate Accounting 6 Cash and Receivables

35. Lee Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on the gross amount of factored accounts receivable. Factoring Cash60,000 Receivables from Factor8,000 Factoring Expense12,000 Accounts Receivable80,000 ($80,000 x.90) - $12,000 $80,000 x 0.10 $80,000 x 0.15 Intermediate Accounting 6 Cash and Receivables

36. 8. Notes Receivable Intermediate Accounting 6 Cash and Receivables A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date.

37. Notes Receivable Intermediate Accounting 6 Cash and Receivables  They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments.  They usually involve interest, requiring the separation of the receivables into its principal and interest components. Notes receivable generally have two attributes that are not found in accounts receivable:

38. Notes Receivable Interest-Bearing Received a $5,000, 60-day, 12% note on October 1, 2004. Notes Receivable5,000 Sales5,000 Received maturity value on December 1, 2004. Cash5,100 Notes Receivable5,000 Interest Revenue100 $5,000 x 0.12 x 60/360 Intermediate Accounting 6 Cash and Receivables

39. Notes Receivable Non-Interest-Bearing Received a $5,100, 60-day, non-interest-bearing note on October 1, 2004. Notes Receivable5,100 Interest Revenue100 Sales5,000 Received maturity value on December 1, 2004. Cash5,100 Notes Receivable5,100 Intermediate Accounting 6 Cash and Receivables

40. Notes Receivable Discounted On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from the customer on August 1, is for 90 days, has a face value of $5,000, and carries an interest rate of 12%. Intermediate Accounting 6 Cash and Receivables

41. 1.Face value of note$5,000.00 2.Interest to maturity ($5,000 x 0.12 x 90/360) 150.00 3.Maturity value of note$5,150.00 4.Discount ($5,150 x 0.14 x 60/360) (120.17) 5.Proceeds$5,029.83 6.Accrued interest revenue: $50 7.Book value of note ($5,000 + $50) (5,050.00) 8.Loss from discounting of note$ (20.17) Notes Receivable Discounted Intermediate Accounting 6 Cash and Receivables

42. Notes Receivable Discounted October 30, 2004 Notes Receivable Discounted5,000.00 Notes Receivable5,000.00 Cash5029.83 Loss from Discounting of Note20.17 Notes Receivable Discounted5,000.00 Interest Receivable50.00 August 31, 2004 Interest Receivable50.00 Interest Revenue50.00 Intermediate Accounting 6 Cash and Receivables

43. Notes Receivable Discounted Assume instead that on November 3, 2004 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee. Notes Receivable Dishonored5,160 Notes Receivable Discounted5,000 Notes Receivable5,000 Cash5,160 Intermediate Accounting 6 Cash and Receivables

44. The End Intermediate Accounting 6 Cash and Receivables