1. 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

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. 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:

4. 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.

5. 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.

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

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

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

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

10. 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.

11. 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.

12. 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.

13. Basic Features of the Voucher System13
A voucher system is a set of procedures for authorizing and recording liabilities and cash payments.
Basic Features of the Voucher System

14. 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.

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

16. 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.

17. 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

18. 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.

19. 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.

20. 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

21. 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
$4,175.98
A deposit of $ did not appear on the bank statement.

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

23. 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
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,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 $ did not appear on the bank statement.

24. Depositor’s records Bank’s books
Beginning balance $3,359.78
Add deposit not
recorded by bank
$4,175.98
Beginning balance $2,549.99
Add note and interest
collected by bank
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,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.

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

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

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

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

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

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

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

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

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

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

35. Petty Cash

36. 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
Cash
Established petty cash fund.

37. 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
Store Supplies
Miscellaneous Administrative Exp
Cash
Replenished petty cash fund.

38. 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.

39. 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
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?

40. Chapter 7
The End