Chapter 7CashAccounting, 21st EditionWarren Reeve FessPowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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.

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.ObjectivesAfter studying this chapter, you should be able to:

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.Objectives

Control Over CashMany 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 CashCash ReceiptsCASHIERS DEPARTMENTACCOUNTINGDEPARTMENTRegister recordsRemittance advices

1ACCOUNTINGDEPARTMENTCASHIERS DEPARTMENTRetailers Sources of Cash

Controlling Cash Received from Cash Sales19Cash3 142 00Cash Short and Over8 00To record cash sales and actual cash on hand. Sales 3 150 00Cash 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 MailMost companies invoices are designed so that customers return a portion of the invoice, call a remittance advice.

Controlling Cash Received in the Mail1.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 Cashiers 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 Mail4.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.

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.Internal Control of Cash Payments

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

Basic Features of the Voucher SystemA 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, suppliers 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 Depositors Records and the Bank StatementOutstanding checksDeposits in transitService chargesCollectionsNot-sufficient-funds (NSF) checksErrors

Steps in a Bank Reconciliation1.Compare each deposit listed on the bank statement with unrecorded deposits appearing on the preceding periods reconciliation and with deposit receipts.2.Compare paid checks with outstanding checks appearing on the preceding periods reconciliation and with recorded checks.Add deposits not recorded by the bank to the balance according to the bank statement.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 depositors records.

Steps in a Bank Reconciliation4.Compare bank debit memorandums to entries recording cash payments.5.List any errors discovered during the preceding steps.Deduct debit memorandums that have not been recorded from the balance according to the depositors records.

Banks booksBeginning balance$3,359.78Depositors recordsBeginning balance$2,549.99Power 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.Banks booksBeginning balance$3,359.78Add deposit not recorded by bank 816.20$4,175.98Depositors recordsBeginning balance$2,549.99

Banks booksDepositors recordsBeginning balance$2,549.99Add note and interest collected by bank 408.00$2,957.99The 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.Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60.Banks booksBeginning balance$3,359.78Add deposit not recorded by bank 816.20Deduct outstanding checks:No. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99$4,175.98Depositors recordsBeginning balance$2,549.99Add note and interest collected by bank 408.00$2,957.99

Banks booksDeduct outstanding checks:No. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99Depositors recordsDeduct check returnedbecause of insufficientfunds$300.00The bank returned an NSF check from one of the firms customers, Thomas Ivey, in the amount of $300. This was a payment on account.

Deduct outstanding checks:No. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99Deduct check returnbecause of insufficientfunds$300.00Bank service charges18.00The bank service charges totaled $18.00.

Banks booksDepositors recordsError recording Check No. 879 9.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26. 327.00

Banks booksBeginning balance$3,359.78Add deposit not recorded by bank 816.20Deduct outstanding checks:No. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99$4,175.98Adjusted balance$2,630.99Depositors recordsBeginning balance$2,549.99Add note and interest collected by bank 408.00Deduct check returnbecause of insufficientfunds$300.00Bank service charges18.00$2,957.99Adjusted balance$2,630.99Error recording Check No. 879 9.00 327

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

Balance per bank statement$3,359.78Add: Deposit not recorded by bank 816.20$4,175.98Deduct: Outstanding checksNo. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99Adjusted balance$2,630.99

Balance per depositors records$2,549.99Add: Note and interest collected by bank 408.00$2,957.99Deduct: NSF check (Thomas Ivey) returned$300.00Bank service charges 18.00Error in recording Check No. 879 9.00 327.00Adjusted balance$2,630.99Power NetworkingBank ReconciliationJuly 31, 2006

Journal entries must be prepared for those items that affected the depositors side of the reconciliation.

Balance per bank statement$3,359.78Add: Deposit not recorded by bank 816.20$4,175.98Deduct: Outstanding checksNo. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99Adjusted balance$2,630.99

Balance per depositors records$2,549.99Add: Note and interest collected by bank 408.00$2,957.99Deduct: NSF check (Thomas Ivey) returned$300.00Bank service charges 18.00Error in recording Check No. 879 9.00 327.00Adjusted balance$2,630.99Power Networking Bank Reconciliation July 31, 2006

July 31Cash 408 00Note collected by bank. Notes Receivable 400 00 Interest Revenue8 00Entries Related to a Bank Reconciliation

Balance per bank statement$3,359.78Add: Deposit not recorded by bank 816.20$4,175.98Deduct: Outstanding checksNo. 812$1,061.00No. 878435.39No. 883 48.60 1,544.99Adjusted balance$2,630.99

Balance per depositors records$2,549.99Add: Note and interest collected by bank 408.00$2,957.99Deduct: NSF check (Thomas Ivey) returned$300.00Bank service charges 18.00Error in recording Check No. 879 9.00 327.00Adjusted balance$2,630.99Power Networking Bank Reconciliation July 31, 2006

Entries Related to a Bank Reconciliation30Accounts ReceivableThomas Ivey 300 00 Miscellaneous Administrative Exp.18 00 Accounts PayableTaylor Co.9 00 Cash327 00NSF check, bank service charges, and error in recording Check no. 879.

Petty Cash

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

Aug. 31 Office Supplies 50 00Replenished petty cash fund. Cash 88 00At 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.Store Supplies 35 00Miscellaneous Administrative Exp. 3 00

Financial Analysis and InterpretationSolvency 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.

A. Cash and equivalents$100,000$ 120,000B. Current liabilities400,0001,500,000 Doomsday ratio A / B0.25 0.08

Doomsday RatioLaettner Co. Oakley Co.How are these ratios used?Use:To indicate the companys ability to meet creditors obligations in the worst case assumption that should the business cease to exist.Financial Analysis and Interpretation

The EndChapter 7

**