CHAPTER 6
Cash and Receivables
Cash
money on deposit in bank and Anything that a bank
would accept for deposit in your account.
Money on deposit in banks includes checking and
saving accounts
ordinary checks received from customers, money
orders, coins and currency and petty cash also are
included as cash
Banks do not accept postage stamps, travel
advances to employees, notes receivable or post-
dated checks as cash.
2
Characteristics of Cash
Cash is used as medium of exchange
Cash is the most liquid asset
Cash is mostly affected by business
transactions
Cash is used to measure the value of other
assets
Cash is mostly exposed to embezzlements
3
Management of Cash
refers to planning, controlling and accounting for
cash transactions and cash balances.
Managing cash requires planning wisely so that
there will not be excess cash held on hand at any
point in time; or there is no shortage of cash at any
point in time to meet the business’s needs.
4
Internal Control of Cash
a. The individuals who receive cash should not
also disburse (pay) cash
b. The individuals who handle cash should not
access accounting records
c. Cash receipts are immediately recorded and
deposited & are not used directly for payments.
d. Disbursements are made by serially numbered
checks, only upon proper authorization
e. Bank accounts are reconciled monthly
5
Cont…..
⚫ The following are the most common
elements of cash control and managements:
⚫ bank account system,
⚫ petty cash fund,
⚫ voucher system,
⚫ change fund, and
⚫ cash short and over.
6
Control of Cash through Bank Accounts
⚫ Bank accounts provide several advantages
such as:
✓Bank accounts reduce the amount of cash on
hand or Cash is physically protected by the
bank
✓A separate record of cash is maintained by
the bank,
✓And customers may remit payments directly
to the bank.
7
Bank Statement
⚫ A summary of all transactions, called a bank
statement, is mailed to the depositor or
made available online, usually each month.
⚫ It shows the beginning balance, additions,
deductions, and the ending balance.
⚫ Checks or copies of the checks listed in the
order that they were paid by the bank may
accompany the bank statement.
8
Cont…
⚫ The company’s checking account balance in
the bank records is a liability. Thus, in the
bank’s records, the company’s account has a
credit balance.
⚫ A debit memo describes the amount and nature
of decrease in the company’s cash accounts.
⚫ A credits memo indicates an increase in the
cash balance of the depositor.
9
10
Reconciliation of Bank and Book Cash Balances
⚫ Monthly reconciling of the bank balance
with the depositor’s cash accounts balance
is essential cash control procedure.
⚫ The most common examples that cause
disparity between the two balances are:
⚫ Outstanding checks:
⚫ Deposits in transit:
⚫ Service charges:
⚫ Notes collected by bank:
11
⚫ Charges for depositing NSF- checks
When checks are deposited in an account, the
bank generally gives the depositor immediate
credit. On occasion, one of these checks may
prove to be uncollectible because the maker of
the check does not have sufficient funds in his or
her account.
⚫ The bank will reduce the depositor’s account by
the amount of this uncollectible item and return
the check to the depositor marked “NSF”.
12
Steps in Preparing Bank Reconciliation
a) The deposits listed on the bank statement
are compared with the deposits shown in
the accounting records. Any deposits not
yet recorded by the bank are deposits in
transit and should be added to the balance
shown in the bank statements.
13
Steps in Preparing Bank Reconciliation
b) The paid and received checks from the bank
are compared with the check stubs. Any
checks issued but not yet paid by the bank
are outstanding checks and should be
deducted from the balance reported in the
bank statements.
c) Any credit memorandums issued by the bank
that have not been recorded by the
depositor, are added to the balance per
depositor’s record.
14
Steps in Preparing Bank Reconciliation
d. Any debit memorandums issued by the bank that
have not been recorded by the depositor are
deducted from the balance per depositor’s
record.
e. Any errors in the bank statement or depositor’s
accounting records are adjusted.
f. The equality of adjusted balance of statement and
adjusted balance of the depositor’s record is
compared.
g. Journal entries are prepared to record any items
delayed by the depositor.
15
Illustration of Bank Reconciliation
⚫ The January bank statement sent by Awash Bank to Satcon
Company shows Br. 5,000.17. Assume also that on January 31,
2000, the Cash account of Satcon Co. shows a balance of Br.
4,262.83. The accountant of Satcon Company has identified
the following items:
1. A deposit of Br. 410.90 made after banking hours on Jan. 31
does not appear on the bank statement.
2. Two checks issued in January have not yet been paid by the
bank:
⚫ Check No. 301 Br. 110.25
⚫ Check No. 342 607.50
16
Illustration of Bank Reconciliation
1. A credit memorandum was included in the bank statement,
which was for proceeds from collection of a non-interest
bearing note receivable from MAN Company Br. 524.74.
2. Three debit memorandums accompanied the bank
statement: Fee charged by bank for handling collection of
notes receivable Br.5; a check of Br. 50.25 received from a
customer, RON company, and deposited by RAM company
was charged back as NSF; and service charge by bank for
the month of January amounts to Br. 12.00.
3. Check No. 305 was issued by RAM Company for payment of
telephone expense in the amount of Br. 85 but was
erroneously recorded in the cash payments journal as Br.
58.
17
Satcon Company
Bank Reconciliation
January 31, 2000
Balance per bank statement, Jan. 31, 2000 Br. 5,000.17
Add: Deposit of Jan. 31 not recorded by bank 410.90
Subtotal Br. 5,411.07
Deduct: outstanding checks:
No. 301 Br. 110.25
No. 342 607.50 717.75
Adjusted Bank balance Br. 4,693.32
18
Satcon Company
Bank Reconciliation
January 31, 2000
Balance per depositor’s record, Jan. 31, 2000 Br. 4,262.83
Add: Note Receivable collected by bank 524.74
Subtotal Br. 4,787.57
Deduct: collection fee Br. 5.00
NSF check of Ron Co. 50.25
Service charge 12.00
Error on check stub No. 305 27.00 94.25
Adjusted Depositor balance Br.4,693.32
19
⚫ The following are journal entries related to the
bank reconciliation.
Jan. 31 cash 524.74
Notes Receivable 524.74
(To record collection of Note Receivable Collected by bank)
31 Miscellaneous Expense 17.00
Accounts Receivable-RON Co. 50.25
Utilities Exp. 27.00
Cash 94.25
(To record bank service charges, NSF check and error in recording Check No. 305)
20
Petty Cash Fund (Imprest fund)
⚫ A basic principle for controlling cash
disbursements is that all payments must be
made by check.
⚫ It is part of the total cash balance, is used to
handle many types of small payments such as
employee transportation costs, purchase of
office supplies, purchase of postage stamps,
and delivery charges
21
⚫ Many businesses find it convenient to make
minor expenditures instead of writing checks.
⚫ The petty cash amount various from Br. 50 to
Br. 1,000, which will cover small expenditures
for a period of two or three weeks.
⚫ After the petty cash fund is established, the
Petty Cash account is not debited or credited
again unless the amount of the fund is changed.
22
Establishment of Petty Cash
⚫ To establish a petty cash fund a check is issued
to a bank.
⚫ This check is cashed and the money is kept on
hand in a petty cash box.
⚫ One employee is designated as custodian of the
fund.
⚫ The issuance of the check for establishment is
recorded by debiting petty cash account and
crediting cash.
23
Establishment of Petty Cash
⚫ To illustrate normal petty cash fund entries,
assume that a petty cash fund of $600 is
established on August 1.
⚫ The entry to record this transaction is as
follows:
⚫ Aug.1. Petty cash......................600
Cash..............................600
24
Replenishment of Petty Cash
⚫ When the fund runs low or at the end of the
company’s fiscal period, a check is issued to
reimburse the fund for the expenditures made
during the period.
⚫ The issuance of this check is recorded by
debiting the appropriate expense accounts and
crediting cash or vouchers payable.
25
Replenishment of Petty Cash
⚫ At the end of August, the petty cash receipts indicate
expenditures for the following items: office supplies,
$400; postage (office supplies), $55; store supplies,
$45; and miscellaneous administrative expense, $50.
⚫ The entry to replenish the petty cash fund on August
31 is as follows:
Office supplies...................................... 455
Store supplies........................................ 45
Miscellaneous administrative expense... 50
Cash.......................................................550
26
Voucher System
⚫ One method to control cash disbursements is a
voucher system.
⚫ A voucher is a special form, which contains relevant
data about a liability and its payment.
⚫ Each approved voucher represents liability and
recorded in a voucher register, which is similar to
purchases journal.
⚫ Those registered vouchers are filed according to their
payment date in an unpaid vouchers file.
27
⚫ When the checks are signed, the paid vouchers are
recorded in a check register which is similar to cash
payments journal.
⚫ Those paid vouchers are filed in paid vouchers file
according to their serial number for future reference.
28
Change Fund
⚫ Some businesses that receive cash directly from
customers should maintain a fund of currency and
coins in order to make change (Amharic=>”zirzir”).
⚫ is part of the total cash balance.
⚫ A change fund is established by issuing a check to the
bank and transferring the cash to the custodian.
⚫ The issuance of a check to establish a change fund is
recorded by debiting cash on hand and crediting cash
on bank or voucher payable.
Cash on hand........................xxx
VP /Cash on bank................................xxx
29
Exercise
⚫ Prepare journal entries for each of the
following:
a. Issued a check to establish a petty cash fund of
$500.
b. The amount of cash in the petty cash fund is
$120. Issued a check to replenish the fund,
based on the following summary of petty cash
receipts: office supplies, $300, and
miscellaneous administrative expense, $75.
Record any missing funds in the cash short and
over account.
30
Cash Short and Over
⚫ In handling cash receipts from daily sales, a few
errors in making changes will occur.
⚫ These errors may cause a cash shortage or
overage at the end of the day.
⚫ The account cash short and over is debited if
there is shortage and credited if there is overage.
At the end of the period if the account had a
debit balance, it appears in the Income statement
as miscellaneous expense; if it has a credit
balance, it is shown as miscellaneous revenue.
31
⚫ For example, assume that the total cash sales
recorded during the day amounts to Br. 12,420.
However, the cash receipts in the cash register
drawer (actual cash count) total Br. 12,415.
⚫ The following entry would be made to adjust the
accounting records for the shortage in the cash
receipts:
Cash Short and Over 5.00
Cash 5.00
⚫ To record a Br. 5.00 (Br. 12,420 – 12,415)
(Shortage in cash receipts for the day)
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6.2. Receivable
⚫ includes all money claims against other
entities, including people, business firms, and
other organizations.
⚫ These receivables are usually a significant
portion of the total current assets.
33
Classification of Receivables
⚫ Receivables can be broadly classified into trade
receivables and non-trade receivables.
⚫ Trade receivables describe amounts owed to the
company for goods and services sold in the normal
course of business.
⚫ Non-trade receivable arise from many other
sources, such as advance to employees, interest
receivables, rent receivables and loan to affiliated
companies.
⚫ Unless we indicate otherwise, we will assume that
all receivables in this unit are trade receivables.
34
⚫ Based on the above broad classification,
receivables can be further classified
into account receivable and notes
receivables.
35
Accounting for Notes Receivable
▪ Recording receipt of N/Recievable
▪ Recording receipt of cash with interest
▪ Accepting notes receivable for overdue
customers account.
▪ Recording of Dishonored notes and etc
36
Accounting for Notes Receivable
⚫ Notes Receivable are usually recorded in a
single note Receivable account to simplify
record keeping.
⚫ Recording of the receipt of a note
⚫ assume that on Jannuary-10, Nile Co. sales
merchandise on account to Tana Co. and
receive a Br. 5,000, 90-day, 12% promissory
note.
37
Jan. 10.
Notes Receivable ------------------5000
Sales----------------------------------5000
⚫ Recording the receipt of cash on due date
April 10: Cash------------------------------5150
Notes Receivable-------------------------5000
Interest Revenue (500 X 12/100 X 90/360) ----150
38
⚫ Companies can sometimes accept a note for
an overdue account Receivable
⚫ assume that a 60-day, 10% note dated September
5, 20x1 is accepted by Awash Co. in settlement of
the account of happy co, which is past due and has a
balance of 10,000.
Sept. 5 N/R-----------------------10, 000
A/R --------------------------10,000
Received a note to settle account
39
Recording a dishonored note
⚫ When a note’s maker is unable or refuses to
pay at maturity, the note is dishonored
⚫ The payee should use every legitimate means to
collect
⚫ The balance of the Notes Receivable account
normally includes only those notes that have not
matured.
⚫ When a note is dishonored, we therefore remove
the amount of this note from the Notes Receivable
account and charge it back to an Accounts
Receivable from its maker
40
⚫ Charging a dishonored note back to the account of
its maker serves for two purposes.
⚫ First, it removes the amount of the note from the
Notes Receivable account and records the
dishonored note in the maker’s account.
⚫ Second, if the maker of the dishonored note
applies for credit in the future, his or her account
will reveal all past dealings, including the
dishonored note.
⚫ Restoring the account also reminds the company to
continue collection efforts
41
⚫Assume Nile Co., holds a Br. 1000, 12%, 30-
day note of Ato Alemu. At maturity, Alemu
dishonored the note. Nile Co. records this
dishonoring of its N/R, on Oct. 25, as follows
Oct.25, A/R Ato Alemu---------------- 1010
N/R-----------------------------1000
Int. Rev. ---------------------------10
To record dishonored note & interest of 1000 X 12% X 30/360 =10
42
End-Of-Period interest Adjustment
⚫ When notes receivable are outstanding at the
end of an accounting period, accrued interest
is computed and recorded.
Eg. December 19, 20x1, Nile Co. accepted a Br.
2000, 60-day, 12% note from a customer in
granting an extension of a past-due account.
Assuming that the accounting period ends on
Dec. 31,
43
End-Of-Period interest Adjustment
Dec. 19. N/R ------------------------2000
A/R- customer-X --------------------2000
Received note in settlement of A\R
Dec. 31. Interest Receivable----------------8
Int. Revenue-----------------------------8
Adjusting entry Interest, Br. 2000 X 12% X 12/360 = 8
Feb. 17. Cash---------------------------2040
N/R------------------------------------2000
Int. Rec. -----------------------------------8
Int. Revenue----------------------------32
Received payment of note & interest at maturity
44
Converting Receivables to cash before Maturity
⚫ Disposal of receivables
⚫ Usually done either by:-
(1) selling them or
(2) using them as security for a loan.
⚫ Notes Receivable can be converted to cash by
discounting them at a financial institutions.
⚫ The process has three steps:-
1. the maker receives goods, service or cash from the
payee in exchange for the note.
45
2. the payee discounts the note with a bank
and receives the maturity value of the note
less a discount (a fee) charged by the bank
3. the maker pays the bank at the maturity of
the note.
46
⚫ Notes Receivable are discounted with or without
recourse(security).
⚫ When a note is discounted without recourse, the
bank assumes the risk of a bad debt loss and the
original payee doesn’t have a contingent liability. A
note discounted without recourse is like an outright
sale of an asset.
⚫ If a note is discounted with recourse and the
original maker of the note fails to pay the bank
when it matures, the payee of the note must pay
for it.
47
⚫ To illustrate, assume that a 90-day, 12%, Br. 20,000
N/R from Hiwot Co. dated Jan.1, 20x2 is discounted at
the payee’s bank on February 12, 20x2 at the
discount rate of 15%.
⚫ The steps to determine the proceeds (-the amount to
be received by the payee from the bank upon
discounting) are as follows:
⚫ Step 1 – Determine the maturity date & maturity value.
MD = April –1 & MV = FV + I
= 20,000 + [20,000 X 12% X 90/360] = 20,600
48
⚫ Step 2 – Determine the Bank Discount
Bank Discount = MV X DR X DP where
MV = Maturity value ( 20,600)
DR = Discount Rate (15%)
Discount = 20,600 X 15% X 48/360 = 412
DP =Discount period (from February12 to April 1)
49
⚫ Step 3- Determine proceed (proceed is the
amount of cash paid to the endorser after
deducting discount)
proceed = MV – D
= 20,600 – 412 = 20188
⚫ Step 4 – Record the necessary journal entry at
the date of discount
Feb 12. Cash-------------------------20,188
N/R ------------------------------20,000
I. Rev. ----------------------------188.00
50
Accounting for uncollectible Accounts Receivable
⚫ When credit is extended, some amount of
uncollectible receivables is generally expected
regardless of the care taken in granting credit and
the control procedures used.
⚫ The operating expense incurred because of the
failure to collect receivables is called Uncollectible
Accounts Expense or Bad Debts Expense or
Doubtful Accounts Expense.
51
Accounting for uncollectible Accounts Receivable
⚫ The debtor’s bankruptcy is one of the most significant
indications of partial or complete uncollectiblity.
Other indications include the closing of the customer’s
business and the failure of repeated attempts to
collect.
⚫ There are two methods of accounting for uncollectible
receivables. The allowance method, which provides
an expense for uncollectible receivables in advance of
their write-off and the direct write-off method, which
recognizes the expense only when accounts receivable
are judged to be worthless.
52
ALLOWANCE METHOD
⚫ This method has two advantages over the direct
write-off method:
(1) Bad debt expense is charged to the period in
which the related sales are recognized, and
(2) A/R is reported on the Balance Sheet at the
estimated amount of cash to be collected.
⚫ The allowance method estimates bad debt
expense at the end of each accounting period and
records it through an adjusting entry.
53
⚫ Assume the A/R account has a balance of Br. 50,000
and based on careful study of the experience of other
companies, Nile Co. estimates that a total of Br. 2000
will be uncollectable.
⚫ The entry will be .
Dec. 31 Uncollectible Accounts Expense --2000
Allowance for Doubtful Accounts --2000
To record estimated bad debts
54
Write-off to the Allowance Account
⚫ When specific accounts are identified as
uncollectible, they are written-off against the
Allowance for Doubtful Accounts.
⚫ Assume after spending some time trying to collect
from Shalla Co., Nile Co. decides that Shalla’s Br. 200
accounts receivable is uncollectible
The entry to writ-it off.:-
Jan. 25 Allowance for Doubtful Accounts---- 200
A/R-Shalla Co. ----------------------200
To write-off uncollectible accounts.
55
Recovery of Uncollectible Accounts
⚫ To help restore credit standing, a customer may
later choose to voluntarily pay all or part of the
amount owed.
⚫ A company makes two entries when collecting an
account previously written-off.
▪ The first is to reverse the original write-off and
▪ Reinstate the customer’s account.
⚫ For example, assume the amount written-off
in the preceding entry is later collected on
February 15.
56
Feb. 15- A/R Shalla Co. ----------200
Allowance for Doubtful Accounts ---200
To reinstate accounts previously written-off
Feb. 15- Cash ----------------------200
A/R-Shalla Co. ---------------200
To record full payment of account
57
Estimating Uncollectibles
⚫ There are two common methods
1. Estimating Based on Sales
2. Estimate Based on Analysis of
Receivables
58
The Direct- Write-Off Method
⚫ The Direct Write-off method of accounting for bad
debts records the loss from an uncollectible A/R at
the time it is determined to be uncollectible.
⚫ No attempt is made to predict uncollectible
accounts expense. Bad debt expense is recorded
when specific accounts are determined to be
worthless.
⚫ If Wonji Co. uses a direct write-off method and
determines on Feb. 20, it can’t collect from a
customer- Home Co. - Br. 500. The entry to write-
off the customer’s account is as follows
59
The Direct- Write-Off Method
Feb. 20 Uncollectible Accounts Expense------ 500
A/R- Home Co.------------------------------- 500
To write-off Uncollectible accounts
Sometimes an amount previously written off is later collected.
⚫ This can be due to factors such as continual collection efforts or
the good fortune of a customer.
⚫ If the account of Home Co. that was written-off directly to Bad
Debt Expense is later collected in full, the following two entries
record this recovery.
Mar. 5 - A/R- Home Co.--------------------- 500
Uncollectible Accounts Expense -------------500
To reinstate account
Mar. 5 – Cash--------------------------------- 500
A/R- Home Co. ----------------------------------500
To record full payment of account
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