Chapter 6: Cash and Receivables

• Cash includes paper money and coins

• 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

 Management Of Cash
• Should ensure there will not be excess cash
held on hand ; or there is no shortage of cash
at any time to meet the business’s needs

• Salespersons may make errors in making

change for customers

• As a result, the amount of cash on hand may

differ from the amount of cash sales. Such
differences are recorded in cash short and
over account.
 Example
• Assume the following cash register data for May 3:
– Cash register total for cash sales ……. 35,690
– Cash receipts from cash sales …………35,668
– The cash sales, receipts, and shortage of ….22
(35,690 - 35,668) would be recorded as follows:
Answer
Cash…………………………35,668
Cash short and over………...…...22
Sale…………………………35,690
• If there had been cash over, Cash Short and Over
would have been credited for the overage
 Internal Control Of Cash
 The individuals who receive cash should not
also disburse (pay) cash
 The individuals who handle cash should not
access accounting records
 Cash receipts are immediately recorded and
deposited in the bank
 Disbursements are made by checks, only
upon proper authorization by someone other
than the person writing the check
 Preparing Bank reconciliation monthly.
 Reconciliation of Bank and Book Cash Balances
• Bank reconciliation is the process of
matching the balances in an entity's
accounting records for a cash account to the
corresponding information on bank statement.

• The balance shown in a bank statement is

sometimes not equal to the balance appearing
in the depositor’s accounting records.
 Causes of Inequality

• Certain transactions recorded by the depositor

may not have been recorded by the bank and
vice versa.
 Causes of Inequality(Cont’d)

o Deposits in transit- Deposits recorded by the depositor

that have not been recorded by the bank are the
deposits in transit. Add these deposits to the balance
per bank.

o Outstanding checks- Issued checks recorded by the

company but that have not yet been paid by the bank
are outstanding checks. Deduct outstanding checks
from the balance per the bank.
o Errors - errors made by the depositor are
reconciling items in determining the adjusted
cash balance per books.

 In contrast, errors made by the bank are

reconciling items in determining the adjusted
cash balance per the bank.

o Bank memorandum- Any credit

memorandums (collection of receivable)
issued by the bank that have not been
recorded by the depositor are added to the
balance per depositor’s record.
• Example of credit memorandums issued by
the bank

 Notes collected by bank: If the bank collects a

note receivable on behalf of the depositor, it
credits the depositor’s account and issues a
credit memorandum for the depositor.
• Any debit memorandums(bank service
charge, NSF) issued by the bank that have not
been recorded by the depositor are deducted
from the balance per depositor’s record

1. Service charges: Banks often charge a fee for

handling checking accounts. The amount of
this charge is deducted by the bank form bank
balance and debit memo is issued for the
depositor.
2. Charges for depositing NSF- checks: NSF stands for
“Not Sufficient Funds.”

• When the maker of the check does not have

sufficient funds in his or her account to pay
the amount written, the bank will reduce the
depositor’s account by the amount of this and
return the check to the depositor marked
“NSF”.
 Checks

• A check is a written order signed by the

depositor directing the bank to pay a specified
sum of money to a designated recipient.

• There are three parties to a check: (1) the

maker (or drawer) who issues the check, (2)
the bank (or payer) on which the check is
drawn, and (3) the payee to whom the check
is payable.
 The equality of adjusted balance of bank
statement and adjusted balance of the
depositor’s record is compared

o Journal entries are prepared to record any

items delayed by the depositor.
The steps in bank reconciliation
 Example
• To illustrate, The bank statement for Power Networking
Com shows a balance of $ 3,359.78 as of July 31
• The cash balance in Power Networking’s ledger on the
same date is $ 2,549.99
• Using the preceding steps, the following reconciling
items were identified:
– Deposit of July 31, not recorded (appeared to late) on bank
statement: $ 816.20
– Outstanding checks: $1,544.99
• Note receivable of $400 plus interest of $8 collected by
bank not recorded in the journal as indicated by a
credit memo of $408.

• Check from customer (Thomas Ivey) for $300

returned by bank because of insufficient funds (NSF)
as indicated by a debit memo

• Bank service charges of $18, not recorded in the

journal as indicated by a debit memo
• In addition, an error of $9 was discovered.
This error occurred when Check for $732.26
to Taylor Co., on account, was recorded in
the company’s journal as $723.26.

– Prepare Bank Reconciliation

– Prepare the necessary journal entry

 NOTE
• Sometimes the balance per company
(depositor) may not be given, in these case,
additional information will be provided for
further computation.

• Balance per company (depositor) = Beginning

balance of cash + Total cash receipts - Total
amount of cash payment (checks issued)
 Example 2
• The bank statement for Dunlop company for
April 30 shows the balances of 10,443.11.
The accounting records indicate the
following summary data for cash receipts and
cash payments for April.

– Balance as of April 1……………...…..5,143.50

– Total cash receipts for April………….28,971.60
– Total amount of checks issued ……….26,060.85
• The bank had collected Dunlop company 912.
the face amount of the note was 900
• A deposit of 1852.21 representing a receipt of
April, had been made too late to appear on the
bank statements
• Checks outstanding totaled 3265.27
• Checks drawn for 79 had been erroneously
charged by the bank as 97
• A check for 10 returned with the statement had
been recorded in the check register as 100.The
check was for the payment of an obligation to
Davis Equipment company for purchase of
supplies on account
• Bank service charge for April amounted 8.20

Required:
• Prepare bank reconciliation
• Journalize the necessary the entries Required
 Solution
Balance per Bank Statement……….…10,443.11
Add Deposit In transit….1,852.21 ______
Bank Error……………18 1,870.21
Sub total…………..…………...$12,313.32
Deduct Outstanding checks…………(3,265.27)
Adjusted Cash balance per Bank……..9,048.05
 Solution
Balance per Company(Depositor)……… 8,054.25*
Add Notes collected …….912 ______
Depositor Error ...……90 1,002.00
Sub total…………..…………... $ 9,056.25
Deduct Bank service charge ……………….(8.20)
Adjusted Cash balance per Depositor…..9,048.05
* 5,143.50 + 28,971.60 - 26,060.85
 Journal Entries
Cash in bank…………1,002.00
Note receivable………….….900
Interest Income…………….. 12
Account Payable………….….90
• (To record Account Payable and collection of Note
Receivable collected by bank)

Miscellaneous Expense…………..8.20
Cash………………………………8.20
(To record bank service charges)
 Petty Cash Fund
• to make minor expenditures instead of writing
checks
• is used to handle small payments
• Example:
– Employee transportation costs, purchase of office
supplies, purchase of postage stamps, and delivery
charges
• The petty cash amount various from Br. 50 or
less to more than Br. 1,000
 Establishment of Petty cash
• To establish a petty cash, petty cash is debited
and cash is credited.
Petty Cash…………………..xx
Cash in Bank…………………xx

• When the amount of money in the petty cash

fund is reduced to a predetermined minimum
amount, the fund is replenished(Replaced).
• To replenish(replace) a petty cash fund, Various
expenses are debited and cash are credited
Expenses…………………..xx
Cash …………………xx
 Example
• On August 1, A petty fund of 100 is established.

• On August 31, the petty cash receipts indicates

the following expenditures:

– office supplies 28, postages supplies 22, store

supplies 35, daily news paper (Miscellaneous
Expense) 3.70

• Question: Record the establishment and

replenishment of petty cash fund
 Solution
August 1
Petty Cash…………………..100
Cash in Bank…………………100

August 31
Office supplies……………….50
Store supplies………………..35
Miscellaneous Expense………3.7
Cash…………………………..88.7

NoTe
• Replenishing the petty cash fund restores it to its
original amount
 Note
• Petty cash fund is either debited or credited if
and only if we want to increase or decrease the
balances in the petty cash fund
– i.e. Debited Petty cash if you want to increase:
Credit Petty cash if you want to decrease
• From 100 to 75
Cash in Bank…………………..25
Petty Cash…………………25

• From 100 to 120

Petty Cash…………………..20
Cash in Bank…………………20