Accounting I  © John Petroff, Nancy Paz, Tibebe Mengistu Source: PEOI

 

Chapter 8
Cash

 

BANK ACCOUNTS
The most effective tool used to control cash is a bank account. It provides a double record of all cash transactions. In order to provide effective controls on the use of bank accounts, special documents are used to evidence transactions. Signature cards are kept by the bank for all employees authorized to make withdrawals. Deposit tickets must accompany deposits, and checks must be issued for all payments. A remittance advice is sent with each payment to ensure that proper credit is recorded by creditors. Banks commonly require that a minimum balance (compensating balance) be held.

BANK STATEMENTS
An advantage of using a bank account to control cash is that banks send a bank statement monthly reporting all the transactions in the account. Information normally present in the bank statement consists of the beginning and ending balances, deposits, other credits, withdrawals and other debits. The cancelled checks are enclosed with the statement, as well as debit and credit memorandums (for items processed by the bank usually unknown to the depositor). Rarely will the bank statement balance and the depositor's Cash in Bank account balance be exactly the same, and they must be reconciled.

BANK RECONCILIATIONS
A bank reconciliation is a method used to determine the reasons for discrepancies between the bank statement balance and the Cash in Bank account balance and to calculate an adjusted balance. Discrepancies are usually due to outstanding items which have not yet been recorded by either of the bank or the company, and which typically include checks not yet presented for collection, deposits in transit and bank service charges. Errors are another common cause of discrepancies, which the reconciliation will help correct. Finally, the reconciliation may uncover irregularities.

Balance per bank  
XX  
Add:    
Deposits in transit  
XX  
Total  
XX  
Less:    
Outstanding checks  
XX  
Adjusted bank balance  
XX  
   


Balance per book    
XX  
Add:      
Deposits not recorded in book  
XX  
 
Interests earned not yet recorded  
XX  
XX  
Total    
XX  
Less:      
Not-sufficient-fund checks  
XX  
 
Bank service charges  
XX  
XX  
Adjusted book balance    
XX  
     

* Adjusted bank balance must equal adjusted book balance.

BANK RECONCILIATIONS
A bank reconciliation is divided into two sections, the balance per bank statement and the balance per depositor's records. Although it is possible to reconcile one balance to the other, common practice adjusts both balances to prove to one another. Outstanding transactions unknown to the depositor discovered when the bank statement was sent require journal entries.

      Example:

            Prepare a bank reconciliation based on the following:

Balance per bank statement   $ 700,000  
Balance per book   430,000  
Deposits in transit   50,000  
Deposits not recorded in book   165,000  
Not-sufficient-fund checks   80,000  
Outstanding checks   250,000  
Bank service charges   15,000  


Balance per bank   $ 700,000  
Add:    
Deposits in transit   50,000  
Total   $ 700,000  
Less:    
Outstanding checks   250,000  
Adjusted bank balance   $ 500,000  
   


Balance per book     $ 430,000  
Add:      
Deposits not recorded in book     165,000  
Total     $ 595,000  
Less:      
Not-sufficient-fund checks   80,000    
Bank service charges   15,000   95,000  
Adjusted book balance     $ 500,000  
     

CASH ACCOUNTS
There are often several cash accounts because they serve different purposes. The Cash in Bank account represents the checking account that processes deposits, checks and memorandum items. The Cash Short and Over account is used to record any variance by sales clerks. The Cash on Hand Fund is used to provide change to conduct business with customers. The Petty Cash Fund is used to pay for small items with cash. Each of these cash accounts needs to be strictly controlled to prevent mishandling.

Setting up petty cash fund  
Journal entry  
   
   
Debit  
Credit  
  Petty cash  
$150  
 
  Cash    
$150  
       

      The accounting assistant brought the following receipts and accepted $ 40 to replenish the petty cash fund.

      Receipts

      Repairs to tables             $ 15

      Delivery to customers             $ 25



Replenishment of petty cash fund  
Journal entry  
   
   
Debit  
Credit  
  Repairs and maintenance  
$15  
 
  Delivery expense  
$25  
 
  Cash    
$40  

INTERNAL CONTROL OF CASH ACCOUNTS
Numerous procedures are available to control cash accounts. Monthly bank statements help verify the cash account balance. The bank reconciliation is particularly useful in controlling cash receipts. The voucher system is used to control cash payments. Different cash funds exist for specific purposes to keep track of each type of cash transaction. It should be noted that it is of utmost importance to separate cash handling and cash related accounting duties.

THE VOUCHER SYSTEM
One of the most common methods to control cash payments is the voucher system. The components of a voucher system are 1)- vouchers: documents establishing proof of payment,
2)- a voucher register: to record every voucher,
3)- an unpaid voucher file,
4)- a paid voucher file, and the
5)- a check register: to record the payment of each voucher.
The voucher system provides effective accounting controls and aids management decision making.

THE VOUCHER SYSTEM
IMPORTANT FACTS CONCERNING VOUCHERS
1)- Vouchers must be prepared for all payments.
2)- Vouchers represent written authorization of a payment.
3)- Before a voucher can be approved; the receiving report,
invoice and purchase order should be compared keeping in mind possible discounts.
4)- All vouchers should be recorded in the voucher register in a numerical order.

THE VOUCHER SYSTEM
FACTS CONCERNING THE VOUCHER REGISTER
1)- All vouchers must be recorded in the voucher register.
2)- Vouchers are listed in numerical order.
3)- The register records the payee, the date the payment is made and the number of the check issued for payment,
4)- The Accounts Payable account is always credited, but there may be different accounts to be debited.
5)- The Sundry Accounts is used to debit accounts not listed in the other Register columns.

THE VOUCHER SYSTEM
VOUCHER FILES PROCEDURES
1)- Unpaid vouchers are filed in the unpaid voucher file.
2)- Unpaid vouchers should be filed in the order they are due.
3)- Paid vouchers are filed in the paid voucher file.
4)- Paid vouchers are filed in numerical order.

THE VOUCHER SYSTEM
USING THE CHECK REGISTER
1)- When a voucher is paid, it is recorded in the check register.
2)- The check register is similar to the cash payments journal.
3)- All checks should be listed numerically, even those thatare voided.
4)- Cash in Bank account should always be credited. If a discount is taken, credit the Purchases Discount account.
5)- Voucher numbers and a running cash balance column are used in the check register.

ELECTRONIC FUNDS TRANSFER
The evolution of electronic funds transfer (EFT) will change the way cash transactions are processed. EFT uses electronic impulses that are computerized to perform cash transactions. This eliminates the need for checks and physical money. EFT has a particularly strong presence in retail sales. Point-of-sale systems are used by customers to pay for purchases using credit cards, charge cards, and bank cards. The greatest benefit EFT can provide is reduced costs, and quicker and more accurate information.

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