7-1 college accounting copyright © 2008 thomson south-western, a part of the thomson corporation....

7-1

COLLEGE ACCOUNTING

COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

HEINTZ & PARRY19th EDITION

7-2

CHAPTER 7

ACCOUNTING FOR CASH

7-3

CASH Includes:

Currency, coins, and checking accounts

Checks received from customers Money orders Bank cashier’s checks

Because cash plays such a central role in operating a business, it must be carefully managed and controlled

7-4

INTERNAL CONTROL

A set of procedures designed to ensure proper accounting for transactions

Good internal control for cash transactions: All cash received should be

deposited DAILY in a bank All disbursements, except for

payments from petty cash, should be made by CHECK

7-5

MAKING DEPOSITS A deposit ticket is a form showing

a detailed listing of items being deposited Currency, coins, and checks are

listed separately Each check should be identified by

its ABA (American Bankers Association) number– Found in upper right-hand corner of

each check– Also shown in magnetic ink character

recognition (MICR) code on the lower left side of the front of each check

– The code is used to sort and route checks

7-6

AUTOMATED TELLER MACHINES Each depositor has a plastic card

and a personal identification number (PIN)

Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs

It is important for the depositor to keep an accounting record of ATM withdrawals and deposits

7-7

WRITING CHECKS A check is a document ordering a

bank to pay cash from a depositor’s account

There are three parties to every check: Drawer—the depositor who orders

the bank to pay the cash Drawee—the bank on which the

check is drawn Payee—the person being paid the

cash Business checks often have a

check stub

7-8

BANK STATEMENT

The statement shows: The balance at the BEGINNING of

the period Deposits and other amounts

ADDED during the period Checks and other amounts

SUBTRACTED during the period The balance at the END of the

period

7-9

BANK STATEMENT

Sent with bank statement Canceled checks, “imaged” sheets of

check faces, or a listing of checks Any other forms representing items

added to or subtracted from the account

7-10

LEARNING OBJECTIVE 2

PREPARE A BANK RECONCILIATION AND RELATED JOURNAL ENTRIES.

7-11

BANK RECONCILIATION EXAMPLE

Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23.

We need to prepare a BANK

RECONCILIATION.

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Maple Consulting Bank ReconciliationNovember 21, 20--

Heading includes:Name of CompanyBank Reconciliation

Date

7-13


Bank statement balance, November 21

Once all reconciling itemsare listed, the

adjusted bank balance is computed.

$1,748.09Add:

Deduct:

Adjusted bank balance

7-14



The adjusted book balance is computed.

$1,748.09Add:

Deduct:

Adjusted bank balanceBook balance, November 21Add:

Deduct:

$2,393.23

Adjusted book balance

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We say it is “reconciled” when the adjusted BANK and adjusted BOOK

balances agree.

$1,748.09Add:

Deduct:

Adjusted bank balanceBook balance, November 21Add:

Deduct:

$2,393.23


7-16

REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES Deposits in transit

Deposits that have not reached the bank or been recorded by the bank before the statement is prepared

Outstanding checks Checks that have not been

presented to the bank for payment before the statement is prepared

Service charges Bank charges for services such as

check printing and processing

7-17

REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES (CONT.)

Collections Collections of promissory notes or

charge accounts made by the bank on behalf of the depositor

Not sufficient funds (NSF) checks Checks deposited but not paid

because the drawer did not have sufficient funds

Errors Errors made by the bank or by the

depositor in recording cash transactions

7-18


Bank statement balance, November 21 $1,748.09Add

Deduct

Adjusted bank balanceBook balance, November 21Add

Deduct:

$2,393.23


deposit in transit 637.02

error on check no. 214 0.90

outstanding checks:No. 219No. 224No. 227

$200.0025.0067.78 292.78

Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80

$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

7-19

EXAMPLE

We now know that the actual amount of cash is $2,092.33, but the general ledger

cash account still shows $2,393.23.

JOURNAL ENTRIESARE NEEDED

7-20

BANK RECONCILIATION JOURNAL ENTRIES Only two kinds of items appearing

on a bank reconciliation require journal entries: Errors in the depositor’s books Bank additions and deductions that

do not already appear in the books ALL items in the book balance

section of the reconciliation require a journal entry

7-21



Deduct


Deduct:

$2,393.23





$200.0025.0067.78 292.78


$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

7-22

BANK RECONCILIATION JOURNAL ENTRIES

DATE DESCRIPTION PR DEBIT CREDIT

Cash1

2

3

4

5

6

7

8

9

10

11

When check no. 214 was written, the cash account was credited for $0.90 more

than the check amount of $46.25.This entry puts $0.90 back

in the Cash account.

0 9020--Nov. 21

7-23



Cash1

2

3

4

5

6

7

8

9

10

11

Accounts Payable

0 90

0 90

Error in recording check

20--Nov. 21

Add error on checkAccounts Payable was originally

debited for $19.88. This was $0.90 more than the actual telephone bill of $18.98.This entry removes the extra $0.90.

7-24



Accounts Payable1

2

3

4

5

6

7

8

9

10

11

Cash

0 90

0 90


20--Nov. 21

Deduct error on check

7-25



Deduct


Deduct:

$2,393.23





$200.0025.0067.78 292.78


$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

7-26



Cash1

2

3

4

5

6

7

8

9

10

11

Since the ATM withdrawal wasfor “personal expenses,” the

drawing account should be debited.

Accounts Payable

0 90

0 90


J. M., Drawing 200 00

Nov.20--

21

21

7-27



Cash1

2

3

4

5

6

7

8

9

10

11

The $200 withdrawal was never recorded.This entry will remove the $100.00

from the cash account.

Accounts Payable

0 90

0 90


J. M., Drawing 100 00

Nov.20--

21

21

Cash 100 00

7-28



Deduct


Deduct:

$2,393.23





$200.0025.0067.78 292.78


$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

7-29



Accounts Receivable10

11

12

13

14

15

16

17

18

19

20

Cash200 00

200 00

Unrecorded NSF check

21

The amount of the bounced checkis placed into Accounts Receivable

and Cash is reduced.

7-30



Deduct


Deduct:

$2,393.23





$200.0025.0067.78 292.78


$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

7-31



Accounts Receivable10

11

12

13

14

15

16

17

18

19

20

Cash

200 00

200 00

Unrecorded NSF check

Service Fee Expense 1 80

21

21

Cash 1 80

Bank service charge

7-32


ESTABLISH AND USE A PETTY CASH FUND.

7-33

THE PETTY CASH FUND A fund set up to pay for small

items with cash Checks for very small amounts are

cumbersome To establish the fund:

A check is written to the petty cash custodian for the amount to be set aside in the fund

The custodian cashes the check and places the money in a petty cash box

The custodian should be the only person authorized to make payments from the fund

7-34

JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND


Petty Cash1

2

3

4

5

6

7

8

9

10

11

200 0020--Dec. 1

Cash 200 00

Establish petty cash fund

7-35

PETTY CASH PAYMENTS RECORD

A special multi-column record that supplements the regular accounting records

Provides a record of each petty cash payment Broken down by account

– e.g.: Travel/Entertainment Expense, Postage Expense, etc.

Used to prepare the replenishment journal entry

7-36

REPLENISHING THE PETTY CASH FUND The petty cash fund should be

replenished whenever the fund runs low and at the end of each accounting period

Once the fund is established by debiting Petty Cash and crediting Cash, no further entries are made to Petty Cash

To replenish the fund, debits are made to appropriate expense accounts and Cash is credited Only if the amount of the fund itself

is being changed would there be a debit or credit to Petty Cash

7-37

EXAMPLE

To replenish the fund: A check is written for $178.80,

which is the total of the eight vouchers

A journal entry is made to recognize:– The expenses shown on the vouchers– The outflow of cash via the check

At the end of the month, the petty cash fund contains eight vouchers and only $21.20 in cash. The fund

needs to be replenished.

7-38

JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND


1

2

3

4

5

6

7

8

9

10

11

40 8020--Dec. 24

39 50

Automobile ExpensePostage Expense

Travel & Entertain. Exp. 30 25

Cash 178 80

Cash should be credited for the amount needed to restore the fund to its established amount.

($200.00 fund – $21.20 in box = $178.80 needed)

Miscellaneous ExpenseJames Maple, Drawing 30 00

38 25

7-39

JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND


1

2

3

4

5

6

7

8

9

10

11

40 8020--Dec. 31

39 50

Automobile Expense

Postage Expense

Travel & Entertain. Exp. 30 25

Cash 178 80

Miscellaneous Expense30 00

38 25

James Maple, Drawing

Replenishment of petty

cash fund

7-40


ESTABLISH A CHANGE FUND AND USE THE CASH SHORT AND OVER ACCOUNT.

7-41

CHANGE FUND

A supply of currency and coins kept in the cash register or cash drawer Allows businesses to make change

when customers pay in cash At the end of the day, cash

received during the day is deposited– But the change fund is held back

for use on the following day

7-42

EXAMPLE

Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund.

CASH

200

Just like the petty cashfund, a change fund

starts by withdrawing from the cash account.

7-43

EXAMPLE

Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund.

CASH

200

Change Fund isan ASSET.

200

CHANGE FUND

7-44

JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND


Change Fund1

2

3

4

5

6

7

8

9

10

11

200 0020--June 1

Cash 200 00

Establish change fund

7-45

EXAMPLE

At the close of its first day of business, Sporty’s had $1,450.00 in

the cash register.

CASH IN DRAWER $1,450.00Less:CHANGE FUND – 200.00

$1,250.00CASH FROM SALES

The CASH from sales shouldagree with the sales recordedon the cash REGISTER TAPE.

7-46

EXAMPLE


the cash register.

CASH IN DRAWER $1,450.00Less: CHANGE FUND – 200.00


Sales from the cash register tapeare also $1,250.00!!!

7-47

JOURNAL ENTRY FOR RECORDING CASH FROM SALES


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Only the $1,250.00 is debited to Cash and deposited.

The change fund is not deposited.

7-48

JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.)


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Service Fees 1,250 00

Cash received from services

What would have happened if the cash register tape didn’t agree with

the cash from sales?

7-49

CASH SHORTAGE EXAMPLE


the cash register.

CASH IN DRAWER $1,450.00Less:CHANGE FUND – 200.00


What if the cash register tape had shown sales of $1,252.00

or $1,247.00?

7-50

CASH SHORTAGE EXAMPLE


$1,250.00CASH FROM SALES$1,252.00CASH REGISTER TAPE

$ 2.00SHORTAGE

Overages and shortages are recorded in an account called “CASH SHORT AND OVER.”

7-51

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Cash is debited for the amount deposited.

7-52

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Cash Short and Over is debited for shortages

and credited for overages.

Cash Short and Over 2 00

7-53

JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Service Fees is credited for the amount on the cash register tape

even though this was not the amount collected.



7-54

CASH OVERAGE EXAMPLE


$1,250.00CASH FROM SALES$1,247.00CASH REGISTER TAPE

$ 3.00OVERAGE

At the close of its first day of business, Sporty’s had $1,450.00 in the cash register… But the cash register tape

showed $1,247.00

7-55

JOURNAL ENTRY FOR RECORDING A CASH OVERAGE


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3


Cash Short and Over is debited for shortages

and credited for overages.

7-56

JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.)


Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 3

Service Fees is credited for the amount on the cash register tape

even though this was not the amount collected.



7-1 college accounting copyright © 2008 thomson south-western, a part of the thomson corporation....

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