Chapter 7

Cash
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

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Professor Emeritus of Accounting
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 Objectives
1. Describe the nature of cash and the importance
After over
of internal control studying
cash.this
2. Summarize chapter, you should
basic procedures for achieving
be able
internal control over cashto:
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.
 Objectives
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.
 Control Over Cash
 Many 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 Cash

Register
Cash
Receipts records

CASHIER’S ACCOUNTING
DEPARTMENT DEPARTMENT

Remittance
advices
Mail Receipts
 Retailers’ Sources of Cash

CASHIER’S ACCOUNTING
DEPARTMENT DEPARTMENT

Deposit ticket Deposit receipt

Bank
 Controlling Cash Received
from Cash Sales
19 Cash 3 142 00
Cash Short and Over 8 00
Sales 3 150 00
To record cash sales and actual
cash on hand.

Cash 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 Mail

Most companies’ invoices

are designed so that
customers return a portion
of the invoice, call a
remittance advice.
 Controlling Cash Received
in the Mail
1. 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 Cashier’s 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 Mail
4. 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.
 Internal Control of Cash
Payments
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.
 13

A voucher system is a set of

procedures for authorizing
and recording liabilities and
cash payments.

Basic
Features of
the Voucher
System
 Basic Features of the
Voucher System
 A 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,
supplier’s 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 Depositor’s
Records and the Bank Statement

 Outstanding checks
 Deposits in transit
 Service charges
 Collections
 Not-sufficient-funds (NSF)
checks
 Errors
 Steps in a Bank Reconciliation
1. Compare each deposit listed on the bank statement
Add deposits not recorded by the bank to the
with unrecorded deposits appearing on the preceding
balance
period’s according and
reconciliation to the
withbank statement.
deposit receipts.
2.Deduct
Compare paid checks
checks with outstanding
outstanding that havechecks
been paid
appearing on the preceding period’s reconciliation and
by the bank from the
with recorded checks.
balance according to the
bank statement.
3. Add
Compare
creditbank credit memorandums
memorandums to entries
that have in the
not been
journal.
recorded to the balance according to the
depositor’s records.
 Steps in a Bank Reconciliation
4.Deduct
Compare bankmemorandums
debit debit memorandums to entries
that have not been
recording cash payments.
recorded from the balance according to the
5. List any errors discovered during the preceding steps.
depositor’s records.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99

Power Network prepares to reconcile the

monthly bank statement as of July 31, 2006
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not
recorded by bank 816.20
$4,175.98

A deposit of $816.20 did not

appear on the bank statement.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99

The bank collected a note in the

amount of $400 and the related
interest of $8 for Power Networking
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99

ThreeAchecks
deposit of $637.02
that did not appear
were written during the
on appear
period did not the bankon
statement.
the bank statement:
#812, $1,061; #878, $435.39, #883, $48.60.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99
Deduct outstanding Deduct check returned
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39
No. 883 48.60 1,544.99

The bank returned an NSF check from one of the

firm’s customers, Thomas Ivey, in the amount of
$300. This was a payment on account.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99
Deduct outstanding Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00

The bank service charges totaled $18.00.

 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99
Deduct outstanding Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00
Error recording
Check No. 879 9.00 327.00

Check No. 879 for $732.26 to Taylor Co. on account,

erroneously recorded in journal as $723.26.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.98 $2,957.99
Deduct outstanding Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00
Error recording
Check No. 879 9.00 327
Adjusted balance $2,630.99 Adjusted balance $2,630.99
Now, if desired, we can
prepare a formal
statement for Power
Networking.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned$300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Journal entries must be prepared
for those items that affected the
depositor’s side of the
reconciliation.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries Related to a Bank Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries Related to a Bank Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.

30 Accounts Receivable—Thomas Ivey 300 00

Miscellaneous Administrative Exp. 18 00
Accounts Payable—Taylor Co. 9 00
Cash 327 00
NSF check, bank service
charges, and error in
recording Check no. 879.
Petty
Cash
 On August 1, issued Check No. 511 for $100
to established a petty cash fund.

Aug. 1 Petty Cash 100 00

Cash 100 00
Established petty cash fund.
 At 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.

Aug. 31 Office Supplies 50 00

Store Supplies 35 00
Miscellaneous Administrative Exp. 3 00
Cash 88 00
Replenished petty cash fund.
Financial Analysis and Interpretation

Solvency 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.
Financial Analysis and Interpretation
Doomsday Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents $100,000 $ 120,000
B. Current liabilities 400,000 1,500,000
Doomsday ratio A / B 0.25 0.08

Use: To indicate
How are thethese
company’s ability to
ratios used?
meet creditors obligations in the
worst case assumption that should
the business cease to exist.
Chapter 7

The End