Cash Control Procedures and Bank Reconciliation Flash Cards

Objectives of cash control procedures

1. To explain cash control procedures. 2. To identify the steps to perform bank reconciliations. 3. To describe how bank activities are journalized.

Cash

Money in the form of coins or bills. May also include cash equivalents in a business cash account. There is approximately $1.1 trillion worth of cash in circulation.

Cash equivalents

Assets that can be turned into cash in a short period of time. Examples: Treasury bills (short-term government borrowing) and money market accounts (interest-paying accounts with withdrawal restrictions).

Cash controls

Procedures to monitor the process of receiving and distributing cash. Involve best practices for collecting, transporting, and storing cash.

Benefits of cash controls

Prevent theft and fraud. Ensure businesses have money to pay bills. Increase accuracy of financial records.

Common cash control procedures

Bank account access. Dual control. Security of check stock. Timely account reconciliations.

Bank account access as a cash control

Limits who can access company funds. Banks keep records of deposits and withdrawals and send monthly statements summarizing transactions.

Dual control in cash management

A process requiring two people to complete a transaction. Prevents employee theft, false accusations, and encourages ethical decisions.

Dual control process example

1. One employee counts cash and records the amount. 2. A second employee compares this with previous records. 3. Both sign a document agreeing on the final amount.

Security of check stock

Checks are stored securely (e.g., locked cabinet or safe). Checks are signed by two people or use signature plates/stamps accessible only to authorized users.

Bank reconciliation

A process to verify that bank statement amounts match company cash amounts. Usually done by someone who doesn't sign checks or maintain accounting records.

Steps in the bank reconciliation process

1. Adjust the balance per bank. 2. Adjust the balance per books. 3. Compare the adjusted balances. 4. Prepare and post journal entries.

Items impacting the adjusting bank balance

Deposits in transit (recorded by the company but not the bank). Outstanding checks (recorded by the company but not cleared by the bank). Bank errors (incorrect amounts or omissions).

Items impacting the adjusting book balance

Bank service charges (fees for account activities). NSF checks (checks not deposited due to insufficient funds). Check printing charges and interest earned.

Petty cash

Cash on hand for small expenses (e.g., stamps, reimbursements). Typically managed by a petty cash custodian.

Petty cash controls

Keeping a petty cash log. Requiring receipts for every transaction. Reconciling the fund by counting cash and verifying the log. Locking the storage area.

Petty cash replenishment

Maintain the original balance by replenishing used cash. A custodian requests replenishment with receipts, and a check is issued to restore the fund.

Electronic Funds Transfer (EFT)

The electronic exchange of money between businesses and customers/employees.

Benefits of EFT

Convenience, provides transaction documentation, less costly than paper checks, faster cash flow.

Example of a bank reconciliation journal entry

*Debit: Miscellaneous Expense $3. Credit:* Cash $3. (To record a bank service charge.)

Purpose of adjusting balances in bank reconciliation

To include transactions not recorded or improperly recorded in the financial statements.

Deposits in transit

Cash received and recorded by the company but not yet recorded by the bank.

Outstanding checks

Checks recorded in the company's cash account but not yet cleared by the bank.

Bank errors in reconciliation

Errors caused by the bank, such as recording incorrect amounts or omitting deposits/withdrawals.

Bank service charges

Fees charged by the bank for account activities like accepting deposits or mailing statements.

Non-sufficient funds (NSF) check

A check not deposited by the bank because the check writer's account lacked sufficient funds.

Interest earned in bank reconciliation

Money given by the bank to the company based on the account balance.

Adjusted bank and book balances mismatch

The reconciliation process should be repeated to identify and correct discrepancies.

Journal entries for adjustments to the book balance

*Increase in cash balance: Debit Cash, credit relevant account. Decrease in cash balance:* Credit Cash, debit relevant account.

Effect of deposits in transit on the bank balance

Deposits in transit are added to the bank balance.

Effect of outstanding checks on the bank balance

Outstanding checks are subtracted from the bank balance.

Effect of interest income on the book balance

Interest income is added to the book balance.

Effect of bank service charges on the book balance

Bank service charges are subtracted from the book balance.

Journal entry for bank service charges

*Debit: Miscellaneous Expense $3. Credit:* Cash $3.

Petty cash usage

Small expenses like stamps, reimbursements, or client lunches.

Petty cash custodian

The person responsible for managing the petty cash fund.

Journal entry for establishing petty cash

*Debit: Petty Cash $300. Credit:* Cash $300.

Journal entry for replenishing petty cash

*Debit: Supplies $50, Fuel Expense $25. Credit:* Cash $75.