Chapter 4

Cash Equivalents

Short-term investments that have a maturity date no longer than 3 months from the date of purchase 

Total Cash Balance is derived from (these are also things that are considered cash)  (a)

• Coins and currency 

• Checks Received 

• Savings Accounts 

Total Cash Balance is derived from (these are also things that are considered cash)  (b)

• Checking Accounts 

• Credit Card Sales 

• Debit Card Sales 

• Cash Equivalents (ex. short term investments) 

Bank Reconciliation

process of comparing the company's cash records (cash book) with the bank's records to make sure they match and to identify any differences.

Things that may explain difference in cash balance in accounting records and balance on bank statement

• Deposit in transit

• Outstanding check

• NSF (bounced) check

Company Records of Cash Activities

Bank Records  

Looking at both records (IN RED), the cash amounts are not the same  

• Bank records say company spent more than company records say  

Questions to ask if you find a discrepancy in bank records

• Why is our cash amount higher? 

• Why is our disbursement lower? 

Differences in Company Records and Bank Statement (a)

2 differences highlighted in red  

Differences in Company Records and Bank Statement (a)

We must do a journal entry for any amounts that are in Bank Statement but not in Company Records  

• don’t need company records bc it may for items that have not made it to bank yet

Bank Reconciliation / Adjusting bank cash balance

• Start w bank balance which is 26.4k 

• Then adjust, in previous ex. We saw deposit of 8.5k didn’t make it so you adjust  

• Also, the disbursement of 5.4k has not been made yet so you take it away 

Adjusting Company Cash Balance  

• Things in bank were deposits so they must be added to bank total (2k) (200) 

• Need to reduce balance from withdrawals  

Equaling out 

After adjusting the bank cash balance and the company cash balance both should equal each other  

Update Company Records  

• Looking at records cash must be increased 2.2k so it will be adjusted in journal 

• Debit items that increase company cash and debit items that lower company cash  

• Make sure to do two journal entries one reducing cash and one adding cash 

  • In actual business you can do additions and reductions all on one journal  

Actions that increase cash 

• Notes Received 

• Interest Received 

Actions that decrease cash 

• EST for utilities (utilities expense) 

• NSF check from customer (accounts receivable) 

• Service fee expense 

• Adverting expense  

Summary of what will be seen in records

Checks outstanding

Checks written by the company that have not yet cleared the bank.

• Subtract from the bank statement balance during reconciliation.

Deposits outstanding (deposits in transit)

Cash received and recorded by the company that has not yet been credited by the bank.

• Add to the bank statement balance during reconciliation.

NSF (bounced) check

customers check is returned unpaid

• bank removes money must update records