ACC 304 Module 2 Chapter 7 - Cash & AR

Cash

Most liquid asset held by business

• Readily available and free of restrictions

• Reported in Current Assets Section of Balance Sheet

• Examples: coin, currency, bank deposits, checks, bank

drafts, checking accounts, savings accounts, etc.

Cash Equivalents

Short-term highly liquid investments

• Readily convertible to cash and near their maturity

• Have a maturity date no longer than three months

from the date of purchase

• Reported in Current Assets Section of Balance Sheet

• Types: money market funds, certificates of deposit,

treasury bills, etc.

Restricted Cash

Cash set aside for a particular purpose.

• Examples: petty cash, payroll and dividend funds.

Compensating Balances

Type of restricted cash account required by bank when an agreement exists between bank and company they lend to.

• Minimum balance required.

• Stated separately from cash, current or noncurrent depending on the borrowing arrangements terms. Can be a short-term or long-term asset.

Bank Overdrafts

• Check is written by company for more than the

amount in the cash account.

• Accounted for as Accounts Payable (Current Liability)

Internal Controls

• Minimize errors and thefts

• Encourage adherence to company policies and procedures

• Enhance the reliability and accuracy of accounting data

• Promote operational efficiency

What do you add to balance per bank for adjusting bank reconciliation

• Deposits in transit

• Undeposited receipts

• Bank errors

What do you subtract from balance per bank for adjusting bank reconciliation

Outstanding Checks

Bank errors (Overstate)

What do you add to balance per books for adjusting bank reconciliation

Bank credits and collections

Book errors (Understate)

What do you subtract from balance per books for adjusting bank reconciliation

Bank charges not yet recorded

Book errors (Overstate)

Information recorded by bank but not the company

will have to be ______

recorded by journal entries to update the books.

JE to add notes receivable to books

Dr. Cash

Cr. Notes Receivable

JE to add interest receivable to books

Dr. Cash

Cr. Interest Receivable

JE for earning money on interest

Dr. Cash

Cr. Interest revenue

JE for NSF check

Dr. A/R

Cr. Cash

JE for Book error (in this case, supplies)

1). Subtract the correct amt from incorrect amt

2) Dr Supplies (if amt was lower than it should be)

Cr. Cash (if amt was lower than it should be)

JE for Misc. Office expense

Dr. Misc Office Expense

Cr. Cash

Transaction price

Teh amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services

Variable consideration

price of a good or service depends on future events

• trade or cash discounts

• returns and allowances

• rebates, and performance bonuses

• Invoice often used as evidence of transaction price

Gross method for cash discounts

• Easier to do, based on timing of actions

• Use if expecting customers to not take the discount

• Uses Sales Discount account

Net method for recording sales / cash discounts

• Harder to calculate

• expects that customer will accept discount

• Records transactions at Net Realizable Value

• Uses Sales Discount Forfeited Account

When it comes to cash, the company should

Minimize cash on hand.

• Only have on hand petty cash and current day’s

receipts.

• Keep cash on hand in a vault, safe, or locked cash

drawer.

• Transmit each day’s receipts to the bank as soon as

possible.

• Vary the number, location and type of bank accounts

• Ex. Lockbox accounts, general checking.

• Periodically reconcile the balance shown in the general

ledger to the cash accounts.

Journal entry: A person is chosen to be the petty cash custodian

Dr. Petty Cash

Cr. Cash

what is petty cash

small amount of physical money a business keeps on hand to pay for minor, everyday expenses without going through formal purchasing or check-writing processes

Journal entry: The petty cash custodian pays for such things as office supplies,

No entries

What is Accounts Receivable

Claims held against customers and others for money, goods or services.

• Ongoing transaction

• Written or oral agreement

• Usually no interest payments

• Uses credit terms (2/10, net 30)

• Classified as Current Asse

What is notes receivable

Written promises, due date usually specified

• Usually a one-time transaction

• Classified as Current on Long-term asset depending on

expected collection date

Transaction price

The transaction price: amount of consideration that a
company expects to receive from a customer in exchange for
transferring goods or services.

Variable consideration

In some cases, the price of a good or service is dependent on future events

JE for sale with gross method

Dr. A/R- Full amt, no discount

CR. Sales Revenue- Full amt, no discount

JE for paying back within discount period with gross method

Dr. Cash- Amt customer paid

Dr. Sales Discount - Amt of discount

Cr. A/R - Full orignial payment

JE for paying back after discount period with gross method

Dr. Cash - full amt

Cr. A/R - full amt

JE for sale with net method

Dr.A/R - amt with discount

Cr. Sales Revenue - amt with discount

JE for paying within discount period with net method

Dr. Cash- Amt with discount

Cr. A/R - Amt with discount

JE for paying after discount period with net method

Dr. Cash - full amount

Cr. Sales discounts forfeited - amt of discount

Cr. A/R - discounted amt

Subsequent valuation of a/r

• Payment isn’t guaranteed

• credit losses (bad debt) are an inherent cost of granting credit

Bad Debt

An expense that was caused by a customer’s failure to pay an obligation arising out of a prior credit sale.

Short term receivables are reported at their ____

Net realizable Value

How to collect NRV for A/R

Allowance for doubtful accounts - Sales Returns - Other Allowances

CECL (“Current Expected Credit Loss”) model

Estimates should consider all receivables and be based on all relevant information, including historical experience, current conditions, and reasonable and supportable forecasts. This method is required starting 2020.

• Analyzing each customer account

• Applying an estimate of the percentage of bad debts to

the entire outstanding receivable balance

• Applying different percentages to accounts receivable

balances depending on the length of time outstanding

Notes Receviable

Formal promissory note specifices terms of payment

ST notes receivable

Recorded at face value, less allowance

Long-Term Notes Receivable

Recorded at present value of cash expected to be collected

Sales of Receivables

• Can be sold at a gain or a loss like other assets

• Accounting treatment is similar to that of the sale of other assets

What is secured borrowing

• Using A/R as collateral for a loan (like I need a loan, but people owe me money, that will be my guarantee)

• Entire receivables balance serves as collateral

• We still have to collect the A/R money, stays in books

• The arrangement should be described in a disclosure note (hey this is being used as collateral)

What is sale of receivables

• Can be sold at a gain or a loss like other assets, leaves books

• DO NOT collect from customer, the perosn who bought the A/R does

• Accounting treatment is similar to that of the sale of other assets

• Gain and loss involved - if sold for more than A/R- gain, if less, loss

Why would someone sell their receivables? How would they do that

Reasons

1. Competition

2. needs cash

3. Time and Cost of Billing and Collection

How

1. Secured borrowing (loan)

2. Sell the receivables thru factoring

Sale with recourse

• Buyer worries if customers don’t pay

• Transfer is outright sale of receivable, no strings attatched and leaves books

• Seller records loss on sale

• Seller use Due from Factor (receivable) account

to cover discounts, returns, and allowances