Study Notes on Cash Accounting

Course Information

• Unit Code: AF0201
• Topic: Cash Accounting
• Reference: Book Chapter 11

Chapter Structure

2. Cash Accounting

• 2.1 Definition of Cash
• 2.2 Cash Control
• 2.3 Cash Accounting Methods
• 2.4 Modified Accrual Accounting
• 2.5 Cash Budgeting and Management

Concepts for Review

• Before studying this chapter, you should understand or revise the following:
  • The use of subsidiary ledgers and control accounts in an accounting system
  • How to journalize cash receipts transactions in a cash receipts journal and post them to ledger accounts
  • How to journalize cash payments transactions in a cash payments journal and post them to ledger accounts
  • The nature and principles of internal control systems

Learning Objectives

• After studying this chapter, you should be able to:
  1. Define the term cash as it is used in accounting.
  2. Explain internal control procedures relevant to cash receipts and cash payments.
  3. Identify the purpose and control features in maintaining a bank account and prepare a bank reconciliation statement.
  4. Explain the purpose of a petty cash fund and how to account for it.
  5. Identify the purpose and control features of a cash budget and prepare one.
  6. Explain essential principles of cash management.
  7. Describe and apply measures of cash adequacy.

Definition of Cash

• Cash is defined in accounting as:
  • Money or equivalents including:
  • Credit card transactions
  • Electronic funds transfers at point of sale (EFTPOS) sales
  • Negotiable instruments like cheques or postal notes accepted by banks for deposit
  • Cash does not include accounts receivable or bills receivable.
  • The character of cash:
  • Must be readily available to pay liabilities as they come due.
  • Cannot be subject to restrictions, contractual or otherwise.

Cash Transactions

• Almost every transaction leads to an inflow or outflow of cash.
• In normal operations, cash refers to:
  • Cash held in the entity (inclusive of petty cash)
  • Cash lodged in night safes of financial institutions
  • Cash deposits with financial institutions
• The total of cash items is reported as a single line in the current assets section of the balance sheet.

Importance of Cash

• Users of financial statements need to understand current cash positions to evaluate an entity's capacity to meet both short-term and long-term obligations.
• Cash management is vital as:
  • Cash, while essential, is an unproductive asset.
  • Inactive cash should be invested for better returns.
  • Proper cash protection and internal controls must be implemented.

Cash Control

• Cash is susceptible to theft, necessitating a robust internal control system to secure cash handling and transaction recording.
• Internal control must include protection for cash on hand and systematic procedures for both cash receipts and cash payments.

Principles of Internal Control for Cash

• Three key principles:
  1. Separation of Responsibility:
  • Separate handling and custodianship of cash from record-keeping to prevent misuse (like borrowing funds temporarily).
  1. Electronic Payments:
  • Making all payments electronically or via cheque.
  1. Clear procedures for handling cash receipts:
  • Structure handling of cash received by mail, cash sales, and any discrepancies recorded (e.g., cash shortages).

Cash Receipts Management

• Types of Cash Receipts:
  • Cash received through the mail
  • Cash from cash sales
• Example Scenario:
  • Cash sales of $1397 on April 4 ($1270 plus $127 GST); cash register reports $1390, leading to a recorded cash shortage of $7.
  • Journal entries for the transactions would be formatted as follows:
  • April 4
    • Cash at Bank: $1390
    • Cash Short and Over: $7
    • Sales: $1270
    • GST Payable: $127

Closing Cash Short and Over

• If cash discrepancies occur:
  • A credit balance in the Cash Short and Over account indicates cash overs and is reported as other income on financial statements.
  • A debit balance signifies shortages and is reported as sundry expenses.

Cash Receipts Journal Example

• Cash Receipts Journal entry for April 4 is summarized as:
  • Debits/Credits:
  • Cash at Bank: $1390
  • Sales: $1270
  • GST Payable: $127

Internal Control Principles for Cash Receipts

• Clear Lines of Responsibility:
  • Designated cashiers handle receipts; a separation exists between cash management and record-keeping.
  • For example, a different individual supervises mail clerk activities concerning cash receipts.
• Mechanical and Electronic Devices:
  • Implement cash registers and EFTPOS equipment to safeguard against discrepancies.

Control of Cash Payments

• Payments are made for various obligations:
  • Paying cash purchases, suppliers, owner withdrawals, expenses, loan repayments, and non-current asset purchases.
• Proper procedures must be in place for authorizing electronic payments and issuing cheques, including separation between invoice approval and payment responsibilities.

Approving Invoices

• Responsibilities include:
  • Designated employees assess invoices for approval without engaging in cheque preparation.
• Verification should confirm that goods/services were authorized and received.

Signing Cheques and Electronic Transfers

• Employees who sign cheques should not approve invoices.
• Cheques require an approval stamp indicating responsiveness to related invoices before being signed and should be prenumbered to maintain accountability.

Internal Control Concepts for Payments

• Clear Lines of Responsibility:
  • Only authorized individuals sign payment instruments.
• Separation of Record Keeping and Custodianship:
  • Ensure no overlap in responsibilities for signing payments and maintaining records.
• Division of Responsibility for Transactions:
  • Individuals authorizing payments must not handle the transaction execution.

Conclusion of Part 2 A

• This section is critical for understanding cash accounting processes, internal controls, and good practices necessary for managing cash effectively.