College Accounting - Chapter 7: Accounting for Cash

College Accounting, 22nd Edition

Chapter 7: Accounting for Cash

Introduction to Cash
  • Cash includes:
    • Currency and coins
    • Checking accounts
    • Checks received from customers
    • Money orders and bank cashier’s checks
  • Importance of Cash Management:
    • Central role in operating a business
    • Requires careful management and control.
Internal Control
  • Definition: A set of policies and procedures designed to ensure proper accounting for transactions.
  • Good Internal Control for Cash Transactions:
    • All cash received should be deposited DAILY in a bank.
    • All disbursements, except for payments from petty cash, should be made by CHECK.
Learning Objectives
  • Learning Objective 1: Describe how to open and use a checking account.

Opening a Checking Account

  • Requirements:
    • Each person authorized to sign checks must complete and sign a signature card.
    • The signature card verifies the depositor’s signature on any banking transactions.
USA Patriot Act
  • Primary Purpose: To help detect and prevent terrorism.
  • Requirement for Banks: Must have a Customer Identification Program (CIP) that provides clear identification of every account holder.
Making Deposits
  • Deposit Ticket:
    • A form showing a detailed listing of items being deposited.
    • Items listed separately: currency, coins, and checks.
  • Check Identification:
    • Each check can be identified by its ABA (American Bankers Association) number, found in the upper right-hand corner and in magnetic ink character recognition (MICR) code on the lower left side of the front of each check.
Endorsements
Part 1
  • Definition: Each check being deposited must be endorsed by the payee (the party to whom the check is payable).
  • Endorsement Methods:
    • Stamping or writing the payee’s name on the back of the check.
    • Businesses often use a rubber stamp for endorsement.
Part 2
  • Types of Endorsements:
    • Blank Endorsement: The payee simply signs the back of the check, making it payable to any bearer.
    • Restrictive Endorsement: The payee adds phrases such as “For deposit only,” specifying the bank or individual, thus restricting payment to a specific party.
Automated Teller Machines (ATMs)
  • User Requirements: Each depositor has a plastic card and a personal identification number (PIN).
  • Accessing ATMs: Most ATMs allow non-customers to use their services.
  • Accounting for ATM Transactions: It is important for the depositor to maintain a record of ATM withdrawals and deposits.
Writing Checks
  • Definition: A check is a document ordering a bank to pay cash from a depositor’s account.
  • Three Parties to Every Check:
    • Drawer: The depositor who orders the bank to pay the cash.
    • Drawee: The bank on which the check is drawn.
    • Payee: The person being paid the cash.
  • Check Stub: Business checks often have a check stub for recordkeeping.
Steps in Preparing a Check
  1. Complete the check stub or register.
  2. Enter the date, payee name, and amount on the check.
  3. Sign the check (the check should not be signed until all details are verified as correct).
Bank Statements
Part 1
  • Definition: A statement of account issued by a bank to each depositor once a month.
  • Contents of the Statement:
    • The balance at the BEGINNING of the period.
    • Deposits and other amounts ADDED during the period.
    • Checks and other amounts SUBTRACTED during the period.
    • The balance at the END of the period.
Part 2
  • Additional Information:
    • Canceled checks, “imaged” sheets of check faces, or a listing of checks sent with bank statements.
Bank Reconciliation
  • Learning Objective 2: Prepare a bank reconciliation and related journal entries.
  • Example:
    • Bank statement shows a balance of $1,748.09 while the general ledger cash account has a balance of $2,393.23.
Preparing a Bank Reconciliation
  • Reconciliation Process:
    1. Start with the balance according to the bank statement.
    2. Adjust for reconciling items to arrive at the adjusted bank balance.
    3. Identify and adjust the BOOK balance.
    4. Agreement of bank and book balances indicates successful reconciliation.
Differences Between Bank and Book Balances
Part 1
  • Common Differences:
    • Deposits in Transit: Deposits not yet recorded by the bank.
    • Outstanding Checks: Checks issued but not yet processed by the bank.
    • Service Charges: Fees charged by the bank for various services.
Part 2
  • Additional Differences:
    • Collections: Banks may collect amounts on behalf of the depositor.
    • NSF Checks: Checks that are not paid due to insufficient funds in the drawer’s account.
    • Errors: Mistakes made in recording transactions by either the bank or the depositor.
Step-by-Step Bank Reconciliation
Step #1
  • Identify deposits in transit and related errors:
    • Compare bank statements with last month’s deposits in transit.
    • Check if individual deposit amounts vary from accounting records.
Step #1 Example
  • A deposit in the accounting records of $637.02 dated November 21 was never received by the bank (this is identified as a Deposit in Transit).
Step #2
  • Identify outstanding checks: Compare canceled checks with bank statements.
  • Outstanding checks are subtracted from the bank balance on reconciliation.
Step #2 Example
  • Error Identification: Check no. 214 was written for $18.98 but was recorded as $19.88 (indicating a $0.90 error). This error results in adjustments.
  • Outstanding checks (numbers 219, 224, and 227) are those not appearing on the bank statement.
Step #3
  • Identify additional reconciling items: Compare all additions and deductions on the bank statement with accounting records.
  • Credit memos are items added, while debit memos are items deducted.
Step #3 Example
  • An ATM withdrawal of $100.00 was made but not recorded; this will require a deduction of $100.00 from the book balance.
  • An NSF check of $200.00 from a client will be deducted from the book balance.
Journal Entries for Bank Reconciliation
  • Two types of reconciling items require journal entries: Errors in the depositor’s books and bank additions or deductions not reflected in the books.
  • Example of Journal Entries: Errors must be accurately reflected in the corresponding accounts, such as Accounts Payable, Cash (when deducting), and Miscellaneous Expenses (for service fees).
Electronic Banking
  • EFT (Electronic Funds Transfer): Both deposits and payments can be made electronically.
  • Increasing Use of EFT: Practices include electronically paying employees, bills from suppliers, and processing payments from customers.
Petty Cash Fund
  • Definition: A fund established for small cash expenses, reducing the inefficiency of handling small amounts via checks.
  • Establishment Process:
    • Write a check to the petty cash custodian.
    • The custodian is the only authorized person to make payments from the fund.
Replenishing the Petty Cash Fund
  • Replenishment Criteria: Should occur whenever the fund runs low or at the end of each accounting period.
  • Accounting Entries: Only debit appropriate expense accounts and credit Cash without changing the established amount of Petty Cash unless a change in the fund itself occurs.
Change Fund
  • Definition: A supply of currency and coins kept in cash registers for making change.
  • Operation: At the end of the day, cash is deposited, but the change fund remains for the next day.
Cash Shortage and Overage Examples
  • Cash Shortage Example: If there is a discrepancy between cash available and sales recorded, it should be recorded in the "CASH SHORT AND OVER" account.
  • Cash Overage Example: Similar to a shortage, when there's excess cash, a corresponding entry is made in the "CASH SHORT AND OVER" account.
Cash Short and Over Account
  • Purpose: Used for accumulating cash shortages and overages throughout the period.
  • Year-End Treatment:
    • A debit balance is treated as an expense.
    • A credit balance is treated as revenue.
Conclusion
  • Perspective on Cash Handling: For those employed in cash-handling positions, such as cashiers, understanding the details of cash management and re-conciliation is crucial for maintaining business efficiency and accountability.
  • The cash handling process begins with counting the change fund at the start of each shift and includes comparing cash at the end of the shift to ensure accuracy.