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7-1
COLLEGE ACCOUNTING
COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.
HEINTZ & PARRY19th EDITION
7-2
CHAPTER 7
ACCOUNTING FOR CASH
7-3
CASH Includes:
Currency, coins, and checking accounts
Checks received from customers Money orders Bank cashier’s checks
Because cash plays such a central role in operating a business, it must be carefully managed and controlled
7-4
INTERNAL CONTROL
A set of 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
7-5
MAKING DEPOSITS A deposit ticket is a form showing
a detailed listing of items being deposited Currency, coins, and checks are
listed separately Each check should be identified by
its ABA (American Bankers Association) number– Found in upper right-hand corner of
each check– Also shown in magnetic ink character
recognition (MICR) code on the lower left side of the front of each check
– The code is used to sort and route checks
7-6
AUTOMATED TELLER MACHINES Each depositor has a plastic card
and a personal identification number (PIN)
Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs
It is important for the depositor to keep an accounting record of ATM withdrawals and deposits
7-7
WRITING CHECKS A check is a document ordering a
bank to pay cash from a depositor’s account
There are 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 Business checks often have a
check stub
7-8
BANK STATEMENT
The statement shows: 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
7-9
BANK STATEMENT
Sent with bank statement Canceled checks, “imaged” sheets of
check faces, or a listing of checks Any other forms representing items
added to or subtracted from the account
7-10
LEARNING OBJECTIVE 2
PREPARE A BANK RECONCILIATION AND RELATED JOURNAL ENTRIES.
7-11
BANK RECONCILIATION EXAMPLE
Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23.
We need to prepare a BANK
RECONCILIATION.
7-12
Maple Consulting Bank ReconciliationNovember 21, 20--
Heading includes:Name of CompanyBank Reconciliation
Date
7-13
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21
Once all reconciling itemsare listed, the
adjusted bank balance is computed.
$1,748.09Add:
Deduct:
Adjusted bank balance
7-14
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21
The adjusted book balance is computed.
$1,748.09Add:
Deduct:
Adjusted bank balanceBook balance, November 21Add:
Deduct:
$2,393.23
Adjusted book balance
7-15
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21
We say it is “reconciled” when the adjusted BANK and adjusted BOOK
balances agree.
$1,748.09Add:
Deduct:
Adjusted bank balanceBook balance, November 21Add:
Deduct:
$2,393.23
Adjusted book balance
7-16
REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES Deposits in transit
Deposits that have not reached the bank or been recorded by the bank before the statement is prepared
Outstanding checks Checks that have not been
presented to the bank for payment before the statement is prepared
Service charges Bank charges for services such as
check printing and processing
7-17
REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES (CONT.)
Collections Collections of promissory notes or
charge accounts made by the bank on behalf of the depositor
Not sufficient funds (NSF) checks Checks deposited but not paid
because the drawer did not have sufficient funds
Errors Errors made by the bank or by the
depositor in recording cash transactions
7-18
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21 $1,748.09Add
Deduct
Adjusted bank balanceBook balance, November 21Add
Deduct:
$2,393.23
Adjusted book balance
deposit in transit 637.02
error on check no. 214 0.90
outstanding checks:No. 219No. 224No. 227
$200.0025.0067.78 292.78
Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80
$2,385.11
$2,092.33
$2,394.13
301.80$2,092.33
7-19
EXAMPLE
We now know that the actual amount of cash is $2,092.33, but the general ledger
cash account still shows $2,393.23.
JOURNAL ENTRIESARE NEEDED
7-20
BANK RECONCILIATION JOURNAL ENTRIES Only two kinds of items appearing
on a bank reconciliation require journal entries: Errors in the depositor’s books Bank additions and deductions that
do not already appear in the books ALL items in the book balance
section of the reconciliation require a journal entry
7-21
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21 $1,748.09Add
Deduct
Adjusted bank balanceBook balance, November 21Add
Deduct:
$2,393.23
Adjusted book balance
deposit in transit 637.02
error on check no. 214 0.90
outstanding checks:No. 219No. 224No. 227
$200.0025.0067.78 292.78
Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80
$2,385.11
$2,092.33
$2,394.13
301.80$2,092.33
7-22
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
When check no. 214 was written, the cash account was credited for $0.90 more
than the check amount of $46.25.This entry puts $0.90 back
in the Cash account.
0 9020--Nov. 21
7-23
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
Accounts Payable
0 90
0 90
Error in recording check
20--Nov. 21
Add error on checkAccounts Payable was originally
debited for $19.88. This was $0.90 more than the actual telephone bill of $18.98.This entry removes the extra $0.90.
7-24
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Accounts Payable1
2
3
4
5
6
7
8
9
10
11
Cash
0 90
0 90
Error in recording check
20--Nov. 21
Deduct error on check
7-25
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21 $1,748.09Add
Deduct
Adjusted bank balanceBook balance, November 21Add
Deduct:
$2,393.23
Adjusted book balance
deposit in transit 637.02
error on check no. 214 0.90
outstanding checks:No. 219No. 224No. 227
$200.0025.0067.78 292.78
Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80
$2,385.11
$2,092.33
$2,394.13
301.80$2,092.33
7-26
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
Since the ATM withdrawal wasfor “personal expenses,” the
drawing account should be debited.
Accounts Payable
0 90
0 90
Error in recording check
J. M., Drawing 200 00
Nov.20--
21
21
7-27
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
The $200 withdrawal was never recorded.This entry will remove the $100.00
from the cash account.
Accounts Payable
0 90
0 90
Error in recording check
J. M., Drawing 100 00
Nov.20--
21
21
Cash 100 00
7-28
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21 $1,748.09Add
Deduct
Adjusted bank balanceBook balance, November 21Add
Deduct:
$2,393.23
Adjusted book balance
deposit in transit 637.02
error on check no. 214 0.90
outstanding checks:No. 219No. 224No. 227
$200.0025.0067.78 292.78
Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80
$2,385.11
$2,092.33
$2,394.13
301.80$2,092.33
7-29
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Accounts Receivable10
11
12
13
14
15
16
17
18
19
20
Cash200 00
200 00
Unrecorded NSF check
21
The amount of the bounced checkis placed into Accounts Receivable
and Cash is reduced.
7-30
Maple Consulting Bank ReconciliationNovember 21, 20--
Bank statement balance, November 21 $1,748.09Add
Deduct
Adjusted bank balanceBook balance, November 21Add
Deduct:
$2,393.23
Adjusted book balance
deposit in transit 637.02
error on check no. 214 0.90
outstanding checks:No. 219No. 224No. 227
$200.0025.0067.78 292.78
Unrecorded ATM withdrawal $100.00NSF check 200.00Bank service charge 1.80
$2,385.11
$2,092.33
$2,394.13
301.80$2,092.33
7-31
BANK RECONCILIATION JOURNAL ENTRIES
DATE DESCRIPTION PR DEBIT CREDIT
Accounts Receivable10
11
12
13
14
15
16
17
18
19
20
Cash
200 00
200 00
Unrecorded NSF check
Service Fee Expense 1 80
21
21
Cash 1 80
Bank service charge
7-32
LEARNING OBJECTIVE 3
ESTABLISH AND USE A PETTY CASH FUND.
7-33
THE PETTY CASH FUND A fund set up to pay for small
items with cash Checks for very small amounts are
cumbersome To establish the fund:
A check is written to the petty cash custodian for the amount to be set aside in the fund
The custodian cashes the check and places the money in a petty cash box
The custodian should be the only person authorized to make payments from the fund
7-34
JOURNAL ENTRY FOR ESTABLISHING A PETTY CASH FUND
DATE DESCRIPTION PR DEBIT CREDIT
Petty Cash1
2
3
4
5
6
7
8
9
10
11
200 0020--Dec. 1
Cash 200 00
Establish petty cash fund
7-35
PETTY CASH PAYMENTS RECORD
A special multi-column record that supplements the regular accounting records
Provides a record of each petty cash payment Broken down by account
– e.g.: Travel/Entertainment Expense, Postage Expense, etc.
Used to prepare the replenishment journal entry
7-36
REPLENISHING THE PETTY CASH FUND The petty cash fund should be
replenished whenever the fund runs low and at the end of each accounting period
Once the fund is established by debiting Petty Cash and crediting Cash, no further entries are made to Petty Cash
To replenish the fund, debits are made to appropriate expense accounts and Cash is credited Only if the amount of the fund itself
is being changed would there be a debit or credit to Petty Cash
7-37
EXAMPLE
To replenish the fund: A check is written for $178.80,
which is the total of the eight vouchers
A journal entry is made to recognize:– The expenses shown on the vouchers– The outflow of cash via the check
At the end of the month, the petty cash fund contains eight vouchers and only $21.20 in cash. The fund
needs to be replenished.
7-38
JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
40 8020--Dec. 24
39 50
Automobile ExpensePostage Expense
Travel & Entertain. Exp. 30 25
Cash 178 80
Cash should be credited for the amount needed to restore the fund to its established amount.
($200.00 fund – $21.20 in box = $178.80 needed)
Miscellaneous ExpenseJames Maple, Drawing 30 00
38 25
7-39
JOURNAL ENTRY FOR REPLENISHING THE PETTY CASH FUND
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
40 8020--Dec. 31
39 50
Automobile Expense
Postage Expense
Travel & Entertain. Exp. 30 25
Cash 178 80
Miscellaneous Expense30 00
38 25
James Maple, Drawing
Replenishment of petty
cash fund
7-40
LEARNING OBJECTIVE 4
ESTABLISH A CHANGE FUND AND USE THE CASH SHORT AND OVER ACCOUNT.
7-41
CHANGE FUND
A supply of currency and coins kept in the cash register or cash drawer Allows businesses to make change
when customers pay in cash At the end of the day, cash
received during the day is deposited– But the change fund is held back
for use on the following day
7-42
EXAMPLE
Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund.
CASH
200
Just like the petty cashfund, a change fund
starts by withdrawing from the cash account.
7-43
EXAMPLE
Sporty’s Cleaners is opening for business on June 3. Sporty needs to establish a $200 change fund.
CASH
200
Change Fund isan ASSET.
200
CHANGE FUND
7-44
JOURNAL ENTRY FOR ESTABLISHING THE CHANGE FUND
DATE DESCRIPTION PR DEBIT CREDIT
Change Fund1
2
3
4
5
6
7
8
9
10
11
200 0020--June 1
Cash 200 00
Establish change fund
7-45
EXAMPLE
At the close of its first day of business, Sporty’s had $1,450.00 in
the cash register.
CASH IN DRAWER $1,450.00Less:CHANGE FUND – 200.00
$1,250.00CASH FROM SALES
The CASH from sales shouldagree with the sales recordedon the cash REGISTER TAPE.
7-46
EXAMPLE
At the close of its first day of business, Sporty’s had $1,450.00 in
the cash register.
CASH IN DRAWER $1,450.00Less: CHANGE FUND – 200.00
$1,250.00CASH FROM SALES
Sales from the cash register tapeare also $1,250.00!!!
7-47
JOURNAL ENTRY FOR RECORDING CASH FROM SALES
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Only the $1,250.00 is debited to Cash and deposited.
The change fund is not deposited.
7-48
JOURNAL ENTRY FOR RECORDING CASH FROM SALES (CONT.)
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Service Fees 1,250 00
Cash received from services
What would have happened if the cash register tape didn’t agree with
the cash from sales?
7-49
CASH SHORTAGE EXAMPLE
At the close of its first day of business, Sporty’s had $1,450.00 in
the cash register.
CASH IN DRAWER $1,450.00Less:CHANGE FUND – 200.00
$1,250.00CASH FROM SALES
What if the cash register tape had shown sales of $1,252.00
or $1,247.00?
7-50
CASH SHORTAGE EXAMPLE
CASH IN DRAWER $1,450.00Less: CHANGE FUND – 200.00
$1,250.00CASH FROM SALES$1,252.00CASH REGISTER TAPE
$ 2.00SHORTAGE
Overages and shortages are recorded in an account called “CASH SHORT AND OVER.”
7-51
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Cash is debited for the amount deposited.
7-52
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Cash Short and Over is debited for shortages
and credited for overages.
Cash Short and Over 2 00
7-53
JOURNAL ENTRY FOR RECORDING A CASH SHORTAGE (CONT.)
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Service Fees is credited for the amount on the cash register tape
even though this was not the amount collected.
Cash Short and Over 2 00
Service Fees 1,252 00
7-54
CASH OVERAGE EXAMPLE
CASH IN DRAWER $1,450.00Less: CHANGE FUND – 200.00
$1,250.00CASH FROM SALES$1,247.00CASH REGISTER TAPE
$ 3.00OVERAGE
At the close of its first day of business, Sporty’s had $1,450.00 in the cash register… But the cash register tape
showed $1,247.00
7-55
JOURNAL ENTRY FOR RECORDING A CASH OVERAGE
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Cash Short and Over 3 00
Cash Short and Over is debited for shortages
and credited for overages.
7-56
JOURNAL ENTRY FOR RECORDING A CASH OVERAGE (CONT.)
DATE DESCRIPTION PR DEBIT CREDIT
Cash1
2
3
4
5
6
7
8
9
10
11
1,250 0020--June 3
Service Fees is credited for the amount on the cash register tape
even though this was not the amount collected.
Cash Short and Over 3 00
Service Fees 1,247 00