ACC 1101

FINANCIAL
ACCOUNTING AND
REPORTING 1

Cash and Cash

Equivalents
What is cash and cash
equivalents?
• Cash comprises cash on hand and demand
deposits.

• Cash equivalents are short-term, highly

liquid investments, that are readily
convertible to known amount of cash, and
which subject to an insignificant risk of
changes in value

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 Example

Operating Investing Financing

activities activities activities

•Cash payment to •Cash payment to •Cash repayments of

suppliers for goods purchase property, amounts borrowed
and services rendered plant and equipment •Cash payments to
by them •Cash payments to owners to redeem the
•Cash payment of acquire equity or debt entity’s shares
salaries instruments of other
entities and interest of
in joint ventures

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 Presentation
Presentation of Cash and
in the statement of
Cash Equivalents
financial position
 WHAT IS INTERNAL CONTROL, AND
HOW CAN IT BE USED TO PROTECT
A COMPANY’S ASSETS?

• A key responsibility of a business manager

is to control operations.
• Internal control is the organizational plan
and all the related measures adopted by
an entity to safeguard assets, encourage
employees to follow company policies,
promote operational efficiency, and ensure
accurate and reliable accounting records.

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 WHAT IS INTERNAL CONTROL, AND
HOW CAN IT BE USED TO PROTECT
A COMPANY’S ASSETS?

Internal control is the plan and measures

designed to:
1. Safeguard assets
2. Encourage employees to follow company
policies
3. Promote operational efficiency
4. Ensure accurate, reliable accounting
records

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 The Components of Internal Control

• Control procedures
• Risk assessment Internal controls
are monitored
• Information by internal
system auditors and
external
• Monitoring of auditors.
controls
• Environment
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 Internal Control Procedures

• Competent, reliable, and ethical personnel

• Assignment of responsibilities
• Separation of duties, which is a division of
responsibilities between two or more
people to limit fraud and promote
accuracy of accounting records
– Separating operations from accounting
– Separating the custody of assets from
accounting

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 Internal Control Procedures

• Audits
– Internal audits are performed by employees of
the company.
– External audits are performed by independent
auditors (not employees).
• Documents
• Electronic devices
– For example, sensors attached to inventory
can reduce theft.

© 2018 Pearson Education, Inc. 8-9

 Internal Control Procedures

• E-commerce
– Encryption rearranges plain-text messages by
a mathematical process.
– Firewalls limit access into a local network.
– Passwords, PINs, and signatures are additional
security measures.
• Other controls
– Examples: Fireproof vaults, alarms,
loss-prevention specialists, fidelity bonds,
mandatory vacations, job rotation

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 The Limitations of Internal
Control—Costs and Benefits
• Internal controls cannot completely
prevent fraud.
• Collusion occurs when two or more people
work together to circumvent internal
controls and defraud a company.
• The stricter the internal controls, the
higher the costs.
– Internal controls are judged based on their
cost versus benefit.

© 2018 Pearson Education, Inc. 8-11

 WHAT ARE THE INTERNAL
CONTROL PROCEDURES WITH
RESPECT TO CASH RECEIPTS?

• Cash receipts occur primarily when a

business sells merchandise or services.
• Each source of cash has unique security
measures.
– A receipt of cash over the counter in a store
involves a point-of-sale terminal (cash
register).
– Many companies receive checks by mail in
payments for services or merchandises.
Several controls are needed for cash receipts
by mail.

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Cash Receipts by Mail

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 Cash Receipts by Mail

• Step 1: All incoming mail is opened by a

mailroom employee. The mailroom then
sends all customer checks to the treasurer
and all remittance advices to the
accounting department.
– A remittance advice is an optional attachment
to a check that tells the business the reason
for the payment.
• Step 2: The treasurer has the cashier
deposit the checks in the bank. The
cashier receives a deposit receipt.

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 Cash Receipts by Mail

• Step 3: The accounting department uses

the remittance advices to record the
journal entries to Cash and customer
accounts.
• Step 4: As a final control, the controller
compares the following records for the
day:
– Bank deposit amount from the treasurer
– Debit to Cash from the accounting department

© 2018 Pearson Education, Inc. 8-15

 Cash Receipts by Mail

• A lock-box system is a system in which

customers send their checks to a post
office box that belongs to a bank. A bank
employee empties the box daily and
records the deposits into the company’s
bank account.

© 2018 Pearson Education, Inc. 8-16

 WHAT ARE THE INTERNAL
CONTROL PROCEDURES WITH
RESPECT TO CASH PAYMENTS?
• Companies make many payments by
check.
• Payments by check provide internal
controls:
– A check provides a record of the payment.
– A check requires a signature by an authorized
official.
– Supporting evidence is reviewed prior to the
check being signed.

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Controls Over Payment by Check

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Controls Over Payment by Check

The controller or the

treasurer should
examine the payment
packet to prove:
1. It received the goods
ordered.
2. It is paying only for the
goods received and
authorized.
3. It is paying the correct
amount.

© 2018 Pearson Education, Inc. 8-19

HOW CAN A PETTY CASH FUND BE USED
FOR INTERNAL CONTROL PURPOSES?

• Petty cash is used as

an in-office source of Uses for Petty Cash
cash for small
immediate purchases. • Office donuts
• Cleaning supplies
• It is often the • Sympathy flowers
responsibility of a • Entertaining clients
designated employee. • Public transportation
• A petty cash ticket • Tips for service
serves as authorization providers
for payment.

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 Setting Up the Petty Cash Fund

On August 1, Smart Touch Learning creates a petty cash

fund of $200. The custodian cashes the $200 check and
places the currency in the fund box.

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 Setting Up the Petty Cash Fund

For each petty cash payment, the custodian prepares a

petty cash ticket.

• An imprest system is a way to account for petty cash

by maintaining a constant balance in the petty cash
account. At any time, cash plus petty cash tickets
must total the amount allocated to the petty cash
fund.
© 2018 Pearson Education, Inc. 8-22
 Replenishing the Petty Cash Fund

On August 31, the petty cash fund holds $118 in

cash and $80 in petty cash tickets. You can see that
$2 is missing:

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 Replenishing the Petty Cash Fund

To replenish the petty cash fund, the company

writes a check, payable to Petty Cash, for $82 to
bring the cash on hand up to $200.

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 Replenishing the Petty Cash Fund

• When cash is missing, the Cash Short & Over

account is used to record the unaccounted for
amount.
• The Petty Cash account is used in a journal
entry only when the fund is started or when
its amount is increased or decreased.
• When replenishing the fund, the company
debits either the associated expense incurred
or the asset purchased with the funds.

© 2018 Pearson Education, Inc. 8-25

 Replenishing the Petty Cash Fund

At times the sum of cash in the petty cash fund plus the
tickets may exceed the fund balance. Consider the
previous example. Assume that petty cash ticket no. 102
for delivery was for $30 instead of $20.

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 Replenishing the Petty Cash Fund

In this case, the cash on hand plus petty cash tickets

($208) is more than the fund balance ($200). A cash
overage exists. The journal entry to replenish the fund
would be:

© 2018 Pearson Education, Inc. 8-27

 Changing the Amount
of the Petty Cash Fund
On September 1, Smart Touch Learning decides to
increase the amount of the petty cash fund from $200 to
$300.
• In order to increase the fund, Smart Touch Learning must
write a check for the additional $100, cash the check, and
place the additional currency in the petty cash box.

© 2018 Pearson Education, Inc. 8-28

 HOW CAN THE BANK ACCOUNT BE
USED AS A CONTROL DEVICE?

Common bank account controls:

• A signature card is a card that shows each
authorized person’s signature for a bank
account.
• A deposit ticket is a bank form that is
completed by the customer and shows the
amount of each deposit.

© 2018 Pearson Education, Inc. 8-29

 HOW CAN THE BANK ACCOUNT BE
USED AS A CONTROL DEVICE?

Common bank account controls:

• A check is a document that instructs a bank
to pay the designated person or business a
specified amount of money.
– The maker is the party who issues the check.
– The payee is the individual or business to whom
the check is paid.
– The routing number identifies the bank upon which
the payment is drawn.
– The account number identifies the account upon
which the payment is drawn.

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 Bank Statement

• A bank statement reports the activity in a

customer’s account.
– It shows the account’s beginning and ending
balances.
– It lists the month’s cash transactions
conducted through the bank account.
• Canceled checks are the physical or
scanned copies of the maker’s cashed
(paid) checks.

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 Electronic Funds Transfers

• Electronic funds transfer (EFT) is a system

that transfers cash by electronic
communication rather than by paper
documents.
– Many bills are paid with EFT.
– Using EFT is less expensive than mailing a
check.
– Debit card transactions and direct deposits are
EFTs.

© 2018 Pearson Education, Inc. 8-34

 Bank Reconciliation

• The bank reconciliation is a document that

compares and explains the differences
between cash on the company’s books and
the bank’s records.
• Differences arise because of a time lag in
recording transactions, called timing
differences.

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 Preparing the Bank Side
of the Bank Reconciliation
The bank side of the reconciliation includes:
• Deposits in transit that are recorded by
the company but not yet by its bank
• Outstanding checks that are issued by a
company and recorded on its books but
not yet paid by its bank
• Bank errors that either incorrectly increase
or decrease the bank balance

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 Preparing the Book Side
of the Bank Reconciliation
The book side of the reconciliation includes:
• Credit memorandums (bank collections), which are
cash receipts the bank has received and recorded but
the company has not recorded on its books
• Electronic funds transfers
• Service charges, often referred to as a debit
memorandums
• Interest Revenue on a Checking Account
• Nonsufficient funds (NSF) checks, which are received
from customers for payment of services rendered or
merchandise sold that have turned out to be
worthless
• Book errors that either incorrectly increase or
decrease the cash balance in the company’s general
ledger

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Steps to prepare bank
reconciliation
1. Compare bank records and bank
statement
2. Tick each entry that appears in both sets
of the records.
3. Circle entries that do not appears in both
set of the records.
4. Entries found in the bank records but
missing in the business records should be
added to the business records
5. Prepare a bank reconciliation statement

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 Completing the Bank Reconciliation

Exhibit 8-7 Bank Reconciliation

Exhibit is continued on the next slide.

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 Completing the Bank Reconciliation

Exhibit 8-7 Bank Reconciliation (continued)

Exhibit is continued on the next slide.

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 Completing the Bank Reconciliation

Exhibit 8-7 Bank Reconciliation (continued)

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 Bank Side of the Reconciliation

The beginning balance taken from the bank

statement is $12,720.
Additions and subtractions:
• Deposit in transit. The deposit made on April 30 for
$9,000 has not yet been recorded by the bank. This
amount is added to the bank balance.
Outstanding check. Check number 204 for $2,000 is
outstanding. This amount is subtracted from the
bank balance.
After all items affecting the bank side have been
identified, the adjusted bank balance is determined.

© 2018 Pearson Education, Inc. 8-42

 Book Side of the Reconciliation

The beginning cash balance taken from the general

ledger is $20,850.
Additions and subtractions:
• Electronic funds transfer (EFT). An EFT receipt from a
customer in the amount of $100 not recorded in the Cash
account. This amount is added to the book balance.
• Interest revenue. A $30 deposit on the bank statement
for interest earned not recorded in the Cash account. This
amount is added to the book balance.
• Service charge. A $20 service charge on the bank
statement not recorded in the company’s Cash account.
This amount is subtracted from the book balance.

© 2018 Pearson Education, Inc. 8-43

 Book Side of the Reconciliation

Additions and subtractions (continued):

• Electronic funds transfer (EFT). An EFT payment
to Water Works for $40 not recorded in the company’s
Cash account. This amount is subtracted from the book
balance.
• Nonsufficient funds (NSF) check. An NSF check
from a customer on the bank statement. This amount is
subtracted from the book balance.
After recording all of the items that affect the book
balance, Smart Touch Learning determines the
adjusted book balance and verifies that it equals
the adjusted bank balance.

© 2018 Pearson Education, Inc. 8-44

 Journalizing
Transactions
from the Bank
Reconciliation

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 Journalizing Transactions from the
Bank Reconciliation
The journal entries are posted to the Cash T-account:

The ending balance in the Cash T-account equals the

adjusted book balance and the adjusted bank balance
on the bank reconciliation.
© 2018 Pearson Education, Inc. 8-46