UNIT-5

Accounting for Cash

5.1 INTRODUCTION
Since cash is the asset most likely to be used improperly by employees, exposed for embezzlement and
many business transactions either directly or indirectly affect it, it is therefore necessary to have
effective control of cash.
5.2 MEANING OF CASH
Cash includes coins, currency (paper money), checks, money orders, petty cash, and money on deposit
that is available for unrestricted withdrawal from banks and other financial institutions. Normally, you
can think of cash as anything that a bank would accept for deposit in your account. Cash includes money
on deposit in banks and other items that a bank will accept for immediate deposit. Money on deposit in
banks includes checking and saving accounts. Banks do not accept postage stamps, travel advances to
employees, notes receivable or post-dated checks as cash.
5.3 CHARACTERISTICS OF CASH
The following are some of the characteristics of cash:
a) Cash is used as medium of exchange
b) Cash is the most liquid asset
c) Cash is mostly affected by business transactions
d) Cash is used to measure the value of other assets
e) Cash is mostly exposed to embezzlements
Cash Equivalents
Some short-term investments are so liquid that they are termed cash equivalents.
Example includes:-
 Money market funds,
 Treasury bills,
 Commercial paper
 Letter of credit
 Certificates of Deposits
5.4 management of cash:- Cash management refers to planning, controlling and accounting for
cash transactions and cash balances. Efficient management of cash is essential to the survival and
success of every business organization.

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5.5 INTERNAL CONTROL OF CASH
Need for cash controls: Control over cash is important because:
1. Cash is the one asset that is readily convertible in to any other type of assets.
2. It is easily conceded and transported
3. It is highly desired
4. It affects large volume of transaction, because of these characteristics; Firms address this problem
through the internal control system. An internal control system is a set of policies and procedures
designed to protect assets, provide accurate accounting records and evaluate performances. Though
include segregation of duties, bank account system, petty cash fund, voucher system, change fund, and
cash short and over.
5.5.1 Segregation of duties
Internal control for cash under segregation of duty should include the following procedures:
a) The individuals who receive cash should not also disburse (pay) cash
b) The individuals who handle cash should not access accounting records
c) Cash receipts are immediately recorded and deposited and are not used directly to make
payments.
d) Disbursements are made by serially numbered checks, only upon proper authorization by
someone other than the person writing the check
e) Bank accounts are reconciled monthly.
5.5.2 Control of Cash through Bank Accounts
Bank accounts are one of the most important means of controlling cash that provide several advantages
such as:
- Cash is physically protected by the bank,
- A separate record of cash is maintained by the bank,
- And customers may remit payments directly to the bank.
If a company uses a bank account, monthly statements are received from the bank. These monthly
statements (reports) received from the bank are called bank statements.
statements.
Bank statement: is the monthly statement send by the bank to the depositor. The bank statement
usually indicates the beginning and ending cash balance of the depositor in the bank and the monthly
transaction (additions and deductions). It also includes cancelled checks (paid checks) and which the

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bank has make payment on behalf of the depositor. It also includes the deposits made by the depositor
and other thing.
 Bank reconciliation
Bank reconciliation is a schedule explaining any difference between the balance shown in bank
statement and the balance shown in the company or depositor's account (cash ledger of the
depositor). At the end of each month, the depositor should prepare bank reconciliation to verify that
these independent sets of records are in agreement.
It might seem that the two balances should be equal but they are not likely to be equal on any specific
date because of the following:
a) Items recorded by the company but not yet recorded by the bank.
1) Deposit in transit: is the deposit that the Depositor has recorded but not recorded by the
bank.
2) Outstanding checks: These have been issued by the company and recorded on its book but
have not yet been paid by the bank.
b) Items recorded by the bank only but not yet recorded by the company
1) Bank collection: notes receivable and interest accrued on notes receivable may be collected by the
bank. The bank will notify (remind) the amount of collection whenever the bank is sending the
bank statement to the depositor.
2) Service charge: the amount of banks fee for processing check. The bank will notify when the bank
provides the bank statement to the depositor.
3) Not sufficient fund (NSF) received from customer.
4) Interest revenue on checking account.
5) Checks collected, deposited and returned to payee by the bank for reason other than NSF the bank
return checks to the payee because: If the maker account has closed, if the signature is not
authorized, if the check form is improper, if the check has been altered. Accounting for all returned
check is the same for NSF.
6) The cost of printing check.
7) Error by either the company or the bank or both.
E.g. 1) a check written for $225 is drawn by the bank as $252.
2) A check written for $225 is journalized by the depositors as $522 that will understate the cash
ledger balance of the depositor.

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 A/p…………………………………….522
Cash……………………………………………522
To record the balance of cash:
Cash……………………………………..297
A/p………………………………………………297

Bank credit memorandums: are additions by bank not recorded by depositor. They are traced to the
cash receipt journal that can be added to the balance according to depositor’s record.
Bank debit memorandums: are the deductions by bank not recorded by the depositor. They are traced
to the cash payment journals that have to be deducted from the balance according to depositor’s record.
Steps in Preparing Bank Reconciliation
A Bank reconciliation is a schedule prepared by the depositor to bring the balance shown in the bank
statement and the balance shown in the depositor’s accounting into agreement.
The steps to prepare bank reconciliation are:
a) The deposits listed on the bank statement are compared with the deposits shown in the
accounting records. Any deposits not yet recorded by the bank are deposits in transit and should
be added to the balance shown in the bank statements.
b) The paid and received checks from the bank are compared with the check stubs. Any checks
issued but not yet paid by the bank are outstanding checks and should be deducted from the
balance reported in the bank statements.
c) Any credit memorandums issued by the bank that have not been recorded by the depositor, are
added to the balance per depositor’s record.
d) Any debit memorandums issued by the bank that have not been recorded by the depositor are
deducted from the balance per depositor’s record.
e) Any errors in the bank statement or depositor’s accounting records are adjusted.
f) The equality of adjusted balance of statement and adjusted balance of the depositor’s record is
compared.
g) Journal entries are prepared to record any items delayed by the depositor.

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 Format for bank reconciliation
XXX Company
Bank Reconciliation
Sep.30, XXXX
Bank balance according to bank record ………………………………………………………..xxx
Add: Additions of depositor not on bank statement (deposit in transit) .....................................xxx
Bank error that under state bank balance ………………….……………………………..xxx
Subtotal …………………………………………………………………………………….….xxx
Deduct: deduction by the depositor not by bank (outstanding Checks ………………………..xxx
Bank error that overstate bank balance …………………………………………………..xxx
Adjusted cash balance as per the bank statement. ……………………………………….. xxx
Bank balance according to depositor records………………………………………………..xxx
Add: additions by bank not recorded by depositor (credit memorandum: Notes &interest
collection, interest revenue on checking accounts) ………………………………………….....xxx
Depositor error that understate the depositor cash ledger balance…………….………..xxx
Subtotal……………………..…………………………………………………………………..xxx
Deduct: Deduction by bank not recorded by the depositor (Debit memorandum:
NSF checks, service charges) ……………………………………….…………………….xxx
Depositor error that overstate cash ledger balance…………………………………………xxx
Adjusted cash balance as per depositor record……………………………………………....xxx

Illustration
The bank statement for ABC Company indicates a balance of $3359.78 as of July 31, 2013. The balance
in cash in ABC Company ledger of same date is $2549.99.
Additional information:
-Deposit of July 31, not recorded on bank statement --------816.20
-Outstanding checks: #812-----------1061.00, #878-----------435.39, #883----------48.60
-Note plus interest of $8 collected by bank (credit memorandum) not recorded in cash receipt journal
-------408.00.
-Bank service charge (debit memorandum) not recorded in cash payment journal is 18.00
-Check #879 for $732.26 to “X”- company on account, recorded in cash payment journal as $723.26.
-NSF checks is $300.00
Instruction
a) Prepare bank reconciliation.
b) Journalize the necessary journal entries.

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 Solution:
A) Bank reconciliation
ABC Company
Bank reconciliation
July 31, 2013
Cash balance according to bank record ----------------------------------------------------------- 3359.78
Add: Additions of depositor not on bank statement (deposit in transit) ----------------------- 816.20
Deduct: outstanding Checks ------#812------------------- 1061.00
#878------------------ 435.39
#883------------------- 48.60 ----------------------------1544.99
Adjusted cash balance ---------------------------------------------------------------------------- 2630.99
Cash balance according to depositor records------------------------------------------------------2549.99
Add: additions by bank not recorded by depositor (Note plus interest collection) ---------- 408.00
Subtotal----------------------------------------------------------------------------------------------2957.99
Deduct: NSF checks----------------------------------------------------------------300.00
Service charge------------------------------------------------------------18.00
Depositor error that overstate cash ledger balance-------------------9.00 ----------- 327.00
Adjusted cash balance------------------------------------------------------------------------------2630.99

B) Journal entries
July 31/ Cash----------------------------------408.00
Notes receivable---------------------------------------400.00
Interest revenue-----------------------------------------8.00
Accounts receivable------------------300.00
Cash ------------------------------------------------300.00
Miscellaneous administrative expense-----18
Cash--------------------------18.00
Accounts payable -----------------------------9.00
Cash-----------------------------------------------------9.00

2. Petty Cash Fund

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 3) Replenishing (reimbursing) the petty cash.
1) Establishing the petty cash: in establishing the petty cash fund, the first step is to estimate the
amount of cash needed for disbursement of relatively small amounts during certain period, such as week
or a month and appointing the petty cash custodian, the one who is responsible for the operation of the
petty cash fund and for making disbursements from the petty cash fund. Checks payable to the petty
cash fund custodian will be issued.
Petty cash-------------------------------------------------- xxx
Cash in bank---------------------------------------------------------- xx
No entry will be made to the petty cash account unless the petty cash fund is changed (increased or
decreased).
2) Making payment from the petty cash:
Petty cash receipt: The employee who request for payment and the petty cash custodian will
sign on it. The petty cash custodian will make payment for the specified employee who
request disbursement.
NB: No journal entry will be made at the time of disbursement (payment) from the petty cash
fund.
The balance of petty cash fund = Amount in the petty cash receipt + cash in bank
3) Replenishing (reimbursing) the petty cash: When the money in the petty cash fund reaches
a minimum level the fund is replenished (reimbursed). Replenishing the petty cash fund
restores to its original amount. The issuance of this check is recorded by debiting the
appropriate expense accounts and crediting cash.
Expenses………xx

Cash at bank………xx
Illustration: To illustrate normal petty cash fund entries, assume that a petty cash fund of Br. 100 is
established on June 30, 2010. The entry to record this transaction is: -
Petty Cash…………………100
J un
30 e Cash at Bank……………..100
(To record Petty Cash establishment)
At the end of August, the petty cash receipts indicate expenditures for the following items:
Office supplies…………………………………...Br. 50
Store supplies………………………………….…Br. 35
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Daily newspapers (Misc. Admin Exp.)………......Br.3
The entry to replenish (መተካት） the petty cash fund on July 31 is as follows:
Office Supplies……………………………….50
J ul
31 y Store Supplies…………………………………35
Miscellaneous Administrative Expense……….3
Cash at bank……………………………………85
(To record Petty cash replenishment)
3. Voucher System

One method to control cash disbursements is a voucher system. A voucher is a special form, which
contains relevant data about a liability and its payment.

In a voucher system, a voucher is prepared for each expenditure and approved by the designated
officials. Each approved voucher represents liability and recorded in a voucher register, which is similar
to purchases journal. Those registered vouchers are filed according to their payment date in an unpaid
vouchers file. The vouchers and supporting documents then are sent to the treasure or other official is
the finance department before issuing checks. When the checks are signed, the paid vouchers are
recorded in a check register which is similar to cash payments journal. Those paid vouchers are filed in
paid vouchers file according to their serial number for future reference.

4. Change Fund
Some businesses that receive cash directly from customers should maintain a fund of currency and coins
in order to make change (Amharic=>”zirzir”). This fund, which is part of the total cash balance, is called
change fund. A change fund is established by issuing a check to the bank and transferring the cash to the
custodian. The issuance of a check to establish a change fund is recorded by debiting cash on hand and
crediting cash or voucher payable.
Once a change fund is established, there will be no change in its balance unless there is a decision by
management to increase or decrease the fund balance.
5. Cash Short and Over
In handling cash receipts from daily sales, a few errors in making changes will occur. These errors may
cause a cash shortage or overage at the end of the day. The account cash short and over is debited if
there is shortage and credited if there is overage. At the end of the period if the account had a debit
balance, it appears in the Income statement as miscellaneous expense; if it has a credit balance, and it is
shown as miscellaneous revenue.
For example, assume that the total cash sales recorded during the day amounts to Br. 12,420. However,
the cash receipts in the cash register drawer (actual cash count) total Br. 12,415. The following entry
would be made to adjust the accounting records for the shortage in the cash receipts:
Cash Short and Over 5.00
Cash 5.00
To record a Br. 5.00 (Br. 12,420 – 12,415)
Shortage in cash receipts for the day

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