Chapter

Four
Accounting for
Cash
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Define Cash.
2. Distinguish items that are reported as cash.
3. Define fraud and internal control.
4. Identify the principles of internal control activities.
5. Explain the applications of internal control principles
to cash receipts and cash disbursements.
6. Describe the operation of a petty cash fund.
7. Indicate the control features of a bank account.
8. Prepare a bank reconciliation.
9. Explain the reporting of cash.
 Introduction- What is
4. Cash?
1.
 Cash is a medium of exchange that a bank will
accept at face value and immediate credit to the
depositors account.
 An item to be reported as cash it must fulfill
the following criteria’s:
1) It should be used as a medium of exchange,
i.e. in settlement of transactions.
2) It should be available immediately for the
payment of current obligations.
3) It should be free from any contractual
restriction that limits its use in satisfying debts
Items those are included as
Cash
 Coins and Currencies (Paper money)

 Money on deposit in a bank that can be drawn with out

any restriction, i.e. demand deposits
 Negotiable instruments, which are documents that can
be transferred from one party to another as money, like
money orders, certified checks or CPO’s, checks issued
by third parties and are available at cashiers, checks
written to third parties but not yet issued, traveler’s
checks, etc
 Saving accounts
 Petty cash funds
 Change funds

 Cont’d
 Some items, however, may initially appear or
seem as Cash; but do not meet the criteria’s.
 For instance, a check received from a third party,
as a payment is not included as cash if the party
issuing the check has not sufficient fund in its bank
account.
 Such checks are marked as NSF (Not Sufficient
Fund) checks and are reported as receivables.
 Similarly, Post dated checks, issued by third parties
but that will be drawn only in the future dates,
reported as receivables.
 4. Fraud & Internal Control
2. Frau
d act by an employee that results in personal
Dishonest
benefit to the employee at a cost of the employer.

Internal Control
Methods and measures adopted to:
1. Safeguard assets.
2. Enhance accuracy and reliability of
accounting records.
3. Increase efficiency of operations.
4. Ensure compliance with laws and regulations.
 Cont’d
Question #1

Internal control is used in a business to enhance

the accuracy and reliability of its accounting
records & to:
a. safeguard its assets.
b. prevent fraud.
c. produce correct financial statements.
d. Deter/prevent/ employee dishonesty.
e. b & d
Five Primary Components of Internal
control :
● Control environment.
● Risk assessment.
● Control activities.
● Information and communication.
● Monitoring.
1. Control environment

It is the responsibility of top management to make it clear

that the organization values integrity and that unethical
activity will not be tolerated.
This component is often referred to as the “tone at the top.”

2. Risk assessment
Companies must identify and analyze the various
factors that create risk for the business and must
determine how to manage these risks.
3. Control activities To reduce the occurrence of
fraud, management must design policies and procedures
to address the specific risks faced by the company.

4. Information and communication The internal

control system must capture and communicate all relevant
information both down and up the organization, as well as
communicate information to appropriate external parties.

5. Monitoring Internal control systems must be monitored

periodically for their adequacy.
Significant deficiencies need to be reported to top management
and/or the board of directors.
Principles of Internal Control
Activities
ESTABLISHMENT OF RESPONSIBILITY

 Control is most effective

when only one person is
responsible for a given
task.
 Establishing responsibility
often requires limiting
access only to authorized
personnel, and then
identifying those
personnel.
 Cont’d

SEGREGATION/SEPARATION
OF DUTIES
 Different individuals should be
responsible for related
activities.
 The responsibility for record-
keeping for an asset should be
separate from the physical
custody of that asset.
 Cont’d
DOCUMENTATION PROCEDURES
 Companies should use
prenumbered
documents, and all
documents should be
accounted for.
 Employees should
promptly forward source
documents for
accounting entries to the
accounting department.
 Cont’d
Illustration
PHYSICAL 7-2
Physical
CONTROLS Controls
Limitations of Internal Control
 Costs should not exceed benefit.

 Human element.

 Size of the business.

 4. Cash Controls
 3.
Cash is the one asset that is readily convertible into
any other type of asset.
 It also is easily masked/hide and transported, and is
highly desired/wanted.
 Because of these characteristics, cash is the asset
most susceptible to fraudulent activities.
 In addition, because of the large volume of cash
transactions, numerous errors may occur in executing
and recording them.
 To safeguard cash and to ensure the accuracy of the
accounting records for cash, effective internal control
over cash is critical.
Cash
Receipt
Controls
OVER-THE-
COUNTER
RECEIPTS
Important internal
control principle—
segregation of
record-keeping
from physical
custody.
Illustration 7-5
Control of Over-the
Counter
Receipts
Cash Disbursement Controls

Generally, internal control over cash

disbursements is more effective when companies
pay by check or electronic funds transfer
(EFT) rather than by cash.
Applications:
 Voucher System Controls
 Petty Cash Fund
 Cont’d
VOUCHER SYSTEM CONTROLS
 A network of approvals by authorized
individuals, acting independently, to ensure all
disbursements by check are proper.
 A voucher is an authorization form prepared
for each expenditure in a voucher system.
Petty Cash Fund Controls

Petty Cash Fund - Used to pay small

amounts.
Involves:
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
Establishing the Petty Cash
Fund
Illustration: If Zhu Ltd. decides to establish a
NT$3,000 fund on March 1, the journal entry is:

Mar. 1 Petty Cash 3,000

Cash
3,000
Making Payments from Petty
Cash
 Management usually limits the size of expenditures.

 Does not permit use of the fund for certain types of

transactions.
 Payments are documented on a prenumbered
receipt.
 Signatures of both the custodian and the individual
receiving payment are required on the receipt.
 Supporting documents should be attached to the
receipt.
 Custodian keeps the receipts in the petty cash box
until the fund is replenished.
 Sum of the receipts and money in the fund should
Replenishing the Petty Cash
Fund
Illustration: Assume that on March 15 Zhu’s petty
cash custodian requests a check for NT$2,610. The
petty cash receipts for postage NT$1,320, freight-out
NT$1,140, and miscellaneous expenses NT$150. The
general journal entry to record the check is:

Mar. 15 Postage Expense 1,320

Freight-Out 1,140
Miscellaneous Expense 150
Cash
2,610
Replenishing the Petty Cash
Fund Occasionally, the company may need to
Illustration:
recognize a cash shortage or overage. Assume that
Zhu’s petty cash request for reimbursement would,
therefore, be for NT$2,640, and Zhu would make the
following entry:

Mar. 15 Postage Expense 1,320

Freight-Out 1,140
Miscellaneous Expense 150
Cash Over and Short 30
Cash
2,640
 > DO IT!
Bateer Company established a R$50 petty cash fund on
July 1. On July 30, the fund had R$12 cash remaining and
petty cash receipts for postage R$14, office supplies
R$10, and delivery expense R$15. Prepare journal entries
to establish the fund on July 1 and to replenish the
fund on July 30.
July 1 Petty Cash 50
Cash 50
July 30 Postage Expense 14
Supplies 10
Delivery Expense 15
Cash Over and Short 1
Cash (R$50 – R$12) 38
 Control Features: Use of
4. a Bank
4.
Contributes to good internal control over cash.
 Minimizes the amount of currency on hand.
 Creates a double record of bank
transactions.
 Bank reconciliation.
Making Bank Deposits
Authorized employee should Illustration 7-8
Deposit slip
make deposit.
Bank Code
Numbers

Front Side Reverse Side

Writing Checks
Written order signed by depositor directing bank to pay
a specified sum of money to a designated recipient.
Illustration 7-9: Check With Remittance Advice

Maker

Payee

Payer
Bank Statements Illustration 7-
10
Bank Statement
DEBIT
MEMORANDUM
 Bank service
charge.
 NSF (not sufficient
funds).
CREDIT
MEMORANDUM
 Collect notes
receivable.
 Interest earned.
Reconciling the Bank Account
Reconcile balance per books and balance per
bank to their adjusted (corrected) cash
balances.
Reconciling Items:
1. Deposits in transit.
Time
2. Outstanding checks. Lags

3. Bank memoranda.
4. Errors.
 Cont’d
RECONCILIATION PROCEDURES Illustration 7-11
Bank
Reconciliation
Adjustments

+ Deposit in Transit + Notes collected by bank

- Outstanding Checks - NSF (bounced) checks
+/- Bank Errors - Check printing or other
service charges
+/- Book Errors

CORRECT BALANCE CORRECT BALANCE

Bank Reconciliation Illustrated
The bank statement for Laird Company, in Illustration 7-
10, shows a balance per bank of £15,907.45 on April 30,
2017. On this date the balance of cash per books is
£11,589.45. Using the four reconciliation steps, Laird
determines the following reconciling items.
Step 1. Deposits In Transit:
April 30 deposit (received by bank on May 1). £2,201.40
Step 2. Outstanding Checks: No. 453, £3,000.00; no. 457,
£1,401.30; no. 460, £1,502.70. 5,904.00
Step 3. Errors: Laird wrote check no. 443 for £1,226.00
and the bank correctly paid that amount. However,
Laird recorded the check as £1,262.00. 36.00
Step 4. Bank Memoranda:
a. Credit—Collection of note receivable for £1,000
plus interest earned £50, less bank collection fee £15.00
1,035.00
b. Debit—NSF check from J. R. Baron for £425.60 425.60
c. Debit—Charge for printing company checks £30.00 30.00
 Cont’d
Illustration: Prepare A Bank Reconciliation at April 30.

Cash balance per bank statement ₤15,907.45

Deposit in transit 2,201.40
Outstanding checks (5,904.00)
Adjusted cash balance per bank ₤12,204.85

Cash balance per books ₤11,589.45

Collection of notes receivable 1,035.00
Error in check No. 443 36.00
NSF check (425.60)
Bank service charge (30.00)
Adjusted cash balance per books ₤12,204.85
Entries from Bank
Reconciliation
Collection of Note Receivable: Assuming interest of
₤50 has not been accrued and collection fee is
charged to Miscellaneous Expense, the entry is:

Apr. 30 Cash 1,035.00

Miscellaneous Expense 15.00
Notes Receivable 1,000.00
Interest Revenue 50.00
 Cont’d
Book Error: The cash disbursements journal shows
that check no. 443 was a payment on account to
Andrea Company, a supplier. The correcting entry is:

Apr. 30 Cash 36.00

Accounts Payable 36.00

NSF Check: As indicated earlier, an NSF check

becomes an account receivable to the depositor. The
entry
Apr. is:
30 Accounts Receivable 425.60
Cash 425.60
 Cont’d
Bank Service Charges: Depositors debit check
printing charges (DM) and other bank service charges
(SC) to Miscellaneous Expense. The entry is:

Apr. 30 Miscellaneous Expense 30.00

Cash 30.00

Illustration 7-13
Adjusted Balance in Cash
Account
 Cont’d
Question #5
The reconciling item in a bank reconciliation that
will result in an adjusting entry by the depositor
is:

a. Outstanding Checks.

b. Deposit in Transit.

c. A Bank Error.

d. Bank Service Charges.

Electronic Funds Transfer (EFT)
System
EFTs
 Are disbursement systems that use wire,
telephone, or computers to transfer cash from
one location to another.
 Use is quite common.
 Normally result in better internal control since no
cash or checks are handled by company
employees.
 > DO IT!
Sally Kist, owner of Linen Kist Fabrics, asks you to
explain how she should treat the following reconciling
items when reconciling the company’s bank account: (1)
a debit memorandum for an NSF check, (2) a credit
memorandum for a note collected by the bank, (3)
outstanding
Solution checks, and (4) a deposit in transit..

Sally should treat the reconciling items as follows.

(1) NSF check: Deduct from balance per books.
(2) Collection of note: Add to balance per books.
(3) Outstanding checks: Deduct from balance per
bank.
(4) Deposit in transit: Add to balance per bank.
 4. Reporting Cash
5.
Reporting Cash
 Cash consists of coins, currency, checks, money
orders, and money on hand or on deposit.
 Statement of financial position reports the amount
ofcash available at a given point in
time.
► Listed last in the current assets section.
► Includes cash on hand, cash in banks,
and petty cash.
 Statement of cash flows shows the sources and
 Cont’d
Cash
Equivalents
Cash equivalents are short-term, highly liquid
investments that are both:
1. Readily convertible to known amounts of cash,
and
2. So near their maturity that their market value is
relatively insensitive to changes in interest rates.
Restricted
Cash
Cash that is not available for general use but rather is
restricted for a special purpose.
 Cont’d
Illustration 7-14
Statement of Financial Position Presentation of Cash
 Cont’d
Question #6
Which of the following statements correctly
describes the reporting of cash?
a. Cash cannot be combined with cash
equivalents.
b. Restricted cash funds may be combined with
cash.
c. Cash is listed last in the current assets
section.
d. Restricted cash funds cannot be reported as a
The End of Chapter
4
Thank You!!!