Chapter 7

Cash
Accounting, 21st Edition
Warren Reeve Fess

© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Some
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 Objectives
Objectives
1. Describe the nature of cash and the importance
After studying
After over
of internal control cash.this
studying this
2. Summarize chapter,
chapter, you
you should
should
basic procedures for achieving
be
be able
internal control over cashto:
able receipts.
to:
3. Summarize basic procedures for achieving
internal control over cash payments, including
the use of a voucher system.
4. Describe the nature of a bank account and its
use in controlling cash.
 Objectives
Objectives
5. Prepare a bank reconciliation and
journalize any necessary entries.
6. Account for small cash transactions
using a petty cash fund.
7. Summarize how cash is presented on
the balance sheet.
8. Compute and interpret the ratio of cash
to current liabilities.
 Control Over Cash
 Many companies need several cash accounts to
account for different cash categories and funds.
 Most companies have multiple bank accounts.
The title for each bank account should be: Cash
in Bank—(Name of Bank)
 Preventive controls protect cash from theft and
misuse of cash.
 Detective controls are designed to detect theft or
misuse of cash and are also preventive in nature.
Retailers’
Retailers’ Sources
Sources of
of Cash
Cash

Register
Cash
records
Receipts

CASHIER’S ACCOUNTING
DEPARTMENT DEPARTMENT

Remittance
advices
Mail Receipts
Retailers’
Retailers’ Sources
Sources of
of Cash
Cash

CASHIER’S ACCOUNTING
DEPARTMENT DEPARTMENT

Deposit ticket Deposit receipt

Bank
 Controlling
Controlling Cash
Cash Received
Received
from
from Cash
Cash Sales
Sales
19 Cash 3 142 00
Cash Short and Over 8 00
Sales 3 150 00
To record cash sales and actual
cash on hand.

Cash
Cash sales
sales for
for March
March 1919 totaled
totaled $3,150.00
$3,150.00 per
per
the
the cash
cash register
register tape.
tape. After
After removing
removing the
the
change
change fund,
fund, only
only $3,142.00
$3,142.00 was
was on
on hand.
hand.
Controlling
Controlling Cash
Cash Received
Received
in
in the
the Mail
Mail

Most
Most companies’
companies’ invoices
invoices
are
are designed
designed so so that
that
customers
customers return
return aa portion
portion
of
of the
the invoice,
invoice, call
call aa
remittance
remittance advice.
advice.
 Controlling
Controlling Cash
Cash Received
Received
in
in the
the Mail
Mail
1. The employee who opens the mail should initially
compare the amount received with the amount on the
remittance advice.
2. The employee opening the mail stamps checks and
money orders “For Deposit Only” in the bank account
of the business.
3. All cash is sent to the Cashier’s Department where
checks and money orders are combined with receipts
from cash sales and a bank deposit ticket is prepared.
 Controlling
Controlling Cash
Cash Received
Received
in
in the
the Mail
Mail
4. The remittance advices and their summary totals are
delivered to the Accounting Department where a clerk
prepares the records of the transactions and posts them
to the customer account.
5. The stamped duplicate copy of the deposit ticket is
returned to the Accounting Department where a clerk
compares the receipt with the total amount that should
have been deposited.
 Internal Control of Cash
Payments
1. Cash controls must provide assurance that
payments are made for only authorized
transactions.
2. Cash controls should ensure that cash is used
efficiently.
3. A voucher system provides assurance that
what is being paid for was properly ordered,
received, and billed by the supplier.
 13

A
A voucher
voucher system
system isis aa set
set of
of
procedures
procedures for
for authorizing
authorizing
and
and recording
recording liabilities
liabilities and
and
cash
cash payments.
payments.

Basic
Features of
the Voucher
System
 Basic
Basic Features
Features of
of the
the
Voucher
Voucher System
System
 A voucher system normally uses vouchers.
 The system normally has a file for unpaid vouchers
and a file for paid vouchers.
 Usually prepared by the Accounting Department
after all necessary supporting documents are
received (purchase order, supplier’s invoice, and a
receiving report).
 In preparing the voucher, the accounts payable
clerk verifies the quantity, price, and mathematical
accuracy of the supporting documents and files the
paid voucher.
A
A summary
summary received
received from
from
the
the bank
bank of
of all
all account
account
transaction
transaction isis called
called aa
statement
statement ofof account.
account.
 AA bank
bank reconciliation
reconciliation isis aa
listing
listing of
of the
the items
items and
and amounts
amounts
that
that cause
cause the
the cash
cash balance
balance
reported
reported in in the
the bank
bank statement
statement to to
differ
differ from
from the
the balance
balance of of the
the
cash
cash account
account in in the
the ledger.
ledger.
Reasons
Reasons for
for Differences
Differences Between
Between Depositor’s
Depositor’s
Records
Records andand the
the Bank
Bank Statement
Statement

Outstanding
 Outstanding checks
checks
Deposits
 Deposits in
in transit
transit
Service
 Service charges
charges
Collections
 Collections
Not-sufficient-funds
 Not-sufficient-funds (NSF)
(NSF)
checks
checks
Errors
 Errors
 Steps
Steps in
in aa Bank
Bank Reconciliation
Reconciliation
1. Compare each deposit listed on the bank statement
Add
Add deposits
deposits not
not recorded
recorded by
by the
the bank
bank to
to the
the
with unrecorded deposits appearing on the preceding
balance
balance
period’s according
accordingand
reconciliation to
to the
withbank
the bank statement.
statement.
deposit receipts.
2.Deduct
Compare paid checks
checks with outstanding
outstanding that havechecks
been paid
Deduct checks outstanding that have been
appearing on the preceding period’s reconciliation and
paid
by
by the
the bank
bank from
from the
the balance
balance according
according to
to the
the
with recorded checks.
bank
bank statement.
statement. to entries in the
3. Add
Compare bank credit memorandums
Add credit
credit memorandums
memorandums that that have
have not
not been
been
journal.
recorded
recorded to
to the
the balance
balance according
according to
to the
the
depositor’s
depositor’s records.
records.
 Steps
Steps in
in aa Bank
Bank Reconciliation
Reconciliation
4.Deduct
Compare bankmemorandums
debit memorandums to entries
Deduct debit memorandums that have not
debit that have not been
been
recording cash payments.
recorded from the balance according to the
5. List any errors discovered during the precedingthe
recorded from the balance according to steps.
depositor’s
depositor’s records.
records.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99

Power
Power Network
Network prepares
prepares to
to reconcile
reconcile the
the
monthly
monthly bank
bank statement
statement as
as ofof July
July 31,
31, 2006
2006
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not
recorded by bank 816.20
$4,175.9
8

AA deposit
deposit of
of $816.20
$816.20 did
did not
not
appear
appear on
on the
the bank
bank statement.
statement.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank
$4,175.9 408.00 $2,957.9
8 9

The
The bank
bank collected
collected aa note
note in
in the
the
amount
amount ofof $400
$400 and
and the
the related
related
interest
interest of
of $8
$8 for
for Power
Power Networking
Networking
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99

A
Three
Three deposit
deposit of
Achecks
checks that
of $637.02
that were did
did not
were written
$637.02 not appear
written during
during the
appear the
period did on
not the
appearbankonstatement.
the
on the bank
period did not appear on the bank
bank statement:
statement. statement:
#812,
#812, $1,061;
$1,061; #878,
#878, $435.39,
$435.39, #883,
#883, $48.60.
$48.60.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check returned
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39
No. 883 48.60 1,544.99

The
The bank
bank returned
returned an
an NSF
NSF check
check from
fromoneone of
of the
the
firm’s
firm’s customers,
customers, Thomas
Thomas Ivey,
Ivey, in
in the
theamount
amount ofof
$300.
$300. This
This was
was aa payment
payment onon account.
account.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00

The
The bank
bank service
service charges
charges totaled
totaled $18.00.
$18.00.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00
Error recording
Check No. 879 9.00
327.00
Check
Check No.
No. 879
879 for
for $732.26
$732.26 to
to Taylor
Taylor Co.
Co. on
on account,
account,
erroneously
erroneously recorded
recorded in
in journal
journal as
as $723.26.
$723.26.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00
Error recording
Check No. 879 9.00 327
Adjusted balance $2,630.99 Adjusted balance $2,630.99
Now,
Now, ifif desired,
desired, we
we can
can
prepare
prepare aa formal
formal
statement
statement forfor Power
Power
Networking.
Networking.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned$300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
 Journal
Journal entries
entries must
must bebe
prepared
prepared forfor those
those items
items that
that
affected
affected the
the depositor’s
depositor’s side
side of
of
the
the reconciliation.
reconciliation.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries
Entries Related
Related to
to aa Bank
Bank Reconciliation
Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries
Entries Related
Related to
to aa Bank
Bank Reconciliation
Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.

30 Accounts Receivable—Thomas Ivey 300 00

Miscellaneous Administrative Exp. 18 00
Accounts Payable—Taylor Co. 9 00
Cash 327 00
NSF check, bank service
charges, and error in
recording Check no. 879.
Petty
Cash
 On
On August
August 1,1, issued
issued Check
Check No.
No. 511
511 for
for $100
$100
to
to established
established aa petty
petty cash
cash fund.
fund.

Aug. 1 Petty Cash 100 00

Cash 100 00
Established petty cash fund.
 At
At the
the end
end of
of August,
August, the
the petty
petty cash
cash receipts
receipts
indicated
indicated expenditures
expenditures for
for the
the following
following items:
items:
office
office supplies,
supplies, $28,
$28, postage
postage (office
(office supplies),
supplies),
$22;
$22; store
store supplies,
supplies, $35,
$35, and
and miscellaneous
miscellaneous
administrative
administrative items,
items, $3.
$3.

Aug. 31 Office Supplies 50

00 Store Supplies 35 00
Miscellaneous Administrative Exp. 3 00
Cash 88 00
Replenished petty cash fund.
Financial Analysis and Interpretation

Solvency is the ability of a business to meet

its financial obligations (debts) as they are
due.
Solvency analysis focuses on the ability of
a business to pay or otherwise satisfy its
current and noncurrent liabilities.
This ability is normally assessed by
examining balance sheet relationships.
Financial Analysis and Interpretation
Doomsday
Doomsday Ratio
Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents $100,000 $ 120,000
B. Current liabilities 400,000 1,500,000
Doomsday ratio A / B 0.25 0.08

Use:
Use: To
To indicate
How
How are
indicate
arethe company’s
these
the ratios ability
ability to
ratios used?
company’s
these used? to
meet
meet creditors
creditors obligations
obligations in in the
the
worst
worst case
case assumption
assumption thatthat should
should
the
the business
business cease
cease to
to exist.
exist.
Chapter 7

The
The End
End