CASH

What Is Cash?
Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring and
accounting for all other items. Companies generally classify cash as a current asset. Cash consists of
coin, currency, and available funds on deposit at the bank. Negotiable instruments such as money
orders, personal checks, and bank drafts are also viewed as cash.

Cash

I) Meaning

 A medium of exchange.
 Acceptable by knowledgeable parties in exchange for goods and services.
 Acceptable for deposits at face value by banks.

Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to
known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in
value because of changes in interest rates.
Example
Treasury bill issued by govt.
Internal Control over cash
Internal control consists of all the related methods and measures adopted within an organization to
safeguard its assets, enhance the reliability of its accounting records, increase efficiency of operations,
and ensure compliance with laws and regulations
The six principles of control activities are as follows.
• Establishment of responsibility
• Segregation of duties
• Documentation procedures
• Physical controls
• Independent internal verification
• Human resource controls

Establishment of Responsibility

Control is most effective when only one person is responsible for a given task.

1|Page
Segregation of Duties

Related duties, including physical custody and record keeping, should be assigned to different
individuals.

Documentation Procedures

Companies should use pre-numbered documents for all documents should be accounted for.

Cash Controls
Cash is the one asset that is readily convertible into any other type of asset. It also is easily concealed
and transported, and is highly desired. 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.
Tools of cash management:
 Cash flows statement
 Cash budgets
 Bank reconciliations
 Petty cash funds
Control over cash

Objectives:
 To protect cash from theft
 To make sure that cash is used for proper business purposes.
 To avoid miss-utilization of cash.
 To have proper /accurate/ accounting record of cash.
 Etc.

PETTY CASH FUND CONTROLS

Better internal control over cash disbursements is possible when companies make payments by check.
However, using checks to pay small amounts is both costs and difficult.
For instance, a company would not want to write checks to pay for postage due, working lunches, or
taxi and other miscellaneous expenses. A common way of handling such payments, while maintaining
satisfactory control, is to use a petty cash fund to pay relatively small amounts.
The operation of a petty cash fund,

1. Establishing the fund

2. Making payments from the fund, and
3. Replenishing the fund

2|Page
1. Establishing the Petty Cash Fund.
Two essential steps in establishing a petty cash fund are:
1. Appointing a petty cash custodian who will be responsible for the fund, and
2. Determining the size of the fund. Ordinarily, a company expects the amount in the fund to cover
expected disbursements for a three- to four-week period.
To establish the fund, a company issues a check payable to the petty cash custodian for the stipulated
amount.

For example, A-Company decides to establish a $100 fund on March 1, the general journal entry is:
Mar. 1 Petty Cash 100
Cash 100
(To establish a petty cash fund

2. Making Payments from the Petty Cash Fund.

The petty cash fund custodian has the authority to make payments from the fund that conform to
prescribed management policies. Each payment from the fund must be documented on a pre number
petty cash receipt (or petty cash voucher)
3. Replenishing the Petty Cash Fund.
When the money in the petty cash fund reaches a minimum level, the company replenishes the fund.
The petty cash custodian initiates a request for reimbursement. The individual prepares a schedule (or
summary) of the payments that have been made and sends the schedule, supported by petty cash
receipts and other documentation.
To illustrate, assume that on March 15 A- Company petty cash custodian requests a check for $87. The
fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous
expenses $5. The general journal entry to record the check is:
Mar. 15
Postage Expense 44
Freight-out 38
Miscellaneous Expense 5
Cash 87
(To replenish petty cash fund)

Occasionally, in replenishing a petty cash fund, the company may need to recognize a cash shortage or
overage. This results when the total of the cash plus receipts in the petty cash box does not equal the
established amount of the petty cash fund.
To illustrate, assume that A-Company petty cash custodian has only $12 in cash in the fund plus the
receipts as listed. The request for reimbursement would therefore be for $88, and Laird would make
the following entry.

3|Page
Mar. 15
Postage Expense 44
Freight-out 38
Miscellaneous Expense 5
Cash Over and Short 1
Cash 88
(To replenish petty cash fund)
Conversely, if the custodian has $14 in cash, the reimbursement request would be for $86 and the
company would credit Cash Over and Short for $1 (overage).

B- Company established a $50 petty cash fund on July 1. On July 30, the fund had $12 cash remaining
and petty cash receipts for postage $14, office supplies $10, and delivery expense $15. Prepare journal
entries to establish the fund on July 1 and to replenish the fund on July 30.
Solution
Petty Cash Fund
July 1
Petty Cash 50
Cash 50
(To establish petty cash fund)
July 30
Postage Expense 14
Supplies 10
Delivery Expense 15
Cash Over and Short 1
Cash ($50 – $12) 38
(To replenish petty cash)

When increase from the 100 to 150

Petty Cash 100

Cash

Bank Reconciliation
A company can safeguard its cash by using a bank as a depository and as a clearing house for checks
received and written. Use of a bank minimizes the amount of currency that a company must keep on
hand. Also, use of a bank facilitates the control of cash. The asset account Cash maintained by the
company should have the same balance as the bank’s liability account for that company. Bank
reconciliation compares the bank’s balance with the company’s balance and explains any differences
to make them agree.

4|Page
Bank Deposits; an authorized employee, such as the head cashier, should make a company’s bank
deposits. Each deposit must be documented by a deposit slip (ticket).

Checks; A check is a written order signed by the depositor directing the bank to pay a specified sum
of money to a designated recipient.

Bank Statement; A bank statement shows the depositor’s bank transactions and balances. Each
month, a depositor receives a statement from the bank. Bank Statement shows: (1) checks paid and
other debits that reduce the balance in the depositor’s account, (2) deposits and other credits that
increase the balance in the account, and (3) the account balance after each day’stransactions.

Debit Memorandum; banks charge a monthly fee for their services. They identify the fee, called a
bank service charge, on the bank statement by a symbol such as SC. Other debit memoranda may also
be issued for other bank services such as the cost of printing checks and wiring funds to other
locations. Banks also use a debit memorandum when a deposited check from a customer “bounces”
because of insufficient funds. This is called NSF (not sufficient funds).

Credit Memorandum; sometimes a depositor asks the bank to collect its notes receivable. In such a
case, the bank will credit the depositor’s account for the cash proceeds of the note. Banks also offer
interest on checking accounts. The interest earned may be indicated on the bank statement by the
symbol INT.

Reconciling the Bank Account

The bank and the depositor maintain independent records of the depositor’s checking account. It is
necessary to make the balance per books and the balance per bank agree with the correct or true
amount. This process is called reconciling the bank account. The need for agreement has two causes:
1. Time lags that prevent one of the parties from recording the transaction in the same period as the
other party.
2. Errors by either party in recording transactions.

Reconciliation Procedure
The bank reconciliation should be prepared by an employee who has no other responsibilities
pertaining to cash. In reconciling the bank account, it is customary to reconcile the balance per books
and balance per bank to their adjusted (correct or true) cash balances. The starting point in preparing
the reconciliation is to enter the balance per bank statement and balance per books on the
reconciliation schedule. The following steps should reveal all the reconciling items that cause the
difference between the two balances.

Step 1. Deposits in transit: Compare the individual deposits listed on the bank statement with
deposits in transit from the preceding bank reconciliation and with the deposits per company records

5|Page
or duplicate deposit slips. Deposits recorded by the depositor that have not been recorded by the bank
are the deposits in transit. Add these deposits to the balance per bank.
Step 2. Outstanding checks: Compare the paid checks shown on the bank statement with (a) checks
outstanding from the previous bank reconciliation, and (b) checks issued by the company as recorded
in the cash payments journal. Issued checks recorded by the company but that have not yet been paid
by the bank are outstanding checks. Deduct outstanding checks from the balance per the bank.
Step 3. Errors: Note any errors discovered in the foregoing steps and list them in the appropriate
section of the reconciliation schedule. For example, if the company mistakenly recorded as $169 a
paid check correctly written for $196, it would deduct the error of $27 from the balance per books. All
errors made by the depositor are reconciling items in determining the adjusted cash balance per books.
In contrast, all errors made by the bank are reconciling items in determining the adjusted cash balance
per the bank.
Step 4. Bank memoranda:Trace bank memoranda to the depositor’s records. List in the appropriate
section of the reconciliation schedule any unrecorded memoranda. For example, the company would
deduct from the balance per books a $5 debit memorandum for bank service charges. Similarly, it
would add to the balance per books $32 of interest earned.
Format

Balance according to bank state. ……………………………………$xxx

Add: Additions by depositor not on bank statement…………..$xx

Bank Errors ……………………………………………….xx xx

$xxx

Deduct: Deductions by depositor not on b/s. ………………. $xx

Bank errors ………………………………………… xx xx

Adjusted balance ………………………………………………… $ xxx

Balance according to depositor’s records ………………………. $xxx

Add: Additions by bank not recorded by depositor ….. $xx

Depositor Errors ………………………………… xx xx

$xxx

Deduct: deductions by bank not recorded by depositor $xx

Depositor errors ………………………………. xx xx

Adjusted balance ……………………………………………. $ xxx

6|Page
Journal entries

 Only items those items that appear as adjustments to the cash balance per the depositor’s
record require journal entries.
 To update cash at bank account.
 To record unrecorded even
Exercise
The bank statement for ABC Company shows a balance per bank of $15,907.45 on April 30, 2012. On
this date the balance of cash per books is $11,589.45. Using the four reconciliation steps, ABC
determines the following reconciling items.
Step 1. Deposits in transit: April 30 deposit (received by bank on May 1) is $2,201.40
Step 2. Outstanding checks: No. 453, $3,000.00; No. 457,$1,401.30; No. 460, $1,502.70 is totally
5,904.00
Step 3. Errors: ABC wrote check No. 443 for $1,226.00 and the bank correctly paid that amount.
However, ABC recorded the check as $1,262.00 the difference is 36.00
Step 4. Bank memoranda:
a. Debit—NSF check from Zizi Company for $425.60
b. Debit—Charge for printing company checks $30.00
c. Credit—Collection of note receivable for $1,000 plus interest earned $35, totally 1,035.00
Instruction: Prepare bank reconciliation and record the transactions.

ABC Company
Bank Reconciliation
April 30, 2012
Cash balance per bank statement $ 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No. 453 $3,000.00
No. 457 1,401.30
No. 460 1,502.70 5,904.00
Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45

Add: Collection of note receivable $1,000, plus
interest earned $35, $1,035.00
Error in recording check no. 443 36.00 1,071.00
12,660.45
Less: NSF check 425.60
Bank service charge 30.00 455.60
Adjusted cash balance per books $12,204.85

7|Page
Entries from Bank Reconciliation
The company records each reconciling item used to determine the adjusted cash balance per books. If
the company does not journalize and post these items, the Cash account will not show the correct
balance. The adjustments include:

Collection of Note Receivable: This entry involves four accounts. Assuming that the interest of $50
has not been accrued and the collection fee is charged to Miscellaneous Expense, the entry is:

Apr. 30 Cash 1,035.00

Notes Receivable 1,000.00
Interest Revenue 35.00
(To record collection of note receivable by bank)

Book Error: The cash disbursements journal shows that check no. 443 was a payment on account to
XYZ Company, a supplier. The correcting entry is:

Apr. 30 Cash 36.00

Accounts Payable 36.00
(To correct error in recording check no. 443)

NSF Check. As indicated earlier, an NSF check becomes an account receivable to the depositor. The
entry is:

Apr. 30 Accounts Receivable 425.60

Cash 425.60
(To record NSF check)

Bank Service Charges. Depositors debit check printing charges (DM) and other bank service charges
(SC) to Miscellaneous Expense because they are usually nominal in amount. The entry is:

Apr. 30 Miscellaneous Expense 30.00

Cash 30.00
(To record charge for printing company checks)

The adjusted cash balance in the ledger should agree with the adjusted cash balance per books in the
bank reconciliation.

8|Page