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ACCT 1201: Intermediate Financial Accounting

Chapter 1:
Accounting for Cash and
Cash at Bank

Course Teacher:
Dr. Niluthpaul Sarker
Associate Professor
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Cash

What is Cash?
◆ Most liquid asset.

◆ Standard medium of exchange.

◆ Basis for measuring and accounting for all items.

◆ Current asset.

◆ Examples: coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.

LO 1 Identify items considered cash.

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Cash

Coins and
currency
Petty cash

Cashier’s checks
Certified checks

Amounts on
deposit with
Money orders financial
institutions
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Cash

Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both

a) readily convertible to cash, and

b) so near their maturity that they present insignificant
risk of changes in value.

Examples: Treasury bills, Commercial paper, and Money

market funds.

LO 2 Indicate how to report cash and related items.

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Cash Equivalents

Items very near cash but

not in negotiable form

Money market
funds

Treasury bills
Commercial
paper
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Reporting Cash

Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and
(3) compensating balances.

Illustration 7-1

LO 2
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Reporting Cash

Bank Overdrafts
Company writes a check for more than the amount in its
cash account.

◆ Generally reported as a current liability.

◆ Offset against other cash accounts only when
accounts are with the same bank.

LO 2 Indicate how to report cash and related items.

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Cash-Related Items
Illustration 7-2

LO 2
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Internal Control of Cash

Encourages adherence
to company policies
and procedures

Promotes operational
efficiency
Enhances the reliability
and accuracy of
accounting data Minimizes errors
and theft
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Control of Cash Receipts

Separate responsibility for

▪ handling cash,
▪ recording cash transactions, and
▪ reconciling cash balances.
Agreed cash amounts deposited with cash
amounts received.
Close supervision of cash-handling and cash-
recording activities.
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Control of Cash Disbursements

Separate responsibilities for

▪ cash disbursement documents,
▪ check writing,
▪ check signing,
▪ check mailing, and
▪ record keeping.
All disbursements, except petty cash, made by
check.
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Restricted Cash and
Compensating Balances
Restricted Cash
Management’s intent to use a certain amount
of cash for a specific purpose – future plant
expansion, future payment of debt.

Compensating Balance
Minimum balance that must be maintained
in a company’s account as support for
funds borrowed from the bank.
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Cash Controls
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Bank Reconciliation

Explains the difference between cash

reported on bank statement and cash
balance on company’s books.

Provides information for

reconciling journal entries.
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Bank Reconciliation

Bank Balance Book Balance

+ Deposits in Transit + Bank Collections

- Service Charges
- Outstanding Checks
- NSF Checks

± Bank Errors ± Book Errors

= Corrected Balance = Corrected Balance

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Bank Reconciliation

Book Balance
All
Balance per Bank

reconciling
+ Bank Collections
+items on
Deposits in the
Transit

book side - Service Charges

requireChecks
- Outstanding an - NSF Checks
adjusting
± entry to the
Bank Errors ± Book Errors

cash account.
= Adjusted Balance = Corrected Balance
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Bank Reconciliation

Let’s prepare a May 31 bank reconciliation

for the Hawthorne Company.

 The May 31 bank statement indicated a

balance of $34,680.
 The cash general ledger account on that date
shows a balance of $35,276.

Additional information necessary for the

reconciliation is shown on the next screen.
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Bank Reconciliation

 Cash receipts not yet deposited on May 31 totaled $2,965.

 A $1,020 check mailed to the bank for deposit had not
reached the bank at the statement date.
 Outstanding checks totaled $5,536.
 A check written to pay for raw materials purchased on
account cleared the bank for $1,790 but was erroneously
recorded at $790.
 The bank statement showed $80 in service charges in May.
 The bank returned NSF checks in the amount of $2,187
received as payment on accounts receivable.
 The bank collected a note receivable for $1,120 that
included $120 of interest.
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Bank Reconciliation
Bank balance, May 31 $ 34,680
Add: Deposit in transit* 3,985
Deduct: Outstanding checks (5,536)
Corrected cash balance $ 33,129

*$2,965 + $1,020 = $3,985

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Bank Reconciliation
Bank balance, May 31 $ 34,680
Add: Deposit in transit* 3,985
Deduct: Outstanding checks (5,536)
Corrected cash balance $ 33,129

Book balance, May 31 $ 35,276

Add: Note collected by bank 1,120
Deduct:
Services charges (80)
NSF checks (2,187)
Error (1,000)
Corrected cash balance $ 33,129

*$2,965 + $1,020 = $3,985

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Bank Reconciliation
Prepare the entries to adjust the cash account to the
corrected balance.

GENERAL JOURNAL Page 66

Post.
Date Description Ref. Debit Credit
May 31 Cash 1,120
Interest Revenue 120
Notes Receivable 1,000

May 31 Miscellaneous Expense 80

Accounts Receivable 2,187
Accounts Payable 1,000
Cash 3,267
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Petty Cash

Used for
minor
expenditures.

Petty cash
fund

Has one Replenished

custodian. periodically.
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Petty Cash
Hawthorne Co. established a petty cash
fund on May 1 by writing a check for $200
to the petty cash custodian.
Prepare the May1st journal entry to record the
establishment of the fund.

GENERAL JOURNAL Page 64

Post.
Date Description Ref. Debit Credit
May 1 Petty Cash 200
Cash 200
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Petty Cash
During May, the petty cash custodian paid bills using
cash from the fund totaling $160 as follows:
Postage $40
Office supplies 35
Delivery charges 55
Entertainment 30
Prepare the May 31 journal entry to record replenishing the fund.

GENERAL JOURNAL Page 65

Post.
Date Description Ref. Debit Credit
May 31 Postage expense 40
Office supplies expense 35
Delivery expense 55
Entertainment expense 30
Cash 160
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CASH CONTROLS

Management faces two problems in accounting for cash

transactions:
1. Establish proper controls to prevent any unauthorized
transactions by officers or employees.

2. Provide information necessary to properly manage cash on

hand and cash transactions.

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

Using Bank Accounts

To obtain desired control objectives, a company can vary the

number and location of banks and the types of accounts.
◆ General checking account

◆ Collection float.

◆ Lockbox accounts

◆ Imprest bank accounts

LO 10 Explain common techniques employed to control cash.

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APPENDIX 7A CASH CONTROLS

The Imprest Petty Cash System

To pay small amounts for miscellaneous expenses.

Steps:
1. Record $300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. The petty cash custodian obtains signed receipts from

each individual to whom he or she pays cash.

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

The Imprest Petty Cash System

Steps:

3. Custodian receives a company check to replenish the

fund.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

The Imprest Petty Cash System

Steps:

4. If the company decides that the amount of cash in the

petty cash fund is excessive by $50, it lowers the fund
balance as follows.

Cash 50
Petty cash 50

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

Physical Protection of Cash Balances

Company should
◆ Minimize the cash on hand.

◆ Only have on hand petty cash and current day’s receipts.

◆ Keep funds in a vault, safe, or locked cash drawer.

◆ Transmit each day’s receipts to the bank as soon as practicable.

◆ Periodically prove (reconcile) the balance shown in the general

ledger.

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

Reconciliation of Bank Balances

Schedule explaining any differences between the bank’s

and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.

2. Outstanding checks.
Time Lags
3. Bank charges and credits.

4. Bank or Depositor errors.

LO 10 Explain common techniques employed to control cash.

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CASH CONTROLS

Reconciliation of Bank Balances Illustration 7A-1

Bank Reconciliation
Form and Content

LO 10 Explain common techniques employed to control cash.

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APPENDIX 7A CASH CONTROLS

LO 10
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CASH CONTROLS

Illustration 7A-2

Advance slide in presentation mode to reveal answer.

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CASH CONTROLS

Illustration: Journalize the adjusting entry on the books of

Nugget Mining Company.

Nov. 30 Cash 542

Office Expense 18
Accounts Receivable 220
Accounts Payable 180
Interest Revenue 600

LO 10 Explain common techniques employed to control cash.

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APPENDIX 7A CASH CONTROLS

Question

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.

LO 10 Explain common techniques employed to control cash.

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RELEVANT FACTS - Similarities

◆ The accounting and reporting related to cash is essentially the same
under both IFRS and GAAP. In addition, the definition used for cash
equivalents is the same.
◆ Like GAAP, cash and cash equivalents are generally reported in the
current assets section of the balance sheet under IFRS.

LO 12 Compare the accounting procedures for cash

and receivables under GAAP and IFRS.
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RELEVANT FACTS - Differences

◆ Under IFRS, bank overdrafts are generally reported as cash. Under
GAAP, such balances are reported as liabilities.

LO 12 Compare the accounting procedures for cash

and receivables under GAAP and IFRS.
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