Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 8

Cash and Cash Controls

8-8-22

Learning Objective 1Define cash and describe three guidelines for control of cash.

Cash includes currency and coins along with the amounts on deposit in bank

accounts.

Control of cash focuses on three areas:

1.Those who handle cash should be separate from those who keep records of cash.2.Cash receipts should be deposited daily in the bank.3.Cash disbursements should be made by check.

LO1

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Learning Objective 2Describe controls for cash receipts.

Cash sheets

Cash SalesCashier

Department

ClerkClerk

SupervisorSupervisor

CashCash

Cash sheets

Register sheets

Register sheets

CashCash

Deposit Deposit SlipSlip Journal Journal

EntryEntry

LO2

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Cash Over and ShortDue to human error, the cash in the cash register might not be equal to the record of cash receipts. Assume that daily sales were shown to be $550 but the cash count at the end of the day indicated cash in the register of $555.

The journal entry for an overage would look like this.

Cash 555.00 Cash over and short 5.00 Sales 550.00 To record cash sales and cash overage.

Now let’s assume that the register’s record shows $625 but the count in the register is $621.The journal for a shortage would look like this.

Cash 621.00 Cash over and short 4.00 Sales 625.00 To record cash sales and cash shortage.

LO2

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Learning Objective 3Describe controls for cash disbursements

A common internal control policy is to require that all disbursements be made by check.

Other controls include the separation of the following duties: Authorization for the disbursement Check signing Recordkeeping Using a voucher system

LO3

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Learning Objective 4Explain and record petty cash fund transactions.

1) The company cashier processes a check for the petty cash amount and gives it to the petty cashier.

2) Next the accountant makes an entry to debit Petty Cash and credit Cash for the amount of the check.

3) Then the petty cashier takes the check to the bank and cashes it. The cash is brought back and placed in a secure location.

4) As petty cash is needed, the petty cashier supplies the cash for the purchases.

5) Receipts supporting the petty cash disbursements are given to the petty cashier.

6) When the petty cash fund is low, the petty cashier takes the receipts to the company cashier and requests a check in that amount to replenish the petty cash fund.

LO4

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Petty Cash Example

Travel Expense 85.00 Entertainment Expense 90.00 Postage Expense 33.00 Office Supplies Expense 33.00 Cash Over and Short 2.00

Cash 243.00

July 31

Journal entry to replenish petty cash fundJournal entry to replenish petty cash fund

LO4

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Learning Objective 5Identify banking activities as controls of cash.

Bank AccountsBank Accounts

Signature CardsSignature Cards

Deposit TicketsDeposit Tickets

ChecksChecks

Electronic Electronic Funds Funds

TransferTransfer

Bank Bank StatementsStatements

Offer certain protections for your cash. For example, use of a bank account is a more secure place for your cash than a safe at the office.

Are used so the bank knows whose signature is approved for use on checks.

Limit the number of people who have their hands on the cash, thus reducing the chance of theft and fraud.

Enable the customers the ability to reconcile their accounts in a timely manner and notice any unusual or unauthorized activity.

Provide support for deposits to your account.

Provide authorization for disbursements from your account.

LO5

8-8-99

Learning Objective 6Describe a bank statement

First National BankNashville, TN 37459 May 31, 2010

Clothes MartNashville, TN

Acct No 278609

Previous Balance Total Checks

Total Deposits

Current Balance

1,488.79 1,367.09 2,604.22 2,725.92 5/1 107 55.00 5/2 1,251.88 5/4 108 279.50 5/7 109 44.75 5/9 110 21.81

5/12 111 37.55 5/15 825.04 5/18 112 175.98 5/21 113 288.31 5/27 114 12.54 5/30 527.30 5/31 115 451.65

Bank Statement

The bank sends each depositor a bank statement showing the activity in the account. Bank statements usually include:

1.Beginning-of-period balance of the depositor’s account.

2.Checks and other debits decreasing the account during the period.

3.Deposits and other credits increasing the account during the period.

4.End-of-period balance of the depositor’s account.

LO6

8-8-1010

Learning Objective 7Prepare and explain a bank reconciliation.

A bank reconciliation is prepared periodically to explain A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank the difference between cash reported on the bank

statement and the cash balance on a company’s books.statement and the cash balance on a company’s books.

First National BankNashville, TN 37459 May 31, 2010

Clothes MartNashville, TN

Acct No 278609

Previous Balance Total ChecksTotal

DepositsCurrent Balance

1,488.79 1,367.09 2,604.22 2,725.92 5/1 107 55.00 5/2 1,251.88 5/4 108 279.50 5/7 109 44.75 5/9 110 21.81

5/12 111 37.55 5/15 825.04 5/18 112 175.98 5/21 113 288.31 5/27 114 12.54 5/30 527.30 5/31 115 451.65

Bank Statement

*

LO7

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Bank Reconciliation

Two sections:Two sections:1.1. Reconcile bank statement balance to Reconcile bank statement balance to

the adjusted bank balance.the adjusted bank balance.2.2. Reconcile book balance to the Reconcile book balance to the

adjusted book balance.adjusted book balance.The adjusted balances should be equal.The adjusted balances should be equal.

LO7

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The July 31 bank statement indicated a balance of $9,610. The cash general ledger account on that date shows a balance of $7,430.

1. Outstanding checks totaled $2,417.

2. A $500 check mailed to the bank for deposit had not reached the bank at the statement date.

3. The bank returned a customer’s NSF check for $225 received as payment on account receivable.

4. The bank statement showed $30 interest earned during July.

5. Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240.

6. A $486 deposit by Mary, Inc. was erroneously credited to our account by the bank.

LO7

8-8-1313

July 31 Cash 30 Interest revenue 30

July 31 Supplies expense 28 Accounts receivable 225

Cash 253

Adjusting Entries from a Bank Reconciliation

Only amounts shown on the book Only amounts shown on the book portion of the reconciliation require an portion of the reconciliation require an

adjusting entry.adjusting entry.

LO7

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End of Chapter 8