Chapter 7

Cash
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University Irsan Lubis 1
Some
Some ofof the
the action
action has
has been
been automated,
automated, soso
click
click the
the mouse
mouse when
whenyouyou see
see this
this
lightning
lightning bolt
bolt in
in the
the lower
lower right-hand
right-hand
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corner ofof the
the screen.
screen. YouYou can
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point and
and
click
click anywhere
anywhere on on the
the screen.
screen.

Irsan Lubis 2
 Objectives
Objectives
1. Describe the nature of cash and the importance
of internal control over cash.
2. Summarize basic procedures for achieving
internal control over cash receipts.
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.
After
After studying
studying this
this
chapter,
chapter, you
you should
should
Irsan Lubis be
be able
able to:
to: 3
 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.

Irsan Lubis 4
 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.

Irsan Lubis 5
Retailers
Retailers Sources
Sources of
of Cash
Cash

Register
Cash
records
Receipts

CASHIERS ACCOUNTING
DEPARTMENT DEPARTMENT

Remittance
Irsan Lubis
advices 6
Mail Receipts
Retailers
Retailers Sources
Sources of
of Cash
Cash

CASHIERS ACCOUNTING
DEPARTMENT DEPARTMENT

Deposit ticket Deposit receipt

Bank
Irsan Lubis 7
 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.
Irsan Lubis 8
Controlling
Controlling Cash
Cash Received
Received
in
in the
the Mail
Mail

Most
Most companies
companiesinvoices
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.

Irsan Lubis 9
 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 Cashiers Department where
checks and money orders are combined with receipts
from cash sales and a bank deposit ticket is prepared.
Irsan Lubis 10
 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.

Irsan Lubis 11
 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.

Irsan Lubis 12
 13

A
Avoucher
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
Irsan Lubis 13
 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, suppliers 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.

Irsan Lubis 14
A
Asummary
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.

Irsan Lubis 15
 AAbank
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 toto
differ
differ from
from the
the balance
balance ofof the
the
cash
cash account
account in in the
the ledger.
ledger.

Irsan Lubis 16
Reasons
Reasons for
for Differences
Differences Between
Between Depositors
Depositors
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
Irsan Lubis 17
 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
periods 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 periods 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
depositors
depositors records.
records.
Irsan Lubis 18
 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.
depositors
depositors records.
records.

Irsan Lubis 19
 BANK

Banks Depositors
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
Irsan Lubis 20
 BANK

Banks Depositors
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not
recorded by bank 816.20
$4,175.9
8

A
Adeposit
deposit of
of $816.20
$816.20 diddid not
not
appear
appear on
on the
the bank
bank
Irsan Lubis
statement.
statement. 21
 BANK

Banks Depositors
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
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
Irsan Lubis 22
 BANK

Banks Depositors
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

Three
ThreeA 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
appear bank onstatement.
the
on the bank
period did not appear on the bank
statement.bank statement:
statement:
#812,
#812, $1,061;
$1,061; #878,
#878, $435.39,
$435.39,
Irsan Lubis #883,
#883, $48.60.
$48.60. 23
 BANK

Banks Depositors
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 checkcheck from
fromoneoneof
of the
the
firms
firmscustomers,
customers,Thomas
Thomas Ivey, Ivey,in
in the
the amount
amount ofof
$300.
$300. This
This was aa payment
wasIrsanpayment on
on account.
account.
Lubis 24
 BANK

Banks Depositors
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.

Irsan Lubis 25
 BANK

Banks Depositors
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 toTaylor
Taylor Co.
Co. on
on account,
account,
erroneously
erroneously recorded
recorded in
in journal
Irsan Lubis
journal as
as $723.26.
$723.26. 26
 BANK

Banks Depositors
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

Irsan Lubis 27
 Now,
Now, ifif desired,
desired, we
we can
can
prepare
prepare aa formal
formal statement
statement
for
for Power
Power Networking.
Networking.

Irsan Lubis 28
 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 depositors 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

Irsan Lubis 29
 Journal
Journal entries
entries must
must bebe
prepared
prepared forfor those
those items
items that
that
affected
affected the
the depositors
depositors side
side of
of
the
the reconciliation.
reconciliation.

Irsan Lubis 30
 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 depositors 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

Irsan Lubis 31
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.

Irsan Lubis 32
 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 depositors 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

Irsan Lubis 33
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 ReceivableThomas Ivey 300 00

Miscellaneous Administrative Exp. 18 00
Accounts PayableTaylor Co. 9 00
Cash 327 00
NSF check, bank service
charges, and error in
recording Check no. 879.
Irsan Lubis 34
 Petty
Cash
Irsan Lubis 35
 On
OnAugust
August 1,
1, issued
issued Check
Check No.
No. 511
511for
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.

Irsan Lubis 36
 At
At the
the end
end of
ofAugust,
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.

Irsan Lubis 37
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.

Irsan Lubis 38
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
Toindicate
How
Howare
indicate the
are companys
these
the ratios ability
ability to
ratios used?
companys
these used? to
meet
meet creditors
creditors obligations
obligations inin the
the
worst
worst case
case assumption
assumption that
that should
should
the
the business
business cease
cease to
to exist.
exist.
Irsan Lubis 39
Chapter 7

The
The End
End

Irsan Lubis 40