Chapter 07 Cash Objectives Cash Rules for Cash Checks Deposit Slips Types of Endorsements Steps in Reconciling the Cash Ledger account and the Bank Statement

Chapter 07

Cash

Objectives• Cash• Rules for Cash• Checks• Deposit Slips• Types of Endorsements• Steps in Reconciling the Cash Ledger account and the Bank

Statement• Cash Funds (Assets)

– Petty Cash– Change Fund

Cash Is King

• Why is the saying “cash is king” true?

• Because without cash, a business will go bankrupt (out of business)

• Therefore, accountants must accurately and efficiently account for cash

• Cash Is King, yes, but…how about:– Cash Is Queen!

Cash

• Currency

• Coins

• Checks (until proven not to be good)

• Money orders

• Traveler’s checks

• Bank drafts

• Bank cashier’s checks …

Rules for Cash• All cash received

during a day should be deposited at the end of the day– So it won’t get stolen– So you can earn

interest

• All cash paid (disbursements), should be paid by check– Check is best record

of transaction

• Business must have “internal controls over cash” that separate duties– Receipts of cash– Disbursements of

cash– Custody, recording,

and authorization must always be separated

Checking Accounts

• Deposit money with bank

• Recorded as an asset for depositor

• Recorded as a liability for bank

• Withdraw money by check, ATM machine, wire transfer, on-line transfer, or bill pay

Signature Card

Check

Writing Checks

• Who is the drawer?– Person who writes check

• Who is the payee?– Person to whom the payment is made

• What is a check?– Order by drawer for bank to make payment to

payee

• Check stub or check carbon copy– Basis for journal entry

Deposit Slips

Types of Endorsements

• Restrictive endorsement– Restricts or limits further transfer of title– Example: “for deposit only”

• Blank endorsement– Signature of payee only – does not restrict further

transfer

• Qualified endorsement– “Pay to the order of…”– “Without recourse– Frees endorser (original payee) from future liability if

drawer does not honor the check

Endorsements

What Is It?

Q: Check that has not been filled out?

A: Paper

Q: Signed check made out to you?

A: Asset

Q: Canceled check that has been returned to you?

A: Record of business transaction

A: Proof that you paid someone

Bank’s Liability Is the Depositor’s Asset (page 223)

Steps in Reconciling

• Start with– Bank statement balance

• Add– Deposits in transit– Bank errors that understate

balance

• Deduct– Outstanding checks– Bank errors that overstate

balance

• Arrive at– Adjusted bank statement

balance

• Start with– Ledger balance of Cash

• Add– Credit memos– Book errors that understate

balance

• Deduct– Debit memos– Book errors that overstate

balance

• Arrive at– Adjusted ledger balance of

Cash

Must Be EqualMust Be Equal

Journal Entries Journal Entries Come from Come from

This SideThis SideBank sideBank side Depositor sideDepositor side

Cash Funds (Assets)

• Separately held reserves of cash set aside for specific purposes

• Examples:– Petty cash

• A cash fund used to make small immediate cash payments

– Change fund• A cash fund used by a firm to make change for

customers who pay cash for goods or services

Journal Entries to Establish a Change Fund

DescriptionPost.Ref. Debit Credit

2002Sept. 1 Change Fund 120.00

Cash 120.00Establish a Change Fund.

General Journal Page 6

Date

Change Fund in Operation

• Used to make change during the day• As sales are made and cash is received, the

new cash (sales revenue) is added to the cash register

• At the end of the day (or shift), all cash in the register is counted; the beginning amount (Change Fund amount) is subtracted to get the total sales (revenue) amount

• Total sales (revenue) amount should equal the printed cash register tape

Change Fund Account: An Example

Does this always equal the cash register receipts?


2002 Cash Count $537Sept. 1 Cash in Bank 417.00 - Change Fund $120

Video Rental Income 417.00 = Amount to Deposit $417Revenue earned for video rentals.

Date


Cash Short and Over• Human beings inevitably make mistakes• The accounting system must deal with

this situation

Cash ShortCash Short DRDR Like an ExpenseLike an Expense



Cash Short and Over 3.00 = Amount to Deposit $487Video Rental Income 490.00

Revenue earned for the dayinvolving cash shortage of $3. Amount to Deposit $487

- Cash Register Tape $490 = Cash Short and Over ($3)

Date


Cash Short and Over• Human beings inevitably make mistakes

• The accounting system must deal with this situation

Cash OverCash Over CRCR Like a RevenueLike a Revenue



Video Rental Income 559.00 = Amount to Deposit $560Cash Short and Over 1.00

Revenue earned during the dayinvolving cash overage of $1. Amount to Deposit $560

- Cash Register Tape $559 = Cash Short and Over $1

Date


Cash Short and Over

•At the end of each day:At the end of each day:Cash Count $1,000

- Change Fund $100 = Amount to Deposit $900

Amount to Deposit $900 - Cash Register Tape $890

= Cash Short and Over $10

Deposited in BankDeposited in Bank

Recorded as RevenueRecorded as Revenue

Difference Recorded asDifference Recorded asCash Short and OverCash Short and Over

Cash Short and Over Account

• Revenue or expense?– Shortages are expenses

• Debit side of Cash Short and Over

• Classified as Miscellaneous Expense

– Overages are revenue• Credit side of Cash

Short and Over• Classified as

Miscellaneous Revenue

• No plus or minus, only debits and credits– Similar to Income

Summary

• No normal balance• Like a holding tank until

the end of the fiscal period

Journal Entries for Cash Short and Over

If debit balance (net shortage)

If credit balance (net overage)


2002Sept. 30 Cash Short and Over 15.00

Miscellaneous Income 15.00To record month's ending Cash Shortand Over balance as Revenue.


Date


2002Sept. 30 Miscellaneous Expense 21.00

Cash Short and Over 21.00To record month's ending Cash Short and Over balance as Expense.

Date


Bank DraftsVs.

Bank Cashier’s Checks• Cashier's Check -- a check

written by a bank or thrift institution on its own funds and signed by a cashier. It is payable to a third party named by the customer who pays for the check at the time it is written. A cashier's check, which is drawn against the funds of the institution itself, differs from a certified check, which is drawn against the funds in a specific depositor's account.

• Bank Draft -- a check written by one bank on its account with another bank.

Documents

Chapter 07 Cash Objectives Cash Rules for Cash Checks Deposit Slips Types of Endorsements Steps in Reconciling the Cash Ledger account and the Bank Statement