Topic 6 Cash

Topic 6: Accounting for Assets

Cash

Current asset

Non-current

Accounting for Assets

Examples: cash, inventory, debtors (account receivables), prepaid items etc.

Examples:Land, buildings (properties), vehicles, machineries, patent, trademark, goodwill and copy right.

Learning Objectives for Accounting for Cash

1. Identify the principles of internal control.2. Explain the application of internal control

principles to handling cash.3. Prepare a bank reconciliation.4. Explain the operation of a petty cash

fund.

Internal Control

Internal control consists all the processes used by management to achieve effective and efficient operations, compliance with laws, etc.

It includes policies to: safeguard assets enhance accuracy and reliability of

accounting records It is an essential part of risk

management.

Principles of Internal Control

1. Establishment of responsibility.2. Segregation of duties.3. Documentation procedures.4. Physical, mechanical and electronic

controls.5. Independent internal verification.

CASH

Cash is the most desirable asset because it is readily convertible into any other asset.

Cash consists of Cash on hand (notes and coins) Cash at bank Cheque accounts Cash equivalents (bank overdrafts,

deposits on money market, 90-day bank acceptance bills)

Internal Control of Cash

Cash receipts Cash Payments

Establishment of responsibility.Segregation of duties.

Documentation procedures.Physical, mechanical and electronic

controls.Independent internal verification.

Internal Control of Cash

1. Internal control over cash receiptsa. Establishment of responsibility

authorised personnel handle cash receipts

b. Segregation of duties different individuals handle cash, record cash

receipts and hold the cash

c. Documentation procedures remittance advices, cash register tapes, deposit

slips used

Internal Control of Cash (cont’d)

d. Physical, mechanical and electronic controls cash stored securely, cash banked

frequently, cash registers used/direct deposits

e. Independent verification cash receipts counted daily, comparison

of receipts to bank deposits

Internal Control of Cash (cont’d)

2. Internal control over cash paymentsa. Establishment of responsibility

authorised personnel only to sign cheques

b. Segregation of duties separate tasks of approving and making

payments, signatory not to record the payment, limit knowledge of PIN, etc.

c. Documentation procedures pre-numbered cheques, approved invoices,

account marked as paid

Internal Control of Cash (cont’d)

d. Physical mechanical and electronic controls blank cheques stored securely,

limited accesse. Independent internal verification

compare cheques to invoices, reconcile bank statement monthly

Bank Reconciliation

The use of a bank contributes significantly to good internal control over cash by: Minimising the amount of cash that must

be kept on hand.Providing a double record of all bank

transactions:one by the businessone by the bank

Bank Reconciliation (cont’d)

Helping a company safeguard its cash by using a bank as a depository and clearinghouse for cheques received and written.

Bank Reconciliation (cont’d)

Reconciling the bank account Lack of agreement between firm’s books

and bank statement can result from: Time lags preventing the parties recording

transactions in the same period. Time between when cheque is written and dated

and date it is paid by the bank. Time between when receipts are recorded and

when recorded by the bank. Errors by either party in recording

transactions.

Bank Reconciliation (cont’d)

Reconciliation procedure Reconcile balance per books and

balance per bank to their adjusted or correct balances.

The reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

1. Unpresented cheque:- Cheque which has been issued but not yet presented to the bank

Example: Seri Enterprise has issued a cheque worth RM 3,000 to Hunter Ltd (a supplier). Cash account of Seri Enterprise has been credited by RM 3,000, however Hunter Ltd has not cashed the cheque.

Transactions - appear on the cash book.

Deposit in transit: - a cheque has been posted to bank (through

mail service), which involves a few days before the cheque is cleared.

Example: A cheque worth RM 2,500 was send by Seri

Enterprise to the bank. The transaction was debited in the cash book but the bank has no information on this transaction as it is still in transit.

Transactions - appear on the cash book……cont

Transactions appear in bank statement

Dishonoured cheque (bounced cheque) or NSF (non-sufficient fund)

Bank charges – bank commission/fees, cheque book and interest on loan

Interest earned Errors in recording. E.g. A cheque RM

5,000 was issued to an employee. The amount recorded in journal was RM 500.

Direct transfer of money

Preparation of Bank Reconciliation Statement:  

Example: A summary of cash books for Seri Enterprise for the month ended 31 July 2007. 

RMOpening balance 1,954Add: Receipts 361,537

363,491Less: Payment 343,287Closing balance 20,204 Closing balance of the bank statement is RM18,025 on 31 July 2007.

Other Information:

i. A cheque worth RM 4,135 was issued to a supplier, Anjung Murni Enterprise, however was not presented to the bank. Deposit in transit worth RM 5,350 is not recorded in the bank statement.

ii. Seri Enterprise paid to ABC Ltd through direct debit from the bank account worth RM 150. The payment is for purchasing of a computer. The amount is not recorded in the cash book.

iii. A cheque issued by Seri Enterprise worth RM 119, is recorded in the cash book as RM191.

iv. Bank charge of RM54. v. The bank has incorrectly debited RM 832 to Seri Enterprise

account.

Method no.1:Cash Account (bank)

Opening bal. 20,204 Bank charge 54 Error 72 Computer 150

Closing bal 20,07220,276 20,276

Bank Reconciliation as at 31 July 2007

RMBalance as per bank statement 18,025Add: Deposit in transit 5,350 Correction by bank 832 6,182Less: Unpresented cheque (4,135) Balance as per cash book 20,072

Method no.2 Bank Reconciliation as at 31 July 2007

RM

Balance as per cash book 20,204Add:Error 72Unpresented cheque 4,135 4,207

24,411Less:Bank charge 54Computer 150Deposit in transit 5,350Error by bank 832 (6,386)  Balance as per Bank statement 18,025

Method no. 3

Bal. of Bank Statement 18,025 Balance of cash book 20,204

Add: Deposit in transit 5,350 Bank’s error 832 6,182 24,207Less: Unpresented cheque (4,135) Bal. per cash book (end) 20,072

Add: Error 72 20,276Less: Bank charge (54) Computer (150) (204)Bal. per cash book (end) 20,072

Procedure after the preparation of Bank Reconciliation:

Dr Cr

Cash 72

Accounts Payable 72

(Correction on entry)

Bank charge 54

Cash 54

(Bank charge for the period)

Accounts payable 150

Cash 150

(payment for computer)

Petty Cash Fund

A petty cash fund is a cash fund used to pay relatively small amounts.

The Petty Cash Fund1. Establishing the petty cash fund

2. Making payments from the fund Amount of expenditure is limited. Receipt for the expense is required. Petty cash voucher for the expense is signed

by an authorised person.

Mar 1 Petty Cash 100 Cash at Bank

100(To establish a petty cash fund)

Note: Sum of cash receipts and monies in fund should equal the petty cash total.

Petty Cash Fund (cont’d)

3. Replenishing the fund

At times the petty cash receipts may not match the cash.

A cash shortage (or surplus) is debited (or credited) to the Over and Short Account (an expense account).

Mar 15 Postage Expense 44Supplies 38Miscellaneous Expense

5 Cash at Bank

87(To replenish petty cash fund)

Oct. 1 A petty cash fund is established with a cheque for $130 issued to the petty cash custodian.

Oct 31 A count of the petty cash fund disclosed the following items:Currency (notes) RM 8.00Coins 0.30

Expenditure receipts:Office supplies RM 36.50Telephone and fax 21.30Postage 53.70Freight-out 8.80

Oct 31 A cheque was written to reimburse the fund and increase the fund to RM 260

Journalise the entries in October, pertaining to the petty cash fund.

Date Account Titles and Explanation Debit Credit

Oct. 1 Petty Cash 130

Cash at Bank 130

31 Office Supplies 36.50

Telecommunications Expense 21.30

Postage Expense 53.70

Freight-out 8.80

Cash Short and Over 1.40

Cash at Bank 121.7

Petty Cash 130

Cash at Bank 130