Chapter 07 Cash Objectives

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 Bank side Depositor side • Start with – Bank statement balance • Add Journal Entries Come from This Side – Ledger balance of Cash • Add – Deposits in transit – Bank errors that understate balance • Deduct – Credit memos – Book errors that understate balance • Deduct – Outstanding checks – Bank errors that overstate balance • Arrive at – Debit memos – Book errors that overstate balance • Arrive at – Adjusted bank statement balance – Adjusted ledger balance of Cash Must Be Equal

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

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?

Cash Short and Over • Human beings inevitably make mistakes • The accounting system must deal with this situation Cash Short DR Like an Expense

Cash Short and Over • Human beings inevitably make mistakes • The accounting system must deal with this situation Cash Over CR Like a Revenue

Cash Short and Over • At the end of each day: Deposited in Bank Recorded as Revenue Difference Recorded as Cash 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)

Bank Drafts Vs. 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.