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Chapter 07

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Chapter 07

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  1. Chapter 07 Cash

  2. 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 Objectives

  3. 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!

  4. Cash • Currency • Coins • Checks (until proven not to be good) • Money orders • Traveler’s checks • Bank drafts • Bank cashier’s checks …

  5. 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 Rules for Cash

  6. 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

  7. Signature Card

  8. Check

  9. 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

  10. Deposit Slips

  11. 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

  12. Endorsements

  13. 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

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

  15. 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 Equal Steps in Reconciling Journal Entries Come from This Side Bank side Depositor side

  16. 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

  17. Journal Entries to Establish a Change Fund

  18. 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

  19. Does this always equal the cash register receipts? Change Fund Account: An Example

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

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

  22. At the end of each day: Deposited in Bank Recorded as Revenue Difference Recorded asCash Short and Over Cash Short and Over

  23. 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 Cash Short and Over Account

  24. Journal Entries for Cash Short and Over If debit balance (net shortage) If credit balance (net overage)

  25. 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. Bank DraftsVs.Bank Cashier’s Checks