title
Study Smarter.....Study The Answers!

Cash

1) Key Things To Know 5) Medium Test
2) Self Test 6) Hard Test
3) Practice as You Learn 7) On Your Test
4) Easy Test 8) Quick Study Sheet

 

 

Key Things to Know

 
Cash
– money or any instrument that banks will accept for deposit to a company’s
               account.  – includes checks, money orders, bank drafts
 
Cash Equivalents – investments with maturities of 3 months or less, readily convertible
     into cash and whose market value is unlikely to change – CDs and Treasury Bills
 
Cash management includes:
            1)  ensure enough cash is on hand to pay liabilities
            2)  make sure excess cash is used to maximize interest earned
            3)  accurate tracking of cash for reports – balance sheet and cash flow statement
 
Internal Control – safeguard the cash – prevent fraud and theft
            1) separate duties for receiving and paying cash
            2) separate duties for accounting for receipts and payments
            3) separate duties for handling cash and accounting for cash
 
            Required for good internal controls:
                        1)  Deposit checks daily
                        2)  Separate authorization of the purchase and the payment
                        3)  Use pre-numbered checks and account for each one
                        4)  Reconcile bank statements monthly
 
Bank Reconciliation:  Compare the ending cash balance in the company’s general
                ledger cash account to the ending cash balance on the bank statement
 
                                            Should be done at the end of each month
 
            The bank statement will not agree to the general ledger balance because of
              timing differences related to receipts and payments and the fact that the
              company waits to record some items until they know the amount on the
              bank statement.
 
            The general ledger cash account will record each month:
           
                        1) Checks written
                        2)  Deposits
 
       The bank statement will show the following transactions each month:
 
                        1)  Checks that have cleared and been paid
                        2)  Deposits that have been added to the account
                        3)  Checks that did not clear (bounced)  NSF checks
                        4)  Bank fees
                        5)  Interest earned
                        6)  Automatic withdrawals and deposits
 
       The difference in the cash account and the bank statement will be accounted for by
           the items that are on one account/statement and not on the other or errors made.
 
        Items the bank has recorded - company has not yet recorded in the cash account:
                        1)  Non sufficient funds check
                           2)  Bank fees and service charges
                           3)  Interest earned
                           4)  automatic deposits and withdrawals
 
                   These items are listed in the cash account column on the reconciliation
                                        
            Items recorded in the cash account – the bank has not yet recorded
                        1)  Outstanding checks
                        2)  Deposits in transit
                       
                     These items are listed in the bank column on the reconciliation
 
Terms to Know:
 
            Outstanding Checks:  Checks written by the company, not yet cleared by
                  the bank and not deducted from the bank balance.
 
                         Compare the checks written by the company to the checks that are
                         cleared on the bank statement – those not cleared on the bank
                         statement are called “outstanding checks”
 
            Deposits in Transit:  Deposits sent to the bank, not yet added to the account
                                             by the bank. 
 
                        Compare the deposits made by the company to the deposits that are
                         recorded by the bank – those not on the bank statement yet are
                         “deposits in transit”
 
            NSF Checks – “non sufficient funds” - a bounced check that was not deposited
                                     to the company’s account because the funds were not available. 
                                            The accounts receivable was not really collected
 
 
Completing the bank reconciliation:
 
            Set up two columns – one for cash account and one for the bank
 
            Start with the ending balance for the month for each
 
                        In the “cash” column – put the items the bank knows about and recorded
                                                           that the company has not yet recorded
 
                                    1)  Non sufficient funds check
                                    2)  Bank fees and service charges
                                    3)  Interest earned
                                    4)  automatic deposits and withdrawals
 
 
                        In the “bank” column – put the items the company knows about and
                                                           recorded that the bank has not yet recorded.
 
                                    1)  Outstanding checks
                                    2)  Deposits in transit
 
 
            Record any error made by either party; put the error fix in the column of the one
                who made the error
 
 
            Total the two columns to get the adjusted ending balance – The two columns
                 will agree when you have accounted for all the differences
 
 
A journal entry must be made for items in the “cash column” that have not
   yet been recorded:
 
                        1)  Negative items are a credit to cash
                        2)  Positive items are a debit to cash
                        3)  NSF checks are a debit to accounts receivable
                        4)  Automatic deposits credit whatever the money was received for
                        5)  Automatic payments debit whatever the money was paid for
 
               Do not put items in the bank column in the journal entry
                Record only the amounts you put in the cash column in the journal entry  

                         

 


 

 

 

 
All material on this web site is copyrighted and the exclusive property of the author.  It may not be reproduced or distributed in any form without prior written permission from the author.