2

Objectives

• To explain cash control procedures.

• To identify the steps to perform bank

reconciliations.

• To describe how bank activities are

journalized.

3

Cash

• Is money in the form of coins or bills

• May also be cash equivalents in a business

cash account

There is approximately $1.1 trillion worth of cash currently in circulation.

4

Cash Equivalents

• Are assets which can be turned into cash in

a short period of time−examples:

• treasury bills− short-term method for the U.S. government to

borrow money

• money market accounts− an account similar to a checking account, but

pays more interest and restricts money

withdrawals

5

Cash Controls

• Monitor the process of receiving and

distributing cash−involve best practices for collecting,

transporting and storing cash

Best practices: procedures which are accepted as most effective

6

Benefits of Cash Controls

• Include the following:−prevent theft and fraud

−ensure the businesses have money to pay bills

−increase accuracy of business financial

records

7

Common Cash Control Procedures

• Include:−bank account access

−dual control

−security of check stock

−timely account reconciliations

8

Bank Account Access

• Is a cash control which limits who can

access company funds−large companies can have accounts in several

location to make cash faster/easier to access

−banks keep records which show when cash

was deposited or withdrawn

−banks usually send monthly statements to

companies which summarize bank

transactions

Deposit: practice of placing money into a bank account

Withdrawal: practice of taking money out of a bank account

9

Dual Control

• Is a cash control process which requires

two people to complete a transaction

• Helps prevent employee “borrowing”

• Prevents false accusations because two

people are present

• Helps the business prevent theft and helps

the employee make ethical decisions

Employee Borrowing: practice of removing cash and replacing it at a later

date

10

Dual Control Process Example

• One employee physically counts cash and

other valuables and records the amount

• A second employee compares this

information with previous documents which

show the expected cash/valuables amounts

• The findings are compared; if they do not

match, the employees determine the issue

11

Dual Control Process Example

• The two employees

sign a document

indicating they both

agree on the final

amount

• What occurs if there is

a loss depends on company procedures

12

Security of Check Stock

• Is a cash control process in which:−check stock is stored in a secure environment

which is only accessible by a few employees

such as a locked cabinet or safe

−checks are signed by two people• large businesses may use signature plates or

stamps for checks to place an authorized

signature on a check− signature plates should be only accessible to

authorized users

Check stock: paper which is used by a company to print checks

13

Reconciliation of Bank Statements

• Is a cash control process which requires

verification that bank statement amounts

match company cash amounts

• Is usually completed by a person who does

not sign checks or maintain accounting

records

• Can be automatically setup within a

company’s system to be done daily or

monthly

14

Bank Reconciliation Process

• Includes four steps:−adjusting the balance per bank

−adjusting the balance per books

−comparing the adjusted balances

−preparing and posting journal entries

15

Adjusting Balances

• Are used to include transactions which were

not included on the financial statement or

were improperly recorded by the business−bank and company

account balances are

commonly different

because many

transactions take

different amounts of

time to be completed

16

Bank Reconciliation Items Impacting the Adjusting Bank

Balance

• Include:−deposits in transit

• cash received and

recorded by the company

but not yet recorded by

the bank

−outstanding checks• checks recorded in the company’s cash

account but not yet recorded (“cleared”) by the

bank

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Bank Reconciliation Items Impacting the Adjusting Bank

Balance• Include:

−bank errors• errors which are caused by

the bank such as recording

incorrect amounts or omitting

deposits/withdrawals

• could increase or decrease

the bank statement balance

18

Bank Reconciliation Items Impacting the Adjusting Book

Balance

• Include:−bank service charges

• fees charged by the bank for performing

common account activities (accepting deposits,

mailing the bank statement, etc.)− decreases the company’s cash account

−non-sufficient funds (NSF) check• checks not deposited by the bank because the

account of the check writer did not have

enough funds

19

Bank Reconciliation Items Impacting the Adjusting Book

Balance

• Include:−check printing charges

• when a company allows its bank to reorder its

checks

−interest earned• the money a bank

gives the company

based on their bank

account balance

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Comparing the Adjusted Balances

• Should occur after the bank and book

balances are adjusted−the balances should be equal

−if the balances are not equal, the process

should be repeated

−the balance is equal to the amount of cash

present at the time the bank reconciliation was

made

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Journal Entries

• Must be prepared when adjustments are

made to the balance per books−adjustments which increase the cash balance

• debit cash and credit another relevant account

−adjustments which decrease the cash balance• credit to cash and a debit to another relevant

account

22

Effect of Bank Reconciliation Items

• Balance per bank statement−added to balance

• deposits in transit, bank errors which

understate bank statement balance

−subtracted from balance• outstanding checks,

bank errors which

overstate bank

statement balance

23

Effect of Bank Reconciliation Items

• Balance per book

statement−added to balance

• interest income

−subtracted from

balance• bank service charges,

NSF checks, bank printing fees

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Bank Reconciliation Example

The Alan Company needs to reconcile their bank

statement. Their bank statement for December 29th

says they have $25,000 in their account. However,

they know they had $24,200 in their account on the

day, so the bank made an error. Also, they just

deposited $1,000 in their account on December 30,

so it would not show on the statement anyway.

Along with the new deposit, the company wrote a

check for $800 to pay for supplies, which would

decrease their balance.

25

Bank Reconciliation Example

Alan Company also noticed some bank information

was not added to their company accounting

records. Their cash account balance was $24,000.

They received $1,500 in interest from keeping their

money in the checking account. They also noticed

the bank did not deposit a customer’s $200 check

because the customer did not have the funds.

Additionally, the bank charged the company $160

for service fees and $140 for automatically printing

company checks.

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Alan Company Bank Reconciliation Example

Balance per Bank, Dec 31 25,000

Add: Deposit in Transit 1,000

Total 26,000

Less: Outstanding Checks 800

Bank error that overstated

balance

200

Adjusted Bank Balance:

Dec 31

25,000

Balance per Books, Dec 31 24,000

Add: Interest Income from

bank

1,500

25,500

Less:

NSF Check 200

Bank Service Charges 160

Bank printing Charges 140

500

Adjusted Book Balance 25,000

Alan Company

Bank Reconciliation

December 31, 2015• Example of post made

for Alan Company Bank

Reconciliation

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Bank Service Charges Example

• On March 7, Brenda’s Burgers received a

bank statement with a bank service charge

of $3. March 7 Debit Credit

Miscellaneous Expense 3

Cash 3

Miscellaneous Expense

Debit

3

Credit

Cash

Debit Credit

3

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Petty Cash

• Is cash on hand to use for small expenses

which do not require checks or credit cards−examples:

• paying for stamps, reimbursing employee for

buying a small item, buying lunch for a client,

etc.

• Is typically controlled by one person within a

business (petty cash custodian)

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Petty Cash Controls

• Involve the effective management of small

expenses

• Include:−keeping a petty cash log to record sums of

money entering and leaving the fund

−requiring a receipt for every transaction

−reconciling the petty cash fund by counting the

amount in the box and verifying the total listed

in the log matches the sum on hand

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Petty Cash Controls

• Include:−integrating petty cash system with the overall

company’s bookkeeping system

−locking the box or storage area when the petty

cash is kept

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How to Replenish Petty Cash Methods

• Include:−keeping the petty cash

amount at the original

balance• as cash is used, it

must be replenished

• each time the fund is replenished, it should be

to the original amount

32

How to Replenish Petty Cash Methods

• Include:−using a petty cash custodian to manage the

account• custodian should make the replenishment

request and include receipts for expenses

• check is written to the custodian in the amount

of the expenses

• cash is placed in the petty cash box

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Journal Entries for Petty Cash

• When debits, are debited based on the

items purchased−examples:

• supplies are recorded in the supplies expense

account

• fuel expenses are recorded in the fuel expense

account

−the amount credited is the total amount

removed from the account

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Establishing Petty Cash Journal Entry & Posting

ExampleOn March 1, Supreme Cuts Barber Shop set up a

petty cash account which holds $300. Below is how

the transaction would be posted in the journal:

March 1 Debit Credit

Petty Cash 300

Cash 300

Petty Cash Fund

Debit

300

Credit

Cash

Debit Credit

300

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Replenishing Petty Cash Journal Entry & Posting

Example• By the end of the week, Supreme Cuts spent $50 for

a new razor and $25 in fuel expenses; the following

is the posted record of these transactions and the

replenishment of the petty cash fund

March 7 Debit Credit

Supplies 50

Fuel Expense 25

Cash 75

Supplies

Debit

50

Credit

Fuel Expense

Debit

25

Credit

Cash

Debit Credit

75

36

Electronic Funds Transfer (EFT)

• Is the process of money being exchanged

between businesses and

customers/employees electronically

• Is a cash control which minimizes the

amount of people with access to money

37

Electronic Funds Transfer (EFT) Examples

• Include:−direct deposit of employee wages into their

checking accounts

−paying bills online

−using online services such as PayPal®

−withdrawing money from an ATM

38

Benefits of Electronic Funds Transfer (EFT)

• Include:−convenience

−provides documentation of transactions

−less costly• cheaper than issuing paper paychecks

−faster cash flow• money from customers can be received

immediately

39

Acknowledgements

• Bank Reconciliation. (n.d.). Retrieved from

http://accountingexplained.com/financial/cash-and-equiv/bank-

reconciliation

• Kieso, D., & Weygandt, J. (2010). Intermediate accounting

(13th ed.). Hoboken, NJ: Wiley.

• Marley, S., & Pedersen, J. (2005). Accounting for business: An

introduction. Frenchs Forest: Pearson Education.

• Nieva, R. (2012). 6 fascinating facts about cash. Retrieved from

http://fortune.com/2012/07/12/6-fascinating-facts-about-cash/

• Swanson, L. Accounting for Petty Cash and Cash Short and

Over [PowerPoint slides]. Retrieved from

http://ww2.nscc.edu/swanson_l/Acct%201104%20Web/Present

ations/Petty%20Cashrev.pdf

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Acknowledgements

• Which items on a bank reconciliation will require a journal

entry? (n.d.). Retrieved from

http://www.accountingcoach.com/blog/bank-reconciliation-

journal-entry

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Acknowledgements

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