MGMT 101 - Chapter 7 Accounting for Cash
What is cash to a business?
Critical business asset that includes currency, coins, checks receive from customers, money orders, and bank cashier's checks
If a $200 NSF check is a deduction by the bank for a check deposited by Takach that proved to be worthless, the amount must be deducted from the book balance and assuming that the $200 was received from a customer on account, what is the required journal entry?
D Accounts Receivable $200, C Cash $200, description "Unrecorded NSF check"
If a petty cash account is established with $200, and over the course of an accounting period the following payments are made: $40.80 (automobile expense), $39.50 (postage expense), $30.25 (Travel and Entertainment Expense), $38.25 (Miscellaneous Expense), $30.00 (Stephen Takach, Drawing), what journal entry would be required to replenish the account back to the $200 balance? [Note: Only if the amount of the fund itself is being changed would there be a debit or credit to Petty Cash]
D Automobile Expense $40.80 D Postage Expense $39.50 D Travel and Entertainment Expense $30.25 D Miscellaneous Expense $38.25 D Stephen Takach, Drawing $30.00 C Cash $178.80 Description "Replenishment of petty cash fund
If a $18.98 payment for an account payable which had been incorrectly debited for $19.88 what is the required journal entry?
D Cash $0.90, C Accounts Payable $0.90, description "Error in recording check"
If the cash register tapes on June 20th showed receipts of $814 and the change fund was $200, but $1,015 in cash was counted at the end of the business day, what would the journal entry be to record the revenues and cash overage
D Cash $815, C Service Fees $814, C Cash Short and Over $1, description "Record service fees and cash overage"
If the cash register tapes on June 19th showed receipts of $963 and the change fund was $200, but $1,161 in cash was counted at the end of the business day, what would the journal entry be to record the revenues and cash shortage
D Cash $961, D Cash Short and Over $2, C Service Fees $963, description "Record service fees and cash shortage"
If the $1.80 bank service charge is a fee for bank services received by Takach, the bank has deducted this amount from Takach's account and as such bank service charges are usually small and are charged to Miscellaneous Expense, what is the required journal entry?
D Miscellaneous Expense $1.80, C Cash $1.80, description "Bank service change"
What are the steps required to utilize the change fund?
Establish the Change Fund, using the Cash Short and Over account (i.e., shortage is an expense, and overage is a revenue)
What are the steps required to utilize a petty cash fund?
Establish the Petty Cash fund, making payments from the fund, recording payments from the fund, replenishing the fund
What is the journal entry required to establish the change fund?
Establishment of the change fund is recorded with the following journal entry: D Change Fund, C Cash, description "Establish change fund" [Note: Only if the amount of the fund itself is being changed would there be a debit or credit to Change Fund]
T/F NSF checks are subtracted from the bank's ending balance on the bank reconciliation
False Deducted from the book balance
T/F The petty cash record is a journal of original entry (entries are posted from it to the general ledger account).
False Entries are not posted from petty cash record to general ledger
T/F The primary purpose of a bank reconciliation is to detect and correct errors made by the bank in its records
False Primary purpose is to reconcile book balance with bank balance
What is a deposit ticket?
Form showing a detailed listing of items being deposited with currency, coins, and checks listed separately
When a petty cash fund is maintained, what is the formal record of all payments from the fund known as?
Petty cash payments record (i.e., special multi-column record that supplements the regular accounting records that is not a journal)
When making payments from a Petty Cash fund what is required?
Petty cash voucher should be prepared for every payment from the fund
What is a system of internal control?
Set of policies and procedures designed to ensure proper accounting for transactions
What is a bank statement?
Statement of account that is issued by a bank to a depositor which shows information (i.e., balance at beginning of period, deposits and other amounts added during the period, checks and other amounts subtracted during the period, balance at the end of the period)
What are the three parts of every check?
The drawer (i.e. the depositor who orders the bank to pay the cash), the drawee (i.e., the bank on which the check is drawn), and the payee (i.e., the person being paid the cash)
What are the key documents required in opening and using a checking account?
The signature card, deposit tickets, and bank statements
Why are vouchers consecutively numbered?
To ensure vouchers can be accounted for at any time and to ensure the sum of the current vouchers and the unused cash should equal the original amount in the Petty Cash fund
What bank reconciliation items require journal entries under the additions to cash balance category?
Unrecorded deposits (including ATM) // promissory note collected by bank // interest earned // errors
What bank reconciliation items require journal entries under the deductions from cash balance category?
Unrecorded withdrawals (including ATM) // NSF checks // bank service charges // unrecorded checks // loan payments // interest payments // errors
What information is included on the petty cash voucher?
Voucher shows the name of the payee, the purpose of the payment, the account to be charged for the payment, the signature of the custodian of the account, the signature of the person receiving the cash, consecutive numbering
What are two scenarios in which the book balance and the bank balance would differ?
When making a deposit, and when making a payment by check (i.e., cash payment)
What is the most likely reason that there is a difference present between a depositor's book balance and the bank's bank balance?
While this difference can be due to errors, it is usually caused by timing (i.e., transactions are recorded by the business at a time that is different from when the bank records them and this "time lag" will be a reason for the difference in the respective balances)
service charge
a bank charge for services such as check printing and processing
signature card
a card that is completed and signed by each person authorized to sign checks
not sufficient funds (NSF) check
a check deposited by the depositor that is not paid because the drawer did not have sufficient funds
outstanding check
a check issued that has not been presented to the bank for payment before the statement is prepared
canceled check
a depositor's check paid by the bank during the bank statement period
check
a document ordering a bank to pay cash from a depositor's account
deposit ticket
a form showing a detailed listing of items being deposited
petty cash fund
a fund established to pay for small items with cash
Automated teller machine (ATM)
a machine used by depositors to make withdrawals or deposits at any time
electronic funds transfer (EFT)
a process using a computer rather than paper checks to complete transactions with the bank
Customer Identification Program (CIP)
a program every bank is required to maintain that provides clear identification of every account holder
petty cash voucher
a receipt that is prepared for every payment from the petty cash fund
bank reconciliation
a report used to bring the book and bank balances into agreement
internal control
a set of procedures designed to ensure proper accounting for transactions
petty cash payments record
a special multi-column record that supplements the regular accounting records
bank statement
a statement of account issued by a bank to each depositor once a month
change fund
a supply of currency and coins kept in a cash register or cash drawer for use in handling cash sales
restrictive endorsement
an endorsement where the depositor adds words such as "For deposit" to restrict the payment of the check
blank endorsement
an endorsement where the depositor simply signs the back of the check, making the check payable to any bearer
When the cash short and over account has a debit balance at the end of the month, it is considered
an expense
credit memo
an item that the bank adds to the account
debit memo
an item that the bank deducts from the account
Which of these could be added to the ending checkbook balance? service charges NSF check checkbook errors outstanding checks
checkbook errors
collections
collections of promissory notes or charge accounts made by the bank on behalf of the depositor
What two kinds of items appearing on a bank reconciliation require journal entries
1) Errors in the depositor's books 2) Bank additions and deductions that do not already appear in the books
T/F Unrecorded ATM withdrawals are added to the checkbook balance on the bank reconciliation
False Deducted from book balance
Where is Petty Cash listed on the balance sheet?
Petty Cash is an asset, is listed immediately below Cash on the balance sheet
When should the petty cash fund be replenished?
Whenever the fund runs low and at the end of each accounting period so that the accounts are brought up to date [Note: Only if the amount of the fund itself is being changed would there be a debit or credit to Petty Cash]
check stub
in some checkbooks, a document attached to a check that contains space for relevant information about the check
Which of these is subtracted from the ending checkbook balance? deposits in transit service charges note collection bank errors
service charges
endorsement
stamping or writing the depositor's name and sometimes other information on the back of the check
magnetic ink character recognition (MICR) code
the character code used to print identifying information on the lower left front side of each check
drawer
the depositor who orders the bank to pay the cash
drawee
the on which the check is drawn
payee
the person being paid the cash
ABA (American Bankers Association) Number
the small fraction printed in the upper right-hand corner of each check
cash
to a business, cash includes currency, coins, checks received from customers, money orders, and bank cashier's checks
With the information above the adjusted bank balance and book balance would be?
$1200 [Note: $1,000 (bank statement balance) + $500 (deposit in transit) - $300 (outstanding checks) = $1,200 (adjusted bank balance)] [Note: $1,205 (book balance) - $5 (bank service charge) = $1,200 (adjusted book balance)]
What are two categories of items that require journal entries?
1) Additions to cash balance 2) Deductions from cash balance
For good internal control of cash transactions what two actions should occur?
1) All cash received should be deposited daily in a bank 2) All disbursements, except for petty cash payments, should be made by check
What are the six (6) most common reasons for differences between the book and bank balances?
1) Deposits in transit (i.e., deposits that have not reached or been recorded by the bank before the bank statement is prepared) 2) Outstanding checks (i.e., checks issued that have not been presented to the bank for payment before the statement is prepared) 3) Service charges (i.e., bank charges for services such as printing and processing) 4) Collections (i.e., collections of promissory notes or charge accounts made by the bank on the behalf of the depositor) 5) Not sufficient funds (NSF) (i.e., checks deposited by the depositor that are not paid because the drawer (the depositor who orders the bank to pay the cash to the payee who is the person being paid the cash) did not have sufficient funds) 6) Errors (i.e., errors made by the bank or the depositor in recording cash transactions)
What are two important aspects of the functioning of a petty cash fund?
1) Once fund established, no further entries made: D Petty Cash, C Cash 2) Petty cash payments record is strictly a supplement to the regular accounting records (i.e., because it is not a journal, no posting is done from this record and a separate entry must be made in the journal to replenish the fund and update the expense accounts) [Note: Only if the amount of the fund itself is being changed would there be a debit or credit to Petty Cash]
T/F The bank service charge requires a journal entry to record its effects on the cash account
True
Which of these is added to the ending bank statement balance? outstanding checks service charges checkbook errors deposits in transit
deposits in transit
deposits in transit
deposits that have not reached or been recorded by the bank before the bank statement is prepared
errors
errors made by the bank or the depositor in recording cash transactions
To establish a petty cash fund, which account is debited? cash petty cash miscellaneous expense revenue
petty cash
What are the three (3) steps in preparing a bank reconciliation?
1)Identify deposits in transit and any related errors (a) compare deposits listed on the bank statement with deposits in transit on last month's bank reconciliation (b) compare the remaining deposits on the bank statement with deposits listed in the accounting records (c) compare the individual deposit amounts on the bank statement and in the accounting records 2)Identify outstanding checks and any related errors (a) compare cancelled checks with the bank statement and the accounting records (b) note which checks have cleared (c) any checks that have not been noted as cleared represent outstanding checks on the bank reconciliation 3) Identify additional reconciling items (a) compare any additions and deductions on the bank statement that are not deposits or checks with accounting records (i.e., interest earned/services charges incurred)
For banks that pay interest on checking account balances, when a bank mails a credit memo to the depositor indicating the amount of interest credited to the account, what journal entry would be required?
A: D Cash, C Interest Earned, description "Earned interest on checking account" [note: "credit memo" items that the bank adds to the account] [note: "debit memo" items that the bank subtracts from the account] [note: a depositors account is a liability to the bank, and thus a credit memo increases this liability, and a debit memo reduces the liability]
What is the reasoning behind having a petty cash fund?
Although good control over cash requires payments generally being made by check, payments for very small amounts can be inconvenient and inefficient and therefore the business will establish a petty cash fund to pay for small items with cash
What happens at the end of the day when using a change fund?
At the end of the day, cash received during the day is deposited, but the change fund is held back for use the following business day (i.e., if the change fund started with $200 and if cash of $1,250 was received for services provided, the cash drawer would contain $1,450 at the end of the day, and $1,250 would be deposited in the bank with the following journal entry): D Cash $1,250, C Service Fees $1,250, description "Cash received for services"
What is the change fund used for?
Businesses must be able to make change when customers use cash to pay for goods or services and to do so it is a good idea to establish a change fund (i.e., a supply of currency and coins kept in a cash register or cash drawer for use in handling cash sales)
What kind of account is utilized to account for shortages and overages in cash?
Cash Short and Over account is used to accumulate cash shortages and overages throughout the accounting period [Note: End of accounting period; a debit balance in the Cash Short and Over account (i.e., net shortage) is treated as an expense] [Note: End of accounting period; a credit balance in the Cash Short and Over account (i.e., net overage) is treated as a revenue]
What does it mean when a check is endorsed?
Checks being deposited must be endorsed by the depositor (i.e., endorsement consists of recording the depositor's name on the back
If in reconciling a bank statement, the bank statement balance is $1,000 and the balance per books is $1,205. A bank service charge is $5; a deposit in transit totals $500; and outstanding checks total $300 then the journal entry for a bank service charge would include what journal entry?
D Miscellaneous Expense, C Cash
To establish a Petty Cash, a check is written to the petty cash custodian for the amount to be set aside in the fund, the custodian cashes the check and places the money in the petty cash box, if the check is written for $100, what journal entry is required?
D Petty Cash $100, C Cash $100, description "Establish petty cash fund"
If a $100 ATM withdrawal has been deducted from Takach's account by the bank and Takach has not yet recorded the withdrawal that were withdrew for Takach's personal use what is the required journal entry?
D Stephen Takach, Drawing, C Cash, description "Unrecorded ATM withdrawal"
What is a check?
Document ordering a bank to pay cash from a depositor's account
What is the signature card?
Document the bank can use to verify the depositor's signature on banking transactions
What is reconciliation?
Due to the fact that on any given day that the balance in the cash account on the depositor's books (i.e., the book balance) is unlikely to be the same as that on the bank's books (i.e., the bank balance), this difference must be resolved (i.e., reconciled) and the process of bringing the book and bank balances into agreement is called preparing a bank reconciliation
How should each check be identified?
Each check should be identified by its American Bankers Association (ABA) number (i.e., the small fraction printed in the upper right-hand corner of each check)
What is an unavoidable part of the change-making process?
Errors can occur and it is important to know whether such errors have occurred and how to account for them [Note: Businesses commonly use cash registers "tapes" that accumulate record of day's receipts and amount of cash according to tapes plus amount of the Change Fund can be compared with the amount of cash in the register to determine any error]
How can a business manage and protect cash?
Establish clear procedures and complete accurate reports in order to properly control cash => plan for future needs (i.e., system of internal control)
How to easily remember what items require a journal entry on the bank reconciliation?
Journal entry is always required for each item in this book balance portion of the bank reconciliation
What are two challenges for businesses in respect to cash?
Managing and protecting cash
What is the big similarity between the petty cash and change fund?
Once the account is established by a debit to the account, no further entries are made to the account [Note: Only if the amount of the fund itself is being changed would there be a debit or credit to Change Fund]
What are actions required to utilize a checking account?
Opening account, making deposits, endorsing, writing checks, reviewing bank statements
