Accounting Ch.9

Angela's Beauty Salon keeps a 100 dollar change fund. At the end of the day, sales per the register tape were 795 dollars, and the cash count was $892. What was the amount of the cash shortage or overage?

$3 short

Internal control procedures for petty cash:

-Use the petty cash fund only for small payments that cannot conveniently be made by check. -Limit the amount set aside for petty cash to the approximate amount needed to cover one month's payments from the fund. -Write petty cash fund checks to the person in charge of the fund, not to the order of "Cash". - Assign one person to control the petty cash fund. This person has sole control of the money and is the only one authorized to make payments from the fund -Keep petty cash in a safe, a locked cash box, or a locked drawer. - Obtain a petty cash voucher for each payment. The voucher should be signed by the person who receives the money and should show the payment details. This provides an audit trail for the fund.

Cash short or over account

If the account has a credit balance, there is an overage which is treated as revenue. If the account has a debit balance, there is a shortage which is treated as an expense.

Which of the following is not an example of good internal control over cash payments?

Make all payments with currency rather than check.

service charges

fees charged by banks to cover the costs of maintaining accounts and providing services, such as the use of the night deposit account and the collection of promissory notes. The debit memorandum shows the type and amount of each service charge

Deposit in transit

is a deposit that is recorded in the general journal but that reaches the bank too late to be shown on the monthly bank statement.

Statement of account

shows the transactions during the month and the balance owed. Customers are asked to pay within 30 days of receiving the statement. Then the checks from the credit customers are journalized and posted, and then deposited in the bank.

When a check is negotiable it means:

that the ownership of the checks can be transferred to another person or business.

Replenish the petty cash fund

the cash fund should be replenished to the same amount of money taken out at the end of the month or sooner if the fund is low.

The first section of the bank reconciliation statement is:

bank statement balance + deposits in transit -outstanding checks+or-bank errors=adjusted bank balance

The second section of the bank reconciliation statement is:

book balance+deposits not recorded-deductions+or- errors in the books=adjusted book balance

blank endorsement

the signature of the payee that transfers ownership of the check without specifying to whom or for what purpose.

Eight essential cash payment controls

1. Make all payments by check except for payments from special purpose cash funds such as petty cash funds or a travel and entertainment fund. 2.Issue checks only with an approved bill, invoice,or other document that describes the reason for the payment. 3. Have only designated personnel, who are experienced and reliable, approve bills and invoices 4. Have checks prepared and recorded in the checkbook or check register by someone other than who approves the payments 5. Have still another person sign and mail the checks to creditors. Consider requiring that two people sign all checks greater than a predesignated amount. 6. Use prenumbered check forms. Periodically, the numbers of the checks that were issued and the number of the blank check forms remaining should be verified to make sure that all check numbers are accounted for. 7.During the bank reconciliation process, compare the canceled checks to the checkbook or check register. The person who does the bank reconciliation should be someone other than the person who prepares or records checks. 8.Enter promptly in the accounting records all cash payment transactions. The person who records cash payments should not be the one who approves payments or the one who writes the checks.

7 Essential Cash Receipt Controls

1.Have only designated employees receive and handle cash whether it consists of checks and money orders, or currency and coins. These employees should be carefully chosen for reliability and accuracy and should be carefully trained. 2.Keep cash receipts in a cash register, a locked cash drawer, or a safe while they are on the premises. 3.Make a record of all cash receipts as the funds come into the business. For currency and coins, this record is the audit tape in a cash register or duplicate companies of numbered sales slips. The use of a cash register provides an especially effective means of control because the machine automatically produces a tape showing the amounts entered. This tape is locked inside the cash register until it is removed by a supervisor. 4.Before a bank deposit is made, check the funds to be deposited against the record made when the cash was received. The employee who checks the deposit is someone other than the one who receives and records the cash. 5. Deposit cash receipts in the bank promptly- every day or several times a day. Deposit the funds intact-do not make payments directly from the cash receipts. The person who makes the bank deposit is someone other than the one who receives and records the funds. 6.Enter cash receipt transactions in the accounting records promptly. The person who records cash receipts is not the one who receives or deposits the funds. 7. Have the monthly bank statement sent to and reconciled by someone other than the employees who handle, record, and deposit the funds

What is a cash shortage? How is it recorded?

A cash shortage occurs when cash in the register, less the change fund, is less than the sales per the cash register tape. The cash shortage is debited to Cash Short and Over.

What is a postdated check? When should postdated checks be deposited?

A check that is dated in the future. It should not be deposited before its date because the drawer of the check might not have sufficient funds in the bank to cover the check at the current time.

electronic funds transfers (EFT)

Businesses can initiate these to vendors from a computer instead of writing checks.

In a well managed business, most bills are paid by what?

Check

Which items are considered cash?

Currency, funds on deposit in the bank, money orders, coins, and checks

Which journal entry could be used to record the replenishment of the petty cash fund?

Debit supplies, Debit delivery expense, Credit cash

James is one of several accounting clerks at Uptown Beverage Company. His job duties include recording invoices as they are received, filing the invoices, and writing the checks for accounts payable. He is a fast and efficient clerk and usually has some time available each day to help other clerks. It has been suggested that reconciling the bank statement be added to his job duties. Do you agree or disagree? Why or why not?

Disagree. Good internal control requires separation of duties.

Why does a payee endorse a check before depositing it?

Endorsement is the legal process by which the payee transfers ownership of the check to the bank.

How would the receipt of a 50 dollar refund for supplies returned be recorded in a general journal?

The cash would be debited 50 dollars and the supplies would be credited 50 dollars.

You notice the Cash Short or Over account has 15 entries during the month. The ending balance is a 10 dollar shortage for the month. Is this a problem? Why or why not?

The frequency of cash discrepancies indicates that a problem may exist in the handling of the cash (depending on the size of the business and the number of registers, 15 entries may not be unusual.

Why does a business use a petty cash fund?

To make small expenditures that require currency and coins

Receipt of cash refund

When a business receives a cash refund for supplies equipment or other assets that are returned to the supplier. In the journal entry cash would then be debited and the supplies would be credited.

Your employer keeps a 75 dollar petty cash fund. She asked you to replenish the fund. She is missing a receipt for 7.40, which she says she spent on postage. How should you handle this?

You should explain to your employer that she must keep all receipts regardless of the amount. Ask your employer to complete a voucher for that amount, then record the entry in the proper account.

post dated check

a check that a business will receive occasionally dated some time in the future. If the business receives a post dated check, it should not deposit it before the date on the check. Or the check could be refused by the drawers bank. Post dated checks are written by drawers who do not have sufficient funds to cover the check. Issuing or accepting postdated checks is not a proper business practice.

full endorsement

a signature transferring a check to a specific person, business, or bank. Only, the person, business, or bank named in the full endorsement can transfer it to someone else.

endorsement

a written authorization that transfers ownership of a check which is needed on each check to be deposited.

A check is

a written order signed by an authorized person called the drawer, who instructs the bank, the drawee, to pay a specific sum of money to a designated person or business, the payee

Promissory note

a written promise to pay a specified amount of money on a certain date.Most notes require that interest is paid at a specific rate. Businesses use promissory notes to extend credit for some sales transactions.

bank reconciliation statement

accounts for the differences between the balance on the bank statement and the book balance of cash.

Cash is short when....

cash receipts are less than the sales per the cash register tape.

Cash is over when....

cash receipts are more than the sales per the cash register tape.

Cancelled checks

checks paid by the bank during the month. They are proof of payment

What journal entry records the establishment of a petty cash fund?

debit petty cash fund and credit cash.

Credit memorandum

explains any addition, other than a deposit, to the checking account. For example, when a notes receivable is due, the bank may collect a note from the maker and place the proceeds in the checking account. The amount collected shows on the bank statement, and the credit memorandum showing the details of the transaction is enclosed with the bank statement

debit memorandum

explains any deduction, other than a check, to the checking account. Service charges and dishonored checks appear as debit memorandum.

Which bank reconciliation items require journal entries?

items in the second section of the bank reconciliation statement require entries in the firm's financial records to correct the Cash account balance and make it equal to the checkbook balance. These may include bank fees, debit memorandums, NSF checks, and interest income.

What account would be credited in the issuance of a promissory note to purchase store equipment?

notes payable

dishonored check

one that is returned to the depositor unpaid. Normally , checks are dishonored because there are insufficient funds in the drawer's account to cover the check. The bank usually stamps the letters NSF for not sufficient funds on the check. The business records a journal entry to debit accounts receivable and credit cash for the amount of the dishonored check. When a check is dishonored, the business contacts the drawer to arrange for collection. The drawer can ask the business to redeposit the check because the funds are now in the account. If so, the business records the check deposit again. Sometimes the business requests a cash payment.

deposit slip

prepared by businesses to record each deposit of cash or checks to a bank account.

Bonding

the process by which employees are investigated by an insurance company. Employees who pass the background check can be bonded; that is, the employer can purchase insurance on the employees. If the bonded employees steal or mishandle cash, the business is insured against the loss.

restrictive endorsement

the safest endorsement. A signature that transfers the check to a specific party for a specific purpose, usually for deposit to a bank account. Most businesses restrictively endorse the checks they receive using a rubber stamp.

In accounting, the term cash is used for

currency, coins, checks, money orders and funds on deposit in the bank.

What is a promissory note? In what situation would a business accept a promissory note?

A written promise to pay a specified amount of money on a specified date. To grant credit in certain sales transactions or to replace open-account credit when a customer has an overdue balance.

Petty cash analysis sheet

used by most businesses to record transactions involving petty cash. The Receipts column shows cash put in the fund, and the Payments column shows the cash paid out. There are special columns for the accounts that are used frequently such as Supplies, Freight in, and Miscellaneous Expense. There is an Other Accounts Debit column for entries that don't fit in a special column.

Petty cash voucher

used to record the payments made from the petty cash fund. The petty cash voucher shows the voucher number,amount, purpose of the expenditure, and account to debit. The person receiving the funds signs the voucher, and the person who controls the petty cash fund initials the voucher.

Outstanding checks

checks that are recorded in the general journal but have not been paid by the bank

Cash proof

prepared by the store manager to verify that the amount in the cash register, less the change fund, equals the amount shown on the cash register totals that were printed from the cash register.