Cash

Cash

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