Cash
Key Things to Know
Key Things To Know
Cash –
Money or any instrument that banks will accept for deposit to a company’s account. Includes currency, coins, checks, money orders, bank drafts
Readily available to the company to use without any restrictions
Cash Equivalents –
Investments with maturities of 3 months or less on the date of purchase, readily convertible into cash with a fair market value unlikely to change as market changes
Money Market funds, Certificate of Deposits, Commercial Paper and Treasury Bills
Cash and Cash Equivalents are combined and reported on the same line on the balance sheet
Restricted Cash:
Reported as Investments and Funds; non current asset if it is restricted for more than one year.
Compensating Balance: cash that must be maintained in a bank account
Cash management includes:
1) make sure 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 reporting on the balance sheet and cash flow statement
Internal Controls:
Committee of Sponsoring Organizations (COSO):
Provides a framework for the design and implementation of control systems
Defines internal control as procedures that provide:
1) Effectiveness and efficiency of operations
2) Reliability of financial reporting
3) Compliance with applicable laws and regulations
Cash Internal Controls:
Safeguard cash
Prevent fraud and theft
Separation of Duties:
The same employee should not handle cash, have access to accounting records or be involved in the bank reconciliation
Strong 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
Cash Discounts (also called Sales Discounts):
Reduction in the amount to be paid by a customer if payment is made within a specified time on a credit sale
When payment is due is based on the “terms” agreed upon
Example: 2/10, n30
means – 2% discount / if pay in 10 days, or, full payment is due in 30 days
n60 means no discount offered, payment due in 60 days
Companies offer a discount in order to collect cash quicker when they need cash
It is very costly to offer a discount, but necessary if the company is not able to borrow money at a lower interest rate
When a payment (cash) discount is taken it is called a sales discount.
Under the gross method sales discounts are reported on the income statement as:
Sales
– Sales Discount
= Net Sales
Journal entries for sales on credit and payment received when a discount is offered:
Two methods used: Gross Method and Net Method
Gross Method: Assumes the discount will not be taken.
The discount is a reduction to sales when it is taken.
Discounts not taken are reported as sales revenue
Sales | Payment received –discount taken | Payment received –no discount taken |
A/R | Sales Discount | Cash |
Sales | Cash | A/R |
A/R |
Accounts receivable is always recorded at the full amount for a debit or a credit
The cash is the amount actually received: sales x 1 – discount % if the discount is taken and the full amount if the discount is not taken
The sales discount amount is: full sales $ x discount % offered
Net Method: Assumes the discount will be taken and if it is not taken it is recorded as “sales discount – forfeited”
Accounts receivable is always at the recorded at the net amount
(sales $ x 1 – discount % offered)
Sales | Payment received –discount taken | Payment received –no discount taken |
A/R | Cash | Cash |
Sales | A/R | A/R |
Sales Discount – Forfeited | ||
net amount | net amount |
Net Method: Sales + Sales Discount Forfeited = Total Sales
Bank Reconciliation:
Reconcile 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 made
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 and the company has not yet recorded in the
cash account:
1) Non-sufficient funds check (NSF)
2) Bank fees and service charges
3) Interest earned
4) Automatic deposits and withdrawals
Listed in the G/L cash account column on the reconciliation
Items recorded in the G/L cash account and the bank has not yet recorded
1) Outstanding checks
2) Deposits in transit
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 made at the bank, not yet added to the account by the bank.
Compare the deposits made 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” is 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 G/L cash account and one for the bank
Start with the ending balance for the month for each
In the “G/L 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 all items in the “G/L 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