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 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

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