Cash
Practice As You Learn
Practice as You Learn
Practice Problem 1. Record sale and cash collection using the gross method
On February 1st, the company sold goods to a customer for $20,000 with terms
of 1/20, n45. Record the required entries for the sale and collection given the company uses the gross method and
A. payment was made on February 18th
B. payment was made on March 10th
Answer
Practice Problem 1. Gross Method
A. The payment is made and the discount is taken,
(17 days is prior to the 20-day time limit for taking the discount.)
| Accounts Receivable 20,000 Sales 20,000 Cash 19,800 |
Cash received is 99% x 20,000 = 19,800 1% (200) is not collected
The accounts receivable always goes on and off at the full amount
Sales discount is 1% x 20,000 = 200; the part not paid
B. The payment is made and the discount is not taken,
(38 days is after the 20-day time limit for taking the discount).
| Accounts Receivable 20,000 Sales 20,000 Cash 20,000 |
Accounts receivable is always debited and credited for the full amount when using the gross method.
No discount is taken, so no discount is recorded
On February 1st, the company sold goods to a customer for $20,000 with terms
of 1/20, n45. Record the required entries for the sale and collection given the company uses the net method and
A. payment was made on February 18th
B. payment was made on March 10th
Answer
Practice Problem 2. Net Method
A. The payment is made and the discount is taken,
(17 days is prior to the 20-day time limit for taking the discount.)
| Accounts Receivable 19,800 Sales 19,800 |
The accounts receivable is recorded at 99%, net of 1%
| Cash 19,800 Accounts Receivable 19,800 |
The cash is at 99% x 20,000 1% is not paid
The accounts receivable always goes on and off at net amount
The company expected the discount to be taken and recorded the sale net, so there is no need to record any discount
B. The payment is made and the discount is not taken,
(38 days is after the 20-day time limit for taking the discount).
| Accounts Receivable 19,800 Sales 19,800 Cash 20,000 |
Accounts receivable is always debited and credited for the net amount
No discount is taken, and the company receives more than was expected and the difference is reported as an addition to sales
The company has the following information for the month of February:
1. The bank statement shows $4,687 for the ending balance 2/28
2. The cash account balance is $7,389 on 2/28
3. The bank service charge for February is $39
4. Deposits not yet posted by the bank total $1,900
5. Checks written by the company, not yet cleared by the bank total $624
6. A note payment, automatically paid by the bank for the company was paid for $1,200. The payment included $128 for interest expense
7. A customer check was marked “non sufficient funds” in the amount of $375
8. A deposit in the amount of $1,800 was recorded by the bank as $1,900.
9. Interest earned for the period was $88
A. Prepare the bank reconciliation for the company for the month of February
B. Prepare the journal entries required to the cash account.
Answer
Practice Problem 3. – Prepare a bank reconciliation
A. Prepare the bank reconciliation – Follow these steps:
1) Set up two columns – one for cash and one for bank
2) Start with the ending balance for the month for each
| Cash | Bank | |
| Ending Balance 2/28 | $7,389 | $4,687 |
3) In the “cash” column – put the items the bank knows about and recorded and the company has not yet recorded
| 1) | Non sufficient funds check – always subtract | $375 |
| 2) | Bank fees and service charges – always subtract | $ 39 |
| 3) | Interest earned – always add | $ 88 |
| 4) | automatic deposits (add) and withdrawals (subtract) | $128 |
| $1072 |
4) In the “bank” column – put the items the company knows about and recorded and the bank has not yet recorded.
| 1) | Outstanding checks – always subtract | $ 624 |
| 2) | Deposits in transit – always add | $1,900 |
5) Record the fix of errors made by either, put the error fix in the column of the one who made the error – the company “cash” or the bank
The bank made the error – so it goes in the bank column
They recorded too much added to the account, so the error amount must be subtracted
$1,900 should be $1,800, so the difference is the error $100
6) Total the two columns to get the adjusted ending balance –
The two columns must agree and will if you have accounted for all transactions correctly.
| Cash | Bank | ||
| Ending Balance 2/28 | $7,389 | $4,687 | |
| Bank service charge | (39) | ||
| Deposits in transit | 1,900 | ||
| Outstanding Checks | (624) | ||
| Interest expense – auto | (128) | ||
| Payment on note | (1,072) | ||
| NSF check | (375) | ||
| Error on deposit | (100) | ||
| Interest earned | 88 | ||
| ______ | ______ | ||
| Adjusted 2/28 balance | $5,863 | = | $5,863 |
B. Prepare the journal entries required to the cash account.
Important: Only make journal entries for items in the cash column.
1st – Determine the difference in the cash column ending balance you started with and the adjusted ending balance: cash decreased by $1,526
2nd – Start the journal entry with the cash account – debit for an increase and
credit for a decrease calculated in 1st step In this case it is a credit.
3rd – Positives will be credit accounts and negatives will be debit accounts.
Record the reconciling items in the cash column ONLY
| Bank service expense | 39 |
| Interest expense | 128 |
| Note payable | 1,072 |
| Accounts receivable | 375 |
| Cash | 1,526 |
| Interest income | 88 |
Non-sufficient funds checks are always debited to accounts receivable.
The customer still owes since the check bounced.