CHAPTER

7 Cash
CHAPTER 7 LEARNING OBJECTIVES
After studying this chapter, you should be able to:

1. Describe the operation of a petty cash fund.

Cash 2. Indicate the control features of a bank account.

3. Prepare a bank reconciliation.
4. Explain the reporting of cash.

Petty Cash Fund

PREVIEW OF CHAPTER 7 Learning Objective 5
Describe the operation of a
Petty Cash Fund - Used to pay small amounts. petty cash fund.

Involves:
Cash
1. establishing the fund,
Bank Reporting 2. making payments from the fund, and
Petty cash
reconciliation cash
3. replenishing the fund.

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 ESTABLISHING THE PETTY CASH FUND MAKING PAYMENTS FROM PETTY CASH

Illustration: If Zhu Ltd. decides to establish a NT$3,000 fund on March 1, the journal entry is:  Management usually limits the size of expenditures.
 Does not permit use of the fund for certain types of transactions.
 Payments are documented on a prenumbered receipt.
 Signatures of both the custodian and the individual receiving payment are required on the
receipt.
 Supporting documents should be attached to the receipt.
 Custodian keeps the receipts in the petty cash box until the fund is replenished.
 Sum of the receipts and money in the fund should equal the established total at all times.

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REPLENISHING THE PETTY CASH FUND REPLENISHING THE PETTY CASH FUND

Illustration: Assume that on March 15 Zhu’s petty cash custodian requests a check for Illustration: Occasionally, the company may need to recognize a cash shortage or overage.
NT$2,610. The fund contains NT$390 cash and petty cash receipts for postage NT$1,320, Assume that Zhu’s petty cash custodian has only NT$360 in cash in the fund plus the receipts as
freight-out NT$1,140, and miscellaneous expenses NT$150. The general journal entry to record listed. The request for reimbursement would, therefore, be for NT$2,640, and Zhu would make the
the check is: following entry:

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 > DO IT! E7-7/p.366
LaSalle SA established a petty cash fund on May 1,
Bateer SA established a R$50 petty cash fund on July 1. On July 30, the fund had R$12 cash cashing a check for €100. The company reimbursed the
remaining and petty cash receipts for postage R$14, office supplies R$10, and delivery expense fund on June 1 and July 1 with the following results.
R$15. Prepare journal entries to establish the fund on July 1 and to replenish the fund on July June 1: Cash in fund €1.75. Receipts: delivery expense
30. €31.25; postage expense
€41.00; and miscellaneous expense €25.00.
July 1: Cash in fund €3.25. Receipts: delivery expense
€21.00; entertainment expense €53.00; and miscellaneous
expense €24.75.
On July 10, LaSalle increased the fund from €100 to €150.
Instructions
Prepare journal entries for LaSalle SA for May 1, June 1,
July 1, and July 10.
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Control Features: Use of a Bank Making Bank Deposits

Learning Objective 6
Illustration 7-8
Indicate the control
Contributes to good internal control over cash. features of a bank account.
Authorized employee should make Deposit slip

deposit.
 Minimizes the amount of currency on hand. Bank Code
Numbers
 Creates a double record of bank transactions.

 Bank reconciliation.

Front Side Reverse Side

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 Writing Checks Bank Statements Illustration 7-10
Bank statement

Written order signed by depositor directing bank to pay a specified sum of money to a DEBIT MEMORANDUM
designated recipient.
 Bank service charge.

Maker  NSF (not sufficient funds).

Payee
CREDIT MEMORANDUM
Payer  Collect notes receivable.
 Interest earned.
Illustration 7-9
Check with remittance advice

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Reconciling the Bank Account Reconciling the Bank Account

Learning Objective 7
Prepare a bank RECONCILIATION PROCEDURES
reconciliation. Illustration 7-11
Bank reconciliation
Reconcile balance per books and balance per bank to their adjusted adjustments

(corrected) cash balances.

Reconciling Items:
1. Deposits in transit.
+ Deposit in Transit + Notes collected by bank
2. Outstanding checks. Time Lags
- Outstanding Checks - NSF (bounced) checks
3. Bank memoranda. +/- Bank Errors - Check printing or other service
charges
4. Errors.
+/- Book Errors
CORRECT BALANCE CORRECT BALANCE

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 BANK RECONCILIATION ILLUSTRATED BANK RECONCILIATION ILLUSTRATED
The bank statement for Laird Company, in Illustration 7-10, shows a balance per bank of £15,907.45 on April
30, 2017. On this date the balance of cash per books is £11,589.45. Using the four reconciliation steps, Laird
Illustration: Prepare a bank reconciliation at April 30.
determines the following reconciling items.
Cash balance per bank statement
Deposit in transit
Outstanding checks
Adjusted cash balance per bank

Cash balance per books

Error in check No. 443
NSF check
Bank service charge
Collection of notes receivable
Adjusted cash balance per books

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ENTRIES FROM BANK RECONCILIATION ENTRIES FROM BANK RECONCILIATION

COLLECTION OF NOTE RECEIVABLE: Assuming interest of ₤50 has not been accrued and BOOK ERROR: The cash disbursements journal shows that check no. 443 was a payment on
collection fee is charged to Miscellaneous Expense, the entry is: account to Andrea Company, a supplier. The correcting entry is:

NSF CHECK: As indicated earlier, an NSF check becomes an account receivable to the depositor.
The entry is:

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 ENTRIES FROM BANK RECONCILIATION ENTRIES FROM BANK RECONCILIATION

BANK SERVICE CHARGES: Depositors debit check printing charges (DM) and other bank service Question
charges (SC) to Miscellaneous Expense. The entry is:
The reconciling item in a bank reconciliation that will result in an adjusting entry by the
depositor is:

a. outstanding checks.

b. deposit in transit.

c. a bank error.

d. bank service charges.

Illustration 7-13
Adjusted balance in Cash account
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Electronic Funds Transfer (EFT) System > DO IT!

EFTs Sally Kist, owner of Linen Kist Fabrics, asks you to explain how she should treat the following reconciling
items when reconciling the company’s bank account: (1) a debit memorandum for an NSF check, (2) a
 Are disbursement systems that use wire, telephone, or computers to transfer cash credit memorandum for a note collected by the bank, (3) outstanding checks, and (4) a deposit in transit..
from one location to another.

 Use is quite common.

 Normally result in better internal control since no cash or checks are handled by
company employees.

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 E7-9/p.367 Reporting Cash
Learning Objective 8
Basel AG is unable to reconcile the bank balance REPORTING CASH Explain the reporting of
cash.
at January 31. Basel’s reconciliation is as follows.
 Cash consists of coins, currency, checks,
money orders, and money on hand or on deposit.

 Statement of financial position reports the amount of cash available at a given point in time.
► Listed first in the current assets section.

► Includes cash on hand, cash in banks, and petty cash.

 Statement of cash flows shows the sources and uses of cash during a period of time.

Instructions
(a) Prepare a correct bank reconciliation.
(b) Journalize the entries required by the reconciliation.
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REPORTING CASH REPORTING CASH

Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are both:
1. Readily convertible to known amounts of cash, and
2. So near their maturity that their market value is relatively insensitive to changes in interest
rates.
Illustration 7-14
Statement of financial position presentation of cash

Restricted Cash
Cash that is not available for general use but rather is restricted for a special purpose.

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 REPORTING CASH > DO IT!

Question Indicate whether each of the following statements is true or false.

1. Cash and cash equivalents are comprised of coins, currency (paper money), money
Which of the following statements correctly describes the reporting of cash? orders, and NSF checks.
a. Cash cannot be combined with cash equivalents. 2. Restricted cash is classified as either a current asset or noncurrent asset,
depending on the circumstances.
b. Restricted cash funds may be combined with cash. 3. A company may have a negative balance in its bank account. In this case, it should
offset this negative balance against cash and cash equivalents on the statement of
c. Cash is listed last in the current assets section.
financial position.
d. Restricted cash funds cannot be reported as a current asset. 4. Because cash and cash equivalents often includes short-term investments, accounts
receivable should be reported as the last item on the statement of financial position.

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Nayak plc has recorded the following items in its

financial records. Instructions
(a) What amount should Nayak report as “Cash
and cash equivalents” on its statement of financial
position?
(b) Where should the items not included in part (a)
be reported on the statement of financial position?
(c) What disclosures should Nayak make in its
The highly liquid investments had maturities of 3 months or financial statements concerning “cash and cash
less when they were purchased. The share investments will equivalents”?
be sold in the next 6 to 12 months. The plant expansion
project will begin in 3 years.
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