Week 10

Accounting for cashBank Reconciliations

Petty Cash

LEARNING OBJECTIVES

1. Define the term cash as it is used in accounting2. Identify the purpose and control features in

maintaining a bank account and prepare a bank reconciliation statement

3. Explain the purpose of a petty cash fund, understand how one operates, and account for petty cash

4. Explain the essential features of cash management

CASH DEFINED

• Cash includes– Money– Duplicates of credit card and EFTPOS sales– Negotiable instruments

• cheque• postal note

that a financial institution will accept

CONTROL OF CASH

• Cash is the asset most subject to theft• Need good internal control systems for handling

cash and recording cash transactions• Three important principles

1. Separation of responsibility for handling and custodianship of cash from maintaining records for cash

2. Banking intact each day’s cash receipts3. Making all payments by electronic transfer or by

cheque

BANK ACCOUNTS AND RECONCILIATION

• Cheque accounts– Essential element of internal control– Source documents

• Use of Electronic Funds Transfer– Gradually replacing cheques– Reduces processing costs

• The Bank Statement– Record of transactions from the bank

6

Reconciliation of the cash account

A report known as a Bank Reconciliation is used to compare (or reconcile) the balances of cash:

This is necessary because they rarely agree, due to:Timing differences

Outstanding deposits, unpresented chequesDirect deposits eg interest, direct charges eg bank

feesErrors (made by either the business or the bank)

Shown in the Business’ records

(ie GL Cash at Bank a/c )

Shown in the Bank’s records

(ie on the bank statement)to

BANK RECONCILIATION

• Cash at Bank account balance rarely agrees with balance as per bank statement

• Mainly due to “timing” differences• Common reasons:

– Items in journals not on bank statement• Unpresented (outstanding) cheques• Outstanding or late deposits

– Items originated by the bank• Service and bank charges, interest, EFT transactions etc.

– Errors either by bank or entity

Reconciliation Procedure

• To prepare a bank reconciliation you require:– Last bank reconciliation– Cash receipts and cash payments journals– Cash at bank ledger balance– Bank statement for the period since last

reconciliation

Reconciliation Procedure

• Step 1: Check all items and errors from last reconciliation have cleared– Any items still not cleared “roll over” into current

reconciliation• Step2: Compare

– Cash receipts journal with credits (deposits) on bank statement

– Cash payments journal with debits (withdrawals) on bank statement

– Mark entries that appear in both and identify any differences– Unmarked entries will explain difference

Reconciliation Procedure

• Step 3: Update cash journals for items captured by bank statement.

• Step 4: Deal with errors– Adjust cash journals for any errors made by entity– Notify bank of any errors in statement

• Note these errors on reconciliation until corrected.

• Step 5: Total cash journals and post to ledgers• Step 6: Prepare bank reconciliation

11

Bank rec format

Cathy’s ConsultingBank Reconciliation Statement

as at 30/6/ 2013

Balance as per bank statement Cr (or Dr) $ 000Add outstanding deposits 000

000Deduct unpresented cheques 00

0000 000

Balance as per Cash at Bank account Dr or (Cr) $ 000

EXAMPLE OF A BANK RECONCILIATION

R.ROBSON AND SONBank Reconciliation Statement

As at 31 July 2013

Balance as per bank statement 399.10 Cr

Add: Outstanding Deposit 219.40

618.50

Less: Unpresented cheques

1922 $10.00

1923 77.40

1924 22.05

1925 82.56 192.01

Balance as per Cash at Bank account 426.49 Dr

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EXAMPLE OF A BANK RECONCILIATION with bank error

Any error by the bank appears here

R.ROBSON AND SONBank Reconciliation Statement

As at 31 July 2013

Balance as per bank statement 5,923.55 Cr

Add: Outstanding Deposit 642.90

6,566.45

Less: Unpresented cheques

248 $406.50

257 174.00 (781.90)

Less: Bank error Chq 251, $77 shown as $7

(70.00)

Balance as per Cash at Bank account

$5714.55 Dr

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EXAMPLE OF A BANK RECONCILIATION with Debit

opening balanceR.ROBSON AND SON

Bank Reconciliation StatementAs at 31 July 2013

Balance as per bank statement (5923.55) DrAdd: Outstanding Deposit 642.90

(5280.65)Less: Unpresented cheques

248 $406.50257 174.00 (781.90)

Balance as per Cash at Bank account

($6062.55) Cr

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Now try Exercise 11.9Cathy’s Consulting

Bank Reconciliation Statementas at 30/6/ 2016

Balance as per bank statement Cr (or Dr) $ 000Add outstanding deposits 000

000Deduct unpresented cheques 00

0000 000

Balance as per Cash at Bank account Dr or (Cr) $ 000

16

Second part of Reconciliation process - Postings to CRJ and CPJ

CRJ Debit Credit

Date

Account Post Bank Disc all

GST Coll

Sales Acc Rec Other GST Coll

31/7

Bill Rec 125 3,000 3,000

31/7

Interest Rev 415 50.00 50.00

31/7

Dish Chq- R.Song

120 (456.00) (456.00)

2,594 (456.00) 3,050

CPJ Debit Credit

Date Account Chq No

Post Purch Acc Pay Other GST Out

Bank Disc Rec

GST Out

31/7 Bank Fees 520 40.00 40.00 31/7 Our Error

adj 9.00 9.00

9.00 40.00 49.00

THE PETTY CASH FUND

• To avoid the expense and inconvenience of writing many cheques to cover minor expenses many entities have a petty cash fund

• Establishing the fundGeneral Journal

Jan 2 Petty Cash (Asset) 100

Cash at Bank 100

(Petty cash fund established)

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THE PETTY CASH FUND

• To avoid the expense and inconvenience of writing many cheques to cover minor expenses many entities have a petty cash fund

• Establishing the fund

CPJ Debit CreditDate Account Chq

NoPost Purch Acc

PayOther GST

OutBank Disc

RecGST Out

2/1 Petty Cash

123 111 100.00 100.00

THE PETTY CASH FUND

• Making payments from the fund– Use a petty cash voucher or receipt

• Reimbursing the fund– Note that Petty Cash account is not touched

General JournalJan 31 Stationery Expense 15.22

Office Supplies Expense 12.30Postage Expense 56.47GST Outlays 8.40

Cash at Bank 92.39(Petty cash fund reimbursed)

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Now attempt the following:

• Establish the petty cash fund for the amt of $300 (Chq 432)

• Show the transactions in the CPJ (show GST)• Record the following transactions:1. Jul 7 Office supplies $99.002. Jul 18 Stationery $55.003. Jul 20 Newspapers $33.004. Jul 23 Advertising expense $44.005. Jul 28 Taxi Fare $22.00transactions 1 to 5.• Reimburse the fund after transaction 5 and increase it to

$400. (Chq 894)

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  Account Cheque No.

Post Ref.

Accts Pay

GST Outlays

Other Disc Rec

Cash at Bank

A. Petty Cash 432       300.00   300.00                 B. Stationery Exp.        

5.00 

50.00   

  Office Supplies Exp.       9.00 90.00     

Advertising Exp.       

4.00 

40.00   

  Sundry Exp.       5.00 50.00        883     23.00 230.00   253.00                 C. Petty Cash 894       100.00   100.00                 

SolutionCash Payments Journal

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  Account Cheque No.

Post Ref.

Accts Pay

GST Outlays

Other Disc Rec

Cash at Bank

A. Petty Cash 432       300.00   300.00                 B. Stationery Exp.        

5.00 

50.00   

  Office Supplies Exp.       9.00 90.00     

Advertising Exp.       

4.00 

40.00   

  Sundry Exp.       5.00 50.00        883     23.00 230.00   253.00                 C. Petty Cash 894       100.00   100.00                 

SolutionCash Payments Journal

CASH MANAGEMENT

• Principles of cash management– Reduce collection time for accounts receivable– Postpone payments to accounts payable– Keep inventory levels to a minimum– Invest surplus cash– Plan for capital expenditures

• Analysing adequacy of cash flows– Short-term cash flow adequacy ratio– Cash flow adequacy ratio