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Topic 6 Cash



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  • 1. Topic 6: Accounting for Assets
  • 2. Accounting for Assets
    Current asset
    cash, inventory, debtors (account receivables), prepaid items etc.
    Land, buildings (properties), vehicles, machineries, patent, trademark, goodwill and copy right.
  • 3. Learning Objectives for Accounting for Cash
    Identify the principles of internal control.
    Explain the application of internal control principles to handling cash.
    Prepare a bank reconciliation.
    Explain the operation of a petty cash fund.
  • 4. Internal Control
    Internal control consists all the processes used by management to achieve effective and efficient operations, compliance with laws, etc.
    It includes policies to:
    safeguard assets
    enhance accuracy and reliability of accounting records
    It is an essential part of risk management.
  • 5. Principles of Internal Control
    Establishment of responsibility.
    Segregation of duties.
    Documentation procedures.
    Physical, mechanical and electronic controls.
    Independent internal verification.
  • 6. CASH
    Cash is the most desirable asset because it is readily convertible into any other asset.
    Cash consists of
    Cash on hand (notes and coins)
    Cash at bank
    Cheque accounts
    Cash equivalents (bank overdrafts, deposits on money market, 90-day bank acceptance bills)
  • 7. Internal Control of Cash
    Cash receipts
    Cash Payments
    Establishment of responsibility.
    Segregation of duties.
    Documentation procedures.
    Physical, mechanical and electronic controls.
    Independent internal verification.
  • 8. Internal Control of Cash
    1. Internal control over cash receipts
    Establishment of responsibility
    authorised personnel handle cash receipts
    Segregation of duties
    different individuals handle cash, record cash receipts and hold the cash
    Documentation procedures
    remittance advices, cash register tapes, deposit slips used
  • 9. Internal Control of Cash (cont’d)
    Physical, mechanical and electronic controls
    cash stored securely, cash banked frequently, cash registers used/direct deposits
    Independent verification
    cash receipts counted daily, comparison of receipts to bank deposits
  • 10. Internal Control of Cash (cont’d)
    2. Internal control over cash payments
    Establishment of responsibility
    authorised personnel only to sign cheques
    Segregation of duties
    separate tasks of approving and making payments, signatory not to record the payment, limit knowledge of PIN, etc.
    Documentation procedures
    pre-numbered cheques, approved invoices, account marked as paid
  • 11. Internal Control of Cash (cont’d)
    Physical mechanical and electronic controls
    blank cheques stored securely, limited access
    Independent internal verification
    compare cheques to invoices, reconcile bank statement monthly
  • 12. Bank Reconciliation
    The use of a bank contributes significantly to good internal control over cash by:
    Minimising the amount of cash that must be kept on hand.
    Providing a double record of all bank transactions:
    one by the business
    one by the bank
  • 13. Bank Reconciliation (cont’d)
    Helping a company safeguard its cash by using a bank as a depository and clearinghouse for cheques received and written.
  • 14. Bank Reconciliation (cont’d)
    Reconciling the bank account
    Lack of agreement between firm’s books and bank statement can result from:
    Time lags preventing the parties recording transactions in the same period.
    Time between when cheque is written and dated and date it is paid by the bank.
    Time between when receipts are recorded and when recorded by the bank.
    Errors by either party in recording transactions.
  • 15. Bank Reconciliation (cont’d)
    Reconciliation procedure
    Reconcile balance per books and balance per bank to their adjusted or correct balances.
    The reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
  • 16. Transactions - appear on the cash book.
    1. Unpresented cheque:
    - Cheque which has been issued but not yet presented to the bank
    Example: Seri Enterprise has issued a cheque worth RM 3,000 to Hunter Ltd (a supplier). Cash account of Seri Enterprise has been credited by RM 3,000, however Hunter Ltd has not cashed the cheque.
  • 17. Transactions - appear on the cash book……cont
    Deposit in transit:
    - a cheque has been posted to bank (through mail service), which involves a few days before the cheque is cleared.
    A cheque worth RM 2,500 was send by Seri Enterprise to the bank. The transaction was debited in the cash book but the bank has no information on this transaction as it is still in transit.
  • 18. Transactions appear in bank statement
    Dishonoured cheque (bounced cheque) or NSF (non-sufficient fund)
    Bank charges – bank commission/fees, cheque book and interest on loan
    Interest earned
    Errors in recording. E.g. A cheque RM 5,000 was issued to an employee. The amount recorded in journal was RM 500.
    Direct transfer of money
  • 19. Preparation of Bank Reconciliation Statement:  
    A summary of cash books for Seri Enterprise for the month ended 31 July 2007.
    Opening balance 1,954
    Add: Receipts 361,537
    Less: Payment 343,287
    Closing balance 20,204
    Closing balance of the bank statement is RM18,025 on 31 July 2007.
  • 20. Other Information:
    A cheque worth RM 4,135was issued to a supplier, Anjung Murni Enterprise, however was not presented to the bank. Deposit in transit worth RM 5,350 is not recorded in the bank statement.
    Seri Enterprise paid to ABC Ltd through direct debit from the bank account worth RM 150. The payment is for purchasing of a computer. The amount is not recorded in the cash book.
    A cheque issued by Seri Enterprise worth RM 119, is recorded in the cash book as RM191.
    Bank charge of RM54.
    The bank has incorrectly debited RM 832 to Seri Enterprise account.
  • 21. Method no.1:
    Cash Account (bank)
    Opening bal. 20,204 Bank charge 54
    Error 72 Computer 150
    Closing bal 20,072
    Bank Reconciliation as at 31 July 2007RM
    Balance as per bank statement 18,025
    Add: Deposit in transit5,350
    Correction by bank 832 6,182
    Less: Unpresented cheque(4,135)
    Balance as per cash book20,072
  • 22. Method no.2
    Bank Reconciliation as at 31 July 2007
    Balance as per cash book 20,204
    Error 72
    Unpresented cheque 4,135 4,207
    Bank charge 54
    Computer 150
    Deposit in transit 5,350
    Error by bank 832 (6,386)
    Balance as per Bank statement 18,025
  • 23. Method no. 3
  • 24. Procedure after the preparation of Bank Reconciliation:
  • 25. Petty Cash Fund
    A petty cash fund is a cash fund used to pay relatively small amounts.
  • 26. The Petty Cash Fund
    1. Establishing the petty cash fund
    2. Making payments from the fund
    Amount of expenditure is limited.
    Receipt for the expense is required.
    Petty cash voucher for the expense is signed by an authorised person.
    Mar 1 Petty Cash 100 Cash at Bank 100 (To establish a petty cash fund)
    Note: Sum of cash receipts and monies in fund should equal the petty cash total.
  • 27. Petty Cash Fund (cont’d)
    3. Replenishing the fund
    At times the petty cash receipts may not match the cash.
    A cash shortage (or surplus) is debited (or credited) to the Over and Short Account (an expense account).
    Mar 15 Postage Expense 44
    Supplies 38
    Miscellaneous Expense 5
    Cash at Bank 87 (To replenish petty cash fund)
  • 28. Oct. 1 A petty cash fund is established with a cheque for $130 issued to the petty cash custodian.
    Oct 31 A count of the petty cash fund disclosed the following items:
    Currency (notes) RM 8.00
    Coins 0.30
    Expenditure receipts:
    Office supplies RM 36.50
    Telephone and fax 21.30
    Postage 53.70
    Freight-out 8.80
  • 29. Oct 31 A cheque was written to reimburse the fund and increase the fund to RM 260
    Journalise the entries in October, pertaining to the petty cash fund.