1. The document discusses internal controls over cash, including procedures for cash receipts, payments, and bank reconciliation. 2. It describes basic features of a voucher system for authorizing cash payments and reasons for differences between bank statements and company records. 3. The objectives are to understand importance of cash controls, procedures for cash receipts and payments, preparing bank reconciliations, and accounting for petty cash and presentation of cash on the balance sheet.

1. ChapterChapter 77
CashCash
Accounting, 21st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
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3. 1. Describe the nature of cash and the importance
of internal control over cash.
2. Summarize basic procedures for achieving
internal control over cash receipts.
3. Summarize basic procedures for achieving
internal control over cash payments, including
the use of a voucher system.
4. Describe the nature of a bank account and its
use in controlling cash.
ObjectivesObjectivesObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:

4. 5. Prepare a bank reconciliation and
journalize any necessary entries.
6. Account for small cash transactions
using a petty cash fund.
7. Summarize how cash is presented on
the balance sheet.
8. Compute and interpret the ratio of cash
to current liabilities.
ObjectivesObjectivesObjectivesObjectives

5. Control Over CashControl Over Cash
 Many companies need several cash
accounts to account for different cash
categories and funds.
 Most companies have multiple bank
accounts. The title for each bank account
should be: Cash in Bank—(Name of Bank)
 Preventive controls protect cash from theft
and misuse of cash.
 Detective controls are designed to detect
theft or misuse of cash and are also
preventive in nature.

6. Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash
Cash
Receipts
CASHIER’S
DEPARTMENT
ACCOUNTING
DEPARTMENT
Register
records
Mail Receipts
Remittance
advices

7. 1
ACCOUNTING
DEPARTMENT
Deposit ticket
Bank
CASHIER’S
DEPARTMENT
Deposit receipt
Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash

8. Controlling Cash ReceivedControlling Cash Received
from Cash Salesfrom Cash Sales
Controlling Cash ReceivedControlling Cash Received
from Cash Salesfrom Cash Sales
19 Cash 3 142 00
Cash Short and Over 8 00
To record cash sales and actual
cash on hand.
Sales 3 150 00
Cash sales for March 19 totaled $3,150.00 perCash sales for March 19 totaled $3,150.00 per
the cash register tape. After removing thethe cash register tape. After removing the
change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand.
Cash sales for March 19 totaled $3,150.00 perCash sales for March 19 totaled $3,150.00 per
the cash register tape. After removing thethe cash register tape. After removing the
change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand.

9. Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
Most companies’ invoices
are designed so that
customers return a portion
of the invoice, call a
remittance advice.
Most companies’ invoices
are designed so that
customers return a portion
of the invoice, call a
remittance advice.

10. Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
1. The employee who opens the mail should initially
compare the amount received with the amount on the
remittance advice.
2. The employee opening the mail stamps checks and
money orders “For Deposit Only” in the bank account
of the business.
3. All cash is sent to the Cashier’s Department where
checks and money orders are combined with receipts
from cash sales and a bank deposit ticket is prepared.

11. Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
Controlling Cash ReceivedControlling Cash Received
in the Mailin the Mail
4. The remittance advices and their summary totals are
delivered to the Accounting Department where a clerk
prepares the records of the transactions and posts them
to the customer account.
5. The stamped duplicate copy of the deposit ticket is
returned to the Accounting Department where a clerk
compares the receipt with the total amount that should
have been deposited.

12. 1.Cash controls must provide assurance that
payments are made for only authorized
transactions.
2. Cash controls should ensure that cash is used
efficiently.
3. A voucher system provides assurance that
what is being paid for was properly ordered,
received, and billed by the supplier.
Internal Control of CashInternal Control of Cash
PaymentsPayments

13. A voucher system is a set of
procedures for authorizing
and recording liabilities and
cash payments.
A voucher system is a set of
procedures for authorizing
and recording liabilities and
cash payments.
BasicBasic
Features ofFeatures of
the Voucherthe Voucher
SystemSystem
1313

14. Basic Features of theBasic Features of the
Voucher SystemVoucher System
Basic Features of theBasic Features of the
Voucher SystemVoucher System
 A voucher system normally uses vouchers.
 The system normally has a file for unpaid
vouchers and a file for paid vouchers.
 Usually prepared by the Accounting
Department after all necessary supporting
documents are received (purchase order,
supplier’s invoice, and a receiving report).
 In preparing the voucher, the accounts
payable clerk verifies the quantity, price, and
mathematical accuracy of the supporting
documents and files the paid voucher.

15. A summary received from
the bank of all account
transaction is called a
statement of account.
A summary received from
the bank of all account
transaction is called a
statement of account.

16. A bank reconciliation is a
listing of the items and amounts
that cause the cash balance
reported in the bank statement to
differ from the balance of the
cash account in the ledger.
A bank reconciliation is a
listing of the items and amounts
that cause the cash balance
reported in the bank statement to
differ from the balance of the
cash account in the ledger.

17. Reasons for Differences Between Depositor’sReasons for Differences Between Depositor’s
Records and the Bank StatementRecords and the Bank Statement
Reasons for Differences Between Depositor’sReasons for Differences Between Depositor’s
Records and the Bank StatementRecords and the Bank Statement
Outstanding checks
Deposits in transit
Service charges
Collections
Not-sufficient-funds (NSF)
checks
Errors
Outstanding checks
Deposits in transit
Service charges
Collections
Not-sufficient-funds (NSF)
checks
Errors

18. Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
1. Compare each deposit listed on the bank statement
with unrecorded deposits appearing on the preceding
period’s reconciliation and with deposit receipts.
2. Compare paid checks with outstanding checks
appearing on the preceding period’s reconciliation and
with recorded checks.
Add deposits not recorded by the bank to theAdd deposits not recorded by the bank to the
balance according to the bank statement.balance according to the bank statement.
Add deposits not recorded by the bank to theAdd deposits not recorded by the bank to the
balance according to the bank statement.balance according to the bank statement.
Deduct checks outstanding that have been paidDeduct checks outstanding that have been paid
by the bank from the balance according to theby the bank from the balance according to the
bank statement.bank statement.
Deduct checks outstanding that have been paidDeduct checks outstanding that have been paid
by the bank from the balance according to theby the bank from the balance according to the
bank statement.bank statement.
3. Compare bank credit memorandums to entries in the
journal.
Add credit memorandums that have not beenAdd credit memorandums that have not been
recorded to the balance according to therecorded to the balance according to the
depositor’s records.depositor’s records.
Add credit memorandums that have not beenAdd credit memorandums that have not been
recorded to the balance according to therecorded to the balance according to the
depositor’s records.depositor’s records.

19. Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation
4. Compare bank debit memorandums to entries
recording cash payments.
5. List any errors discovered during the preceding steps.
Deduct debit memorandums that have not beenDeduct debit memorandums that have not been
recorded from the balance according to therecorded from the balance according to the
depositor’s records.depositor’s records.
Deduct debit memorandums that have not beenDeduct debit memorandums that have not been
recorded from the balance according to therecorded from the balance according to the
depositor’s records.depositor’s records.

20. BANK
Bank’s
books
Beginning balance $3,359.78
Depositor’s
records
Beginning balance $2,549.99
Power Network prepares to reconcile the
monthly bank statement as of July 31, 2006
Power Network prepares to reconcile the
monthly bank statement as of July 31, 2006

21. A deposit of $816.20 did not
appear on the bank statement.
A deposit of $816.20 did not
appear on the bank statement.
BANK
Bank’s
books
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
$4,175.9
8
Depositor’s
records
Beginning balance $2,549.99

22. BANK
Bank’s
books
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
$4,175.9
8
Depositor’s
records
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
$2,957.9
9
The bank collected a note in the
amount of $400 and the related
interest of $8 for Power Networking
The bank collected a note in the
amount of $400 and the related
interest of $8 for Power Networking

23. A deposit of $637.02 did not appear
on the bank statement.
A deposit of $637.02 did not appear
on the bank statement.
Three checks that were written during the
period did not appear on the bank statement:
#812, $1,061; #878, $435.39, #883, $48.60.
Three checks that were written during the
period did not appear on the bank statement:
#812, $1,061; #878, $435.39, #883, $48.60.
BANK
Bank’s
books
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$4,175.9
8
Depositor’s
records
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
$2,957.9
9

24. BANK
Bank’s
books
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Depositor’s
records
Deduct check returned
because of insufficient
funds $300.00
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
$4,175.9
8
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
$2,957.9
9
The bank returned an NSF check from one of the
firm’s customers, Thomas Ivey, in the amount of
$300. This was a payment on account.
The bank returned an NSF check from one of the
firm’s customers, Thomas Ivey, in the amount of
$300. This was a payment on account.

25. Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Deduct check return
because of insufficient
funds $300.00
Bank service
charges 18.00
BANK
Bank’s
books
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
$4,175.9
8
Depositor’s
records
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
$2,957.9
9
The bank service charges totaled $18.00.The bank service charges totaled $18.00.

26. BANK
Bank’s
books
Depositor’s
records
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$4,175.9
8
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
Deduct check return
because of insufficient
funds $300.00
Bank service
charges 18.00
$2,957.9
9
Error recording
Check No. 879 9.00
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
327.00

27. BANK
Bank’s
books
Beginning balance $3,359.78
Add deposit not
recorded by bank 816.20
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
$4,175.9
8
Adjusted balance $2,630.99
Depositor’s
records
Beginning balance $2,549.99
Add note and interest
collected by bank 408.00
Deduct check return
because of insufficient
funds $300.00
Bank service
charges 18.00
$2,957.9
9
Adjusted balance $2,630.99
Error recording
Check No. 879 9.00 327

28. Now, if desired, we can
prepare a formal
statement for Power
Networking.
Now, if desired, we can
prepare a formal
statement for Power
Networking.

29. Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99
Balance per depositor’s records $2,549.99
Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned$300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Power Networking
Bank Reconciliation
July 31, 2006

30. Journal entries must be
prepared for those items that
affected the depositor’s side of
the reconciliation.
Journal entries must be
prepared for those items that
affected the depositor’s side of
the reconciliation.

31. Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99
Balance per depositor’s records $2,549.99
Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Power Networking
Bank Reconciliation
July 31, 2006

32. July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Receivable 8 00
Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation

33. Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99
Balance per depositor’s records $2,549.99
Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Power Networking
Bank Reconciliation
July 31, 2006

34. Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation
July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Receivable 8 00
30 Accounts Receivable—Thomas Ivey 300 00
Miscellaneous Administrative Exp. 18 00
Accounts Payable—Taylor Co. 9 00
Cash 327 00
NSF check, bank service
charges, and error in
recording Check no. 879.

35. Petty
Cash

36. Aug. 1 Petty Cash 100 00
Established petty cash fund.
Cash 100 00
On August 1, issued Check No. 511 for $100On August 1, issued Check No. 511 for $100
to established a petty cash fund.to established a petty cash fund.
On August 1, issued Check No. 511 for $100On August 1, issued Check No. 511 for $100
to established a petty cash fund.to established a petty cash fund.

37. Aug. 31 Office Supplies 50
00
Replenished petty cash fund.
Cash 88 00
At the end of August, the petty cash receiptsAt the end of August, the petty cash receipts
indicated expenditures for the following items:indicated expenditures for the following items:
office supplies, $28, postage (office supplies),office supplies, $28, postage (office supplies),
$22; store supplies, $35, and miscellaneous$22; store supplies, $35, and miscellaneous
administrative items, $3.administrative items, $3.
At the end of August, the petty cash receiptsAt the end of August, the petty cash receipts
indicated expenditures for the following items:indicated expenditures for the following items:
office supplies, $28, postage (office supplies),office supplies, $28, postage (office supplies),
$22; store supplies, $35, and miscellaneous$22; store supplies, $35, and miscellaneous
administrative items, $3.administrative items, $3.
Store Supplies 35 00
Miscellaneous Administrative Exp. 3 00

38. Financial Analysis and InterpretationFinancial Analysis and Interpretation
Solvency is the ability of a business to meet
its financial obligations (debts) as they are
due.
Solvency analysis focuses on the ability of
a business to pay or otherwise satisfy its
current and noncurrent liabilities.
This ability is normally assessed by
examining balance sheet relationships.

39. A. Cash and equivalents $100,000 $ 120,000
B. Current liabilities 400,000 1,500,000
Doomsday ratio A / B 0.25 0.08
Doomsday RatioDoomsday RatioDoomsday RatioDoomsday Ratio
Laettner Co. Oakley Co.
How are these ratios used?How are these ratios used?Use: To indicate the company’s ability to
meet creditors obligations in the
worst case assumption that should
the business cease to exist.
Use: To indicate the company’s ability to
meet creditors obligations in the
worst case assumption that should
the business cease to exist.
Financial Analysis and InterpretationFinancial Analysis and Interpretation

40. The EndThe End
Chapter 7Chapter 7