Chapter Outline
Teaching Notes
3. Cash Paid to Reimburse Employees (Petty Cash)
a. Petty cash fund—A system used to reimburse
employees for expenditures they have made on behalf
of the organization.
i. Acts as a control by establishing a limited amount
of cash to use for specific types of expenses.
ii. Rather than transfer funds from a general bank
account to another special account at the bank, the
company removes cash from its general bank
account to hold at its premises in a locked cash box
b. The company’s petty cash custodian is responsible for
operating the petty cash fund; he or she should be
supervised and the petty cash fund should be subject
to surprise audits.
The “Spotlight on Controls”
feature addresses the use of
Pcards for small dollar
transactions
III. Cash Reporting
The balance in a company’s cash records usually differs from
the balance in the bank’s records for a variety of valid reasons
LO 5-4 Perform the key control of reconciling cash to bank statements.
A. Bank Statement
1. Bank reconciliation––An internal report prepared to
verify the accuracy of both the bank statement and the
cash accounts of a business or individual.
2. Checks cleared—The payee presents the check to a
financial institution, which contacts the check writer’s
bank, which in turn withdraws the amount of the check
from the check writer’s account and reports it as a
deduction on the bank statement; the check has then
cleared the bank.
A bank statement is
illustrated in Exhibit 5.7
3. Deposits made—Deposits are listed on the bank
statement in the order in which the bank processes them.
4. Other transactions—The balance in a bank account can
change for a variety of other reasons.
a. The bank statement is presented from the bank’s point
of view; the amounts in a company’s bank account are
liabilities to the bank.
b. Increases are reported as credits on the bank
statement.
c. Amounts that are removed from a bank account are
reported as debits on the bank statement.
B. Bank Reconciliation
1. Company’s records can differ from bank’s statement of
account for two basic reasons:
Reconciling differences are
listed in Exhibit 5.8
a. The company has recorded some items that the bank
doesn’t know about at the time it prepares the
statement of account.
b. The bank has recorded some items that the company
doesn’t know about until the bank statement arrives.
Chapter Outline
Teaching Notes
2. Causes of differences:
a. Bank errors—If you discover a bank error, you’ll need
to ask the bank to correct its records, but you should
not change yours.
b. Time lags—Common:
i. Deposit in transit—Time lag occurs when you
make a deposit after the bank’s normal business
hours. You know you’ve made the deposit, but
your bank doesn’t know until it processes the
deposit the next day.
ii. Outstanding check—Occurs when you write and
mail a check to a company, but your bank doesn’t
find out about it until that company deposits the
check in its own bank, which then notifies your
bank.
c. Interest deposited—You probably do not know the
amount of interest until you read your bank statement.
d. Electronic funds transfer (EFT)—Occasionally funds
may be transferred into or out of your account without
your knowledge.
e. Service charges—Amounts the bank charges you for
processing your transactions.
f. NSF (not sufficient funds) checks––Another name
for bounced checks; they arrive when the check writer
(your customer) does not have sufficient funds to
cover the amount of the check.
i. Because the bank increased your account when
you first deposited the check, the bank will
decrease your account when it discovers the
deposit was not valid.
ii. You will need to reduce the Cash balance by the
amount of these bounced checks (plus any
additional bank charges), and you’ll have to try to
collect the amount from the check writer.
g. Your errors—These are mistakes that you’ve made or
amounts that you haven’t yet recorded in your
checkbook.
3. Bank Reconciliation Illustrated
Illustrated in Exhibit 5.9
a. To prepare the bank reconciliation, the entries in the
Cash account are compared to the bank statement with
the following goals:
✓ Supplemental Enrichment
Activity (Activity) #1
✓ Activity #2
i. Identify the deposits in transit.
ii. Identify the outstanding checks.
iii. Record other transactions on the bank statement
and correct your errors.
Chapter Outline
Teaching Notes
b. Journal entries that will bring the Cash account to that
balance are then prepared and recorded.
i. Entries on the Bank Statement side of the bank
reconciliation do not need to be adjusted because
they will work out automatically when the bank
processes them next month.
The “Spotlight on Controls”
ii. Only the items on the Company’s Books side of
the bank reconciliation need to be recorded in the
company’s records.
feature addresses frauds
committed by “trustworthy”
employees.
LO 5-5 Explain the reporting of cash.
C. Reporting Cash—Cash, as reported on the balance sheet,
includes: cash deposited with banks, petty cash on hand, and
cash equivalents.
1. Cash––Money or any instrument that banks will accept
for deposit and immediate credit to a company’s account,
such as a check, money order, or bank draft.
2. Cash equivalents––Short-term, highly liquid investments
purchased within three months of maturity; equivalent to
cash because they are both readily convertible to known
amounts of cash and so near to maturity that there is little
risk their value will change.
D. Restricted cash––Not available for general use but rather
restricted for a specific purpose.
1. Restricted cash must be reported separately on the
balance sheet.
2. Classification on balance sheet:
a. Restricted cash that is expected to be used up within a
year would be classified as a current asset.
b. Restricted cash that is not expected to be used up
within a year would be classified as a noncurrent asset.
III. Petty Cash Systems
LO 5–S1 Describe the operations of petty cash systems.
A. A petty cash system involves three steps:
1. Putting money into petty cash to establish a fund.
a. The company establishes the fund by writing a
check to the petty cash custodian; the amount of
the check equals the total estimated payments to be
made from the fund over a fairly short period.
b. Entry includes debit to Petty Cash and credit to
Cash.
Chapter Outline
Teaching Notes
2. Paying money out to reimburse others.
a. The custodian determines when to make payments
out of the cash box following policies established
by the company’s managers.
b. The custodian attaches any related documents to
the petty cash receipt and places it in the cash box.
c. Payments out of petty cash are not recorded in the
accounting system until the fund is replenished.
3. Putting money back into petty cash to replenish the
fund.
a. When the amount of cash in the cash box runs low,
the petty cash custodian asks that the fund be
replenished.
b. The amount of the check is recorded as a reduction
in Cash (with a credit), and the various items that
were paid are recorded in their corresponding
accounts (with debits).
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 5–1
Use Handout 5–1 for an in-class activity designed to review the preparation of a bank reconciliation.
The solution follows the handout master.
2. Handout 5–2
Use Handout 5–2 for a second in-class activity designed to review the preparation of a bank
reconciliation. The solution follows the handout master.
HANDOUT 5–1
BANK RECONCILIATION
Information from the records and bank statement and of Matrix, Inc. as of July 31, 2016 is set forth below
Cash balance per bank, July 31, 2016
$9,610
Cash balance per general ledger, July 31, 2016
7,430
Outstanding checks at July 31, 2016
2,417
Check mailed to the bank for deposit that had not reached the bank by July 31, 2016
500
NSF check (from a customer for a payment on account) returned by bank
281
July interest earned per bank statement
30
Check no. 781 for supplies expense cleared the bank for $240, but was erroneously
recorded in the books at $268
Deposit by Acme Company erroneously credited by the bank to our account
486
Part A
Prepare the bank reconciliation for Matrix, Inc.
HANDOUT 5–1, continued
Part B
Prepare any journal entries that should be made as a result of the bank reconciliation.
Date
Debit
Credit