Unit 6 Cash
Unit 6 Cash
Unit 6 Cash
CASH
6.1 INTRODUCTION
Since cash is the asset most likely to be used improperly by employees, exposed for embezzlement and many
business transactions either directly or indirectly affect it, it is therefore necessary to have effective control of
cash.
6. 2 MEANING OF CASH
Cash includes money on deposit in banks and other items that a bank will accept for immediate deposit. Money
on deposit in banks includes checking and saving accounts. Other items such as ordinary checks received from
customers, money orders, coins and currency and petty cash also are included as cash. Banks do not accept
postage stamps, travel advances to employees, notes receivable or post-dated checks as cash.
6.3 CHARACTERISTICS OF CASH
The following are some of the characteristics of cash:
a) Cash is used as medium of exchange
b) Cash is the most liquid asset
c) Cash is mostly affected by business transactions
d) Cash is used to measure the value of other assets
e) Cash is mostly exposed to embezzlements
6.4 MANAGEMENT OF CASH
Cash management refers to planning, controlling and accounting for cash transactions and cash balances.
Efficient management of cash is essential to the survival and success of every business organization. Managing
cash requires planning wisely so that there will not be excess cash held on hand at any point in time; or there is
no shortage of cash at any point in time to meet the business’s needs.
If a company uses a bank account, monthly statements are received from the bank showing beginning and
ending balances and transactions occurring during the month including checks paid, deposits received, and
service charges. These monthly statements (reports) received from the bank are called bank statements. Bank
statements generally are accompanied by checks paid and charged to the accounts during the month, debit and
credited memos, which inform the company about changes in the cash accounts. For a bank, the depositor’s
cash balance is a liability, the amount the bank owes to the firm. Therefore, a debit memo describes the amount
and nature of decrease is the company’s cash accounts. A credits memo indicates an increase in the cash
balance of the depositor that it has with the bank.
The most common examples that cause disparity between the two balances are:
a) Outstanding checks:
Checks issued and recorded by the company, but not yet presented to the bank for payment.
b) Deposits in transit:
Cash receipts recorded by the depositor, but not reached the bank to be included in the bank statement for the
current month.
c) Service charges:
When the depositor prepares bank reconciliation, the balances shown in the bank statement and in the
accounting records both are adjusted for any unrecorded transactions. Additional adjustments may be required
to correct any errors discovered in the bank statements or in the accounting records.
1. A deposit of Br. 410.90 made after banking hours on Jan. 31 does not appear on the bank statement.
2. Two checks issued in January have not yet been paid by the bank:
Check No. 301 Br. 110.25
Check No. 342 607.50
3. A credit memorandum was included in the bank statement, which was for proceeds from collection of a
non-interest bearing note receivable from MAN company Br. 524.74.
4. Three debit memorandums accompanied the bank statement: Fee charged by bank for handling
collection of notes receivable Br.5; a check of Br. 50.25 received from a customer, RON company, and
deposited by RAM company was charged back as NSF; and service charge by bank for the month of
January amounts to Br. 12.00.
5. Check No. 305 was issued by RAM Company for payment of telephone expense in the amount of Br. 85
but was erroneously recorded in the cash payments journal as Br. 58.
RAM Company
Bank Reconciliation
January 31, 2000
To establish a petty cash fund a check is issued to a bank. This check is cashed and the money is kept on hand
in a petty cash box. One employee is designated as custodian of the fund. The issuance of the check for
establishment is recoded by debiting petty cash account and crediting cash.
Petty cash xxxx
Cash xxxx
N.B. Petty cash account will be debited in the following two cases
When petty cash is established
When the firm decides to increase the amount of petty cash balance
Petty cash account will be edited only when the firm decides to reduce the amount of petty cash balance
COMPILED BY BIRHANU M.(MBA-F) Page 5
Petty cash account will not be affected at time of replenishing the petty cash
In a voucher system, a voucher is prepared for each expenditure and approved by the designated officials. Each
approved voucher represents liability and recorded in a voucher register, which is similar to purchases journal.
Those registered vouchers are filed according to their payment date in an unpaid vouchers file. The vouchers
and supporting documents then are sent to the treasure or other official is the finance department before issuing
checks. When the checks are signed, the paid vouchers are recorded in a check register which is similar to cash
payments journal. Those paid vouchers are filed in paid vouchers file according to their serial number for future
reference.
Once a change fund is established, there will be no change in its balance unless there is a decision by
management to increase or decrease the fund balance.
For example, assume that the total cash sales recorded during the day amounts to Br. 12,420. However, the cash
receipts in the cash register drawer (actual cash count) total Br. 12,415.
The following entry would be made to adjust the accounting records for the shortage in the cash receipts: