Lecture 6
Cash and Notes Receivable:
- Cash is an asset that is readily converted into any other type of asset.
- Cash includes funds immediately available from bank accounts, bank notes, coins and money
orders, checks, etc.
Cash Equivalents:
- Short-term investments readily convertible to cash with a minimal risk of price changes due
to interest rate movements.
Accounting for Cash:
- Cash account is used to register receiving and paying cash to/from: governments, employees,
customers, suppliers, creditors, owners, etc.
Cash in Corporations:
- Cash is generally stored on bank accounts or invested in cash equivalents.
- Stores, restaurants and other types of firms that receive cash payments from customers also
have currency stored in the point-of-sale terminals (cash registers).
Petty-Cash Fund:
- Certain (pre-decided) amount of money held in a fund, available for insignificant monetary
costs of the business.
- One specific employee is made responsible for the fund – the cash custodian.
- Organizations use an account ‘petty cash’ to register the creating and replenishment of the
fund.
- Accounts effects of payments are recorded when petty cash is replenished.
Petty-Cash Fund Replenishment:
- PC funds usually have minimum and maximum amount.
- When the fund reaches a minimum, it is replenished (money is added), usually to the
maximum amount.
- A petty-cash fund is always replenished at the end of the accounting period, regardless of the
amount of cash in the fund.
- There is no petty cash recording in the journal, only Dr. Expenses Cr. Cash
, Cash Differences:
- To ensure the amount of cash ‘in the books’ is correct, organizations use a specific account to
record unexplained differences.
o Common label – Cash Over and Short
- When cash is short, the record made is Dr. Cash + Dr. Cash Over and Short
- When cash is over, the record made is Dr. Cash + Cr. Cash Over and Short
Company Bank Accounts:
- With contemporary technology the need for petty cash funds with bank notes and coins have
reduced.
- Like individuals, organizations can have multiple bank accounts.
- Bank accounts are typically tied to accounts in the organization’s general ledger.
- Periodically, the 2 balances will have to be reconciled.
- There can be justified differences: time lags, errors (by either party), etc.
Checks:
- In the US and some other counties, the use of checks is still widespread.
- Checks are written orders signed by an account holder directing the bank to pay a specified
sum of money to a designated employee.
Internal Control of Cash:
- Cash is the most susceptible asset to fraudulent activities.
- Cash is easily concealed and transported.
- Internal control mechanisms must be established within business to prevent fraud, these
include: procedures, checks, monitoring devices and limitations of decision-making.
- These procedures are just an example of all the internal control systems.
- Designing, testing, updating and consulting on internal control procedures is one of the most
important tasks of accountants.
Internal Control:
- Methods and measures adopted by an organization to serve the following 4 general purposes:
o Safeguard assets.
o Enhance accuracy and reliability of accounting records.
o Ensure compliance with laws and regulations and incentivize employees to follow
company policies.
o Promote operational efficiency.
Safeguarding of Assets:
- Preventing theft and fraud.
- Fraud refers to dishonest acts by employees which result in personal gain through the loss to
the business (at the cost of the employer).
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Cash and Notes Receivable:
- Cash is an asset that is readily converted into any other type of asset.
- Cash includes funds immediately available from bank accounts, bank notes, coins and money
orders, checks, etc.
Cash Equivalents:
- Short-term investments readily convertible to cash with a minimal risk of price changes due
to interest rate movements.
Accounting for Cash:
- Cash account is used to register receiving and paying cash to/from: governments, employees,
customers, suppliers, creditors, owners, etc.
Cash in Corporations:
- Cash is generally stored on bank accounts or invested in cash equivalents.
- Stores, restaurants and other types of firms that receive cash payments from customers also
have currency stored in the point-of-sale terminals (cash registers).
Petty-Cash Fund:
- Certain (pre-decided) amount of money held in a fund, available for insignificant monetary
costs of the business.
- One specific employee is made responsible for the fund – the cash custodian.
- Organizations use an account ‘petty cash’ to register the creating and replenishment of the
fund.
- Accounts effects of payments are recorded when petty cash is replenished.
Petty-Cash Fund Replenishment:
- PC funds usually have minimum and maximum amount.
- When the fund reaches a minimum, it is replenished (money is added), usually to the
maximum amount.
- A petty-cash fund is always replenished at the end of the accounting period, regardless of the
amount of cash in the fund.
- There is no petty cash recording in the journal, only Dr. Expenses Cr. Cash
, Cash Differences:
- To ensure the amount of cash ‘in the books’ is correct, organizations use a specific account to
record unexplained differences.
o Common label – Cash Over and Short
- When cash is short, the record made is Dr. Cash + Dr. Cash Over and Short
- When cash is over, the record made is Dr. Cash + Cr. Cash Over and Short
Company Bank Accounts:
- With contemporary technology the need for petty cash funds with bank notes and coins have
reduced.
- Like individuals, organizations can have multiple bank accounts.
- Bank accounts are typically tied to accounts in the organization’s general ledger.
- Periodically, the 2 balances will have to be reconciled.
- There can be justified differences: time lags, errors (by either party), etc.
Checks:
- In the US and some other counties, the use of checks is still widespread.
- Checks are written orders signed by an account holder directing the bank to pay a specified
sum of money to a designated employee.
Internal Control of Cash:
- Cash is the most susceptible asset to fraudulent activities.
- Cash is easily concealed and transported.
- Internal control mechanisms must be established within business to prevent fraud, these
include: procedures, checks, monitoring devices and limitations of decision-making.
- These procedures are just an example of all the internal control systems.
- Designing, testing, updating and consulting on internal control procedures is one of the most
important tasks of accountants.
Internal Control:
- Methods and measures adopted by an organization to serve the following 4 general purposes:
o Safeguard assets.
o Enhance accuracy and reliability of accounting records.
o Ensure compliance with laws and regulations and incentivize employees to follow
company policies.
o Promote operational efficiency.
Safeguarding of Assets:
- Preventing theft and fraud.
- Fraud refers to dishonest acts by employees which result in personal gain through the loss to
the business (at the cost of the employer).
2
