HA1020 Accounting Principles & Practices

Lecture 8: Part C

Internal Control & Cash Management

 Lecture 8C: What you will learn

Examine how best to reconcile – and get used to the HI Pathways method of
1 reconciliation

Learn how to take a complex corporate environment and reconciliation and

2 prepare adjustments and reconcile

Examine the utility of a petty cash fund, how it is used and why it is necessary
3 for psychological reasons that it be audited and kept updated

Finally, learn that the aged trial balance of accounts receivable should be updated
4 and executives in sales and general management kept aware of accounts greater
than 30 days.

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 Your turn

You have been supplied with the following information produced by comparing the records
of Oneup Limited with the most recent bank statement:

a. debit balance as per cash at bank account in ledger as at 30 June, 13,100.00.

b. credit balance as per bank statement as at 30 June, 17,315.90.
c. deposits not reflected on bank statement, 2,300.00.
d. unpresented cheques 30 June, 6,285.90.
e. service charge on bank statement not recorded in books, 150.00.
f. cheque for postage expense, 400.00, incorrectly recorded in books as 780.00.

Required:

1. Prepare a bank reconciliation statement as at 30 June.

2. Prepare entries in general journal form to update the records of Oneup Limited .

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 Your turn - a method…

Divide a page into two parts horizontally! Put in the following headers.

Cash balance as per bank statement…

Ending cash balance as per company records…

Ask: “Who knows 1st” ? The 2nd person (who does not know) will be the
person making the adjustment.

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 Your turn - a method…

OK, you have outstanding deposits which you have received from clients and
unpresented cheques which you have written to suppliers. How do they impact?
Which was the “2nd person/organization to know”?

Cash balance as per bank statement…

Add or deduct? outstanding deposit –see “C” previous slide

Add or deduct? unpresented cheques – see “D” previous slide

Ending cash balance as per company records…

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 Your turn - a method…

So, add in the outstanding deposits and unpresented

cheques to the bank statement because the bank was the
“2nd person to know”!

Cash balance as per bank statement…

Add: outstanding deposit

Less: unpresented cheques

Ending cash balance as per company records…

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 Your turn - a method…

Add or deduct any corrections. And deduct any bank

charges from company records as company “did not
know”, but the bank did.

Cash balance as per bank statement…

Add: outstanding deposit

Less: unpresented cheques

Ending cash balance as per company records…

Add/Deduct any errors

Deduct: bank charges

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 Your turn – bank reconciliation

OneUp Limited
Bank reconciliation statement at 30 June

Balance as per bank statement 17 315.90 Cr

Add: Outstanding deposit 2 300.00
19 615.90
Less: Unpresented cheques 6 285.90
Adjusted cash balance at bank 13 330.00 Cr

Ending balance per company records 13 100.00 Dr

Add: Correction – cheque for $400 incorrectly
recorded as $780 380.00
13 480.00
Deduct: Bank charges 150.00
Adjusted balance as per cash at bank account 13 330.00 Dr

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 Your turn - final adjustments

Adjustments for:
General journal

June 30 Bank charges 150 1. Bank charge expense

Cash at bank 150 150.00
2. Correction of postage
Cash at bank 380
Postage 380
expense error 380.00
expense

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 Petty cash is a small fund…

Petty cash is a small fund, usually ranging from 200 - 400 which is
maintained, usually by a junior administration person for the purpose of
paying for small purchases.

Used for taxi fares, milk, coffee, etc. possibly for postage stamps (if not
generally used) and any other occasional small purchase.

The amount held is called a “float” and once it is reduced to a certain level,
it is replenished.

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 Establishing the fund

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 Reimbursing the petty cash fund

Reimbursing the fund

Jan 31 Stationery Expense 15.20
Office Supplies Expense 12.30
Postage Expense 56.47
VAT Outlays 8.40
Cash at Bank 92.39
(Petty cash fund reimbursement)

If special journals this entry would be recorded in the

cash payments journal

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 And, getting the receipts to verify…

It can be seen from the previous slide that an amount of 92.39 was
reimbursed back into the PC fund

Dockets/receipts to this amount must be retained to show where the

expenditure was applied and to ensure the integrity of the fund

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 Cash budgeting

Need for cash budgeting

Projection of anticipated future receipts and payments

Non-cash items excluded

Will ensure:

1. Entity can meet commitments and maintain credit standing

2. Assessment of expenditure
3. Borrowings (and interest) minimised
4. Surplus funds utilised

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 Cash budgeting

CITY ENTERPRISES
Cash Budget
for 2 months ending 31 December 2012
November December
Cash at bank, beginning of month 800 6 614
Expected cash collections from sales:
Cash 36 300 38 500
Credit 34 320 36 080
Total cash from sales 70 620 74 580
Total cash available 71 420 81 194
Expected cash payments:
Purchases 36 652 38 808
Wages 16 000 16 000
Rent 4 620 4 620
Advertising 3 300 4 400
Purchase of printer 900
VAT payable to HM Tax 2 344 2 258
T Duncan, drawings 900 900
Total expected payments 64 806 66 986
Cash at bank, end of month 6 614 14 208

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 Cash budgeting

Most businesses produce a cash budget for a twelve-month period.

This enables them to determine if/when they may have a cash surplus or a
cash shortfall, what decisions they can decide what action needs/can be
taken in a timely manner.

E.g. if they can see a possible shortfall, they may be able to offset that with
a short-term borrowing such as a bank overdraft.

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 Cash management

The final area we look at is cash management:

Managing the inflows and outflows of cash is vitally important.

Being profitable does not always mean that a business is in a
good financial position.

There are a number of considerations for good cash

management (next slide)

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 Cash management

Principles of cash management

1. Revenue collection time for accounts receivable
2. Postpone payments to accounts payable (not always a good
strategy)
3. Keep inventory levels to a minimum
4. Invest surplus cash
5. Plan for capital expenditures

Analysing adequacy of cash flows

1. Short-term cash flow adequacy ratio
2. Cash flow adequacy ratio

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 Revenue collection time for accounts receivable.

This means keeping track of debtors, ensuring that they adhere to credit terms.

There should be strict credit terms and conditions such as:

1. 30-day terms payment expectation.

2. 45+ days, suspension of credit facility, after discussion with Head of Sales.
3. 60+ days, then credit facility closed, and client referred to a collection
agency, after discussion with Head of Sales.

Also consider discount incentives for early payment.

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 Summary: What have you learned?

We examined how best to reconcile the bank and use the HI Pathways
1 method of reconciliation

Learned that the aged trial balance of accounts receivable should be updated and
2 executives in sales and general management kept aware of accounts greater than
30 days.
Examined the utility of a petty cash fund, how it is used and why it is necessary
3 for psychological reasons that it be audited and kept updated

Learned how to take a complex corporate environment and reconciliation

4 and prepare adjustments and reconcile

Holmes Institute
Applied Business Statistics for Managers
Pathways