Training, Teaching and Learning Materials(TTLM)

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Unit of Competence Establish and Maintain a Cash Accounting

System
Module Title Establishing and Maintaining a Cash Accounting System

LG Code: EIS ABS4 13 0812

TTLM Code: EIS ABS4M 13 0812

INTRODUCTION
Welcome to the module “Establish and Maintain a Cash
Accounting System”. This learner’s guide was prepared to help you achieve the required
competence in “Accounts and Budget Support Level IV ”. This will be the source of
information for you to acquire knowledge attitude and skills in this particular occupation with
minimum supervision or help from your trainer.

Summary of Learning Outcomes

After completing this learning guide, you should be able to:

Lo1:- . Identify relevant information and establish a chart of accounts

Lo2:- . Analyse and verify source documents
Lo3:- Process receipts and payments
Lo4:- . Set up and maintain a petty cash system
Lo5:- Process and reconcile credit cards
Lo6:- Manage bank reconciliations and prepare and produce reports
How to Use this TTLM

o Read through the Learning Guide carefully. It is divided into sections that cover
all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of each section
to check your progress
o Read and make sure to Practice the activities in the Operation Sheets. Ask your
trainer to show you the correct way to do things or talk to more experienced
person for guidance.

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o When you are ready, ask your trainer for institutional assessment and provide you
with feedback from your performance.

Lo1:- . Identify relevant information and establish a

chart of accounts
CASH
Chapter Objectives: At the end of the course the student is expected to understand:

 Controlling mechanism of cash

 Internal control of cash receipts
 Internal control of cash payments
 Bank reconciliation statements
 Voucher systems and petty cash
Introduction
Cash is any medium of exchange that a bank will accept at face value. It includes bank deposits,
currency, checks, bank drafts and money orders. Cash is the most liquid asset in comparison to
other assets. Because of the easy with which money can be transferred, cash is the asset most
likely to be diverted and used improperly by employees. Moreover, money transactions either
directly or indirectly affect the receipt or payment of cash. It is, therefore, necessary that cash be
effectively safeguarded by special control.
The bank account as mechanism for controlling of cash
One of the major devices for maintaining control over cash is the bank account. To get the best
benefit from a bank account all cash received must be deposited in the bank and all payment
must be made by checks drawn on the bank or from special cash funds. When such a system is
followed, there is a double record of cash, one maintaining by the business and the other by the
Bank
Compensating balance:- in some cases, a bank may require a business to maintain in a bank
account a minimum cash balance. This requirement is generally imposed by the bank as part of
aloan agreement or line of credit which is an amount the bank is willing to lend. This minimum
balance that has to be maintained in a bank is called compensating balance
The forms used by a business in connection with a bank account are: signature card, deposit
ticket, checks and record of checks drawn.

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1. Signature card: - at the time an account is opened, an identifying number is assigned to

the account, and signature are must be signed by each person authorized to sign checks
drawn on account.
2. Deposit ticket: The details of a deposit are listed by the depositor on a printed form
supplied by a bank. Deposit ticket may be prepared in duplicating, in which case the copy
is stamped or initialed by the bank’s teller and given to the depositor as a receipt. This
method gives the depositor written proof of the date and the total amount of the
deposit.
3. Check: - A check is a written instrument signed by the depositor, ordering the bank to
pay a certain sum of money to the order of the designated person. There are three
parties to a check
a) The drawer:- the drawer is the one who signs the check ordering the bank to pay
cash from that person’s account or the account of a business.
b) The drawee:- the drawee is the bank on which the check is drawn
c) The payee:- the payee is the one to whose order the check is drawn. It is a
person or a business to whom the bank is ordered to pay the cash.
When checks are issued to pay bills, they are recorded as credits to cash on the day issued even
though they are not presented to the drawers’ bank until some later time. More over , when
checks are received from customers, they are recorded as debits to cash, on the assumption
that the customer has enough money on deposit.
4. Records of checks drawn:- a memorandum record of the basic details of a check should
be prepared at the time the check is written. The record may be a stub from which the
check is detached or it may be a small booklet designed to be kept with the check forms.
Each type of record also provides spaces for recording deposits and the current bank
balance. Checks issued to a creditor on account are usually accompanied by a
notification of the specific invoice that is being paid. The purpose of such notification
some times called a remittance advice. It helps to make sure that proper credit is
recorded in the accounts of the creditor. Mistakes are less likely to happen and the
possible need for exchange of correspondence is reduced.
Internal control of cash receipts
Department stores and other retail business as ordinarily receive cash from two main sources.
1. Over the counter from cash customers
2. By mail from charge customer making payment on account
At the end of the business day, each sales check counts the cash in the assigned cash drawer
and records the amount on a memorandum from.

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An employee from the cashiers department remove the cash register taper on which total
receipts were recorded from each cash drawer, counts the cash, compares the total with the
memorandum and the tape noting any difference. The cash is then taken to the casher ‘s office
and the tapes and memorandum forms are forwarded to the accounting department, where
they become the basis for entries in the cash receipts journal
People who open incoming mail compare the amount of cash received with the amount shown
on the accompanying remittance advice (remittance notice) to be certain that the two amounts
agree. If there is no separate remittance advice, an employee prepares one on a form designed
for such use. All cash received, usually in the form of checks and money orders, is sent to the
cashiers department where it is combined with the receipts from cash sales a deposit ticket is
prepared.
The remittance advices are delivered to the accounting department, where they become the
basis for entries in the cash receipts journal and for posting to the customers account in the
subsidiary ledger
Petty Cash
As previously emphasized, adequate internal control over cash requires that all cash received be
deposited in the bank and all disbursements be made by check. How ever, every business finds it
convenient to have a small amount of cash on hand with which to make small minnor
expenditures.
In most business there is a frequent need for the payment of relatively small amounts, such as for
postage due , for transportation charges or for the purchase of urgently needed supplies at a near
by retail store.
Payment by check in such cases would result in delay, annoyance, and excessive expense of
maintaining the records. Because these small payments may occur frequently and therefore,
amounts to a considerable total sum, it is desirable to retain close control over such payments.
This may be done by maintaining a special cash fund called petty cash.
In establishing the petty cash fund, the first step is to estimate the amount of cash needed for
disbursement of relatively small amounts during a certain period, such as a week or a month
If a voucher system is used, a voucher is then prepared for this amount and it is recorded in the
voucher register as a debit to petty cash and a credit to account payable i.e.
Petty cash ---------------------xx
Account payable -----------------------xx
However, the check drawn to pay the voucher is recorded in the check register as a debit to
account payable and credit to cash in bank i.e.
Account payable ------------------xx
Cash in bank--------------------------------xx

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The money obtained from cashing the check is placed in the custody of a specific employee
(cashier) who is authorized to disburse the fund according to restrictions as to maximum amount
and purpose.
When the amount of money in the petty cash fund is reduced to the predetermined minimum
amount, the fund is replenished. Replenished the petty cash fund restores it to its original
amount. If the voucher system is used in replenishing the petty cash fund, the accounts debited
on the replenishing voucher are those indicated by a summary of expenditures. The voucher is
then recorded in the voucher register as debit to various expenses and asset accounts and
accredits to account payable. If the petty cash fund is used for the purchase of office supplies,
utility expenses, store supplies etc, the entry will be:

Office supplies xxx

Store supplies xxx
Utility expenses xxx
Account payable xxx
Because disbursements are not recorded in the accounts until the fund is replenished, petty cash
funds and other special funds that operate in like a manner should always be replenished at the
end of the accounting period.
The following example helps you to understand the recording system while the petty cash fund is
established and replenished.
Assume that a petty cash fund of Br. 200 was established on June 1 and that payment total
Br.174.95 was made from the fund during the next two weeks. Since the Br. 200 originally
placed in the fund is nearly exhausted, the fund therefore should be replenished. To replenish
petty cash fund means to replace the amount of money that has been spent, thus, restoring the
fund to its original amount. A check is drawn payable to petty cash for the exact amount of the
expenditure, Br. 174, 95. This check is cashed and the money placed in the petty cash box.
The several entries to record establishment of the petty cash fund is shown as follows.

June1 Petty cash 200

Cash at bank 200

The journal entry to record replenishment of petty cash fund is also shown as follows (assume
the petty cash is spent to purchase office supplies, for transportation, portage and other
miscellaneous expenses), therefore

Office supplies expense 80.60

June 15 Transportation - 16.00
Postage expense 45.25

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Miscellaneous expense 33.10

Cash 174.9
Note that expense accounts are debited each time fund is replenished and the petty cash
account is debited only when the fund is first established. The petty cash fund is usually
replenished at the end of accounting period, even though the fund is not running low.

Lo2:- . Analyse and verify source documents

4.2.2. Cash short and over
It is a usual practice that the amount of cash actually received during a day does not agree with
the record of cash receipts. Whenever there is a difference between the record and the actual
cash and no error can be found in the record, it must be assumed that the mistake occurred in
making change. The cash shortage and overage is recorded in an account entitled cash short
and over. A common method for handling such mistakes is to include in the cash receipts
journal,
- As a debit to cash short and over account if cash is found to be short
- As a credit to cash short and over account if cash is found to be over

* If the amount of cash actually received is greater than the amount of cash shown in the
record, the difference is said to be cash overage. If the amount of cash actually recorded is less
than the amount of cash shown - In the record, the deference is said to be cash shortage

For example, if the actual cash received from daily sales is less the amount indicated by the cash
registered totally, the entry in the cash journal would be:
Cash in bank xx
Cash short and over xx
Sales xx
If, however, the actual cash received from daily sales is grater than the amount indicated by the
cash registered totally, the entry in the cash journal would be:
Cash in bank xx
Sales xx
Cash short & over xxx
If cash overage is found at the end of the fiscal period, it is revenue and may be listed in the
other income section of the income statement. However, if cash shortage is found at the end of

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the period, it is an expense and may be included in the miscellaneous administrative expense
on the income statement.
The following example helps you to understand how to maintain a record when ever cash short
and over is occurred.
Example 1 .If the actual cash received from cash sales is Br. 4,577.60 for the day. However the
amount indicated by the cash register is Br. 4,550.76. Therefore, the actual cash received is less
than the amount indicated by the cash register by the amount of Br. 3.16
Cash ---------------------------------4577.60
Cash short and over 3.16
Sales 4580.76
Example 2 If the actual cash received from cash sales for the day is Br. 5000 and the amount
indicated by the cash registered is Br. 4,850 there for ,the actual cash received is greater than
the amount in the cash registered by Br. 150. The entry to show the above fact is :
Cash 5,000
Sales 4,850
Cash short and over 150
4.2.3 Bank statement
Banks usually maintain an original and a copy of all checking account transactions. When this is
done the original becomes the statement of account that is mailed to the depositor, usually
once each month. The bank statement shows the beginning balance, checks and the debits
(deduction by the bank), deposits and other credits (added by the bank) and the ending
balance. The depositor’s checks received by the bank during the period may accompany the
bank statement, arranged in the order of payment. The paid or canceled checks are perforated
or stamped “paid” together with the date of payment.
4.2.4 Bank reconciliation
Bank reconciliation is a schedule explaining any difference between the balance shown in the
bank statement and the balance shown in the depositor’s account records. Remember that both
the bank and the depositor are maintaining independent records of the deposits, the checks
and the current balance of the bank account each month the depositor should prepare a bank
reconciliation to verify that these independent sets of records are in agreement. Therefore, the
process of bringing the bank balance and the depositor’s balance in to agreement is called Bank
reconciliation
The balance shown in a monthly bank statement seldom equals the balance appearing in the
depositor’s accounting records. Certain transactions recorded by the depositor may not have
been recorded by the bank. The most common examples are:
1. Outstanding checks: are checks issued and recorded by the company but not yet
presented to the bank for payment.

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2. Deposit in transit: cash receipts recorded by the depositor, but which reached the bank
too late to be included in the bank statement for the current month.
In addition, certain transactions appearing in the bank statement may not have been recorded
by the depositor. For example:
1. Service charges: banks often charge a fee for handling small accounts, the amount of this
charge usually depends up on both the average balance of the account and the number
of checks paid during the month.
2. Charges for depositing sufficient fund: when checks are deposited, the bank increases
(credits) the depositor’s account. On occasion, one of these checks may prove to be un
collectible, because the maker of the check does not have sufficient funds in his or her
account. In such case, the bank will reduce the depositor’s account by the amount of this
un collectible item and return the check of the depositor marked “NSF”
The depositor should view an NSF check as an account receivable from the maker of the
check, not as cash. The accounting entry required consists of a debit to the account
receivable from the customer and a credit to cash.
3. Credit for interest earned: most banks offer some checking accounts which earn
interest. At month end, this interest is credited to the depositor’s account and reported
on the bank statement.
4. Miscellaneous bank charges and credits: banks charge for services such as printing
checks, handling collections of notes receivable, and processing Non sufficient fund
checks the bank deducts these changes from the depositors account and notifies the
depositor by including a debit memorandum in the monthly bank statement
If the bank collects a note receivable on behalf of the depositor, it adds the money to the
depositor’s account and issues accredit memorandum. In bank reconciliation, the balances
shown in the bank statement and in the accounting records both are adjusted for any un
recorded transaction. Additional adjustments may be required to correct any errors discovered
in the bank statement or in the accounting records.
Generally, to prepare a bank reconciliation, we determine those items which make up the
difference between the ending balance per the bank statement and the balance of cash
according to the depositor’s records. By listing and studying these reconciling items we can
determine the correct figure for cash owned.
Example 1
The July bank statement sent by the bank to ABC company shows a balance of cash on deposit
at July 31 of Br.5000.17. Assume that on July 31,assum the on July 31, ABC’s ledger shows a
bank balance of Br. 4, 262. 83.

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1. A deposit of Br 410. 90 made after banking hours and doesn’t appear in the bank
statement
2. For checks issued in July have not yet been paid by the bank (outstanding checks).
Theses checks are:

Check No date amount

801 June 15 Br. 100,00

888 July 24 Br. 10.25

890 July 27 Br. 402.50

891 July 30 Br. 205.00

3. Proceeds from collection of anon – interest bearing note receivable from David. ABC
company had left this note with the banks collection department.
4. Br. 24.75 interest earned on average account balance during July
5. Br. 5,00 fee charged by bank for handling collection of note receivable
6. Br. 50.25 check from customer John deposited by ABC company charged bank as Non
sufficient fund (NSF)
7. Br. 12.00 service charged by bank for the month of July.
8. Check number 875 was issued July 20 in the amount of Br 85 but was erroneously
recorded in the cash payment Journal as Br 58 for payment of telephone expense

ABC Company
Bank reconciliation
July 31, 2001

Balance per bank statement July 31, 2001 -----------------Br. 5000. 17

Add. Deposit in transit-------------------------------------------- 410.90
Br 5, 411.07
Deduct: outstanding checks
Check No 801 Br 1,000
No 888 10.25
No 890 402, 50

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No 891 205, 00 (717.75)

Adjusted cash balance ---------------------------------------- Br 4, 693.32
Balance per depositor’s record July 31, 2001 ----------------- 4,263.83
Add. Notes receivable collected for us by bank Br 500, 00
Interest earned during July ---------------------- 24.74 524.74
Deduct: collection fee------------------------------- -Br. 5,00
NSF Br. 50.25
Bank service change 12.00

Error on check stub No 875 27.00

Br.(94.25)

Adjusted cash balance Br. 4, 693.32

Lo3:- Process receipts and payments

Up dating the accounting records

The last step in reconciling a bank statement is to up date the depositor’s accounting record for
any unrecorded cash transaction brought to light. In the bank reconciliation, every adjustment
to the balance per depositor’s record is a cash receipt or a cash payment that has not been
recorded in the depositor’s accounts. There fore, each of theses items should be recorded.
* To record collection of note receivable from Devid collected by bank and interest earned by
bank:
Cash ------------------------------524.74
Notes receivable ------------------- 500,00
Interest Revenue ------------------- 24.75
* To record bank service charges, to reclassify NSF checks from customer as account receivable
and to correct understatement of cash payment for telephone expenses.
Bank service changes 17.00
Account receivable 50.25
Telephone expense 27.00
Cash ----------- --------- 94.25

Importance of bank reconciliation

The bank reconciliation is an important part of the system of internal control, because
1. It is a means of comparing recorded cash, as shown by the accounting records, with the
amount of cash reported by the bank.

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2. It provide a means for finding and correcting errors and irregularities

In order to have a greater internal control, the bank reconciliation has to be prepared by
employees who do not take part in recording cash transactions with the bank. Proper separation
of duties is important to prevent cash from embezzlement.
4.3. Internal control of cash payment
It is usually practice for business enterprise to require that every payment of cash be evidenced
by a check signed by a designated official. As an additional control, some firms required two
signatures on all checks or only on checks which are larger than a certain amount. When an
owner of a business has personal knowledge of all goods and serves purchased, the owner may
sign checks; with the assurance that the creditors have followed the terms of their contracts and
that the exact amount of the obligation is being paid. Disbursing officials are seldom able to
have such a complete knowledge of affairs.
Most enterprises usually divided responsibility of issuing purchase orders inspecting goods
received and verifying contractual and arithmetical details of in voices. It is desirable, therefore,
to coordinate these related activities and to ink them with the final issuance of checks to
creditors. One of the best systems used for this purpose is the voucher system.

Lo4:- . Set up and maintain a petty cash system

A voucher system
A voucher system is made up of records, methods, and procedures used in proving and
recording liabilities and in making and recording cash payments. A voucher system uses (1)
vouchers, (2) a voucher register, (3) a file for unpaid vouchers, (4) a check register, and (5) a file
for paid vouchers. As in all areas of accounting systems and internal controls, many differences
in detail are possible. The discussion that follows refers to a medium-size merchandising
enterprise with separate departments for purchasing, receiving, accounting, and disbursing.
Vouchers: The term voucher is widely used in accounting. In a general sense, it means any
document that serves as proof of authority to pay cash, such as an invoice approved for
payment, or as evidence that cash has been paid, such as a canceled check. The term has a
narrower meaning when applied to the voucher system: a voucher is a special form on which is
recorded relevant data about a liability and the details of its payment.

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An important characteristic of the voucher system is the requirement that a voucher be

prepared for each expenditures. In fact, a check may not be issued except in payment of a
properly authorized voucher. Vouchers may be paid immediately after they are prepared or at a
later date, depending upon the circumstances and the credit terms.
Voucher register: - after approval by the designated official, each voucher is recorded in a
journal known as a voucher register. When a voucher is paid, the date of payment and the
number of the check are inserted in the proper columns in the voucher register. These notations
provide a ready means of determining at any time the amount of an individual unpaid voucher
or of the total amount of unpaid vouchers.
Unpaid voucher file: After a voucher has been recorded in the voucher register, it is filed in an
unpaid voucher file, where it remains until it is paid. The amount due on each voucher
represents the credit balance of an account payable, and the voucher itself is like an individual
account in a subsidiary accounts payable ledge. Accordingly, a separate subsidiary ledger is not
needed.
All voucher systems include some way to assure payment with in the discount period or on the
last day of the credit period. A simple but effective method is to file each voucher in the unpaid
voucher file according to the earliest date that consideration should be given to its payment.
The file may be made up of a group of folders and numbered. Such a system brings to the
attention of the disbursing official the vouchers that are to be paid on each day. It also provides
management with a convenient means of forecasting the amount of cash needed to meet
maturing obligation.
When a voucher is to be paid, it is removed from the unpaid voucher file and a check is issued in
payment. The date, the number, and the amount of the check are listed on the back, of the
voucher for use in recording the payment in the check register. Paid vouchers and the
supporting documents are often run through a canceling machine to prevent accidental or
international reuse.
Check register: The payment of a voucher is recorded in a check register. The check register is a
modified form of the cash payments journal and is so called because it is a complete record of
all checks. It is common to record all checks in the check register in sequential order, including
occasional checks that are voided because of an error in their preparation.
Paid voucher fill: After payment, vouchers are usually filed in numerical order in a paid voucher
file. They are then readily available for examination by employees or independent auditors
needing information about certain expenditure. Eventually the paid vouchers are destroyed
according to the firm’s policies concerning the retention of records.

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Individual Assignment
1. The bank statement for XYZ Company for April 30 indicates a balance of Br. 10,443.11. The
XYZ Company employs the voucher system in controlling expenditures and disbursements.
All cash receipts are deposited each evening in a night depository, after banking hours. The
accounting records indicate the following summary data for cash receipts and
disbursements for April
Cash in bank account
Balance as of April 1……………………..Br.5, 143.50
Cash receipts journal
Total cash receipts for April………………Br.28, 971.60
Check register
Total amount of checks issued in April……Br.26, 060.85
Comparison of the bank statement and the accompanying canceled checks and memorandums
with the records revealed the following reconciling items:
a. The bank had collected for XYZ Company Br. 912 on a note left for collection. The
face of the note was Br. 900
b. A deposit of Br. 1,852.21, representing receipts of April 30, had been made too
late to appear on the bank statement.
c. Checks outstanding totaled Br. 3,265.27
d. A check drawn for Br. 79 had been erroneously charged by the bank as Br.97
e. A check for Br. 10 returned with the statement had been recorded in the check
register as Br. 100. The check was for the payment of an obligation to Davis
equipment company for the purchase of office supplies on account
f. Bank service charges for April amounted to Br.8.20
Instruction:
• Prepare a bank reconciliation for April
• Journalize the entries that should be made by XYZ company

2. The following data are accumulated for use in reconciling the bank accounts of Mega
Company for June.
A. Balance per bank statement at June 30, Br. 7929.50
B. Balance per depositor’s record at June 30, Br. 6017.05
C. Checks outstanding Br. 2510.40

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D. A checks for Br. 230 in payment of a voucher was erroneously recorded in the
check registered as Br. 320
E. Deposit in transit, not recorded by bank, Br. 671.25
F. Bank debit memorandum for service charges, Br. 16.70
INSTRUCTIONS:
A. Prepared a bank reconciliation
B. Prepared all necessary entries in a general journal
Group Assignment
1. What is meant by cash? Why is cash said to be the most liquid assets?
2. Distinguish between the drawers and the payee of a check?
3. What is the purpose of preparing bank reconciliation?
4. Identify each of the following reconciling items as:
i) An addition to the balance per bank statement
ii) A deduction from the balance per bank statement
iii) An addition to the balance per depositor’s record
iv) A deduction from the balance per depositor’s record
5. The combined cash counts of all cash registers at the close of a business is
Br. 3.50 more than the cash sales indicated by the cash registered tapes
a) In what account is the cash overage recorded?
b) Are cash overages debited or credited to this account?
6. What is meant by the term voucher as applied to the voucher system?
7. What is meant by the term petty cash? Distinguish between establishment and
replenishments of petty cash?
8. The cash in the bank account of XYZ Company at June 30, of the current year indicated a
balance of Br. 19, 650.30 after both the cash receipts Journal and the check registered for June
had been posted. The bank statement indicated a balance of Br. 30,606.30 on June 30. Other
related events occurred during the month were:
a. Checks outstanding totaled Br. 14,941.50
b. A deposit of Br. 6,467.75 representing receipts of June 30, had been made too late to
appear on the bank statement
c. The bank had collected Br. 3090 on a note left for collection. the face of the note was Br.
3000
d. A check for Br. 91 returned with the statement had been recorded erroneously in the
check register as Br. 19. The check was for the payment of an obligation to ABC Company
for the purchase of office equipment on account.
e. A check drawn for Br. 55 had been erroneously charged by the bank as Br. 550
f. Bank service charges for June amounts to Br. 40.75

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Instructions:
a. Prepare a bank reconciliation
b. Record the necessary entries in general journal form

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