Occupational Standard: Accounting and Finance Level III

Unit Title Balance Cash Holdings

Unit Code LSA ACF3 07 1221
Unit Descriptor This unit describes the performance outcomes, skills and
knowledge required to clear registers, count money, calculate
non-cash transactions and reconcile takings and balance cash
holdings.

Elements Performance Criteria

1. Maintain 1.1 Cash in safe box is maintained in accordance with
accurate cash organization's policies and procedures
floats 1.2 Regular cash transaction processing and proofing are
conducted within specified timeframes and recorded
appropriately with cash withdrawn and deposited checked for
accuracy
1.3 Cash at close of business is counted in accordance with
organization's policies and procedures and discrepancies are
investigated and corrected in order to balance float
1.4 Cash within organization budget is maintained within set
limits
2. Remove 2.1 Terminal balances are performed in line with organization's
receipts from policies and procedures and cash supplied to terminal
terminal according to organization policies and procedures with
float separated from takings prior to balancing procedures
2.2 Terminal information is recorded appropriately after accurate
checking
2.3 Security policies and procedures are followed in the
removal and transportation of cash, cash float and non-cash
documents
3. Reconcile 3.1 Cash and non-cash documents are correctly counted and
takings calculated with terminal reading and sum of cash and non-
cash transactions compared appropriately to achieve balance
3.2 Records of individual takings are recorded accurately and in
accordance with organization's policies and procedures

Variable Range
Cash in safe box  notes and coins held in manual cash handling devices
includes:
Terminal includes:  a range of manual or electronic equipment used for the
deposit and withdrawal of cash and non-cash documents
Organisation  neatness and tidiness of cash in safe box
policies and  terminal balancing and security
procedures include  time frames for:
policies and  processing transactions
procedures relating
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 to:  periodic and end of day balances
 recording of discrepancies
Security policies  organizational policies and procedures that specifically refer to
and procedures the securing and safe handling and transport of money and
includes: non-cash transactions
Non-cash  cheques
documents or  advance cards/ suspense payment voucher
transactions may  others
include
Accurate recording  duplicate or triplicate copies
of information may  permanent hard copy
require recording  Proformas
on:

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.
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.
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
Cash float is difference between the cash balances reported in a business accounting and the amount of cash a
business actually hold in its bank accounts. This discrepancy is usually the result of delays in payments or
money transfers, as well as processing checks, which may take a bank several days to receive and record.

Types of cash floats

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1. Disbursement float: is a specific term for when the cash on the company’s financial statements is lower than
the amount in the bank.
 This is usually caused by the business sending out payments (usually checks) that haven’t cleared the
bank yet. If the payment is a check that’s being physically mailed to the recipient, the time in the mail
system is also part of the float.
2. Collection float: is the opposite of disbursement float. When a company’s internal ledger shows a higher
amount of money than the bank statement does, that’s a collection float.
 This occurs when the company receives a payment (a check or charge), but the balance in the bank
account hasn’t gone up by the same amount.
3. Net float: is the total of all cash floats, combining the positive and negative values from collection,
disbursement, and other types of floats.
 This net float calculation is used to keep a better handle on how close the incoming or outgoing cash
flow is to what the bank says it is.
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.

INTERNAL CONTROL OF CASH

The need to safeguard cash is crucial in most businesses because cash is mostly exposed to embezzlement.
Firms address this problem through the internal control system. An internal control system is a set of policies
and procedures designed to protect assets, provide accurate accounting records and evaluate performances.
A sound internal control system for cash increases the likely hood that the reported values for cash are accurate.

Internal control for cash should include the following procedures:

a) The individuals who receive cash should not also disburse (pay) cash
b) The individuals who handle cash should not access accounting records
c) Cash receipts are immediately recorded and deposited and are not used directly to make payments.
d) Disbursements are made by serially numbered checks, only upon proper authorization by someone other
than the person writing the check
e) Bank accounts are reconciled monthly.
The following are the most common elements of cash control and managements: bank account system, petty
cash fund, voucher system, change fund, and cash short and over.

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Control of Cash through Bank Accounts

Bank accounts are one of the most important means of controlling cash that provide several advantages such as:
- Cash is physically protected by the bank,
- A separate record of cash is maintained by the bank,
- And customers may remit payments directly to the bank.
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.
Reconciliation of Bank and Book Cash Balances
Monthly reconciling of the bank balance with the depositor’s cash accounts balance is essential cash control
procedure. To reconcile a bank statement means to verify that the bank balance and the accounting records of
the depositor are consistent. 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 and vice versa.
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:
Banks often charge a fee for handling checking accounts. The amount of this charge is deducted by the bank
form bank balance and debit memo is issued for the depositor.
d) Charges for depositing NSF- checks:
NSF stands for “Not Sufficient Funds.” When checks are deposited in an account, the bank generally gives the
depositor immediate credit. On occasion, one of these checks may prove to be uncollectible because the maker
of the check does not have sufficient funds in his or her account. In such a case, the bank will reduce the
depositor’s account by the amount of this uncollectible item & return the check to the depositor marked “NSF”.
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 e) Notes collected by bank:
If the bank collects a note receivable on behalf of the depositor, it credits the depositor’s account and issues a
credit memorandum for the depositor.
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.
Steps in Preparing Bank Reconciliation
Bank reconciliation is a schedule prepared by the depositor to bring the balance shown in the bank statement
and the balance shown in the depositor’s accounting into agreement.
The steps to prepare bank reconciliation are:

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The adjusted balances in the bank and company sections of the reconciliation must be equal. If the balances are
not equal, an item has been overlooked and must be found.
Sometimes, the adjusted balances are not equal because either the company or the bank has made an error. In
such cases, the error is often discovered by comparing the amount of each item (deposit and check) on the bank
statement with that in the company’s records.
Any bank or company errors discovered should be added or deducted from the bank or company section of the
reconciliation depending on the nature of the error.
For example, assume that the bank incorrectly recorded a company check for $50 as $500. This bank error of
$450 ($500 – $50) would be added to the bank balance in the bank section of the reconciliation. In addition, the
bank would be notified of the error so that it could be corrected. On the other hand, assume that the company
recorded a deposit of $1,200 as $2,100. This company error of $900 ($2,100 – $1,200) would be deducted from
the cash balance in the company section of the bank reconciliation. The company would later correct the error
using a journal entry.
Illustration
This bank statement shows a balance of $3,359.78 as of July 31. The cash balance in Power Networking’s
ledger on the same date is $2,549.99. Using the preceding steps, the following reconciling items were identified:
Step 2. Deposit of July 31, not recorded on bank statement: $816.20
Step 3. Outstanding checks:
Check No. 812: $1,061.00
Check No. 878: 435.39
Check No. 883: 48.60
Total……….. $1,544.99
Step 6. Note receivable of $400 plus interest of $8 collected by bank not recorded in the journal as indicated by
a credit memo of $408.
Step 7. Check from customer (Thomas Ivey) for $300 returned by bank because of insufficient funds (NSF) as
indicated by a debit memo of $300.00.

Bank service charges of $18, not recorded in the journal as indicated by a debit memo of $18.00.
In addition, an error of $9 was discovered. This error occurred when Check No. 879 for $732.26 to Taylor Co.,
on account, was recorded in the company’s journal as $723.26.

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The journal entries for Power Networking, based on the bank reconciliation shown are as follows:

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Illustration-2
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,assume the on July 31, ABC’s ledger shows a bank balance of Br. 4, 262.
83.
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 10.25
890 July 27 402.50
891 July 30 205.00
3. Proceeds from collection of anon – interest bearing note receivable from David Br 500. ABC company
had left this note with the banks collection department.
4. Br. 24.74 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 305 was issued by ABC company for payment of telephone expense in the amount of Br
85 but was erroneously recorded in the cash payment Journal as Br 58
Required:
Prepare bank reconciliation for ABC Company for the month of July 31, 2001
Record the necessary journal entries

Solution-
1. ABC Company
Bank reconciliation
July 31, 2001
Balance per bank statement July 31, 2001 -----------------Br. 5000. 17
Add. Deposit in transit-------------------------------------------- 410.90
Subtotal………………………………..……. Br 5, 411.07

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Deduct: outstanding checks
Check No 801…………….Br 1,000
Check No 888 ………………..10.25
Check No 890…………………402.50
Check No 891………………...205.00 …………………...(717.75)
Adjusted cash balance ----------------------------------------------------------- Br 4, 693.32
Balance per depositor’s record July 31, 2001 ---------- Br 4,262.83
Add. Notes & interest collected by bank…….................…524.74
Subtotal………………………………. Br 4,787.57
Deduct: collection fee ------------------------------Br. 5.00 =
NSF ………………………………....….50.25
Bank service change………………….....12.00
Error on check stub No 305……………. 27.00 ….Br.(94.25)
Adjusted cash balance……………………………………………… Br. 4, 693.32

EXERCISE
The cash in bank account for ABC Company at August 1, of the current year indicated a balance of birr
18,443.90 during august the total cash deposited was birr 30,650.75 and checks written totaled birr 31,770.25
the bank statement indicated a balance of birr 26,465.50 on august 31, comparison of the bank statement the
cancelled checks and the accompanying memorandum with the records revealed the following reconciling
items.
 Check outstanding totaled birr 8,003.84
 A deposit of birr 2,148.21 representing receipts of august 31 had been made too late to appear on the
bank statement.
 The bank had collected for ABC Company birr 3,650 on a note left for collection. The face of the note
was birr 3,500.
 A check for Birr 84.20 returned with the statement had been recorded by ABC Company as Birr 8.42 the
check was for payment of an obligation to FANA COMPANY on account.
 A check for birr 470 returned with the statement had been incorrectly charged by the bank as birr 740.
 Bank service charge for august amounted to birr 18.75.
Instructions:
1. Prepare a bank reconciliation statement
2. Record the necessary journal entry

Petty Cash Fund

Petty cash fund, which is part of the total cash balance, is used to handle many types of small payments such as
employee transportation costs, purchase of office supplies, purchase of postage stamps, and delivery charges.
Many businesses find it convenient to make minor expenditures instead of writing checks. The amount of petty
cash varies depending on magnitude of the firm/organization
Establishment of Petty Cash
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

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 Cash xxxx
Assume that a petty cash fund of $500 is established on August 1.

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 credited only when the firm decides to reduce the amount of petty cash
balance
Petty cash account will not be affected at time of replenishing the petty cash
Replenishment of Petty Cash
During the period, the custodian makes small payments form the petty cash fund and obtains a receipt or
prepares a petty cash voucher. This petty cash voucher explains the nature and amount of every expenditure and
is kept with the fund. When the fund runs low or at the end of the company’s fiscal period, a check is issued to
reimburse the fund for the expenditures made during the period. The issuance of this check is recorded by
debiting the appropriate expense accounts and crediting cash or vouchers payable.
Supplies expense xxx
Postage expense xxx
Miscellaneous expense xxx
Cash xxxx
At the end of August, the petty cash receipts indicate expenditures for the following items:
Office supplies $380
Postage (debit Office Supplies) 22
Store supplies 35
Miscellaneous administrative expense 30
Total $467
The entry to replenish the petty cash fund on August 31 is as follows:

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Occasionally, errors may occur that affect the balance of the petty cash account. This may be the result of an
employee not getting a receipt or getting back incorrect change from the store where the purchase was made. In
this case, an expense is created that creates a cash overage or shortage.

When there is a shortage of cash, we record the shortage as a “debit” and this has the same effect as an expense.
If we have an overage of cash, we record the overage as a credit, and this has the same impact as if we are
recording revenue. If there were cash overage, the petty cash account would be debited and the cash over and
short account would be credited. In this case, the expense balance decreases, and the year-end balance is the net
balance from all overages and shortages during the year.

If a petty cash account is consistently short, this may be a warning sign that there is not a proper control of the
account, and management may want to consider additional controls to better monitor petty cash.
Example-1: On June 5, 2014 R&T Company established petty cash fund of Br 500 and placed it in the custody
of the main secretary. Assume the petty cash fund of R&T Company shows the following composition on June
15, 2014:
Urgent supplies…………….150
Miscellaneous expenses……110
Urgent merchandise………..220
Amount of cash in the fund is determined to be Br.22.5
 Record the necessary journal entries to recognize transactions related to establishment & replenishment
of petty cash
1. The entry to record the establishment is:
June 5, 2014 / Petty Cash …….500
Cash in bank …….500
2. The entry to replenish the fund is:
June 5, 2014 / Supplies expenses………..150
Miscellaneous expenses….110
Purchase………………….220

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 Cash in Bank……………….477.5
Cash short and over…………2.5

Example-2: Record the following transactions:

A. Started a petty cash fund in the amount of $200.
B. Replenished petty cash fund using the following expenses: Auto $15, Office Expenses $20,
Postage Expense $81, Miscellaneous Expenses $66. Cash on hand is $10.
Solution:
A. Petty Cash …….200
Cash in bank …….200
B. Auto expenses……………..15
Office expenses………........20
Postage expense………..….81
Miscellaneous Expenses…..66
Cash short and over….….…8
Cash in Bank……………….190

Exercise
Casopia S.C. completes the following transactions during the month of March 2021. The
company uses Cash Shortage & Overage recording system. Analyze the transactions and pass
the necessary journal entries for each.
March 1. Establish a petty cash fund of Br. 1,500.00. March 31. The amount of cash in the petty
cash fund is Br. 368.00. Issued a check to replenish the fund, based on the following summary
of petty cash receipts: Postage, Br. 456.00 Freight-out, Br. 235.00 and miscellaneous expense,
Br. 442.00.

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