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Fundamentals of Acct - I, Lecture Note - Chapter 5-1
Fundamentals of Acct - I, Lecture Note - Chapter 5-1
FUNDAMENTALS OF ACCOUNTING-I
CHAPTER 5-1
ACCOUNTING FOR CASH
B) If a cash register shows cash sales of Birr 984 but the count of cash in the register
is Br 979. The entry to record cash sales and its Shortage is:
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 1
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
If there is a debit balance in the cash short and over account at the end of the fiscal
period, it is an expense and may be included in “miscellaneous administrative
expense” on the income statement. If there is a credit balance, it is revenue and may
be listed in the “other income” section. If the balance becomes larger than may be
accounted for by minor errors in making change, management should take corrective
measures.
ii) Cash Change Funds
Retail stores and other businesses that receive cash directly from customers must
maintain a fund of currency and coins in order to make change. The fund may be
established by drawing a check.
Illustration 2
ABC Company establishes a cash change fund for Br 150. The entry to record cash
charge fund is:
No additional charges or credits to the cash on hand accounts are necessary unless the
amount of the fund is to be increased or decreased. At the end of each business day,
the total amount of cash received during the day is deposited and the original amount
of the change fund is retained. The desired composition of the fund is maintained by
exchanging bills or coins for those of other denominations at the bank.
Because two people are involved, theft of cash receipts by mail usually requires
collusion between these two employees. The person opening the mail makes a list (in
triplicate) of money received. This list should contain a record of each sender’s name,
the amount, and an explanation of why the money is sent. The first copy is sent with
the money to the cashier. A second copy is sent to the record keeper in the accounting
area. A third copy is kept by the clerk who opened the mail. The cashier deposits the
money in a bank, and the record keeper records the amounts received in the
accounting records.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 2
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 3
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
After all data except details of payment have been inserted, the invoice or other
supporting evidence is attached to the voucher. The voucher is then given to the
designated officials for final approval.
Voucher Register
After approval by the designated official each voucher is recorded in a journal known
as a voucher register. The vouchers are entered in numerical order, each being
recorded as a credit to accounts payable (sometimes entitled Vouchers payable) and
as a debit to account or accounts to be charged for the expenditure. When a voucher is
paid, the data 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.
Check Register
The payment of a voucher is recorded in a check register. The check register is
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.
Each check issued is in payment of a voucher that has previously been recorded as an
account payable in the voucher register. The effect of each entry in the check register
is a debit to Accounts Payable and a credit to cash in bank (and Purchases Discounts,
when appropriate).
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 4
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
When the company takes advantage of the discount and the amount due on
November 12, the entry is:
These entries reflect the gross method of recording purchases. The gross method
records the invoice at its gross amount of Br. 1,200 before recognizing the cash
discount. Many companies record invoice in this way.
Another method of recording purchases is the net method. The net method records the
invoice at its net amount after recognizing the cash discount. This method is viewed
as providing more useful information to management.
Illustration 4
Assuming that, if ZEFMESH Company uses the net method of recording purchases, it
deducts the potential Br. 24 cash discount from the gross amount, and records the
initial purchase at the Br. 1,176 net amount, the entry is:
Illustration 5
If the invoice for this purchase is paid within the discount period, the entry is:
If payment is not made within the discount period and the discount is lost, the
following entry must be made either on the date discount is lost or when the invoice
is paid:
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 5
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Illustration 6
When the discount is lost:
When the invoice is paid (assuming that the payment is made on Dec. 10):
The net method gives the management an advantage in controlling and monitoring
purchase discounts. When the invoices are recorded at gross amount, the amount of
discounts taken is deducted from the balance of Merchandise Inventory account. This
means the amount of any discounts lost is not reported in any account or on the
income statement. Discounts lost recorded in this way are unlikely to come to the
attention of management. But when purchases are recorded at net amounts, a
Discounts Lost expense is brought to management’s attention as operating expense on
the income statement. Management can then seek to identify the reason for discounts
lost such as oversight, carelessness, or unfavorable terms. This practice gives
management better control over persons responsible for paying bills to insure they
take advantage of favorable discounts. In this way, its less likely favorable discounts
are lost.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 6
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Illustration 7
If the DIL Company decides to establish a Br. 100 fund on March 1, the entry to
record the establishment of a petty cash is:
However, no additional entries will be made to the petty cash account unless the
stipulated amount of the fund is changed.
Illustration 8
For example, if DIL Company decides on July 1, to increase the size of the fund to
Br. 250, the journal entry would be:
Each payment from the fund must be documented on a pre-numbered petty cash
receipt (or petty cash voucher). The signature of both the custodian and the individual
receiving payment are required on the receipt. If other supporting documents such as
a freight bill or invoice are available, they should be attached to the petty cash receipt.
The receipts are kept in the petty cash box until the fund is replenished. As a result,
the sum of the petty cash receipts and money in the fund should equal the established
total at all times. This means the surprise counts can be made at any time by an
independent person, such as an internal auditor, to determine whether the fund is
being maintained in tact.
No accounting entry is made to record a payment at the time it is made from the
petty cash. It is considered to be both inexpedient and unnecessary to do so.
Instead, the accounting effects of each payment are recognized when the fund is
replenished.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 7
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Illustration 9
Assume that on March 15 the petty cash custodian requests a check for Br 87. The
fund contains Br.13 cash and petty cash receipts for postage Br. 44, freight- in Br.38
and miscellaneous expenses Br.5. The entry to record the reimbursement check is:
Note that the petty cash account is not affected by the reimbursement entry.
Replenishment changes the composition of the fund by replacing the petty cash
receipts with cash, but it does not change the balance in the fund. It may be necessary
in replenishing a petty cash fund to recognize a cash shortage and overage.
Illustration 10
Assume in the example above that the custodian had only Br.12 in cash in the fund
plus the receipts as listed. The request for reimbursement would, therefore, have been
for Br. 88, and the entry would be made as:
Illustration 11
Conversely, if the custodian had Br, 14 in cash, the reimbursement request would
have been for Br. 86 and cash over and short would have been credited for Br. 1, as:
A petty cash fund should be replenished at the end of the accounting period
regardless of the cash in the fund. Replenishment at this time is necessary in order to
recognize the effects of the petty cash payments on the financial statements.
Internal control over petty cash fund is strengthened by:
(1) Having a supervisor make surprise counts of the fund to ascertain whether the paid
vouchers and fund cash equal the established amount and
(2) Canceling or mutilating the paid vouchers so they cannot be resubmitted for
reimbursement.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 8
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Bank Account
Opening a bank account is relatively simple procedure. A bank account is a record set
up by a bank for a customer. It permits for customer to deposit money for
safeguarding and check withdrawals. Typically, the bank makes a credit check on the
new customer and the depositor is required to sign signature card. The card should
contain the signatures of each person authorized to sign check on the account. The
signature card is used by bank employees to validate signatures on the check.
Bank Deposits
Bank deposit should be made by an authorized employee, such as the head cashier.
Each deposit must be documented by a deposit slip (ticket). A deposit slip (ticket)
lists the items such as currency, coins, and checks deposited and their corresponding
dollar amounts. Deposit slips are prepared in duplicate. The original is retained by the
bank, the duplicate, stamped by the bank to establish its authenticity, is retained by
the depositor.
Bank Check
To withdraw money from an account a customer uses a check. A check is a written
order signed by the depositor directing the bank to pay a specified sum of money to a
designated recipient. Thus, there are three parties to a check.
The maker (or drawer) who issues (signs) the check, the bank (Or payer) on which
the check is drown, and the payee to whom the check is payable. A check is a
negotiable instrument that can be transferred to another party by endorsement. For
both individuals and businesses, it is important to know the balance in the checking
account all times. To keep the balance current, each deposit and check should be
entered on running balance memorandum forms provided by the bank or on the check
stubs contained in the checkbook.
Bank Statement
Each month, the depositor receives a bank statement from the bank. A bank statement
shows the depositor’s bank transactions and balances. The items that included in a
bank statement are described as follows:
(1) The beginning balance
(2) Checks paid and other debits (deductions by the bank)
(3) Deposits and other credits (additions by the bank) and
(4) The balance at the end of the month
Most banks offer depositors the option of receiving “paid” checks with their bank
statement. Irrespective of the depositor’s choice, all “paid” checks are listed in
numerical sequence on the bank statement along with date the check was paid and its
amount. Up on paying a check, the bank stamps the check “paid”; a paid check is
sometimes referred to as a canceled check.
In addition, the bank includes with the bank statement memoranda explaining other
debits and credits made by the bank to the depositor’s account.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 9
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Debit Memorandum
Bank charge a monthly fee for the use of their services. The fee, called a bank service
charge, is often identified on the bank statement by a code symbol such as SC. A
debit memorandum explaining the charge is included with the bank statement.
Separate debit memoranda may also be issued for other bank services such as the cost
of printing checks, issuing traveler’s checks, and wiring funds to other locations. The
symbol DM is often used for such charges.
Credit Memorandum
A depositor may ask the bank to collect its notes receivable. In such a case, the bank
will credit the depositor’s account for the cash proceeds of the note. It will issue a
credit memorandum, which is sent with the statement to explain the entry. Many
banks also offer interest on checking account. The interest earned may be indicated on
the bank statement by the symbol CM or INT.
BANK RECONCILIATION
Why it is necessary to reconcile a bank account?
Because the bank and the depositor maintain independent records of the depositor’s checking
account, you might assume that the respective balances will always agree. In fact, the two
balances are seldom the same at any given time, and it is necessary to make the balance per
books agree with the balance per bank – a process called reconciling the bank account.
Time lags occur frequently. For example, several days may elapse between the time a cheek
is mailed to a payee and, the date the check is paid by the bank. The incidence of errors
depends on the effectiveness of the internal controls maintained by the depositor and the
bank. Bank errors are infrequent. However, either party could inadvertently record a
Br.450.00 check as Br.45.00 or Br.45, 000. In addition, the bank might mistakenly charge a
check drawn by Belete to the account of Beletu.
Reconciliation Procedure
To obtain maximum benefit from bank reconciliation, the reconciliation should be
prepared by an employee who has no other responsibilities pertaining to cash. In reconciling
the bank account, it is customary to reconcile the balance per books and per bank to their
adjusted (correct or true) cash balances. The reconciliation schedule is divided in to two
sections, as shown below in the table. One section begins with the balance as per bank
statement and ends with the adjusted balance; the other section begins with the balance per
depositor’s records and also ends with the adjusted balance. The two amounts designated, as
the adjusted balance must be equal.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 10
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
The following steps should reveal all the reconciling items that cause the
difference between the two balances.
1. Compare the individual deposits on the bank statement with deposits in transit from the
preceding bank reconciliation and with the deposits per company records or copies of
duplicate deposit slips. Deposits recorded by the depositor that have not been recorded
by the bank represent deposit in transit and are added to the balance per bank!
2. Compare the paid cash shown on the bank statement or the paid checks returned with
the bank statement with
a. Checks outstanding from the preceding bank reconciliation and
b. Checks issued by the company as recorded in the cash payments journal. Issued
checks recorded by the company that has not been paid by the bank represent
outstanding checks that are deducted from the balance per the bank.
3. Note any errors discovered in the foregoing steps and list them in the appropriate
section of the reconciliation schedule. For example, if a paid check correctly written by
the company for Br. 195 was mistakenly recorded by the company for Br. 159, the error
of Br. 36 is deducted from the balance per books. All errors made by the depositor are
reconciling items in determining the adjusted cash balance per books. In contrast all
errors made by the bank are reconciling items in determining the adjusted cash balance
per the bank.
4. Trace bank memorandum to the depositor’s records. Any unrecorded memoranda
should be listed in the appropriate section of the reconciliation schedule. For example, a
Br. 50 debit memorandum for bank service charge is deducted from the balance per
depositor books, and a Br. 32 credit memorandum of interest earned is added to the
balance per books.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 11
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Prepare Bank Reconciliation for Jamboree Enterprises for the month ended
November 30, 2002. The following information is available to reconcile Jamboree
Enterprises Book Balance of cash with its Bank Statement Balance as of November
30, 2002.
(a) After all posting is completed on November 30, the company’s book balance of
the cash account had a Br. 16,380 debit balance, but its bank statement showed a
Br, 38,520 balances.
(b) Checks No. 2024 for Br. 4, 810 and No. 2036 for Br 5000 are, Outstanding.
(c) In comparing the canceled checks returned by the bank with the entries in the
accounting records. We find that check No. 2025 in payment of rent is correctly
drawn for Br. 1000 but was erroneously entered in the accounting records as Br.
880
(d) The November 30 deposit of Br.17, 150 was placed in the night depository after
banking hours on that date, and this amount did not appear on the bank statement.
(e) In reviewing the bank statement, a check belonging to jumbo enterprises in the
amount of Br.160 was erroneously drawn against Jamboree’s account.
(f) A credit memorandum enclosed with the bank statement indicated that the bank
collected a Br. 30,000 note and Br. 900 of related interest on Jamboree’s behalf.
This transaction was not recorded by Jamboree before receiving the statement.
(g) A debit memorandum for Br. 1000 listed a Br. 1,100 NSF check. The check had
been received from a customer, Abreham Wolde; Jamboree had not recorded the
return of this check before receiving the statement.
(h) Bank service charge for November totaled Br. 40. These charges where not
recorded by Jamboree before receiving the statement.
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 12
Addis Ababa University, College of Business and Economics, Department of Accounting & Finance
Each reconciling item in determining the adjusted balance per book should be
recorded by the depositor. If these items are not journalized and posted, the cash
account will not show the correct balance
Lecture Note - Fundamentals of Accounting I; Ch. 5-1; By: Kassaye Tuji 2023/4GC (2016) Page 13