CASH AND CASH EQUIVALENTS

C MBAHIJONA

24 August 2022 Fundamentals of Accounting - AFE3582 C Mbahijona 1

 LEARNING OUTCOME

• Disclose transactions with the bank on the bank

statement;
• Update the two cash journals of the entity whose
books you are preparing;
• Reconcile the balance of the bank account with the
balance as per the bank statement;
• Prepare the petty cash journal;
• Show how cash and cash equivalents are disclosed in
the statement of financial position.
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 INTRODUCTION – CASH AND CASH
EQUIVALENTS
• The term cash and cash equivalents includes:
currency, coins, cheques received but not yet
deposited, petty cash, savings accounts, money
market accounts, and short-term, highly liquid
investments with a maturity of three months or less
at the time of purchase.

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 NATURE OF CASH AND CASH
EQUIVALENTS
• Cash can be defined as any legal means of payment which
can immediately be used as a means to pay someone else.
• Cash includes coins, notes, cheques, postal orders, credit
card vouchers and any deposits on demand.
• Cash equivalents are short-term highly liquid investments
which are readily convertible into cash.
1. Liquidity
Liquidity is the availability of cash for payment of claims
against the entity. Cash and cash deposits are liquid,
because they are immediately available for payment.
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 NATURE OF CASH AND CASH
EQUIVALENTS
• Cash is the most form of money, it is therefore the
primary legal tender in the economic system.
2. The primary liquid tender
• Cash is the most active asset in an entity.
• All expenses are eventually paid in cash either by
cheque or electronic transfer and all income is
received in cash.
• This implies that after each cash receipts or
payment, the liquidity of the entity changes.
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 NATURE OF CASH AND CASH
EQUIVALENTS
• When cash inflows exceeds the outflow, a cash
surplus is created, and surplus should be invested
if not needed for payment in the near future.
• When cash outflows exceeds the cash inflow, it may
be necessary for the entity to withdraw from
available investments or to borrow money to cover
the shortage.
• Money that is invested earns interest, and money
that is borrowed is charged interest.
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 NATURE OF CASH AND CASH
EQUIVALENTS
• Rate of interest on borrowed money is usually
higher than the rate of interest on investments. It is
therefore unwise to borrow money when
investments can be converted into cash.
• Due to the highly liquidity of cash, the risk of loss
through theft and fraud and other causes is high.
Management has a responsibility to ensure that
effective internal control measures over cash exist.

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 INTERNAL CONTROL OVER CASH

Nature of internal control over cash

• Internal control is defined as the process designed and effected
by those charged with governance to provide reasonable
assurance that company assets are safeguarded, records are
kept accurately and that financial reporting is done according
to applicable accounting standards.
• The purpose of internal control over cash is to ensure that all
cash that should be paid to an entity has been received and
recorded. The purpose of internal control is that all cash that
should be deposited in a bank account has been deposited and
that all cash payments have been duly authorised and verified.

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 USE OF BANK ACCOUNT

Opening of a bank account

• All entities that receive and disburse cash should open a
current account with a banking institution into which cash
can be deposited and out of which payments can be made. A
current account, also known as cheque account.
Bank Statement
• Banks provides a bank statement periodically to their clients.
The bank statement reflects all transactions of the clients’
accounts in the books of the bank; deposit made, cheques
paid and other debits and credits. The bank statement also
shows the daily balance of the account.
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 BANK RECONCILIATION STATEMENT

• Bank reconciliation statement is a statement which

details the differences between the cash book balance
and the bank statement balance after appropriate
adjustments have been made.
Reasons for differences in balances
The more the transactions an entity has with the bank,
the more these two balances do not correspond to each
other. The following are the most common causes of
differences between the balances shown in the records of
the entity and those of the bank.
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 BANK RECONCILIATION STATEMENT

• Items appearing in the entity’s books but not yet

reflected in the bank’s record like; outstanding cheques –
these are cheques that have been drawn by the entity,
but have not yet been presented to the bank for
payment.
• Deposits not yet credited by the bank
The bank’s books may show various items not yet
recorded by the entity like:
• Direct deposits made into the bank account of the entity
but have not yet been recorded by the entity.
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 BANK RECONCILIATION STATEMENT

• Charges for services rendered by the bank, bank

charges fees
• Interest charged on an overdrawn balance or
granted on a favourable balance.
• Commission on a cheques and cash deposit fees
• Unpaid cheques referred to drawer – R/D
• Bills recovered or paid by the bank on behalf of the
entity.

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 RECONCILIATION PROCEDURE -
EXAMPLE
• 01 May 2000, Ndeshi Shilongo started a trading
business, Shilongo Traders. Cash receipts Journal
for May 2000 of Shilongo Traders Reflected the
followings:
Doc No Date Details Analysis Bank
1 1 N. Shikongo - Cap 10 000 10 000
2 13 Cash Sales 1 450
3 14 Cash Sales 1 350 2 800
4 21 Cash Sales 900
5 24 R Charles - Rent 350 1 250
6 31 Cash Sales 850 850
14 900
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 RECONCILIATION PROCEDURE -
EXAMPLE
The bank statement for May 2022, received from the bank
reflects
Details
the
Fee
following:
Date Debit Credit Balance
N$ N$ N$ N$
Deposit 02 May 10 000 10 000
Deposit 15 May 2 800 12 800
Deposit 25 May 1 250 14 050

It obvious that the debit balance of the bank account of N$14

900 differs from the credit balance on the bank statement of
N$14 050. All the amounts have been reflected on the bank
statement except the deposit of N$850 on the 31 May 2022.
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 RECONCILIATION PROCEDURE -
EXAMPLE
The following is the bank reconciliation as at 31 May
2022:
Debit Credit
Debit (favourable) balance as per 14 900
bank account
Credit outstanding deposit 850
Credit (favourable) balance as per
bank statement 14 050
14 900 14 900

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 EXAMPLE 2

Cash book
19x9 Jan N$ 19x9 Jan N$
1 Bal b/d 320 10 C Mosa 110
16 R Lomas 160 20 McCarthy 90
24 V Van Zyl 140 28 Caledon 180
31 J Soames 470 30 Pienar 200
31 R Joorst 90 31 Balance c/d 600
1180 1180
Feb 1 Bal b/d 600

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 EXAMPLE 2

Bank Statement
19x9 Withdrawals Deposits Balance
Jan
1 Bal b/f 320
12 10627 110 210
16 Deposit 160 370
23 10628 90 280
24 Deposit 140 420
28 Dir. Debit Caledon 180 240
31 Dir. Credit R Joost 90 330

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 EXAMPLE 2

Required: Prepare bank reconciliation statement at

31 January 19x9.

Which balance is indicated as balance b/d in the

statement of financial position?

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 PETTY CASH JOURNAL
An entity needs to pay for certain smaller items such as
postage, wages of day workers, cleaning materials, teas
and coffee and toiletries. Therefore, the entity maintain a
petty cash float:
• Draw a cheque and cash the cheque for petty cash float;
• Petty cash float should be kept separate from other
money received by the entity.
• A separate journal is used to record petty cash
payments.

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 QUESTIONS

ANSWERS

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