Ch6Accounting For Cash and Receivables

Accounting for Cash
and Receivables
Financial Accounting, IFRS Edition

Weygandt Kimmel Kieso
Slide
8-1
Accounting for
Cash
Slide
8-2
Financial Accounting
IFRS Second Edition
Slide
8-3
Fraud and Internal Control
Fraud
Dishonest act by an employee that results in personal benefit
to the employee at a cost to the employer.
Three factors that

contribute to
fraudulent activity.
Illustration 7-1
Slide
8-4
LO 1 Define fraud and internal control.
Internal Control
Methods and measures adopted to:
1. Safeguard assets.
2. Enhance accuracy and reliability of accounting records.
3. Increase efficiency of operations.
4. Ensure compliance with laws and regulations.
Slide
8-5
Internal Control
Five Primary Components:
1. Control environment.
2. Risk assessment.
3. Control activities.
4. Information and communication.
5. Monitoring.
Slide
8-6
Principles of Internal Control Activities

Establishment of Responsibility
Control is most effective when only one person is responsible for a
given task.
Segregation of Duties
Related duties should be assigned to different individuals.
Documentation Procedures
Companies should use prenumbered documents and all
documents should be accounted for.
Slide
8-7
LO 2 Identify the principles of internal control activities.

Illustration 7-2
Physical
Controls
Slide
8-8

Independent Internal Verification
Illustration 7-3
1. Records periodically
verified by an
employee who is
independent.
2. Discrepancies
reported to
management.
Slide
8-9

Human Resource Controls
1. Bond employees.
2. Rotate employees’
duties and require
vacations.
3. Conduct background
checks.
Slide
8-10
Limitations of Internal Control

 Costs should not exceed benefit.
 Human element.
 Size of the business.
Slide
8-11
Cash Controls
Cash Receipts Controls
Illustration 7-4
Slide
8-12 LO 3
Cash Controls
Illustration 7-4
Slide
8-13 LO 3
Cash Controls
Cash Receipts
Controls
Over-the-Counter
Receipts
Important internal
control principle—
segregation of record-
keeping from physical
custody.
Illustration 7-5
Slide
8-14 LO 3
Cash Controls

Mail Receipts
 Mail receipts should be opened by two people, a list
prepared, and each check endorsed.
 Each mail clerk signs the list to establish responsibility for the
data.
 Original copy of the list, along with the checks, is sent to the
cashier’s department.
 Copy of the list is sent to the accounting department for
recording. Clerks also keep a copy.
Slide
8-15
LO 3 Explain the applications of internal control principles to cash receipts.
Cash Controls
Cash Disbursements Controls

Generally, internal control over cash disbursements is more
effective when companies pay by check, rather than by
cash.
Applications:
 Voucher system
 Petty cash fund
Slide LO 4 Explain the applications of internal control

8-16 principles to cash disbursements.
Cash Controls
Cash Disbursements
Controls
Illustration 7-6
Slide
8-17 LO 4
Cash Controls
Cash Disbursements
Controls
Illustration 7-6
Slide
8-18 LO 4
Cash Controls

Voucher System
 Network of approvals, by authorized individuals, to
ensure all disbursements by check are proper.
 A voucher is an authorization form prepared for each

expenditure.
Slide LO 4 Explain the applications of internal control

8-19 principles to cash disbursements.
Cash Controls

Petty Cash Fund - Used to pay small amounts.
Involves:
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
Slide
8-20
LO 5 Describe the operation of a petty cash fund.
Cash Controls
Illustration: If Zhu Company decides to establish a NT$3,000

fund on March 1, the journal entry is:
Mar. 1 Petty cash 3,000

Cash
3,000
Slide
8-21
Cash Controls
Illustration: Assume that on March 15 Zhu’s petty cash custodian

requests a check for NT$2,610. The fund contains NT$390 cash
and petty cash receipts for postage NT$1,320, freight-out
NT$1,140, and miscellaneous expenses NT$150. The general
journal entry to record the check is:
Mar. 15 Postage expense 1,320

Freight-out expense 1,140
Miscellaneous expense 150
Cash
2,610
Slide
8-22
Cash Controls
Illustration: Occasionally, the company may need to recognize a

cash shortage or overage. Assume that Zhu’s petty cash custodian
has only NT$360 in cash in the fund plus the receipts as listed. The
request for reimbursement would, therefore, be for NT$2,640, and
Zhu would make the following entry:
Mar. 15 Postage expense 1,320

Freight-out expense 1,140
Miscellaneous expense 150
Cash over and short 30
Cash
2,640
Slide
8-23
Control Features: Use of a Bank
Contributes to good internal control over cash.

 Minimizes the amount of currency on hand.
 Creates a double record of bank transactions.
 Bank reconciliation.
Slide
8-24
LO 6 Indicate the control features of a bank account.
Illustration 7-8
Making Bank Deposits
Authorized employee Bank Code
should make deposit. Numbers
Reverse Side
Front Side
Slide
8-25
Writing Checks
Written order signed by depositor directing bank to pay a
specified sum of money to a designated recipient.
Illustration 7-9
Maker
Payee
Payer
Slide
8-26
Bank Statements Illustration 7-10
Debit Memorandum
 Bank service charge.
 NSF (not sufficient
funds).
Credit Memorandum
 Collect notes
receivable.
 Interest earned.
Slide
8-27
Reconciling the Bank Account

Reconcile balance per books and balance per bank to
their adjusted (corrected) cash balances.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks. Time Lags

3. Bank memoranda.
4. Errors.
Slide
8-28
LO 7 Prepare a bank reconciliation.
Reconciliation Procedures Illustration 7-11
+ Deposit in Transit + Notes collected by bank

- Outstanding Checks - NSF (bounced) checks
+/- Bank Errors - Check printing or other
service charges
+/- Book Errors
CORRECT BALANCE CORRECT BALANCE
Slide
8-29
The bank statement for Laird Company, in Illustration 7-10, shows a
balance per bank of £15,907.45 on April 30, 2014. On this date the
balance of cash per books is £11,589.45. Using the four reconciliation
steps, Laird determines the following reconciling items.
Step 1. Deposits in transit:
April 30 deposit (received by bank on May 1).
£2,201.40
Step 2. Outstanding checks: No. 453, £3,000.00; no. 457,
£1,401.30; no. 460, £1,502.70.
5,904.00
Step 3. Errors: Laird wrote check no. 443 for £1,226.00
and the bank correctly paid that amount. However,
Laird recorded the check as £1,262.00.
36.00
Step 4. Bank memoranda:
a. Debit—NSF check from J. R. Baron for £425.60
Slide
425.60
8-30
LO 7 Prepare
b. Debit—Charge for printing company checks £30.00 a bank reconciliation.
Illustration: Prepare a bank reconciliation at April 30.
Cash balance per bank statement ₤15,907.45

Deposit in transit 2,201.40
Outstanding checks (5,904.00)
Adjusted cash balance per bank ₤12,204.85
Cash balance per books ₤11,589.45

Error in check No. 443 36.00
NSF check (425.60)
Bank service charge (30.00)
Collection of notes receivable 1,035.00
Adjusted cash balance per books ₤12,204.85
Slide
8-31
Entries From Bank Reconciliation

Collection of Note Receivable: Assuming interest of ₤50 has
not been accrued and collection fee is charged to Miscellaneous
Expense, the entry is:
Apr. 30 Cash 1,035.00

Miscellaneous expense 15.00
Notes receivable
Interest revenue 1,000.00
50.00
Slide
8-32
Book Error: The cash disbursements journal shows that check

no. 443 was a payment on account to Andrea Company, a
supplier. The correcting entry is:
Apr. 30 Cash 36.00

Accounts payable
36.00
NSF Check: As indicated earlier, an NSF check becomes an

account receivable to the depositor. The entry is:
Apr. 30 Accounts receivable 425.60

Cash
Slide 425.60
8-33
Bank Service Charges: Depositors debit check printing

charges (DM) and other bank service charges (SC) to
Miscellaneous Expense. The entry is:
Apr. 30 Miscellaneous expense 30.00

Cash
30.00
Illustration 7-13
Slide
8-34
Electronic Funds Transfer (EFT) System

 Disbursement systems that uses wire, telephone, or
computers to transfer cash balances between locations.
 EFT transfers normally result in better internal control

since no cash or checks are handled by company
employees.
Slide
8-35
Reporting Cash
Cash Equivalents
Cash equivalents are short-term, highly liquid investments
that are both:
1. Readily convertible to cash, and
2. So near their maturity that their market value is relatively

insensitive to changes in interest rates.
Restricted Cash
Should be reported separately on the balance sheet as
restricted cash.
Slide
8-36
LO 8 Explain the reporting of cash.
Reporting Cash
Illustration 7-14
Slide
8-37
LO 8 Explain the reporting of cash.
Accounting for
Receivables
Financial Accounting, IFRS Edition

Slide
8-38
Accounting
Accounting for
for Receivables
Receivables
Statement
Types of Accounts
Notes Receivable Presentation and
Receivables Receivable Analysis
Accounts Recognizing Determining Presentation

receivable accounts maturity date Analysis
Notes receivable receivable Computing
Valuing accounts interest
Other
receivables receivable Recognizing
notes receivable
Disposing of
accounts Valuing notes
receivable receivable
Disposing of
notes receivable
Slide
8-39
Types
Types of
of Receivables
Receivables
Amounts due from individuals and other companies that

are expected to be collected in cash.
Amounts owed by Claims for which “Nontrade” (interest,

customers that formal instruments loans to officers,
result from the sale of credit are issued advances to
of goods and as proof of debt. employees, and
services. income taxes
refundable).
Accounts
Accounts Notes
Notes Other
Other
Receivable
Receivable Receivable
Receivable Receivables
Receivables
Slide
8-40
SO 1 Identify the different types of receivables.
Accounts
Accounts Receivable
Receivable
Three accounting issues:

1. Recognizing accounts receivable.
2. Valuing accounts receivable.
3. Disposing of accounts receivable.
Recognizing Accounts Receivable

The following exercise was illustrated in Chapter 5. For
simplicity, inventory and cost of goods sold have been
omitted.
Slide
8-41
SO 1 Identify the different types of receivables.
Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: Assume that Jordache Co. on July 1, 2011, sells
merchandise on account to Polo Company for $1,000 terms 2/10,
n/30. Prepare the journal entry to record this transaction on the
books of Jordache Co.
Jul. 1 Accounts receivable 1,000

Sales
1,000
Slide
8-42
SO 2 Explain how companies recognize accounts receivable.
Recognizing
Recognizing Accounts
Accounts Receivable
Receivable
Illustration: On July 5, Polo returns merchandise worth $100 to
Jordache Co.
Jul. 5 Sales returns and allowances 100

Accounts receivable
100
Illustration: On July 11, Jordache receives payment from

Polo Company for the balance due.
Jul. 11 Cash 882

Sales discounts ($900 x .02) 18
Accounts receivable
900
Slide
8-43
SO 2 Explain how companies recognize accounts receivable.
Accounts
Accounts Receivable
Receivable
Valuing Accounts Receivables

Reported as an asset on the statement of financial
position.
Reported at the amount the company thinks they will be

able to collect.
Sales on account raise the possibility of accounts not

being collected.
Valuation can be difficult because an unknown amount

of receivables will become uncollectible.
Slide SO 3 Distinguish between the methods and bases

8-44 companies use to value accounts receivable.
Valuing
Valuing Accounts
Accounts Receivable
Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Allowance Method

Theoretically undesirable: Losses are estimated:
no matching. better matching.
receivable not stated at net receivable stated at net
realizable value. realizable value.
not acceptable for financial required by IFRS.
reporting.

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Direct Write-Off Method for Uncollectible Accounts
Under the direct write-off method, when a company determines

a particular account to be uncollectible, it charges the loss to Bad
Debts Expense. Assume, for example, that on December 12
Warden Co. writes off as uncollectible M. E. Doran’s $200
balance. The entry is:
Dec. 12 Bad debt expense 200

Accounts receivable
200

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Allowance Method for Uncollectible Accounts

1. Companies estimate uncollectible accounts receivable.
2. To record estimated uncollectibles:

Bad Debts Expense xxx
Allowance for Doubtful Accounts
xxx
3. To write off uncollectible accounts:

Allowance for Doubtful Accounts xxx
Accounts Receivable
Slide
xxx SO 3 Distinguish between the methods and bases
Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording Estimated Uncollectibles: Assume that Hampson
Furniture has credit sales of $1,200,000 in 2011. Of this amount,
$200,000 remains uncollected at December 31. The credit
manager estimates that $12,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles is:
Dec. 31 Bad debt expense 12,000

Allowance for doubtful accounts
12,000

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 8-2
Presentation of allowance for doubtful accounts

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
The financial vice-president of Hampson Furniture authorizes a
write-off of the $500 balance owed by R.A.Ware
on March 1, 2012. The entry to record the write-off is:
Mar. 1 Allowance for doubtful accounts 500

Accounts receivable
500
Illustration 8-3

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recording the Write-Off of an Uncollectible Account:
The write-off affects only statement of financial position accounts.

Illustration 8-3
Illustration 8-4

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Recovery of an Uncollectible Account: On July 1, R. A. Ware
pays the $500 amount that Hampson had written off on March 1.
These are the entries:
Jul. 1 Accounts receivable 500

500
Jul. 1 Cash 500
Accounts receivable
500

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Bases Used for Allowance Method

Illustration 8-5

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Illustration: Assume that Gonzalez Company elects to use

the percentage-of-sales basis. It concludes that 1% of net credit
sales will become uncollectible. If net credit sales for 2011 are
$800,000, the adjusting entry is:
Dec. 31 Bad debts expense 8,000 *

8,000
* $800,000 x 1%

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Sales
Emphasizes the matching of expenses with revenues.

When the company makes the adjusting entry, it disregards
the existing balance in Allowance for Doubtful Accounts.
Illustration 8-6

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Percentage-of-Receivables
Illustration 8-7
Aging schedule

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration: If the trial balance shows Allowance for Doubtful

Accounts with a credit balance of $528, the company will make the
following adjusting entry.
Dec. 31 Bad debts expense 1,700 *

1,700
* $2,228 - 528

Valuing
Valuing Accounts
Accounts Receivable
Receivable
Illustration 8-8
Occasionally the allowance account will have a debit balance

prior to adjustment.

Accounts
Accounts Receivable
Receivable
Disposing of Accounts Receivable
Companies sell receivables for two major reasons.
1. Receivables may be the only reasonable source of cash.
2. Billing and collection are often time-consuming and costly.
Slide
8-59
SO 4 Describe the entries to record the disposition of accounts receivable.
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Sale of Receivables
Factor
 Buys receivables from businesses and then collects
the payments directly from the customers.
 Typically charges a commission to the company that

is selling the receivables.
 Fee ranges from 1-3% of the amount of receivables

purchased.
Slide
8-60
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Illustration: Assume that Hendredon Furniture factors

$600,000 of receivables to Federal Factors. Federal Factors
assesses a service charge of 2% of the amount of receivables
sold. The journal entry to record the sale by Hendredon Furniture
is as follows. ($600,000 x 2% = $12,000)
Cash 588,000
Service charge expense 12,000
Accounts receivable
600,000
Slide
8-61
Disposing
Disposing of
of Accounts
Accounts Receivable
Receivable
Credit Card Sales
Retailer considers credit card sales the same as cash

sales.
Retailer must pay card issuer a fee of 2 to 4% for
processing the transactions.
Retailer records sale in a similar manner as checks
deposited from cash sale.
Slide
8-62
Credit
Credit Card
Card Sales
Sales
Illustration: Anita Ferreri purchases $1,000 of compact discs

for her restaurant from Karen Kerr Music Co., using her Visa
First Bank Card. First Bank charges a service fee of 3%. The
entry to record this transaction by Karen Kerr Music is as follows.
Cash 970
Service charge expense 30
Sales
1,000
Slide
8-63
Notes
Notes Receivable
Receivable
A promissory note is a written promise to pay a specified

amount of money on demand or at a definite time.
Promissory notes may be used:

1. when individuals and companies lend or borrow money,
2. when amount of transaction and credit period exceed
normal limits, or
3. in settlement of accounts receivable.
Slide
8-64
SO 5 Compute the maturity date of and interest on notes receivable.
Notes
Notes Receivable
Receivable
To the Payee, the promissory note is a note receivable.
To the Maker, the promissory note is a note payable.
Illustration 8-10
Slide
8-65
Notes
Notes Receivable
Receivable
Determining the Maturity Date

Note expressed in terms of
Months Illustration 8-12
Days
Slide
8-66
Notes
Notes Receivable
Receivable
Determining the Maturity Date

Illustration 8-13
Illustration 8-14
Slide
8-67
Notes
Notes Receivable
Receivable
Recognizing Notes Receivable
Illustration: Calhoun Company wrote $1,000, two-month, 12%

promissory note to settle an open account, Wilma Company
makes the following entry for the receipt of the note.
Notes receivable 1,000

Accounts receivable 1,000
Slide
8-68
SO 6 Explain how companies recognize notes receivable.
Notes
Notes Receivable
Receivable
Valuing Notes Receivable

Like accounts receivable, companies report short-term
notes receivable at their cash (net) realizable value.
Estimation of cash realizable value and bad debts

expense are done similarly to accounts receivable.
Allowance for Doubtful Accounts is used.
Slide
8-69
SO 7 Describe how companies value notes receivable.
Notes
Notes Receivable
Receivable
Disposing of Notes Receivable

1. Notes may be held to their maturity date.
2. Maker may default and payee must make an

adjustment to the account.
3. Holder speeds up conversion to cash by selling the

note receivable.
Slide
8-70
SO 8 Describe the entries to record the disposition of notes receivable.
Notes
Notes Receivable
Receivable
Disposing of Notes Receivable

Honor of Notes Receivable
A note is honored when its maker pays it in full at its
maturity date.
Dishonor of Notes Receivable

A dishonored note is not paid in full at maturity.
A dishonored note receivable is no longer negotiable.
Slide
8-71
Notes
Notes Receivable
Receivable
Honor of Notes Receivables
Illustration: Betty Co. lends Wayne Higley Inc. $10,000 on June
1, accepting a five-month, 9% interest-bearing note. Assuming
that Betty Co. presents the note to Wayne Higley Inc. on the
maturity date, Betty Co.’s entry to record the collection is:
Nov. 1 Cash 10,375

Interest revenue 375
Slide
8-72
Notes
Notes Receivable
Receivable
Illustration: If Betty Co. prepares financial statements as of
September 30, it must accrue interest. Betty Co. would make an
adjusting entry as follows.
Sept. 30 Interest receivable 300

Slide
8-73
Notes
Notes Receivable
Receivable
Illustration: The entry by Betty Co. to record the honoring of the
Wayne Higley Inc. note on November 1 is:
Nov. 1 Cash 10,375

Interest receivable 300
Interest revenue 75
Slide
8-74
Notes
Notes Receivable
Receivable
Dishonor of Notes Receivables
Illustration: Wayne Higley Inc. on November 1 indicates that it
cannot pay at the present time. If Betty Co. does expect eventual
collection, it would make the following entry at the time the note is
dishonored (assuming no previous accrual of interest).
Nov. 1 Accounts receivable 10,375

Slide
8-75
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
Identify in the statement of financial position or in the
notes each major type of receivable.
F/P Report short-term receivables appear in current assets.
Report both gross amount of receivables and allowance

for doubtful account.
Report bad debts expense and service charge expense

as selling expenses.
I/S
Report interest revenue under “Other” in the
nonoperating section.
Slide
8-76
SO 9 Explain the statement presentation and analysis of receivables.
Statement
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-15
This Ratio used to:

Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Slide
8-77
Statement
Presentation and
and Analysis
Analysis
Analysis
Illustration 8-16
Average collection period in terms of days.

Used to assess effectiveness of credit and collection
policies.
Collection period should not exceed credit term period.
Slide
8-78

Ch6Accounting For Cash and Receivables

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Accounting for Cash

Financial Accounting, IFRS Edition

Three factors that

2. Enhance accuracy and reliability of accounting records.

3. Increase efficiency of operations.

4. Ensure compliance with laws and regulations.

4. Information and communication.

Principles of Internal Control Activities

Principles of Internal Control Activities

Principles of Internal Control Activities

Principles of Internal Control Activities

Limitations of Internal Control

 Size of the business.

Cash Receipts Controls

Cash Receipts Controls

Cash Receipts Controls

Cash Disbursements Controls

 Petty cash fund

Slide LO 4 Explain the applications of internal control

Cash Disbursements Controls

 A voucher is an authorization form prepared for each

Slide LO 4 Explain the applications of internal control

Cash Disbursements Controls

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

Illustration: If Zhu Company decides to establish a NT$3,000

Mar. 1 Petty cash 3,000

Illustration: Assume that on March 15 Zhu’s petty cash custodian

Mar. 15 Postage expense 1,320

Illustration: Occasionally, the company may need to recognize a

Mar. 15 Postage expense 1,320

Contributes to good internal control over cash.

 Creates a double record of bank transactions.

Bank Statements Illustration 7-10

Reconciling the Bank Account

2. Outstanding checks. Time Lags

Reconciliation Procedures Illustration 7-11

+ Deposit in Transit + Notes collected by bank

Illustration: Prepare a bank reconciliation at April 30.

Cash balance per bank statement ₤15,907.45

Cash balance per books ₤11,589.45

Entries From Bank Reconciliation

Apr. 30 Cash 1,035.00

Book Error: The cash disbursements journal shows that check

Apr. 30 Cash 36.00

NSF Check: As indicated earlier, an NSF check becomes an

Apr. 30 Accounts receivable 425.60

Bank Service Charges: Depositors debit check printing

Apr. 30 Miscellaneous expense 30.00

Electronic Funds Transfer (EFT) System

 EFT transfers normally result in better internal control

2. So near their maturity that their market value is relatively

Financial Accounting, IFRS Edition

Accounts Recognizing Determining Presentation

Amounts due from individuals and other companies that

Amounts owed by Claims for which “Nontrade” (interest,

Three accounting issues:

Recognizing Accounts Receivable

Jul. 1 Accounts receivable 1,000

Jul. 5 Sales returns and allowances 100

Illustration: On July 11, Jordache receives payment from

Jul. 11 Cash 882