CHAPTER FIVE

Cash and
Receivables
NATURE OF CASH AND THE IMPORTANCE OF
CONTROLS OVER CASH

Cash includes money on deposit in banks and

other items that a bank will accept for
immediate deposit.
Cash includes coins, currency (paper money),
checks, money orders, and money on deposit
that is available for unrestricted withdrawal
from banks and other financial institutions.
 CHARACTERISTICS OF CASH

The following are some of the characteristics of

cash:
Cash is used as medium of exchange
Cash is the most liquid asset
Cash is mostly affected by business
transactions
Cash is used to measure the value of other
assets
Cash is mostly exposed to embezzlements
 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.
 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.
 CONT.
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.
 Internal control principles to cash receipts
Internal control over cash receipts are;
Establishment of Responsibility
Only designated personnel are authorized to handle
cash receipts (cashiers
Segregation of Duties
Different individuals receive cash, record cash receipts,
and hold the cash
Documentation Procedures
Use remittance advice (mail receipts), cash register
tapes or computer records, and deposit slips
Physical Controls
Store cash in safes and bank vaults; limit access to
storage areas; use cash registers
Independent Internal Verification
Supervisors count cash receipts daily; assistant treasurer
compares total receipts to bank deposits daily
Human Resource Controls
 Internal control principles to cash
Disbursements
Generally, internal control over cash disbursements is more effective
when companies pay by check or electronic funds transfer (EFT)
rather than by cash.
Internal control over cash disbursements are;
Establishment of Responsibility
Only designated personnel are authorized to sign checks
(treasurer) and approve vendors
Segregation of Duties
Different individuals approve and make payments; check
signers do not record disbursements
Documentation Procedures
Use pre-numbered checks and account for them in sequence;
each check must have an approved invoice; require employees
to use corporate credit cards for reimbursable expenses; stamp
invoices “paid”
Physical Controls
Store blank checks in safes, with limited access; print check
amounts by machine in indelible ink
Independent Internal Verification
Compare checks to invoices; reconcile bank statement monthly
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,
Customers may remit payments directly to the bank.
 Cont..
If a company uses a bank account, monthly
statements are received from the bank showing
beginning and ending balances.
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.
Debit memo describes the amount and nature of
decrease is the company’s cash accounts.
A credits memo indicates an increase in the cash
 Cont.
The two controlling devices for controlling cash are:

a) Petty cash &

b) The bank account
a)The bank account
 It is one of the major devices for maintaining
control over cash.

 To get the most benefit from the bank account, all

cash received must be deposited in the bank and
all payments must be made by checks drawn on
the bank or from special cash funds.
 Cont.
Forms used in a bank account
A) Signature card: An identifying number is assigned to the
account which is used for verification. The depositor will sign
on. It is a written check.
B) Deposit ticket (slip): Used by the business as a receipt to
record the cash deposit.
C) Check: is a written document signed by the depositor,
ordering the bank to pay a sum of money to an individual or
business entity.
Three parties involved in a check:
1) Maker (drawer): One who signs on the check is called
drawer.
2) Payer (drawee): the bank on which the check is drawn is
known as drawee.
3) Payee: the party to whom payment is made. It is the party
to whose order the check is drawn.
 Bank statement
Is the monthly statement send by the bank to
the depositor.
The bank statement usually indicates the
beginning and ending cash balance of the
depositor in the bank and the monthly
transaction(additions and deductions).
It also includes cancelled checks (paid checks)
and which the bank has make payment on
behalf of the depositor.
It also includes the deposits made by the
depositor and other thing.
 Bank Reconciliation
Bank reconciliation is the schedule that accounts
for any of the difference between the bank
statement balance and the company (depositor)
book balance
The bank and the depositor maintain independent
records of the depositor’s checking account.
People tend to assume that the respective
balances will always agree.
In fact, the two balances are seldom (rarely) the
same at any given time, and both balances differ
from the “correct” or “true” balance.
Therefore, it is necessary to make the balance per
books and the balance per bank agree with the
correct or true amount this process called
reconciling the bank account (Bank
 Cont..
It might seem that the two balances should be equal but
they are not likely to be equal on any specific date because
of the following:
1) Items recorded by the company but not yet recorded
by the bank.
a) Outstanding checks:
Checks issued and recorded by the company, but not
yet presented or paid by the bank
b) Deposits in transit:
Is the deposit that the company has recorded but not
recorded by the bank.
2) Items recorded by the bank but not yet recorded by
the company
a) 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.
B) Bank collection:
Notes receivable and interest accrued on notes
 Cont..
3) NSF- checks:
NSF stands for “Not Sufficient Funds.”
Not sufficient fund (NSF) received from
customer.
The bank return checks to the payee because
-If the maker account has closed.
If the signature is not authorized.
If the check form is improper.
If the check has been altered.
Accounting for all returned check is the
same for NSF.
4) Interest revenue on checking account.
5) The cost of printing check.
6) Error by either the company or the bank
or both.
 Cont.
Bank credit memorandums:
Are additions by bank not recorded by depositor.
They are traced to the cash receipt journal that
can be added to the balance according to
depositor’s record.

Bank debit memorandums:

Are the deductions by bank not recorded by the
depositor.
They are traced to the cash payment journals
that have to be deducted from the balance
according to depositor’s record.
 Format for bank reconciliation
Xx - Company
Bank Reconciliation
Sep. 30, xx
Bank balance according to bank record -------------------------xxx
Add: Deposit in transit -------------------------------------xx
Bank error that under state bank balance ----------xx xxx
Deduct: Outstanding Checks -------------------------------xx
Bank error that overstate bank balance ---------xx xxx
Adjusted cash balance -------------------------------------------- xxx
Bank balance according to depositor
records-----------------------------------------xxx
Add: Additions by bank not recorded by depositor
(credit memorandum) :
Notes & interest collection -------------------------------------- xx
Depositor error that understate cash ledger balance-------xx
xxx
Sub -
total----------------------------------------------------------------------------------xxx
Deduct: Deduction by bank not recorded by the depositor
(debit memorandum):
NSF checks, service charges) -------------------------------------xx
Depositor error that overstate cash ledger balance----------xx
xxx
 Illustration
The bank statement for Laird Company (Illustration 8-10) shows
a balance per bank of $15,907.45 on April 30, 2017. On this date
the balance of cash per books is $11,589.45. Using the four
reconciliation steps, Laird determines the following reconciling
items.
1. Deposits in transit: April 30 deposit (received by bank on May
1) is $2,201.40
2. Outstanding checks: for check no. 453, $3,000.00; no. 457,
$1,401.30; no. 460, $1,502.70.
3. 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.
4. NSF check from J. R. Baron for $425.60.
5. Charge for printing company checks $30.00.
6. Collection of note receivable for $1,000 plus interest earned
$50, less bank collection fee $15.00.
Required
a. Prepare bank reconciliation
b. Prepare the necessary journal entry
b) The company records each reconciling item used to
determine the adjusted cash balance per books. Laird
Company would make the following entries on April 30

I) COLLECTION OF NOTE RECEIVABLE BY BANK

II) BOOK ERROR

III) NSF CHECK r, an NSF check becomes an account receivable to the depositor.

IV) BANK SERVICE CHARGES

Adjusted balance in Cash account

Petty cash fund
 It is the small fund used to make payment for small expenditures. There are three
steps involved in the operation of the petty cash.
1) Establishing the petty cash
2) Making payment from the petty cash.
3) Replenishing (reimbursing) the petty cash.
1) ESTABLISHING THE PETTY CASH FUND
 To establish the fund, a company issues a check payable to the
petty cash custodian for the stipulated amount.
 Two essential steps in establishing a petty cash fund are;
1) Appointing a petty cash custodian who will be responsible for
the fund, and
2) Determining the size of the fund.
 Checks payable to the petty cash fund custodian will be issued.
Petty cash----------------------------xx
Cash in bank----------------------------xx
2) MAKING PAYMENT FROM THE PETTY CASH
 Petty cash receipt: The employee who request for payment
and the petty cash custodian will sign on it.
 The petty cash custodian will make payment for the specified
employee who request disbursement.
3. REPLENISHING THE PETTY CASH FUND
 When the money in the petty cash fund reaches a minimum
level, the company replenishes the fund.
 The petty cash custodian initiates a request for
reimbursement. The individual prepares a schedule (or
summary) of the payments that have been made and sends
the schedule, supported by petty cash receipts and other
documentation, to the treasurer’s office.
 The treasurer’s office examines the receipts and supporting
documents to verify that proper payments from the fund
were made. The treasurer then approves the request and
issues a check to restore the fund to its established
amount
 Example
If Laird Company decides to establish a $100 fund on March
1, on March 15 Laird’s petty cash custodian requests a check
for $87. The fund contains $13 in cash and petty cash
receipts for postage $44, freight-out $38, and miscellaneous
expenses $5. Assume that March 15 Laird’s petty cash
custodian has only $12 in cash in the fund plus the receipts.
Required
a. Prepare the journal entry during establishment of petty
cash fund.
b. Prepare the journal entry during replenishment of petty
cash fund
Solution
 Example 2
Bateer Company established a $50 petty cash fund on July 1.
On July 30, the fund had $12 cash remaining and petty cash
receipts for postage $14, office supplies $10, and delivery
expense $15. Prepare journal entries to establish the fund on
July 1 and to replenish the fund on July 30.
 RECEIVABLES & TEMPORARY
INVESTMENTS
 Receivables are Varity of claims from other parties that generally
provide a future inflow of cash.
 Receivables refer to amount due from individuals and other
companies and they are claims expected to be collected in cash.

CLASSIFICATION OF RECEIVABLE
 Receivables are classified as 1) Account Receivable
2) Notes Receivable
3) Others

1) ACCOUNT RECEIVABLES
o Represent amount owed by customers on account.
o They result from sales of goods and services on credit.
o Are expected to be collected with in 30 to 60 days
 Cont.

2) NOTE RECEIVABLE
 Represent claims that are evidenced by formal
instrument of credit.
 They are expected to be collected with in 60 to 90 days
or longer.
 N/R and A/R that result from sales transaction are often
called Trade Receivables.
3) OTHER RECEIVABLES
 Include those non-trade Receivables such as interest
receivables, loan to company offices, advance to
employees and income tax refundable etc

RECOGNITION OF ACCOUNT RECEIVABLES

 It is straight forward to recognized account receivables.
 It is explained with the following illustration.
Example
Assume that Betel Company on July 1, 2001 Sales merchandise on
account to Robel Company for $1000 terms 2/10, n/30 on July 5
merchandize worth $100 is returned. On July 11 Payment is received
from Robel Company for the balance due.
Required: - record the above transaction
July1. A/R---------------1,000
Sales---------------------1,000
July 5. Sales return and allowance-----100
A/R------------------------------------------------100
July 11. Cash-------------------882
Sales Discount-------18
A/R------------------------900
 Valuing Accounts Receivable
 Once receivables are recorded in the account the next
question is how should these receivables be reported on the
balance sheet?
 This issue is important because some receivables will
become uncollectible.
 To ensure that receivables are not overstated on the balance
sheet, they are stated net cash realizable value i.e. Net
amount expected to be received in cash.
 Receivables are therefore reduced by estimated uncollectible
receivable on the balance sheet.
 Uncollectible receivables refer to the amount that will not
collect due to failure of the customers to make payment.
 The expense is reported as bad debt expense
(uncollectible account expense) on the income statement.
 In accounting credit losses (receivables not collected) from
customers are debited to bad debt expense (uncollectible
account expense).
 Such losses are considered a normal and necessary risk of
doing business on a credit basis.
 Accounting methods for uncollectible
There are two accounting methods for uncollectible;
1) Allowance method
2) Direct write off method
1) ALLOWANCE METHOD (RESERVE METHOD)
 This method is required for financial reporting purpose when bad debts are significant
in size.
 To present accurate financial statements, accountants in company’s with large credit
sales use the allowance method of measuring bad debts.
 This method also records collection losses based on estimates before the business
knows which specific customers account will be uncollectible.
 Allowance methods has the following essential features:-
 Uncollectible Account receivables are estimated and matched against sales on the same
accounting period in which sales occurs.
 Estimated uncollectible are debited to bad debt expense and credited to allowance for
doubtful account through an adjusting entry at the end of each accounting period.
 Actual uncollectible are debited to allowance for doubtful account and credited to
account receivables at the time the specific account is written-off.
RECORDING ESTIMATED UNCOLLECTIBLES

To illustrate the allowance method, assume that Hampson

Furniture has credit sales of $1,200,000 in 2017. 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 increases (debits) Bad Debt Expense and
increases (credits) Allowance for Doubtful Accounts, as follows.
Required: record the adjusting entry for the estimated
uncollectible
2001
Dec 31 Uncollectible Account Expense (Bad Debt)----------
$12,000
Allowance for Doubtful
Accounts----------------------$12,000
(Estimated uncollectible)
 The company deducts the allowance account from accounts receivable in the
current assets section of the balance sheet.

The amount of $188,000 represents the expected cash realizable value of the
accounts receivable at the statement date. Companies do not close
Allowance for Doubtful Accounts at the end of the fiscal year.
2. Direct written off method
Recording written off uncollectible Account
 When all appropriate means of collecting a past due amount have been exhausted
and collection appears impossible the account should be written off.
 To prevent premature write-off each write off should be formally approved in
writing by authorized management personnel.
Example
To illustrate a receivables write-off, assume that the financial vice president of
Hampson Furniture authorizes a write-off of the $500 balance owed by R. A. on
March 1, 2018. The entry to record the write-off is as follows.

March 1, 2018
Allowance for Doubtful Accounts --------------500
Accounts Receivable—R. A. --------------------------500
(Write-off of R. A. account)
 Bad Debt Expense does not increase when the write-off occurs.
Under the allowance method, companies debit every bad debt
write-off to the allowance account rather than to Bad Debt
Expense

General ledger balances after write-off

Cash realizable value comparison

RECOVERY OF AN UNCOLLECTIBLE ACCOUNT

 Occasionally, a company collects from a customer after it has

written off the account as uncollectible.
 The company makes two entries to record the recovery of a bad
debt.
(1)It reverses the entry made in writing off the account. This
reinstates the customer’s account.
(2)It journalizes the collection in the usual manner.

To illustrate, assume that on July 1, R. A. Ware pays the $500

amount that Hampson had written off on March 1. Hampson makes
the following entries.
 Recognize notes receivable.
Companies may also grant credit in exchange
for a formal credit instrument known as a
promissory note.
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 the amount of the transaction
and the credit period exceed normal limits, or
(3) in settlement of accounts receivable.
In a promissory note, the party making the
promise to pay is called the maker.
The party to whom payment is to be made is
called the payee.
Determining the Maturity Date
 When the life of a note is expressed in terms of months, you find
the date when it matures by counting the months from the date of
issue.
 For example, the maturity date of a three-month note dated May 1
is August 1.
 A note drawn on the last day of a month matures on the last day
of a subsequent month.
 That is, a July 31 note due in two months matures on September
30.
 When the due date is stated in terms of days, you need to count
the exact number of days to determine the maturity date.
 For example, the maturity date of a 60-day note dated July 17 is
September 15, computed as follows.
 Computing Interest
Formula for computing interest
 Example
Gambit Stores accepts from Leonard Co. a $3,400,
90-day, 6% note dated May 10 in settlement of
Leonard’s overdue account.
(a) What is the maturity date of the note?
(b)What is the interest payable at the maturity
date?
 Discounting Notes
Receivable
 When a company is a need of cash it may transfer its note receivable to a bank by
endorsement.
 The discount(interest) charged by bank is computed on the maturity value of the
note for the period of time the bank must hold the note; namely:-
 The time that will pass between the date of transfer and
 The due date of the note.
 The amount of the proceed paid to the endorser is the excess of maturity value
after the discount amount.
 The bank transfers cash (the proceeds) to the company after deducting a discount
(interest) that is computed on the maturity value of the note for the discount period.
 The discount period is the time that the bank must hold the note before it becomes
due
Example
Assume that a 90 day 12% note receivable for $1,800 dated April 8 discounted
at the pays bank on May 3 at the rate of 14%.
Required: compute
1. Maturity value
2. Discount period
3. Due date
4. Discount amount
5. Interest on the note
6. The proceed
7. Prepare Journal entry
1. Maturity value of note due July 7 is $1,854.00
Interest =1800x12%x90/360=54
Maturity Value= Principal + Interest
= 1800+54=1854
2. Discounting period is 65 day
April (30-8=22 day) + May 3 day=25 day
90-25=65 day
3. Due Date is July 7
term of a note------------------------90 day
Issue date (April 8) 30-8----22
May------------------------------30
June-------------------------------31----83
Maturity Date or Due Date---July 7
4. Discount amount=1854X.14X65/360=46.87
5. Interest on the note (90 day at 12%) ---
1800x12%x90/360=54
6. Proceed =Maturity value (-) Discount amount
= 1854-46.87=1807.13
7. Journal Entry
cash---------------1807.13
Notes Receivable -----------------1800
 TEMPORARY INVESTMENT

 The investment that a company makes with a

temporary cash surplus is called temporary
investments (marketable securities).
 Temporary investments in securities include
stocks and bonds. Stocks are equity securities
issued by corporations and bonds are debt
securities issued by corporations and various
government agencies.
The End!!