Chapter Five
Cash and Receivable
What is receivable
• Contents Classifications of receivable
What is cash Valuation of receivable
Characteristics of cash Allowance method
Internal control over cash Direct write off method
Bank reconciliation Interest computation
What is cash
• Cash is any medium of exchange that a bank will accept at face value, such as:
coins, paper money, currency, checks, bank deposit, money orders, bank drafts,
Bankers’ acceptance, Certificate of Deposit, traveler's checks, and the charge slips
signed by customers using bank credit cards, such as VISA and master card etc.
• Cash is listed first in the balance sheet, because it represents resources that can be
used immediately to pay any type of obligation.
• 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
Internal control for cash should include the following procedures:
The individuals who receive cash should not also disburse (pay)
cash
The individuals who handle cash should not access accounting
records
Cash receipts are immediately recorded and deposited and are
not used directly to make payments.
Disbursements are made by serially numbered checks, only
upon proper authorization by someone other than the person
writing the check
Bank accounts are reconciled monthly.
Bank reconciliation
• Bank reconciliation is a schedule explaining any difference between
the balance shown in bank statement and the balance shown in the
company or depositor's account (cash ledger of the depositor). At
the end of each month, the depositor should prepare bank
reconciliation to verity that these independent sets of records are in
agreement.
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Items recorded by the company but not yet recorded by the bank.
• Deposit in transit: is the deposit that the Depositor has recorded but
not recorded by the bank.
• Outstanding checks: These have been issued by the company and
recorded on its book but have not yet been paid by the bank.
Items recorded by the bank but not yet recorded by the company.
• Bank collection: notes receivable and interest accrued on notes
receivable may be collected by the bank.
• Service charge: the amount of banks fee for processing check. The
bank will notify when the bank provides the bank statement to the
depositor.
• Not sufficient fund (NSF) received from customer.
• Error by either the company or the bank or both.
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Example
For instance
The bank statement for ABC Company indicates a balance of $3359.78 as of July 31, 2013.
The balance in cash in ABC Company ledger of same date is $2549.99.
• Additional information:
• -Deposit of July 31, not recorded on bank statement --------816.20
• -Outstanding checks: #812-------1061.00, #878-------435.39, #883----48.60
• -Note plus interest of $8 collected by bank (credit memorandum) not recorded in cash
receipt journal -------408.00.
• -Bank service charge (debit memorandum) not recorded in cash payment journal is 18.00
• -Check #879 for $732.26 to “X”company on account, recorded in cash payment journal as
$723.26.
• -NSF checks is $300.00
Instruction
• a) Prepare bank reconciliation.
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Petty cash
• Petty cash 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.
• Example: If “X” company desires to establish a $100 fund on August 1, the entry will be
August 1/ Petty cash-----------$ 100
Cash in bank--------------100
• Assume that on August 31, the petty cash custodian request replenishment. The fund contains $13
cash and petty cash receipt for postage expense $44, freight in, $38 and miscellaneous expense,
$5.
• The entry to record the replenishment on August 31 will be:
August 31/ Postage expense------------44
Freight in ………….... 38
Miscellaneous exp. -------- 5
Cash in bank------------------87
Receivable
• The term receivable refers to amounts due from individuals and other
companies.
• Receivables are claims that are expected to be collected in cash.
• The term receivables includes all money claims against other entities,
including people, business firms, and other organizations.
• These receivables are usually a significant portion of the total current
assets. They are frequently classified as
Accounts receivable,
Notes receivable
Other receivables.
There are two methods of valuations of account receivables.
• The term accounts receivable valuation describes the methods used to
determine the value of accounts receivable appearing on the company's
balance sheet. Typical adjustments to accounts receivable can include
discounts, sales returns, and uncollectable accounts.
Allowance Method:
• The allowance method of accounting for bad debts involves estimating
uncollectible accounts at the end of each period. This provides better
matching on the income statement. It also ensures that companies state
receivables on the balance sheet at their cash (net) realizable value.
Direct write-off Method:
• The Direct Write-off method of accounting for bad debts records the loss
from an uncollectible A/R at the time it is determined to be uncollectible.
No attempt is made to predict uncollectible accounts expense. Bad debt
expense is recorded when specific accounts are determined to be worthless.
Example of allowance method
Example for direct write-off method
Accounting for 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.
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Discounting notes receivable
• Sometimes, companies convert receivables to cash before they
are due. Reasons for this include the need for cash or a desire
not to be involved in collection activities. Converting receivable
is usually done either (1) by selling them, or (2) by using them
as security for a loan.
• Example-23: Assume that a 90-day, 12%, Birr 20,000 N/R from
Hiwot Company dated Jan.1, 2002 is discounted at the payee’s
bank on February 12, 20x2 at the discount rate of 15%.
Solution: The steps to determine the proceeds (-the amount to
be received by the payee from the bank upon discounting) are
as follows:
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The end
