PART 2: WORKING CAPITAL

UNIT 9: CASH

Contents
9.0 Aims and Objectives
9.1 Introduction
9.2 Management and Control of Cash
9.3 Controlling Cash Receipts and Payments
9.3.1 Bank Reconciliation
9.3.2 Proof of Cash
9.3.3 Petty Cash Fund
9.3.4 Change Fund
9.4 Cash Overdraft
9.5 Compensating Cash Balances
9.6 Summary
9.7 Answers to Check Your Progress
9.8 Model Examination Questions
9.9 Glossary

9.0 AIMS AND OBJECTIVES

This unit aims at discussing the management, control procedures and accounting for cash and
cash transaction.

After studying this chapter, you will:

 be familiar with the composition of cash

 know how to construct a bank reconciliation
 understand other control procedures for cash

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9.1 INTRODUCTION

Cash, the most liquid of assets, is the standard medium of exchange and provide the basis for
measuring and accounting for all other item. It is generally classified as a current asset. To be
report as “cash” it must be readily available for the payment of current obligations, it must be
free from any contractual restriction that limits its use in satisfying debts.

Cash consists of coins, currency, and available funds on deposit at the bank. Negotiable
instruments such as money orders, certified checks, cashiers’ check, personal checks, and
bank drafts are viewed as cash. Savings accounts are usually classified as cash, although the
bank has a legal right to demand notice before withdrawal. But the privilege of prior notice is
rarely exercised by banks, so savings accounts are considered cash.

Certificates of deposits (CDs), deposit receipts, treasury bills, commercial and finance
company paper, similar types of deposits, and “short-term paper” that provides small
investors with an opportunity to earn high rates of interest are more appropriately classified as
temporary investment than cash. The logic for this classification is that these situations
usually contain restrictions or penalties on their conversion to cash.

Items that present classification problem are postdated checks, IOUs, travel advances, postage
stamps, and special cash funds. Travel advances are properly treated at receivables if the
advances are to be collected from the employees or deducted from their salaries. otherwise,
classification of the travel advance as prepaid expense is more appropriate postdated checks
and IOUs are treated as receivables.

Postage stamps on hand are classified as part of office supplies inventory or as a prepaid
expense. Petty cash fund and change funds are included in the current assets as cash balance
these funds are used to meet current operating expense and to liquidate current liabilities.

9.2 MANAGEMENT AND CONTROL OF CASH

Cash presents special management and control problems not only because it enters into a
great many transactions but also for these reasons.

1. Cash is the single asset readily convertible into any other type of asset.

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It is easily concealed and transported, and it is almost universally desired. Correct accounting
for cash transactions therefore requires that control be established to ensure that cash
belonging to the enterprise is not improperly converted to personal use by someone in, or
connected with, the enterprise.

2. The amount of cash owned by an enterprise should be regulated carefully so that neither too
much nor too little is available at any time.

Two problems of accounting for cash transactions face the accounting department.
(a) Proper controls must be established to ensure that no unauthorized transactions are
entered into by officers or employees;
(b) Information necessary to the proper management of cash on hand and cash
transactions must be provided.

Most companies fix the responsibility for obtaining proper record control over cash
transactions in the accounting department. Record control of course, is not possible without
adequate physical control; therefore the accounting department must take an interest in
preventing intentional or unintentional mistakes in cash transactions.

Regulating the amount of cash on hand is primarily a management problem, but accountants
must be able to provide the information required by management for regulating cash on hand
through the special transactions of borrowing or investing.

Internal controls for cash should

 Separate custody of and accounting for cash
 Account for all cash transaction
 Maintain only the minimum cash balance needed
 Provide for periodic test counts of cash balances

Check your progress – 1

i. What are the usual components of cash?
_____________________________________________________________________
______________________________________.

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ii. What is a system of internal control?
_____________________________________________________________________
_____________________________________.

9.3 CONTROLLING CASH RECEIPTS AND PAYMENTS

The objective in the control of cash receipts is to ensure that all cash that is receivable by the
business enterprise is collected and recorded without loss. The system of controlling cash
payments should be designed to ensure that no unauthorized payments are made.

9.3.1 A Bank Reconciliation

Once a month, the bank sends each depositor a statement and returns the canceled checks that
it has paid and charged to the depositor’s account. The returned checks are said to be
“canceled” because the bank stamps or cancels, them to show that they have been paid. The
bank statement shows the balance at the beginning of the month, the deposits, the checks paid,
other debits and credits during the moth, and the balance at the end of the month.

Rarely will the balance of a company’s cash account exactly equal the cash balance shown on
the bank statement. Certain transactions shown in the company’s records may not have been
recorded by the bank, and certain bank transactions may not appear in the company’s records.
Therefore, a necessary step in internal control is to prove both the balance shown on the bank
statement and the balance of cash in the accounting records.

A bank reconciliation is the process of accounting for the difference between the balance of
cash according to the company’s records. This process involves making additions to and
subtractions from both balances to arrive at the adjusted cash balance.
The most common examples of transactions shown in a company’s records but not entered in
the bank’s records are the following:
1. Outstanding checks: these are checks that have been issued and recorded by the
company, but do not yet appear on the bank statement.
2. Deposits in transit: these are deposits that were mailed or taken to the bank but were
not received in time to be recorded on the bank statement.

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Transactions that may appear on the bank statement but that have not been recorded by the
company include the following:
1. Service charge: Banks often charge a fee, or a service charge, for the use of a
checking account. Many banks have the service charge on a number of factors, such as
the average balance of the account during the month or the number of checks drawn.
2. NSF (Non-Sufficient Funds) check: A check deposited by the company that is not
paid when the company’s bank present it to the makers bank. The bank charges the
company’s account and returns the check so that the company can try to collect the
amount due. If the bank has deducted the NSF check from the bank statement but the
company has not deducted it from its book balance, an adjustment must be made in the
bank reconciliation. The depositor usually reclassifies the NSF check from cash to
Account Receivable because the company must now collect from the person or
company that wrote the check.
3. Interest income: It is very common for banks to pay interest on a company’s average
balance. These accounts are sometimes called N.O.W or money market accounts but
can take other forms. Such interest is reported on the bank statement.
4. Miscellaneous charges and credits: Banks also charge for other services such as
collection and payment of promissory note, stopping payment on checks and printing
checks. The bank notifies the depositor of each deduction including a debit
memorandum with the monthly statement. A bank will sometimes serve as an agent in
collecting on promissory notes for the depositor. In such case, a credit memorandum
will be included.
An error by either the bank or the depositor will, of course, require immediate correction.

Assume the following data for September 1996 for Nile Corporation to illustrate the
preparation of bank reconciliation:
1. Cash balance in the bank according to September 30 bank statement: Br. 114,621
2. Cash balance in the bank according to Sept. 30 general ledger account: Br. 126,372.
3. Deposits made at the bank during Sept. recorded on Nile’s books:
Sept. 3 -------- Br. 10,000 Sept. 10 -------- Br. 15,000 Sept. 24 ---------Br. 8,000
Sept. 6 ------------ 12,000 Sept. 18 -------------25,000 Sept. 30 ----------- 12,000
Total = Br. 82,000

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4. deposits made by Nile Co. on august 31 that had not cleared the bank (deposit in
transit) by August 31: Br. 16,000
5. Checks written by Nile Co. prior to Sept. 1 that had not cleared the bank (checks
outstanding) by August 31
Check no
no. 555 ------------ Br. 25
Check no
no. 580 ---------------- 90
6. Checks written during Sept. recorded on Nile’s book
Check No
No. 621 ----- Br. 48 check no
no. 625 ----- Br. 88 check no 629 ----- Br. 62 check no 634 ---- Br. 81
622 -------- 123 626 -------- 704 630 ---------- 12 635 --------
-------- 95
623 -------- 308 627 ----------29 632 ---------112 Total = ________
624 --------- 94 628 ---------66 633 --------- 53
7. Deposits shown on the Sept. bank statement:
Sept. 1 ---------- Br. 16,000 Sept. 7 -------- Br. 12,000 Sept 19 ---------- 25,000
Sept. 4 -------------- 10,000 Sept. 11 ---------- 15,000 Sept. 25. ----------- 8000
Total = 86,000
8. Cancelled checks of Nile Corporation returned with the Sept. bank statement and
recorded there on:
Check No. 580 ------- Br. 90 check No 624 ------- Br. 94 check no 629 ---- Br. 62 check no. 633 ----- Br. 53
621 ----------- 48 626 -----------704 630 --------- 12 634 ----------
---------- 81
622 ----------123 627 ------------ 29 631 --------- 34
623 --------- 308 628 ------------66 632 -------- 112 Total Br. 1816
9. Cancelled check of Nice Corporation returned with the Sept. bank statement of Nile
Corporation and recorded thereon: Br. 98
10. Bank service charge of Br 7 made against Nile’s account but not recorded by Nile
Corporation
11. A customers check for Br. 60 returned with the Sept. bank statement and marked NSF,
not yet redpostied and not recorded on Nile’s books.
12. Interest of Br. 125 collected on behalf of Nile, not yet recorded by Nile Corporation.
13. Cancelled check no. 631 returned by the bank for Br. 34 (correct amount) for office
supplies recorded as Br. 43 in the accounting records.
14. Miscellaneous revenue collected by the bank for Nile Corpn. Br. 72 not yet recorded
by Nile Corpn.

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15. The cash receipt journal indicated that the cash received during Sept. totaled Br.
82,000 and the cash payment journal showed payments during spet, Br. 1, 918
16. The bank statement for Sept. total deposits, Br. 86,197, payments Br. 1,981.

Required:
Required: prepare Bank Reconciliation for Nile Corpn for the month of Sept 1996.
There are three formats of preparing bank reconciliation
I. The first format reconciles the balance per bank statement and the balance per book with
adjusted cash balance.
II. The second format reconciles the balance per bank statement with the balance per
depositor’s record and then with adjusted cash balance.
III. The third format reconciles the balance per depositor’s record with the balance per bank
statement and then with adjusted cash balance.

Based on the above given information the bank reconciliation for Nile corporation for the
month of September 1996 is prepared as follows:
Using the first format, the bank reconciliation is:
Nile Corporation
Bank Reconciliation
September 30,1996
Balance per bank statement ------------------------------------------- Br. 114,621
Add: Deposits in transit ---------------------------- 12,000
Error 98 12,098
Dedu: Outstanding checks, June 30,1996
Check No
No 555 -------------------------- 25
Check No
No 625 88
Check No
No 635 95 (208)
Adjusted cash balance Br. 126,511
Balance per depositor’s record Br. 126,372
Add: Interest collected by the bank---------------------- 125
Miscellaneous revenue collected by the bank -----72
Error 9 206
Dedu: Bank service charge 7
Not sufficient fund 60 (67)
Adjusted cash balance 126,511

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This form of bank reconciliation serves three functions:
a) to determine the correct cash balance to be reported in the balance sheet
b) to disclose errors made in recording cash transactions either by the bank or by
the depositor, and
c) to provide information necessary to bring the accounting records up to date

The journal entry required to adjust the accounting records for errors and omissions is taken
from the adjustments to the depositor’s records in the bank reconciliation. All items appearing
in the reconciliation as adjustments to or deductions from the “balance in depositors records”
must be included in the journal entry. The journal entry on September 30,1996, to adjust the
accounting records of Nile corporation is shown below:

1996 Cash in bank --------------------------------------------- 206

September 30 Miscellaneous Expense (bank service charge) --------7
Account receivable -------------------------------------- 60
Interest revenue ------------------------------------- 125
Miscellaneous revenue ------------------------------ 72
Supplies expense -------------------------------------- 9
To adjust cash ledger accounts per September 30,1996, bank reconciliation

Using the second format, the bank reconciliation is:

Nile Corporation
Bank Reconciliation
September 30,1996
Balance per bank statement Br. 114,621
Add: Deposit in transit 12,000
Error made by the bank 98
Bank service charge 7
NSF check 60 12,165
Dedu: Outstanding checks
Check no 555 25
Check no 625 88
Check no 635 95 (206)

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Balance per depositor’s record 126,372
Add: Adjustments to cash account 139*
Adjusted cash balance Br. 126,511
*Br. 139  Items not recorded by depositor
 206 – 67

In the above form of bank reconciliation the bank balance is reconciled to the unadjusted
balance of the depositors cash account in the general ledger. Then, the required adjustment to
the cash account is entered in the bank reconciliation resulting in the correct cash balance.

The journal entry is the same as the first format.

Using the third format, the bank reconciliation is

Nile Corporation
Bank Reconciliation
September 30,1996
Balance per depositor’s record Br. 126,372
Add: Outstanding checks:
Check no 555 25
Check no 625 88
Check no 635 95 208
Interest revenue collected by bank 125
Miscellaneous revenue collected by bank 72
Error made by the depositor 9 414
Dedu: Deposits in transit 12,000
Bank service charge 7
NSF check 60
Error made by bank 98 12,165
Balance per bank statement 114,621
Add: Adjustment to cash account 11,890*
Adjusted cash balance 126,511
* 11,890  Items not recorded by bank
= 12,000 + 98 – 208

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Check your progress – 2
i. What are the functions of a bank reconciliation?
_____________________________________________________________________
____________________________________.
ii. What is the meaning of outstanding check and how it is treated on the bank
reconciliation?
_____________________________________________________________________
__________________________________________.

9.3.2 Proof of Cash

Cash balances in the bank statement and the depositor’s ledger are reconciled to establish the
accuracy of the cash records on a specific date. A full reconciliation of cash receipts and
payments (known as a proof of cash) also may be made to establish the accuracy of the cash
balance and the effectiveness of internal control over cash receipts and cash payment for a
selected month or a longer period.

Proof of cash is preferred by auditors as a means of identifying all differences between the
books and the bank statement during the period covered by the reconciliation. It is generally
prepared when a company has weak internal control over cash; it assists in identifying
unauthorized and unrecorded transfer of cash.

Proof of cash has four columns

The first column reconciles the beginning of the cash balances per bank statement and the
depositors records. The second column reconciles the current period cash receipts (deposits)
per bank statement to receipts recorded in the books. The third column reconciles the current
period cash disbursements per bank statement to disbursements recorded in the books. The
fourth column reconciles the end of period cash balances per the bank statement and the
books.

The proof of cash for Nile Corporation is prepared below:

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Nile Corporation
Proof of Cash
September 30,1996
Balance on Receipts Payments Balance on
August 31,1996 September 30,1996
Balance per bank statement Br. 30,405 Br. 86,197 Br. 1,981 114,621
Deposit in transit:
August 31,1996 16,000 (16,000)
September 30,1996 12,000
Outstanding checks:
August 31,1996 (115) (115)
Sept 30,1996 208 (208)
Other reconciling items:
Bank service charges for Sept. (7) 7
NSF check (60) 60
Bank error (98) 98
Depositor error 9 (9)
Collection by bank _______ (197) ______ (197)
Balance per depositors record Br. 46,290 Br. 82,000 Br. 1,918 Br. 126,372
Add: Adjustment to cash account 131
Adjusted cash balance Br.126,511
Br.126,511

The proof of cash for Nile Corporation on September 30,1996 is explained below:
1. Reconciliation of cash receipts in bank statement and in depositor’s records.
The Br. 16,000 deposit in transit on August 31,1996 is deducted from the deposits recorded
by the bank in September because it was a receipt of cash in August. The Br. 12,000 deposit
in transit on September 30 is a receipt of cash in September and should be included in total
cash receipts for September. The Br. 197 (Br. 125 + Br. 72) interest and miscellaneous
revenue collected by the bank must be deducted from the deposits recorded by the bank
because these revenues had not been entered in the accounting records (before adjustment) on
September 30,1996.

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2. Reconciliation of cash payments in bank statement and in depositor’s records.
The autstanding checks of Br. 115 on August 31 are included in the bank debits for
September. These do not represent cash payments during September but rather were shown
properly as cash payments in August. The outstanding checks of Br. 208 on September 30 did
not include any checks that were outstanding on August 31; therefore, this total is properly
classified as a cash payment by Nile Corporation during September. The bank service charges
of Br. 7 and the NSF checks of Br. 60 were included in the banks debit for September but not
in the accounting records (unadjusted). The bank recorded check no. 631 at its correct amount
of Br. 34, that amount is Br. 9 larger than the Br. 43 a check of Nice Corporation, which
amounts Br. 98 in the account of Nile Corporation incorrectly
3. Reconciliation of bank and depositor cash balances
The last column of the reconciliation is identical to the reconciliation of the bank and
depositor balances to the correct cash balance

Check your progress – 3

1. What function does the proof of cash serve?
_____________________________________________________________________
__________________________________________.

9.3.3. The petty cash fund (impress petty cash system)

Almost every company finds it necessary to pay small amounts for a great many things such
as employees lunches, and taxi fare, purchase of minor office supply items, and small expense
payments. It is frequently impractical to require that such disbursements be made by check yet
some control over them is important. A common method of obtaining reasonable control,
simplicity of operation, and general adherence to the rule of disbursement by check is the
impress system for petty cash disbursements.

This is how the system works:

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1. Some individual is designated as the petty cash custodian and given a small amount of
currency as a fund from which to make small payments. For example, if the fund established
is Br. 300, the journal entry will be
Petty cash fund 300
Cash 300
2. As disbursements are made, the petty cash custodian obtains signed receipts from each
individual to whom cash is paid. If possible, evidence of the disbursements should be attached
to the petty cash receipt. (Petty cash transactions are not recorded until the fund is reimbursed
and, then such entries are recorded by someone in accounting not the petty cash custodian)
3. When the supply of money runs low, the custodian presents to the general casher a request
for reimbursement supported by the petty cash receipts and other evidence that has been
obtained for all disbursements, and receives a company check drawn to “cash” or “petty cash”
to replenish the fund.
Office supplies expense 42
Postage expense 53
Entertainment expense 76
Cash over and short 2
Cash 173
N.B.
N.B. These expenses are paid form the petty cash fund.
4. It is decided that the amount of cash in petty cash fund is excessive, an adjustment may be
made as follows (lowering the fund balance from Br. 300 to Br. 200)
Cash 100
Petty cash 100
The journal entry to increase this fund balance would be a debit to petty cash and a credit to
cash.

Entries are made to the petty cash account only to increase or decrease the size of the fund, or
to adjust the petty cash account balance and related expenses if not replenished at year-end.
The reimbursement entry does not affect the petty cash account, but it does affect the amount
of petty cash on hand.

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The cash short and over account is used when the fund fails to prove out. If the cash proves
out short (that is, the sum of the vouchers and cash in their fund is less than the impress
amount), the shortage is debited to the cash short and over account. It is proves out over, the
overage is credited to cash short and over account. This account is left open until the end of
the year, when it is closed and generally shown on the income statement as a miscellaneous
expense or income.

There are usually expense items in the fund except immediately after reimbursement;
therefore, if accurate financial statements are desired, the fund must be reimbursed at the end
of each accounting period and also when nearly depleted.

Under the imprest system the petty cash custodian is responsible at all times for the amount of
the fund on hand either as cash or in the form of signed vouchers.

These vouchers provide the evidence required by the disbursing officer to issue a
reimbursement check. Two additional procedures are followed to obtain more complete
control over the petty cash fund.

1. Surprise counts of the funds are made from time to time by a superior of the petty cash
custodian to determine that the fund is being accounted for satisfactory.
2. Petty cash vouchers are cancelled or mutilated after they have been submitted for
reimbursement, so that they cannot be used to secure a second and improper
reimbursement.

9.3.4 Change Fund

A change fund is used to facilitate the collection of cash from customers. The amount of the
change fund is deducted from the total cash (including checks, money orders, etc) on hand at
the close of business each day to determine the daily cash collections. The cash should be
counted and compared with the cash register tape daily. In general, change and petty cash
funds are combined with cash on hand and in the bank and are presented as a single amount in
the balance sheet.

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Check your progress – 4
i. Change fund and petty cash fund serve the same purpose
A. True B. False

9.4 CASH OVERDRAFT

The issuance of checks in excess of the balance on deposit creates an overdraft in the bank
account. Banks often (but not always) refuse to pay a check that exceeds the balance of the
depositor’s account. Such refusal prevents an overdraft from occurring. In the rare situation in
which a business enterprise maintains only one bank account and that account is overdrawn
on the balance sheet date, the overdraft amount is reported as a current liability. However, if
can enterprise has other accounts in the same bank with larger positive balances, it is
reasonable to present the net balance of cash as a current asset. This treatment is based on the
reasoning that users of financial statements are interested in an enterprise’s net cash position,
rather than in the status of its individual bank accounts in a particular bank.

An overdraft in an account in one bank should not be offset against positive balances in other
banks because no right of offset exists. The overdraft in the one bank account is a current
liability, and the total of the positive balances is a current asset.

In rare instances, an accountant may discover a situation in which checks are written (and
recorded) in excess of the amount on deposit, but the checks are not issued to creditors. In the
preparation of financial statement, the credit balance in the cash ledger account should be
eliminated by a debit to the cash account and a credit to the Accounts payable account (or to
either liability accounts) for the amount of the checks written but not issued.

9.5 COMPENSATING CASH BALANCES

A compensating balance generally is defined as the portion of any demand deposit

maintained by a depositor that constitutes support for existing borrowing arrangements with
banks.

Disclosure of compensating balance arrangements is required because such balances are not
available for discretionary use by management on the balance sheet date. Because the

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maintenance of compensating cash balances affects liquidity and the effective cost of
borrowing from banks, users of financial statements may find such information useful.

Check your progress – 5

1. Define compensating cash balances and state the reasons for disclosure of such
balances in a note to the financial statements.
_____________________________________________________________________
_____________________________________________.

9.6 SUMMARY

Cash consists of coin, currency, bank deposits, and negotiable instruments such as money
orders, checks and bank drafts. Control over the handing of cash and cash transactions is an
important consideration for any business enterprise. It is the most liquid asset held by an
enterprise and is the asset most easily converted to personal use by officers or employees.
Numerous control procedures are available for cash transactions, but the two commonly used
procedures are impres petty cash systems and bank reconciliation.

In an impres petty cash system, a petty cash custodian is given a small amount of currency
from which to make small payments (minor office supplies, taxi, postage etc). Each time a
disbursement is made, the petty cashier obtains a signed receipts for the payment. When cash
in the fund runs low, the petty cashier submits the signed receipts to the general cashier and a
check is prepared to replenish the petty cash fund. This process is designed to promote control
over small cash disbursements which would be awkward to pay by check.

A basic cash control is preparation of a monthly bank reconciliation. The bank reconciliation,
when properly prepared, proves that the cash balance per bank and the cash balance per book
are in agreement.

It is common practice for an enterprise to have an agreement which a bank concerning credit
and borrowing arrangement when such an agreement exists, the bank usually requires the
enterprise to maintain a minimum cash balance on deposit.

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This minimum balance is known as a compensating balance. Compensating balances that
result in legally restricted deposits must be separately classified in the balance sheet. The
nature of the borrowing arrangement determines whether the compensating balance is
classified as current asset or a non-current asset.

Proper cash management involves the problem of liquidity Vs profitability. In terms of

liquidity, management attempts to provide an ample amount of cash to meet all its obligations
as they mature. However, when the focus is on profitability, management attempts to make
maximum use of cash by purchasing revenue-providing assets. Thus, the problem concerns
the identification of an optimum cash position, one that will permit prompt payment of
maturing obligations and provide for maximum investment in revenue – producing assets. In
most instances some trade-off between liquidity and profitability must be made.

9.7 ANSWERS TO CHECK YOUR PROGRESS

1. (i) Cash consists of coin, currency, personal checks, bank drafts, money orders as well
as money on deposit with banks.
(ii) Internal control system refers to the policies and procedures established to provide
reasonable assurance that the enterprises goals and objectives will be achieved.
2. (i) Bank reconciliation is a schedule indicating and explaining any differences between
the bank’s and company’s records of cash. It serves three functions
1) To determine the correct balance to be reported on the balance sheet.
2) To disclose errors made in recording cash transactions, either by the bank or by
the depositor.
3) To provide information necessary to bring the accounting records up-to-date.
(ii) Outstanding check is a check written and recorded by the depositor but not cleared
and recorded by the bank. It is deducted from balance per bank statement to
determine the correct cash balance.
3. Proof of cash (reconciliation of cash receipts and cash payments) is prepared to
establish the accuracy of the cash balance and the effectiveness of internal controls
over cash receipts and cash payments for a selected month or a longer period.
4. B

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5. A compensating balance is defined as the portion of any demand deposit maintained
by a depositor that constitutes support for existing borrowing arrangements with banks

Disclosure of compensating balance arrangements is required because such cash balances are
not available for discretionary use by management on the balance sheet date.

9.8 MODEL EXAMINATION QUESTIONS

I True / False
__________ 1. The replenishment of the petty cash fund under an imprest system requires a
debit to the petty cash account for the amount of the replenishment.
__________ 2. Because the bank has the legal right to demand notice before withdrawal,
savings accounts usually are not classified on the entity’s balance sheet as
cash
__________ 3. Legally restricted deposits held, as compensating balances against short-term
borrowing arrangements should be stated separately among the cash and cash
items in current assets.
_________ 4. A bank reconciliation is an integral part of system of internal control over cash.
_________ 5. When preparing a bank reconciliation for the purpose of arriving at a correct
cash balance, NSF (not sufficient funds) checks are subtracted from the
balance per books.

II Multiple Choice
__________ 1. Which of the following is properly classified as cash?
A. Customer’s post dated checks on hand
B. Certificates of deposit
C. Saving accounts
D. Bond sinking fund cash
__________ 2. Which of the following journal entries is appropriate to establish an imprest
petty cash fund?
A. Petty Cash Fund -------------------------------- XX
Cash --------------------------------------------------- XX
B. Petty Cash Expense --------------------------------- XX

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Cash -------------------------------------------------- XX
C. Administrative Expense ------------------------ XX
Selling Expense --------------------------------- XX
Operating Expense ------------------------------ XX
Cash --------------------------------------------- XX
D. Miscellaneous Expense -------------------- XX
Cash ------------------------------------------- XX
__________ 3. In the process of preparing a bank reconciliation
A. Outstanding checks should be added to the bank balance of cash
B. Outstanding checks should be subtracted from the book balance of cash
C. All of the reconciling items shown on a bank reconciliation must be
entered in the accounting records after the reconciliation is completed
D. Items that appear on the reconciliation as corrections to the bank balance of
cash should be entered in the accounting records
E. None of the above
__________ 4. In preparing its bank reconciliation for the month of March, year 2, DOT
Company has available the following information:
Balance in bank statement, March 31, year 2 ------------------ Br. 36,050
Deposit in transit, March 31, year 2 ----------------------------------- 6250
Outstanding checks, March 31, year 2 ---------------------------------5750
Credit erroneously recorded by bank in DOTs account
March 12, year 2 ----------------------------------------------------------250
Bank service charges for March, year 2 ---------------------------------50
The correct balance of DOT Company’s cash on March 31, year 2 is
A. Br. 35,250 B. Br. 36,250 C. Br. 36,300 D. Br. 36,550 E. None
__________ 5. Each of the following measures strengthens internal control over cash receipts
except.
A. The use of a voucher system
B. Preparation of a daily listing of all checks received through mail
C. The deposit of cash receipts in fact in the bank on a daily bases
D. The use of cash register.

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III Exercises
1. Reconciliation of Eagle Company’s bank account at May 31 was as follows:
Balance from bank statement ----------------------- Br. 5250
Deposit in transit --------------------------------------------750
Checks outstanding ---------------------------------------- (75)
Correct cash balance ---------------------------------Br.
---------------------------------Br. 5,925
Balance from books ----------------------------------Br. 5,932
Bank service charge -------------------------------------- (7)
Correct cash balance, May 31 ----------------------Br.
----------------------Br. 5925

June transactions: Bank Books

Checks recorded Br. 5,750 Br. 5,900
Deposits recorded 4,050 4, 500
Service charges recorded 6 __
Collection by bank (Br. 1800 note plus interest) 1050 __
NSF check returned with June statement
(Will be redeposited assumed to be good) 25
Balances, June 30 4,569 4,525

Required:
(1) Compute deposits in transit and checks outstanding at June 30 by comparing bank and
books deposits and checks
(2) Prepare a bank reconciliation for June using the bank and book balance to correct cash
balance format
(3) Give all journal entries that should be made based on the June bank reconciliation

2. As part of its newly designed internal control system, DOR Corporation established a petty
cash fund. Transactions for the first month were as follows:
A. Wrote a check for Br. 500 on August 1 and gave the cash to the fund custodian
B. Summary at the petty cash expenditures made by the custodian:
August 1 – 15 August 16 – 31
Postage used Br. 40 Br. 58

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Supplies purchased and used 265 190
Delivery Expense 98 178
Miscellaneous Expense 35 40
Totals Br. 438 Br. 466
C. Fund replenished on August 16
D. Fund replenished on August 31 and increased by Br. 300

Required: Give all of the entries indicated through August 31.

3. It is March 31 and Fry company is ready to prepare its March bank reconciliation. The
following information is available.
A. Company Cash Account
March 1 balance ---- Br. 28,350 Checks ----------- 53,000
Deposits ---------------- 51,468

B. Bank Statement, March 31:

Balance, March 1 ---------------------------------------Br. 30,800
Deposits ------------------------------------------------------51,198
Checks cleared ----------------------------------------------(54,118)
NSF checks (customer zinny) ---------------------------------(100)
Note collected for depositor (including interest, Br. 80) ---1680
Interest on bank balance------------------------------------------ 36
Bank service charge ----------------------------------------------(14)
----------------------------------------------(14)
Balance, March 31 Br. ------------------------------------ Br.29,482
Br.29,482
C. Additional information:
(1) The company overstated one of its deposits by Br. 20; the bank recorded it correctly.
(2) The bank cleared a Br. 178 check as Br. 187; the error has not been corrected by the
balance
(3) End of February: deposits in transit, Br. 1550; checks outstanding Br. 4000

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Required:
(1) Based on the data given above, compute the March 31 deposits in transit and checks
outstanding
(2) Prepare a bank reconciliation for March (Hint: A check figure, Br. 28,400). Use bank
and book balance to correct cash balance format
(3) Give all journal entries that should be made
4. From the following data of sky company for December, year 7
a) Compute the cash balance in the accounting records before adjustment are recorded,
b) Prepare a journal entry to bring the accounting records up to date.
Balance in bank statement ----------------------------- Br. 15,500
Checks outstanding -------------------------------------------6,400
Cash receipts recorded in the accounting records
not yet deposited -----------------------------------------------1,920
Bank service charges not recorded in the
accounting records -------------------------------------------------22
Promissory note collected by bank, not recorded
in the accounting records (includes interest of Br. 40) ---- 4,040

9.9 GLOSSARY

1. Bank account – account which a customer has with a bank, where the customer can deposit
and withdraw money.
2. Bank draft – order by one bank telling another bank (usually in another country) to pay
money to someone.
3. Bank reconciliation – the process of accounting for the difference between the balance
appearing on a bank statement and the cans balance in the company records
4. Bank service charges – charge which a bank makes for carrying out work for a customer.
5. Bank statement – a report sent by a bank to a customer that shows the status of the
customer’s account.
6. Cash overdraft – amount of money, which a company or person can withdraw from a bank
account with the banks permission, and which is more than there is in the account.
7. Change fund – a fund maintained by a business in order to provide changes to customers.

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8. Compensating balance – a minimum amount that a bank requires be kept in an account as
part of a credit granting arrangement.
9. Money order – document which can be bought for sending money through the post
10. NSF (Non-Sufficient Fund) – not having enough money in a bank account, to pay a check
drawn on that account.
11. Petty cash fund – a fund established by a business for making small payments of cash.

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