ACC201

Financial Accounting 1

Workshop 6
Cash Management
 COMMONWEALTH OF AUSTRALIA
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Material adapted from Financial accounting / John Hoggett, John Medlin, Keryn
Chalmers, Claire Beattie, Andreas Hellmann, Jodie Maxfield Tenth edition. John
Wiley & Sons Australia, Ltd

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2
 Learning objectives

1. Define the term cash as it is used in accounting

2. Explain internal control procedures relevant to the
control of cash receipts and cash payments
3. Prepare a bank reconciliation statement
 Class Discussion
1. Many people think of cash as coins and notes. In
accounting, cash has a broader meaning. What type
of assets are defined as cash in accounting?

2. ‘Although the process of bank reconciliation provides

a measure of control over cash in a business entity,
bank reconciliation is useless unless it operates
within a framework that incorporates essential
elements of a good internal control system.’ Discuss
this statement.
 Learning objectives

1. Define the term cash as it is used in accounting

2. Explain internal control procedures relevant to the
control of cash receipts and cash payments
3. Prepare a bank reconciliation statement
 Cash defined

• Cash is a term used in accounting to identify money,

duplicates of credit card and electronic funds transfer at
point of sale (EFTPOS) sales, and any other negotiable
instrument, such as a cheque or postal note, that a bank
or financial institution will normally accept as a deposit to
an account.
• Practically every transaction eventually results in an
inflow or outflow of cash.
• The control and proper use of cash is an important
management function.
 Cash management

• Effective management of cash should include the

following:
- Any cash accumulated that is not needed should be invested.
- Cash funds must be continually monitored and controlled by
management
- Cash must be protected by controlling access to it and its use by
employees
- Internal control systems for cash receipts and payments should be
established
 Class Activity

• Benjamin runs a cheese shop at the local shopping centre.

Some months Benjamin seems to have more than enough
cash to pay his bills when they are due. Other months
Benjamin struggles to pay bills on time as he runs short of
cash in the business’ bank account and has to use money
from his personal account to pay business expenses.

• Required: Advise Benjamin on ways he can overcome his

cash flow management issues
 Learning objectives

1. Define the term cash as it is used in accounting

2. Explain internal control procedures relevant to the
control of cash receipts and cash payments
3. Prepare a bank reconciliation statement
 Control of cash

• Cash is the asset most subject to theft, and it is

therefore important to set up a good internal
control system for handling cash and recording
cash transactions.
 Control of cash

• Three important principles:

– Separation of responsibility for handling and
custodianship of cash from maintaining records about
cash.
– Banking intact each day’s cash receipts.
– Making all payments by electronic transfer to a bank
account of another person or entity or by cheque.
 Bank accounts and reconciliation

• Cheque accounts:
– Internal control is strengthened because the bank
record of deposits received, cheques paid and
transfers provides an independent cross‐check on the
internal cash records of the entity.
– Deposits of cash receipts are made by preparing a
deposit slip.
– Cheques, as with other forms of currency, are subject
to misappropriation, and every effort should be made
to protect the interests of all parties to a cheque.
 Bank accounts and reconciliation

• Electronic funds transfer:

– Advances in mobile phone technology have also
contributed to the increasing use of EFT.
– EFT opens up the possibility of a ‘chequeless society’.
– Internet banking has increased security risk and users
must make sure their online access details are
protected by using a firewall, anti‐spyware and
antivirus software.
 Bank accounts and reconciliation

• The bank statement:

– The bank statement is a statement of the bank’s
liability to the entity rather than a statement of the
entity’s asset, as commonly assumed.
– The most common entries in the credit column are the
deposits made to the account.
– The most common entries in the debit column are
cheques and EFTs that have been paid by the bank
as evidenced by cheque and EFT numbers in the
‘Particulars’ column.
 Class Activity

• Julia Ross Company has the following internal control

procedures over cash payments.
- 1. Company cheques are prenumbered
- 2. The bank statement is reconciled monthly by an internal
auditor.
- 3.Blank cheques are stored in a safe in the finance manager's
office.
- 4. Only the finance manager or assistant may sign cheques.
- 5. Cheque signers are not allowed to record cash payment
transactions.

• Required: Identify the internal control principle that is

applicable to each procedure.
 Learning objectives

1. Define the term cash as it is used in accounting

2. Explain internal control procedures relevant to the
control of cash receipts and cash payments
3. Prepare a bank reconciliation statement
 Bank accounts and reconciliation

• Bank reconciliation:
– The Cash at Bank account balance at a particular
date rarely agrees with the balance shown on a bank
statement of the same date.
 Bank accounts and reconciliation

• Bank reconciliation:
– There are three main reasons that the two records
may disagree over the same period of time.
1. Some items recorded in the entity’s cash journals in the
period covered are not recorded by the bank on the bank
statement for the same period.
2. Some items originate in the bank statement.
3. Errors may have been made either by the entity in the
cash journals or by the bank in the entity’s account and
bank statement.
 Bank accounts and reconciliation

• Bank reconciliation:
– Reconciliation procedure:
• To prepare a bank reconciliation statement, the following is
required:
– The last bank reconciliation statement prepared.
– Cash receipts and cash payments journals covering the period
since the last reconciliation.
– The opening balance of the Cash at Bank account for the
period beginning with the preparation of the last reconciliation
statement.
– The bank statement covering the period since the last
reconciliation.
 Bank accounts and reconciliation
• Step 1: Check that outstanding items and errors included in the last
reconciliation statement now appear in the bank statement for the current
period. Any items not adjusted must be included again in the current
reconciliation statement.
• Step 2: Compare the entries in the cash receipts journal with the entries in
the credit column of the bank statement, and the entries in the cash
payments journal with the debit column of the bank statement. Entries that
appear in both the cash journals and the bank statements should be ticked.
These items will bot be responsible for any variations. Unticked entries will
fall into the following categories (outstanding deposits, unpresented
cheques, items on the bank statement that have been initiated by the bank,
errors made in entering items in the cash journals).
• Step 3: Enter all the items that appear only in the bank statement in the
appropriate cash journals. Once these items have been entered, they can
be ticked since they are common to both sets of records.
 Bank accounts and reconciliation
• Step 4: Adjust the cash journals for any errors that exist in these journals.
Once these errors have been adjusted, the entries should agree with the
bank statement entries and can be ticked off.
• Step 5: The cash journals should now be totaled and cross added and the
appropriate totals posted to the Cash at Bank account in the general ledger.
This account can then be balanced to give the final adjusted balance.
• Step 6: Prepare the bank reconciliation statement. At this stage, the only
normal entries that cause a difference are the outstanding deposits and the
unpresented cheques.
 Class Activity

The following information relates to the cash position of Cathy

Fraser, loan broker.
- Cash at Bank account balance as at 30 June 2019: $45 451
debit.
- Bank statement balance as at 30 June 2019: $47 512 credit.
- 30 June receipts amounting to $1820 have not been deposited.
- Cheques issued but not presented total $3468.
- A $312 cheque was returned marked ‘dishonoured’. The cheque
had been received from J. Simms, a new customer.
- A $750 deposit made by L. Richards was incorrectly credited to
the bank account of Cathy Fraser.
- The bank statement shows that the bank has charged the
business’s account with fees and charges of $25.

Required: Prepare a bank reconciliation at 30 June 2019

Preparation – Workshop 7