UNIT FIVE

ACCOUNTING FOR CASH

Introduction
Cash is a necessary asset for every company. Most companies also include cash
equivalents, which are similar to cash, as part of cash. They are the most liquid of all
assets and easily hidden and moved. Therefore, it is important to apply principles of
a good internal control to cash and cash equivalent. Good system of internal control
provides adequate procedures for protecting both cash and cash equivalents. In this
unit therefore, you learn about the definition of cash and cash equivalents. This unit
applies also the internal controls for cash receipt and cash disbursement. This unit is
divided in to three sections. Section one defines cash, cash equivalent, and liquidity.
Section two discusses internal controls over cash receipts. Section three explains
internal controls of cash disbursements.
1. Cash, Cash Equivalent, And Liquidity
Overview
As noted above cash is important asset for every company and must be managed.
Cash equivalent considered also as a part of cash. Both cash and cash equivalents
are very liquid assets.
The purpose of this section is to define cash and cash equivalents. It also explains
liquidity and its relation to cash and cash equivalents .

Outline of this Section

1.1 Definition of Cash
1.2 Definition of cash Equivalent
1.3 Liquidity

1.1 Definition of Cash

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Cash consists of coins, currency (paper money), cheeks, money order, and
money on hand or on deposit in a bank or similar depository. The general
rule is that if the bank will accept it for deposit, it is cash

Items such as postage stamps and post-dated checks (checks payable in the future)
are not cash. Stamps are a prepaid expense, the post-dated checks are accounts
receivable.
1.2 Definition of Cash Equivalent
To increase their return on investment, many companies invest idle cash in assets
called cash equivalent.

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Cash equivalents are short-term, highly liquid investment
assets meeting two criteria:
(i) Readily convertible to a known cash amount
(ii) Sufficiently close to their maturity date so that market
value is not sensitive to interest rate changes

Only investment purchased with in three months of their maturity dates usually
satisfy these criteria. They include money market funds, money market savings
certificates, bank certificates of deposit, treasury bills and notes.
1.3 Liquidity

< Liquidity is how easily an asset can be converted in to another asset

or be used in paying for services or obligations.

All assets can be judged on their liquidity. Cash and similar assets are called liquid
assets. Because, they are converted easily in to other assets or used to pay for
services or liabilities. A company must own some liquid assets, for example, so that
bills are paid on time and purchases are make for cash when necessary.
Just as cash is the beginning of a company’s operating cycle, it is usually the
starting point for a company’s system of internal control. Cash is the one asset that
is readily convertible in to any other type of asset; it is easily concealed and
transported; and it is highly desired. Because of these characteristics, cash is the
asset most susceptible to improper diversion and use. Moreover, because of the
large volume of cash transactions, numerous errors may occur in executing and
recording transactions. To safeguard cash and to assure the accuracy of the
accounting records of cash, effective internal control over cash is imperative. The
application of internal control over cash will be discussed in section 2 and 3 of this
unit.
2. Internal Control over Cash Receipt
Overview
Cash receipts may result from a variety of sources; such as cash sales, collection on
account from customers, the receipt of interest, rents and dividends; investment by
owners, bank loans and proceeds from the sale of non-current assets.
Internal control of cash receipts ensures that all cash received is properly recorded
and deposited. The principles of internal control apply to all types of cash receipts.

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This section explains internal control over two important types of cash receipts
namely: over the counter receipt and by mail receipt.

Outline of this Section

2.1 Over-the-counter Cash Receipts
2.1.1 Cash Short and Over
2.1.2 Cash Change Funds
2.2 Cash Receipt by Mail

2.1 Over-the-counter Cash Receipts

Control of over-the- counter receipts in retail businesses is centered on cash
registers that are visible to customers. In supermarkets and variety stores cash
registers are placed in checkout lines near the exit (s). In some stores, each
department has its own cash register. When a cash sale occurs, the sales are “rung
up” on a cash register with the amount clearly visible to the customer. This measure
prevents the cashier from ringing up a lower amount and pocketing the difference.
The customer receives an itemized cash register receipt slip and is expected to count
the change received. A cash register tape, which is locked in to the register until
removed by a supervisor or manager, accumulates the daily transactions and totals.
When the tape is removed, the supervisor compares the total with the amount of
cash in the register. It should show all register receipts accounted for. The
supervisor’s finding s are reported on a cash count sheet that is signed by both the
cashier and supervisor.

The count sheet, register tapes, and cash are then given to the head cashier. This
individual prepares a daily cash summary showing the total cash received and the
amount from each source such as cash sales and Collection on account. The head
cashier sends one copy of the summary to the accounting department for entry in to
the cash receipts journal. The other copy goes to the treasurer’s office for
subsequent comparison with daily bank deposit. Next, the head cashier prepares a
deposit slip and makes the bank deposit. The total amount deposited should be equal
to the total receipts on the daily cash summary. This will assure that all receipts
have been placed in the custody of the bank. In accepting the bank deposit, the bank
stamps the duplicate deposit slip and send it to the company treasurer, who makes
the comparison with the daily cash summary. The activities of the sales department
are shown separate from those of the cashier’s department to indicate the
segregation of duties in handling cash.

2.1.1 Cash Short and Over

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The amount cash actually received during a day often does not agree with the record
of cash receipts. Whenever there is a difference between the record and the actual
cash and no error can be found in the record, it must be assumed that the mistake
occurred in making change.

< The cash shortage or overage is recorded in an account entitled cash short
and over.

A common method for handling such mistakes is to include in the cash receipt
journal cash short and over debit column in to which all cash shortage is entered,
and cash short and over credit column into which all cash overages are entered.
Illustration
(1) If the actual cash received from cash sale is Br. 5, 754 and the amount indicated
by the cash register total was Br. 5, 750. The entry to record cash sales and its
overage is:
Cash 5,754
Sales 5,750
Cash short and over 4

(2) If a cash register shows cash sales of Birr 984 but the count of cash in the
register is Br 979. The entry to record cash sales and its Shortage is:
Cash 979
Cash short and over 5
Sales 984
If there is a debit balance in the cash short and over account at the end of the fiscal
period, it is an expense and may be included in “miscellaneous administrative
expense” on the income statement. If there is a credit balance, it is revenue and may
be listed in the “other income” section. If the balance becomes larger than may be
accounted for by minor errors in making change, management should take
corrective measures.
2.1.2 Cash Change Funds
Retail stores and other businesses that receive cash directly from customers must
maintain a fund of currency and coins in order to make change. The fund may be
established by drawing a check. For example, ABC Company establishes a cash
change fund for Br 150. The entry to record cash charge fund is:
Cash on hand 150
Cash in bank 150
No additional charges or credits to the cash on hand accounts are necessary unless
the amount of the fund is to be increased or decreased. At the end of each business
day, the total amount of cash received during the day is deposited and the original

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amount of the change fund is retained. The desired composition of the fund is
maintained by exchanging bills or coins for those of other denominations at the
bank.
2.2 Cash Receipt by Mail
Control of cash receipts that arrive through the mail starts with the person who
opens the mail. Preferably, two people are assigned the task of and are present for
opening the mail. Because two people are involved, theft of cash receipts by mail
usually requires collusion between these two employees. The person opening the
mail makes a list (in triplicate) of money received. This list should contain a record
of each sender’s name, the amount, and an explanation of why the money is sent.
The first copy is sent with the money to the cashier. A second copy is sent to the
record keeper in the accounting area. A third copy is kept by the clerk who opened
the mail. The cashier deposits the money in a bank, and the record keeper records
the amounts received in the accounting records.

This process reflects excellent internal control. First, when the bank balance is
reconciled by another person (to be explained later in this unit), he/she reveals errors
or fraud by the clerk, the cashier, or the record keeper. They are revealed because
the bank’s record of cash deposited must agree with the records from each of the
three people. This arrangement virtually eliminates the possibility of errors and
fraud. If the clerk does not report all receipts correctly, for instance, customers will
question their account balances. If the cashier does not deposit all receipts, for
instance, the bank balance does not agree with the record keeper’s cash balance. The
record keeper and the person who reconciles the bank balance do not have access to
cash; therefore, have no opportunities to divert cash to themselves. This system
makes errors and fraud highly unlikely.
3. Control of Cash Disbursement
Overview
Cash may be disbursed for a variety of reasons, such as to pay expense and
liabilities, or to purchase assets. Generally, internal control over cash disbursements
is more effective when payments are made by check, rather than by cash except for
incidental amounts that are paid out of petty cash.
Payment by check generally occurs only after specified control procedures have
been followed. In addition, the “paid” check provides proof of payment. Effective
internal controls of cash disbursements are achieved through a voucher system.
This section describes the basic features and application of a voucher and petty cash
system. It also explains the bank account as a tool for controlling cash.
3.1 Basic Features of the Voucher System
When the owner of a business has personal knowledge of all goods and services
purchased, the owner may sign checks, with the assurance that the creditors have
followed the terms of their contracts and that the exact amount of the obligation is
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being paid. Disbursing officials are seldom able to have such a complete knowledge
of affairs however. In enterprises of even moderate size, the responsibility for
issuing purchase orders, inspecting goods received and verifying contractual and
arithmetical details of invoices is divided among the employees of several
departments. It is desirable, therefore, to coordinate these related activities and to
link them with the final issuance of checks to creditors. One of the best systems
used for this purpose is the voucher system.

< A voucher system is made up of records, methods, and procedures used in

proving and recording liabilities and in making and recording cash
payments.

A voucher system uses

(1) Vouchers
(2) A voucher registers
(3) A file for unpaid vouchers
(4) A check register, and
(5) A file for paid vouchers.
As in all areas of accounting systems and internal controls, many differences in
detail are possible. The discussion that follows refers to a medium-size
merchandising enterprise with separate departments for purchasing, receiving,
accounting, and disbursing.
Vouchers
The term voucher is widely used in accounting. In general sense, it means any
document that serves as proof of authority to pay cash, such as an invoice approved
for payment or as evidence that cash has been paid, such as a canceled check. The
term has a narrower meaning when applied to the voucher system: a voucher is a
special form on which is recorded relevant data about a liability and the details of its
payment.

Voucher Register
After approval by the designated official each voucher is recorded in a journal
known as a voucher register. The vouchers are entered in numerical order, each
being recorded as a credit to accounts payable (sometimes entitled Vouchers
payable) and as a debit to account or accounts to be charged for the expenditure.
When a voucher is paid, the data of payment and the number of the check are
inserted in the proper columns in the voucher register. These notations provide a
ready means of determining at any time the amount of an individual unpaid voucher
or of the total amount of unpaid vouchers.
Unpaid Voucher File

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After a voucher has been recorded in the voucher register, it is filed in an unpaid
voucher file, where it remains until it is paid. The amount due on each voucher
represents the credit balance of an account payable and voucher itself is like an
individual account in a subsidiary accounts payable ledger. Accordingly, a separate
subsidiary ledger is not needed.

Check Register
The payment of a voucher is recorded in a check register. The check register is
modified form of the cash payments journal and is so called because it is a complete
record of all checks. It is common to record all checks in the check register in
sequential order, including occasional checks that are voided because of an error in
their preparation.
Each check issued is in payment of a voucher that has previously been recorded as
an account payable in the voucher register. The effect of each entry in the check
register is a debit to Accounts Payable and a credit to cash in bank (and Purchases
Discounts, when appropriate).
Paid Voucher File
After payment, vouchers are usually filed in numerical order in a paid voucher file.
They are then readily available for examination by employees or independent
auditors needing information about certain expenditure. Eventually, the paid
vouchers are destroyed according to the firm’s policies, concerning the retention of
records.
3.3 Petty Cash Fund
Why a petty cash does is established?
As you learned earlier in this section, better internal control over cash disbursements
is possible when payments are made by check. However, using checks to pay such
small amounts as those for postage due employee launches, and taxi fares is
impractical and a nuisance (in convenient). A common way of handling such
payments, while maintaining satisfactory control, is to use a petty cash fund.

< A petty cash fund is a cash fund used to pay relatively small amounts.

The operation of a petty cash fund, often called an imprest system, involves:
(i) Establishing the fund
(ii) Making payment from the fund and
(iii) Replenishing (reimburse) the fund
Establishing the Fund
Two essential steps in establishing a petty cash fund are
(1) Appointing a petty cash custodian who will be responsible for the fund and

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 (2) Determining the size of the fund. Ordinarily, the amount is expected to cover
anticipated disbursements for a 3-to-4 week period.
When the fund is established, a check payable to the petty cash custodian is issued
for the stipulated amount. The check is then cashed and proceeds are placed in a
locked petty cash box or drawer. Most petty cash funds are established on a fixed
amount basis.
To illustrate, if the DIL Company decides to establish a Br .100 fund on March 1,
the entry to record the establishment of a petty cash is:
March 1 petty cash 100
Cash 100
However, no additional entries will be made to the petty cash account unless the
stipulated amount of the fund is changed. For example, if DIL Company decides on
July 1, to increase the size of the fund to Br. 250, the journal entry would be:
(250-100=150)
July 1 petty cash 150
Cash 150
(To establish a petty cash fund)
Making Payment from the Fund
The custodian of the petty cash fund has the authority to make payments from the
fund that conforms to prescribed managements policies. Usually, management limits
the size of expenditures that may be made and does not permit use of the fund for
certain types of transactions (such as making short-term loans to employees). Each
payment from the fund must be documented on a pre-numbered petty cash receipt
(or petty cash voucher). The signature of both the custodian and the individual
receiving payment are required on the receipt. If other supporting documents such as
a freight bill or invoice are available, they should be attached to the petty cash
receipt.
The receipts are kept in the petty cash box until the fund is replenished. As a result,
the sum of the petty cash receipts and money in the fund should equal the
established total at all times. This means the surprise counts can be made at any time
by an independent person, such as an internal auditor, to determine whether the fund
is being maintained intact. No accounting entry is made to record a payment at the
time it is made from the petty cash. It is considered to be both inexpedient and
unnecessary to do so. Instead, the accounting effects of each payment are
recognized when the fund is replenished.
Replenishing (Reimbursing) the Fund
When the money in the petty cash fund reaches a minimum level, the fund is
replenished. The request for reimbursement is initiated by the petty cash custodian.
This individual prepares a schedule (summary of the payments that have been made)
and sends the schedule, supported by petty cash receipts and other documentation,
to the treasurer’s (Accounting) department. The receipts and supporting documents
are examined in the treasurer’s office to verify that they were proper payments from
the fund. The treasurer then approves the request and a check is prepared to restore

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the fund to its established amount. At the same time, all supporting documentation is
stamped “paid” so that it can not be submitted again for payment.

To illustrate, assume that on March 15 the petty cash custodian requests a check for
Br 87. The fund contains Br.13 cash and petty cash receipts for postage Br. 44,
freight- in Br.38 and miscellaneous expenses Br.5. The entry to record the
reimbursement check is:
March 15 Postage expense 44
Freight – in 38
Miscellaneous expense 5
Cash 87
(To replenish petty cash fund)
Note that the petty cash account is not affected by the reimbursement entry.
Replenishment changes the composition of the fund by replacing the petty cash
receipts with cash, but it does not change the balance in the fund.
It may be necessary in replenishing a petty cash fund to recognize a cash shortage
and overage. To illustrate, assume in the example above that the custodian had only
Br.12 in cash in the fund plus the receipts as listed. The request for reimbursement
would, therefore, have been for Br. 88, and the following entry would be made:

March15 Postage expense 44

Freight in 38
Miscellaneous expense 5
Cash short and over 1
Cash 88
(To replenish petty cash fund)
Conversely, if the custodian had Br, 14 in cash, the reimbursement request would
have been for Br. 86 and cash over and short would have been credited for Br. 1, as
follows.
March 15 postage expense 44
Freight – in 38
Miscellaneous expense 5
Cash 86
Cash short and over 1
A petty cash fund should be replenished at the end of the accounting period
regardless of the cash in the fund. Replenishment at this time is necessary in order
to recognize the effects of the petty cash payments on the financial statements.

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Internal control over petty cash fund is strengthened by:

(1) Having a supervisor make surprise counts of the fund to ascertain whether
the paid vouchers and fund cash equal the imp rest amount and
(2) Canceling or mutilating the paid vouchers so they cannot be resubmitted
for reimbursement.
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3.4 The Bank Account as a Tool for Controlling Cash
The use of a bank contributes significantly to good internal control over cash. A
company can safe guards its cash by using a bank as a depository and clearinghouse
for checks received and checks written. Use of a bank minimizes the amount of
currency that must be kept on hand. In addition, the use of a bank facilities the
control of cash because a double record is maintained of all bank transaction one by
the business and other by bank. The asset account, cash, maintained by the depositor
is the reciprocal of the bank’s liability account for each depositor. It should be
possible to reconcile these accounts (make them agree) at any time. In the following
paragraphs we will discuss the services and documents provided by banking
activities.
Bank Account
Opening a bank account is relatively simple procedure. A bank account is a record
set up by a bank for a customer. It permits for customer to deposit money for
safeguarding and check withdrawals. Typically, the bank makes a credit check on
the new customer and the depositor is required to sign signature card. The card
should contain the signatures of each person authorized to sign check on the
account. The signature card is used by bank employees to validate signatures on the
check.
Bank Deposits
Bank deposit should be made by an authorized employee, such as he head cashier.
Each deposit must be documented by a deposit slip (ticket). A deposit slip (ticket)
lists the items such as currency, coins, and checks deposited and their corresponding
dollar amounts. Deposit slips are prepared in duplicate. The original is retained by
the bank, the duplicate, in duplicate. The original is retained by the bank, the
duplicate, stamped by the bank to establish its authenticity, is retained by the
depositor.
Bank Check
To withdraw money from an account a customer uses a check. A check is a written
order signed by the depositor directing the bank to pay a specified sum of money to
a designated recipient. Thus, there are three parties to a check. The maker (or
drawer) who issues (signs) the check, the bank (Or payer) on which the check is
drown own, and the payee to whom the check is payable. A check is a negotiable
instrument that can be transferred to another party by endorsement.
For both individuals and businesses, it is important to know the balance in the
checking account all times. To keep the balance current, each deposit and check
should be entered on running balance memorandum forms provided by the bank or
on the check stubs contained in the checkbook.
Bank Statement

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Each month, the depositor receives a bank statement from the bank. A bank
statement shows the depositor’s bank transactions and balances. The items that
included in a bank statement are described as follows:
(1) The beginning balance
(2) Checks paid and other debits (deductions by the bank)
(3) Deposits and other credits (additions by the bank) and
(4) The balance at the end of the month
Most banks offer depositors the option of receiving “paid” checks with their bank
statement. Irrespective of the depositor’s choice, all “paid” checks are listed in
numerical sequence on the bank statement along with date the check was paid and
its amount. Up on paying a check, the bank stamps the check “paid”; a paid check is
sometimes referred to as a canceled check. In addition, the bank includes with the
bank statement memoranda explaining other debits and credits made by the bank to
the depositor’s account.
Debit Memorandum
Bank charge a monthly fee for the use of their services. The fee, called a bank
service charge, is often identified on the bank statement by a code symbol such as
SC. A debit memorandum explaining the charge is included with the bank
statement. Separate debit memoranda may also be issued for other bank services
such as the cost of printing checks, issuing traveler’s checks, and wiring funds to
other locations. The symbol DM is often used for such charges.
A debit memorandum is used by the bank when a previously deposited customer’s
check “bounces” because of insufficient funds. In such a case, the check is marked
NSF (not sufficient fund) by a customer’s bank and is returned to the depositor’s
bank. The bank then debits the depositor’s account and sends the NSF checks and
debit memorandum to the depositor as notification of the charge. The NSF check
creates an account receivable for the depositor and reduces cash in the bank account.
Credit Memorandum
A depositor may ask the bank to collect its notes receivable. In such a case, the bank
will credit the depositor’s account for the cash proceeds of the note. It will issue a
credit memorandum, which is sent with the statement to explain the entry. Many
banks also offer interest on checking account. The interest earned may be indicated
on the bank statement by the symbol CM or INT.
3.5 Bank Reconciliation
Why it is necessary to reconcile a bank account?
Because the bank and the depositor maintain independent records of the depositor’s
checking account, you might assume that the respective balances will always agree.
In fact, the two balances are seldom the same at any given time, and it is necessary
to make the balance per books agree with the balance per bank – a process called
reconciling the bank account.
The lack of agreement between the two balances is due to:

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1- Time lags – that prevent one of the parties from recording the transaction in the
same period.
2- Errors by either party in recording transactions
Time lags occur frequently. For example, several days may elapse between the time
a cheek is mailed to a payee and, the date the check is paid by the bank.
The incidence of errors depends on the effectiveness of the internal controls
maintained by the depositor and the bank. Bank errors are infrequent. However,
either party could inadvertently record a Br.450 check as Br.45 or Br.450.
In addition, the bank might mistakenly charge a check drawn by Belete to the
account of Beletu.
Reconciliation Procedure
To obtain maximum benefit from bank reconciliation, the reconciliation should be
prepared by an employee who has no other responsibilities pertaining to cash. When
the internal control principle of independent internal verification is not followed in
preparing the reconciliation, cash embezzlements by may escape unnoticed. For
example, cash who prepares the reconciliation can embezzle cash and embezzlement
misstating the reconciliation. Thus, the bank accounts would reconcile and
embezzlement would not be deducted.
In reconciling the bank account, it is customary to reconcile the balance per books
and per bank to their adjusted (correct or true) cash balances. The reconciliation
schedule is divided in to two sections, as shown below in the table. One section
begins with the balance as per bank statement and ends with the adjusted balance;
the other section begins with the balance per depositor’s records and also ends with
the adjusted balance. The two amounts designated, as the adjusted balance must be
equal.

Bank balance per bank statement - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Br. x x x x

Add: Additions by depositor not on bank statement - - - - Br. x x x
(Deposit in transit)
Bank error - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xx xxx
Br. x x x x
Deduct: Deductions by depositors not on bank statement Br. x x x
(Outstanding checks)
Bank errors - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x x xxx

Adjusted Balance - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Br. x x x

Bank balance per depositor’s records - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Br. x x x x

Add - Additions by bank not recorded by depositor - - - - -Br. x x

(Credit memorandum)
- Depositor errors - - - - - - - - - - - - - - - - - - - - - - - - - - x x - - - - - - - - - - - - - - - x x
Br. x x x
Deduct – deductions by bank not recorded by depositor Br. x x
(Debit memorandum)
- Depositor errors - - - - - - - - - - - - - - - - - - - - - - -- - - x x xx
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Adjusted balance - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Br. x x
x
The starting point in preparing the reconciliation is to enter the balance per bank
statement and balance per depositor’s record (per book) on the schedule.
The following steps should reveal all the reconciling items that cause the difference
between the two balances.
1. Compare the individual deposits on the bank statement with deposits in transit
from the preceding bank reconciliation and with the deposits per company
records or copies of duplicate deposit slips. Deposits recorded by the depositor
that have not been recorded by the bank represent deposit in transit and are
added to the balance per bank
2. Compare the paid cash shown on the bank statement or the paid checks returned
with the bank statement with (a) Checks outstanding from the preceding bank
reconciliation and (b) Checks issued by the company as recorded in the cash
payments journal. Issued checks recorded by the company that has not been paid
by the bank represent outstanding checks that are deducted from the balance
per the bank.
3. Note any errors discovered in the foregoing steps and list them in the
appropriate section of the reconciliation schedule. For example, if a paid check
correctly written by the company for Br. 195 was mistakenly recorded by the
company for Br. 159, the error of Br.36 is deducted from the balance per books.
All errors made by the depositor are reconciling items in determining the adjusted
cash balance per books. In contrast all errors made by the bank are reconciling items
in determining the adjusted cash balance per the bank.
4. Trace bank memorandum to the depositor’s records. Any unrecorded
memoranda should be listed in the appropriate section of the reconciliation
schedule. For example, a Br. 50 debit memorandum for bank service charge is
deducted from the balance per depositor books, and a Br. 32 credit
memorandum of interest earned is added to the balance per books.
Illustration of Bank Reconciliation
Prepare bank reconciliation for jamboree enterprises for the month ended November
30, 2002. The following information is available to reconcile jamboree enterprises
book balance of cash with its bank statement balance as of November 30, 2002.
(a) After all posting is completed on November 30, the company’s book balance of
the cash account had a Br. 16,380 debit balance, but its bank statement showed a
Br, 38,520 balances.
(b) Checks No. 2024 for Br. 4, 810 and No. 2036 for Br5000 are, Outstanding.
(c) In comparing the canceled checks returned by the bank with the entries in the
accounting records. We find that check No. 2025 in payment of rent is correctly
drawn for Br. 1000 but was erroneously entered in the accounting records as Br.
880

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(d) The November 30 deposit of Br.17, 150 was placed in the night depository after
banking hours on that date, and this amount did not appear on the bank
statement.
(e) In reviewing the bank statement, a check belonging to jumbo enterprises in the
amount of Br.160 was erroneously drawn against Jamboree’s account.
(f) A credit memorandum enclosed with the bank statement indicated that the bank
collected a Br. 30,000 note and Br. 900 of related interest on Jamboree’s behalf.
This transaction was not recorded by Jamboree before receiving the statement.
(g) A debit memorandum for Br. 1000 listed a Br. 1,100 NSF check. The check had
been received from a customer, Daba Tolera; Jamboree had not recorded the
return of this check before receiving the statement.
(h) Bank service charge for November totaled Br. 40. These charges where not
recorded by Jamboree before receiving the statement.
Based on the prevailing information the bank reconciliation will be as follows
Jamboree Enterprises
Band reconciliation
November 30,2002

Balance per bank statement Br. 38, 520 Balance per book Br. 16, 380
Add Add

Deposit of Nov.30 Br. 17,150 Collection of Note- 30,000

Bank error 160 17,310 Interest earned 900 30, 900
Br. 55,830 47,280
Deduct: Deduct
Outstanding checks; NSF check – Br.1, 100
No.2024 - 4810 Recording error- 120
No.2036 5000 9,810 Service charge – 40 1,260
Adjusted bank balance 46,020 Adjusted book balance 46,020

Entries from Bank Reconciliation

Each reconciling item in determining the adjusted balance per book should be
recorded by the depositor. If these items are not journalized and posted, the cash
account will not show the correct balance
Then adjusting entries for Jamboree enterprise on November 30 are as follows.
Nov. 30 cash - - - - - 30, 900
Notes receivable - - 30,000
Interest earned - - - 900
(To record collection of note principal and interest)
Nov.30 Accounts Receivable –Daba Tolera– 1,100
Cash - - - - - - - - - - - - - - - - 1,100
(To reinstate account due from an NSF check)

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 Nov.30 Rent expense - - 120
Cash - - - - - - - - - - - - - - - - - 120
(To correct recording error on check No. 2025)
Nov.30 Bank service charges – 40
Cash - - - - - - - - 40
(To record bank service charges)
What entries does the bank make? If any errors are discovered in preparing the
reconciliation, the bank should be notifies so it can make the necessary corrections
on its records. However, the bank does not make any entries for deposits in transit
or outstanding checks. Only when these items reach the bank will the bank record
these items.

Review Question

The following information is available to you to reconcile Selam Company’s’ book

balance Cash with its bank statement balance as for July 31,2002.
1. The bank service charge for July was br.25
2. The bank collected a note receivable of Br. 1,200 for Selam Company on July 15,
plus Br.48 of interest. The bank made a Br.10 charge for the collection.
3. The July 31 receipts of Br. 1,819.60 were not included in the bank deposits for July.
These receipts were deposited by the company in a night deposit on July 31.
4. Company check No. 2480 issued to Dil Company, a creditor, for Br. 492 that
cleared the bank in July was incorrectly entered in the cash payments journals on
July 10 for Br. 429.
5. Checks written prior to July 31 that had not cleared by bank on July 31 totaled Br.
1,480.10
6. On July 31, the bank statement showed an NSF charge of Br. 550 for a check
received by the company from Ato Yosef, a customer on account
7. The cash balance per books of the company was Br. 6,815.30
8. The cash balance per bank statement was Br. 7,075.80.

Required:

(a) Prepare the bank reconciliation as of July 31.

(b) Prepare the necessary adjusting entries at July 31.

1.Maru Company maintains a petty cash fund for small expenditures. The following transactions
occurred over a 2-month period:
July 1. Established petty cash fund by writing a check on NIB bank for Br. 200.

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 15. Replenished the petty cash fund by writing a check for Br. 194.30. On this date the
fund consisted of Br. 5.70 in cash and the following petty cash receipts: Freight-in Br.
94.00, Postage expense Br. 42.40, Entertainment expense Br. 46.60, and miscellaneous
expense Br. 10.70.
30. Replenished the petty cash fund by writing a check for Br. 192.00. At this date, the fund
consisted of Br. 8.00 in cash and the following petty cash receipts: Freight-in Br. 82.10,
Charitable contributions expense Br. 30.00, Postage expense Br. 47.80, and
miscellaneous expense Br.32.10.
August 15. Replenished the petty cash fund by writing a check for Br. 188.00.On this date, the
fund consisted of Br. 12.00 in cash and the following petty cash receipts: Freight-in
Br.74.40, entertainment expense Br.43.00, Postage expense Br. 33.00, and miscellaneous
expense Br.38.00.
16.Incerased the amount of the petty cash fund to Br.300 by writing a check for Br. 100.
31. Replenished petty cash fund by writing a check for Br. 283.00.On this date, the fund
consisted of Br. 17.00 in cash and the following petty cash receipts: Postage expense
Br.145.00, Entertainment expense Br.90.60, and freight-in Br. 45.40.
2.On May 31,1996, Dembel Company had a cash balance per books of Br. 5,781.50. The bank
statement from commercial bank of Ethiopia on that date showed a balance of Br. 6,804.60. A
comparison of the statement with cash account revealed the following facts:
1.The statement included a debit memo of Br.40 for the printing of additional company checks.
2.Cash sales of Br. 836.15 on May 12 were deposited in the bank .the cash receipts journal entry
and the deposit slip were incorrectly made for 846.15. The bank credited Dembel Company for
the correct amount.
3.Outstanding checks at May 31 totaled Br. 1,276.25, and deposits in transit were Br.936.15.
4.On May 18, the company issued check No. 1181 for Br. 685 to Ambassel Company, on
account .The check, which cleared the bank in May, was incorrectly journalized and posted by
Dembel Company for Br. 658.
5. A Br. 2,000 note receivable was collected by the bank for Dembel Company on May 31 plus
Br.80 interest. The bank charged a collection fee of Br.20. No interest has been accrued on the
note.
6.Included with the cancelled checks was a check issued by Dessie Company to Ambassador
Company for Br.600 that was incorrectly charged to Dembel Company by the bank.
7.On may 31, the bank statement showed an NSF charge of Br.700 for a check issued by Ato
Abebe, a customer, to Dembel Company.

Instructions:
(a) Prepare the bank reconciliation at May 31,1996.
(b) Prepare the necessary adjusting entries for Dembel Coompany at May 31,1996.

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