HI5001 - Lecture 8 - Version 3

HI5001 Accounting for Business Decisions
Lecture 7
Cash Management & Control
Click to edit Master title style
Overview
Lecture Lecture Topic Readings/Preparation
1 Role of Accounting for Decision Making Textbook Chapter: 1
2 Financial Statements & Decision Making Textbook Chapter: 2
3 Recording Business Transactions Textbook Chapter: 3
4 Adjusting Entries & Preparing Financial Statements Textbook Chapter: 4
5 Completing The Accounting Cycle Textbook Chapters: 5
6 Accounting Systems Textbook Chapter: 7
7 Cash Management & Control Textbook Chapter: 11
8 Receivables Textbook Chapter: 12
9 Inventories Textbook Chapter: 6 & 13
10 Non-current Assets Textbook Chapter: 14 & 15
11 Liabilities Textbook Chapter: 16
12 Analysis & Interpretation of Financial Reports Textbook Chapter: 19
Applied Business Statistics for Managers Holmes Institute

Click to edit Master title style
Overview
Lecture 6 Lecture 7
B
Accounting Systems Cash Management
B &
b
Control
Illegal

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
1 What constitutes “cash”?
2 Control of cash
3 Bank reconciliation
4 Use of petty cash account

Topics
Click toCovered In This
edit Master titleLecture
style
Here’s what you will learn from this lecture:
5 Cash budgeting
6 Management of Cash

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Cash Defined
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Money
Assets
Credit card
Cash Fixed
Electronic Assets
fund transfer
Intangible
Assets
Negotiable
instruments

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Cash Defined
Balance sheet
Money
Equity
Assets
Share Capital
Credit card Current Retained
Assets Earning
Cash Fixed
Liabilities
Electronic Assets Current
fund transfer
liability
Intangible
Non-current
Assets
liability
Negotiable
instruments

Click to
Cash Defined
▪ Cash is a term used in accounting to identify

✓ Money
✓ Duplicates of credit card and EFTPOS sales
✓ Negotiable instruments
o Cheque (though this “vehicle” is fast becoming obsolete due to EFT
options being safer, faster, simpler and cheaper)
o Postal note
✓ that a financial institution will accept
▪ The sum of all cash is reported (generally) as a single
line item in the current assets section of BS.

Click to of
Control edit
Cash
Master title style
• Cash is the asset most subject to theft
• Need a good internal control system for handling cash and
recording cash transactions
• 3 important principles:
1. Separation of responsibility for handling and custodianship of cash
from maintaining records for cash
2. Banking intact each day’s cash receipts
3. Making all payments by electronic transfer or by cheque

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Control edit
Cash
Master title style
Principles of handling cash
Separation of Making all major

responsibility for payments through
handling cash & electronic
maintaining transfers or
record cheques
Banking each
day’s cash
receipts

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Control edit
Cash
Master
Receipts
title style
Each type of receipt has its own characteristics, and internal
control procedures appropriate to the particular receipt must be
developed.
• Cash received through the mail

• Control relies heavily on separation of record keeping and
custodianship
• Cash receipts from cash sales
• Use of cash register
• Pre-numbered sales dockets
• Cash short and over
• Cash shortage is recorded when daily sales are recorded
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Control edit
Cash
Master
Receipts
title style
Internal Control Concepts Application to cash receipts
1 Clear responsibility Designate person as cashier
Separation of recording & Handling cash & recording receipt

2 by separate people
custodian duties
Mail clerk records receipts while

3 Division of responsibility
Illegal
supervised
Mechanical & electronic Cash register & EFTPOS equipment

4
devices
5 Physical control Use of safe to store cash

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Control edit
Cash
Master
Payments
title style
Two key elements of effective control of cash payments are:

• Use of a business bank account to enable all major payments
to be made by cheque or electronic transfer.
• Use of a petty cash fund to cover small incidental cash
payments.

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Control edit
Cash
Master
Payments
title style
Internal Control Concept Application to cash payment
1 Clear responsibility Authorization of payment
Separation of recording & Signing cheques & recording

2
custodian duties payments
Ordinary
3 Authorization of payment &
Division of responsibility
Illegal
signing of cheque
Mechanical & electronic Cheque printing machine to

4
devices prevent changes
5 Physical control Use safe to store blank cheque

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Pause Point 1title style
Comment on the adequacy of internal control for the following cases:
1. The cashier records the receipt of cash, banks it and also keeps the ledger.
2. The office manager authorises the payments of salaries and also prepares sales
invoices
3. Our bookkeeper is very loyal and efficient. She handles all the banking and the
records and hasn’t even taken annual leave for five years

Answer:
1. Inappropriate – recording and custody not separated. The cashier can ensure
that the initial record matches the bank deposit – it should be the other way
around – and the opportunity to pick up any discrepancy is lost because
he/she keeps the ledger
2. There is no direct link between these two activities so there is no breach of the
rule about separation of duties.
3. Inappropriate – There is no separation of custodianship from recording.
Requiring annual leave is an important control as when someone else take
over, fraud or error may be detected

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Bank Accounts
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& Reconciliation
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Bank Accounts
▪ Cheque accounts
• Essential element of internal control
• Source documents
▪ Use of electronic funds transfer
• Reduces processing costs
▪ The bank statement
• Record of transactions from the bank

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Bank Accounts
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& Reconciliation
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The Bank Statement
NOTE:
• The bank statement
presents from the bank’s
position, not from the
customers.
• DR to you will be CR to
them.

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Bank Accounts
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& Reconciliation
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Cash at Bank Account Balance as per

Bank Statement
Date Account Debit Credit Date Account Debit Credit
1/5/16 Opening Balance 50,000 1/5/16 Opening Balance 50,000
31/5/16 Alex Corporation 5000
31/5/16 Closing balance 45,000 31/5/16 Closing balance 50,000

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Bank Accounts
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& Reconciliation
title style
▪ Balance per books rarely agrees with balance as per bank
statement
▪ 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.

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Bank Accounts
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& Reconciliation
title style
▪ Differences include: Book
balance does
✓ Outstanding cheques not equal to
bank
✓ Deposits in transit balance?
✓ Errors by the bank
✓ Errors by the entity
✓ Dishonoured cheque
Ordinary
✓ Other transactions
– Service and bank charges
– Interest
– EFT transactions

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Bank Accounts
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& Reconciliation
title style
Reconciliation Things required for reconciliation

procedure
Last bank
reconciliation

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Bank Accounts
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& Reconciliation
title style
Things required for reconciliation
Cash receipts &

Cash payments Last bank
journal reconciliation

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Bank Accounts
edit Master
& Reconciliation
title style
Cash at bank
ledger
Cash receipt &

cash payment Last bank

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Bank Accounts
edit Master
& Reconciliation
title style
Bank
Cash at bank statement for
ledger the period
Ordinary
Cash receipt &
cash payment Last bank

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Bank Accounts
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& Reconciliation
title style
Steps in process
1. Check that all items from previous reconciliation are cleared
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 bank statement, and mark off common items.
Circle the uncommon items.

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Bank Accounts
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& Reconciliation
title style
3. Update cash records:
Enter all the unticked/unmarked items that appear on the
bank statement that have been initiated by the bank in the
appropriate cash journals. These items can then be ticked.
i) Unmarked Dr items on the bank statement
• cash payments journal
ii) Unmarked Cr items on the bank statement
• cash receipts journal

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Bank Accounts
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& Reconciliation
title style
4. Adjust the cash journals for any errors that exist in these
journals.
5. Totalling cash journals and post to the Cash at bank general
ledger
6. Prepare the bank reconciliation statement.
Items in the cash receipts/payments records remaining
unmarked indicate transactions not yet recorded by the bank
• Outstanding cheques
• Unrecorded deposits

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Bank Accounts
edit Master
& Reconciliation
title style
R. Robson & Son
Bank Reconciliation Statement
30 June 2015
Balance as per bank statement Cr (or Dr) $XXX

Add (or deduct) outstanding deposits XXX
XXX
Deduct (or add) unpresented cheques $XX
XX
XX XXX
Balance as per Cash at Bank account Dr (or Cr) $XXX

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Bank Accounts
edit Master
& Reconciliation
title style
Bank Reconciliation Example
Willow’s window wash received it’s bank statement for the month of July,
which has a credit balance of $1007.
The beginning cash balance shown in the cash ledger on 1 July is $4830.
The details of the cash receipts and cash payments during the month of July
are included in its cash receipts and cash payments journals.
Required:
Prepare the bank reconciliation statement for Willow’s window wash for July.

Bank Reconciliation
Click example
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Compare cash journals with bank statement

Bank
ClickReconciliation
to edit Master example
title style- Update cash receipt journal

ClickReconciliation
Bank to edit Masterexample
title style– Update cash payments journal

ClickReconciliation
Bank to edit Masterexample
title style– Post to Cash at bank
ledger
Add cash journals in CRJ & CPJ and post to ledger. Calculate cash balance.
Cash at Bank
op. 4830 CPJ 9075
CRJ 4702
c/d 457
9532 9532
c/d 457

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Bank to edit Master
Reconciliation title –style
example Prepare the bank reconciliation statement

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Bank Reconciliation
edit Master title
- Another
style Example
Sandy Bottom (finance advisor) receives her bank statement (as at 30/6/15) with
a credit balance of $95,024. Her “Cash at bank” account shows $90,902 as at the
same date. The following information will assist you to prepare a bank
reconciliation:
1. 30/6/15 receipts for $3,640 not deposited

2. Cheque Nos 856: $2,200, 861: $1,894, 863: $576 and 864: $2,266 not
presented
3. Cheque for $624 returned as dishonoured (I Pore)
4. $1,500 deposit by S. Beach incorrectly credited to S. Bottom account
5. Bank fees amount to $50

Click to
Bank Reconciliation
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- Worked
style Example
Balance per Bank statement $95,024 1. 30/6/15 receipts for $3,640
not deposited
Add: Deposits in transit 3,640 2. Cheque Nos 856: $2,200,
Total $98,664 861: $1,894, 863: $576 and
Less: 864: $2,266 not presented
3. Cheque for $624 returned as
Cheques not presented (total) $6,936 dishonoured (I Pore)
Cheque incorrectly recorded 1,500 8,436 4. $1,500 deposit by S. Beach
incorrectly credited to S.
Total (Adjusted Cash per Bank Statement) $90,228 Bottom account
5. Bank fees amount to $50
Balance per Cash at bank $90,902

Less:
Dishonoured cheque $624
Bank fees 50 674
Total (Adjusted Cash per Ledger/Book) $90,228

Pause the video here and take a few moments to review and research.
Discuss the following statements:
• 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.
• A manager of a small online business believes that because most of the

transactions take place using electronic transfer of funds rather than cash or
cheques, the business no longer needs to do a bank reconciliation each month.
Explain to the manger why a bank reconciliation is still necessary
for the business.

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Petty Cash
• A fund used within a business to streamline those small

activities which cash is required, generally at short notice and
with a limit set.
• Petty cash funds usually range from $200-400 (float) and
cover such immediate expenses such as taxi fares,
coffee/milk, postage stamps, etc.
• Limit of expense set by management but generally less than
$100 for a single transaction.

ClickPetty
The to edit
Cash
Master
Fund title style
Establishing petty cash fund
Cash at Bank Petty Cash
Jan 2 Petty cash 100

Cash at bank 100
Petty cash fund established

ClickPetty
The to edit
Cash
Master
Fund title style
Payments from petty cash fund
Amount
Purpose
Ordinary
Illegal
Date
Petty Cash

ClickPetty
The to edit
Cash
Master
Fund title
(cont.)
style
Reimbursement of petty cash fund
Jan 31 Stationery expense 15.22

Office supplies expense 12.30
Postage expense 56.47
GST Outlays 8.40
Cash at bank 92.39
Petty cash fund reimbursement
Note: If special journals this entry would be recorded in the

cash payments journal

Pause the video here and research
• Why is a petty cash fund established?

• How to record reimbursement of a petty cash fund?
• How is a petty cash fund used to provide internal control to cash?

Click to
Cash Budgeting
Meeting
commitments &
maintain credit
standing
Assessment of
expenditure
Cash budget
to ensure
Minimization of
borrowing &
interest
Utilization of
surplus funds

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Cash Budgeting
Need for cash budgeting

➢ Projection of anticipated future receipts and payments
➢ Non-cash items excluded
➢ Will ensure:
✓Entity can meet commitments and maintain credit standing
✓Assessment of expenditure
✓Borrowings (and interest) minimised
✓Surplus funds utilised

Click to
Cash Budget
CITY ENTERPRISES
Cash Budget
for 2 months ending 31 December 2015
November December
Cash at bank, beginning of month $ 800 $ 6,614
Expected cash collections from sales:
Cash 36,300 38,500
Credit 34,320 36,080
Total cash from sales 70,620 74,580
Total cash available $ 71,420 $ 81,194
Expected cash payments:
Purchases $ 36,652 $ 38,808
Wages 16,000 16,000
Rent 4,620 4,620
Advertising 3,300 4,400
Purchase of printer 900
GST payable to ATO 2,344 2,258
T. Duncan, drawings 900 900
Total expected payments $ 64,806 $ 66,986
Cash at bank, end of month $ 6,614 $ 14,208

Click to
Cash Management
The final area we look at is cash management
Inflow
Outflow
Ordinary
Profitable may not be Managing cash inflow
equal to good financial & outflow is
position important

Click to
Cash Management
Principles of cash management
▪ Revenue collection time for accounts receivable
✓This means keeping track of debtors, ensuring that they adhere
to credit terms.
✓There should be strict credit terms and conditions such as 30
day terms. Non-payment by 45 days, suspension of credit
facility. If 60 days, then credit facility closed and to a collection
agency.
✓Also consider discount incentives for early payment.

Click to
Cash Management
Principles of cash management
▪ Postpone payments to accounts payable
▪ Keep inventory levels to a minimum
▪ Invest surplus cash
▪ Plan for capital expenditures

Click to
Cash Management
Analysing adequacy of cash flows
• An important component in assessing solvency is the
amount of cash generated by the entity’s operating
activities
• Short-term cash flow adequacy ratio
• Cash flow adequacy ratio

Key Take
Click Aways
to edit Master title style
Summary of Lecture 7
• What constitutes “cash”?

• Control of cash
• Bank reconciliation
• Use of petty cash account
• Cash budgeting
• Management of cash

End ofto
Click Lecture 7
• Recommended Readings
Hoggett & Edwards - Chapter 11
• Tutorial Questions
Hoggett & Edwards - Chapter End Questions
• Discussion Board & Drop-in Session

Post your questions in the discussion board
• Next Lecture
Lecture 8 Receivables

HI5001 - Lecture 8 - Version 3

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HI5001 Accounting for Business Decisions

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

1 What constitutes “cash”?

4 Use of petty cash account

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

▪ Cash is a term used in accounting to identify

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Separation of Making all major

Applied Business Statistics for Managers Holmes Institute

• Cash received through the mail

Internal Control Concepts Application to cash receipts

1 Clear responsibility Designate person as cashier

Separation of recording & Handling cash & recording receipt

Mail clerk records receipts while

Mechanical & electronic Cash register & EFTPOS equipment

5 Physical control Use of safe to store cash

Applied Business Statistics for Managers Holmes Institute

Two key elements of effective control of cash payments are:

Applied Business Statistics for Managers Holmes Institute

Internal Control Concept Application to cash payment

1 Clear responsibility Authorization of payment

Separation of recording & Signing cheques & recording

Mechanical & electronic Cheque printing machine to

5 Physical control Use safe to store blank cheque

Applied Business Statistics for Managers Holmes Institute

Comment on the adequacy of internal control for the following cases:

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Cash at Bank Account Balance as per

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Reconciliation Things required for reconciliation

Applied Business Statistics for Managers Holmes Institute

Cash receipts &

Applied Business Statistics for Managers Holmes Institute

Cash receipt &

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Balance as per bank statement Cr (or Dr) $XXX

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

Applied Business Statistics for Managers Holmes Institute

1. 30/6/15 receipts for $3,640 not deposited

Applied Business Statistics for Managers Holmes Institute

Balance per Cash at bank $90,902

Applied Business Statistics for Managers Holmes Institute

Discuss the following statements: