Account and Budget Support Level III

Based on August 2012, Version 2

Occupational Standards (OS) and
Curriculum

Unit of competencies: Balance cash Hold

Module Title: Balancing Cash Holdings

LG Code: EIS ACB3 M10 1121 LO (1-3)

TTLM Code: EIS ACB3 TTLM10 1121v1
December, 2023
Addis Ababa, Ethiopia

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 LG#41 LO #1- Maintaining accurate cash floats

Information Sheet 1 Maintaining cash in safe box

1.1 Definition Cash safe box medium of exchange that a bank will accept at face value and
immediate credit to the depositors account.
An item to be reported as cash it must fulfill the following criteria’s:
 It should be used as a medium of exchange, i.e. in settlement of transactions.
 It should be available immediately for the payment of current obligations.
 It should be free from any contractual restriction that limits its use in satisfying debts
Items those are included as Cash:
Coins and Currencies(Paper money)
Money on deposit in a bank that can be drawn without any restriction, i.e. demand
deposits
Negotiable instruments, which are documents that can be transferred from one party
to another as money, like money orders, certified checks or certified payment
orders(CPOs), checks issued by third parties and are available at cashiers, checks
written to third parties but not yet issued, traveler’s checks, and bank drafts.
Saving accounts
Petty cash funds
Change funds
Credit card sales draft
Some items, however, may initially appear or seem as Cash; but do not meet the criteria’s. For
instance, a check received from a third party, as a payment is not included as cash if the party
issuing the check has not sufficient fund in its bank account. Such checks are marked as NSF
(Not Sufficient Fund) checks and are reported as receivables. Similarly, Postdated checks, issued
by third parties but that will be drawn only in the future dates, reported as receivables. Postage
Stamps are items for which cash has been paid and are expected to be used in the future. They
represent office supplies (prepaid expense items).

Self-check 1 Written test

Directions: Answer all the questions listed below. Use the Answer sheet provided in the
next page:
1. What are Cash safe
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Information Sheet 2 Conducting regular cash transaction processing and proofing

1 Explain the Reporting of Cash

Cash is recorded in both the balance sheet and the statement of cash flows. The balance sheet
shows the amount of cash available at a given point in time. The statement of cash flows shows
the sources and uses of cash during a period of time.
Cash on hand, cash in banks, and petty cash are often combined and reported simply as cash.
Cash is the most liquid asset and listed first in the current assets section of the balance sheet.
Many companies use the designation “Cash and cash equivalents” in reporting cash. Cash
equivalents are short-term, highly liquid investments that are both:
(1) Readily convertible to known amounts of cash, and
(2) So near their maturity that their market value is relatively insensitive to changes in interest
rates.
A negative balance in the cash account should be rare. It should be reported among current
liabilities. A company may have cash that is not available for general use but rather is restricted
for a special purpose. Cash restricted in use should be reported separately on the balance sheet
as restricted cash. If the restricted cash is expected to be used within the next year, the amount
should be reported as a current asset. When this is not the case the restricted funds should be
reported as a noncurrent asset.
Discuss the Basic Principles of Cash Management
Many companies struggle, not because they fail to generate sales, but because they cannot
manage their cash. Managing the often-precarious balance created by the ebb and flow of cash
during the operating cycle is one of a company’s greatest challenges.
Management of cash is the responsibility of the company treasurer.
A company can improve its chances of having adequate cash by following five basic
principles of cash managemen
1. Increase the speed of collection on receivables
 The more quickly customers pay the more quickly a company can use those funds.
 Any attempt to force customers to pay earlier must be carefully weighed against the
possibility of angering or alienating customers.
 One common way to encourage customers to pay more quickly is to offer cash discounts
for early payment.
2. Keep inventory levels low

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  Maintaining large inventories ties up large amounts of cash, as well as warehouse space.
 Increasingly, firms are using techniques to reduce the inventory on hand, thus conserving
their cash.
3. Delay payment of liabilities
 A company should use the full payment period, but not “stretch” payment past the point
that could damage its credit rating.
4. Plan the timing of major expenditures
 In order to increase the likelihood of obtaining outside financing, a company should
carefully consider the timing of major expenditures in light of its operating cycle. If at all
possible, the expenditure should be made when the company normally has excess cash—
usually during the off-season.
5. Invest idle cash
 Cash on hand earns nothing.
 An important part of the treasurer’s job is to ensure that any excess cash is invested, even
if it is only overnight.
 A liquid investment is one with a market in which someone is always willing to buy or
sell the investment.
 A risk-free investment means there is no concern that the party will default on its promise
to pay its principal and interest.
The following are some activities that are increases or decreases the cash balance

Activities that increases cash balance Activities that decrease cash balance
(Cash Inflow) (Cash outflow)

 Increasing long- term debt  Decreasing long- term debt

 Increasing equity(selling some stocks)
 Increasing current liabilities
 Decreasing current assets other than
cash
 Decreasing fixed assets (selling assets)
 Decreasing equity
 Decreasing current liabilities
 Increasing current assets other than
cash(buying some inventories etc)
 Increasing fixed assets (purchase
Building, Furniture etc.)

What are examples of cash inflows?

Examples of Cash Inflow
 Customer payments;  Supplier refunds;
 Bank loan receipts;  Directors loans to the business;
 Bank interest;  Grants & Funding proceeds
 Sale of fixed assets;
Identify the Primary Elements of a Cash Budget

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 Cash: - is vital and planning the company's cash needs is a key business activity. The cash
budget shows the anticipated cash flows, over a one- to two-year period. The cash budget
contains the following three sections:
1 Cash receipts section—includes expected receipts from the company's principal
source(s) of revenue, such as cash sales and collections from customers on credit sales.
This section also shows anticipated receipts of interest and dividends, and proceeds from
planned sales of investments, plant assets, and the company's capital stock.
2 Cash disbursements section—shows expected payments for direct materials, direct
labor, manufacturing overhead, and selling and administrative expenses. This section
also includes projected payments for income taxes, dividends, investments, and plant
assets.
3 Financing section—shows expected borrowings and the repayment of the borrowed
funds and interest.
 Data in the cash budget must be prepared in sequence because the ending cash balance of one
period becomes the beginning cash balance for the next period.
 Data for preparing the cash budget are obtained from other budgets and from information
provided by management.
 A cash budget contributes to more effective cash management

Written test
Self-check 2

1. List basic principles of cash management. (10)

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Information Sheet 3 Counting cash at close of business and investigate and correct
discrepancies in order to balance float
Motives for Holding Cash (Reasons for Holding Cash)
There are three primary motives (Reasons) for maintaining cash balance:
1. Transaction Motive;
2. Precautionary Motive
3. Speculative Motive
Transaction Motive: An important reason for maintaining cash balance is the Transaction
Motive. This refers to the holding of cash to meet routine cash requirements to finance the
transactions, which a firm carries on in the ordinary course of business. A firm enters into a
variety of transactions to accomplish it objectives, which have to be paid for in the form cash.
For example, cash payments have to be made for purchase, wages, operating expenses, financial
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 charges like interest, taxes, dividends, and so on. Similarly, there is a regular inflow of cash to
the firm from the sales operations returns on outside investment, and so on. These receipts and
payments constitute a continuous two- way flow of cash.
Motive and such motive refers to be holding of cash to meet anticipate obligations whose
timing is not perfectly synchronized with cash receipts.
Precautionary Motive: In addition to the non-coincide of anticipated cash receipt and payments
in the ordinary course of business, a firm may have to pay cash for purposes, which cannot be
predicted or anticipated. The unexpected cash need at short notice may be result of
* Flood, strikes and failure of important customer;
* Bills may be presented for settlement earlier than expected;
* Unexpected slowdown in collection of accounts receivable;
* Cancellation of some order for goods as the customer is not satisfied; &
* Sharp increase in cost of raw materials.
The cash balance held in reserve for such random and unforeseen fluctuations in cash flows
are called as precautionary balances. In other words, precautionary motive of holding cash
implies the need to hold cash to meet unpredictable obligations.
Speculative Motive: It refers to the desire of a firm to take advantage of opportunities which
represent themselves at unexpected moments and which are typically outside the normal course
of business. While the precautionary motive is defensive in nature in that firms must make
provision
to tide over unexpected contingencies, the speculative motive represents a positive and
aggressive approach. Firms aim to exploit profitable opportunities and keep cash in reserve to do
so. The speculative motive help to take advantage of:
* An opportunity to purchase raw materials at reduced price on payment of
immediate cash.
* A chance to speculate on interest rate movements by buying securities when.

Written test
Self-check 3
Instruction: Answer the questions listed below,
1. Three primary motives (Reasons) for maintaining cash balance? (10)
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Information Sheet 4 Maintaining cash within organization budget

1.4 Cash within organization budget is maintained within set limits

* Delay purchase of raw materials on the anticipation of decline in prices and
* Make purchase at favorable prices.

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Of the three primary motive of holding cash balance, the most important one is the Transaction
Motive. Business firms normally do not speculate and need not have speculative balances. The
requirement of precautionary balance can be met out of short- term borrowings.
Benefit of Holding Adequate (Sufficient) Cash Balance
The important advantages of holding adequate cash balances are:
* It prevents insolvency or bankruptcy arising out of the inability of a firm to
meet its obligations.
* The relationship with the bank is not strained (worried).
* It helps in developing good relations with trade creditors and supplier of raw
material, as prompt payment may help their own cash management.
* A cash discount can be availed, if its payment is made within the due date.
* It leads to a strong credit rating which enables the firm to purchase goods on
favorable terms and to maintain its line of credit with banks and other sources of
credit.
* To take an advantage of favorable business opportunities that may be available
periodically and finally.
* The firm can meet unanticipated cash expenditure with a minimum of strain.
Keeping large cash balance, however, implies a high cost.
Objectives of cash Management
the basic objectives of cash management are two- fold:
(a) Meeting payment
(b) Minimizing Funds Committed to Cash Balance
Meeting payment: In the normal course of business, firms have to make payments of cash on a
continuous and regular basis to suppliers of goods, employees and so on. At the same time, there
is a constant inflow of cash through collections from accounts receivables. A basic objective of
cash management is to meet the payment schedule, that is, to have sufficient cash to meet the
cash disbursement need sofa firm.
Minimizing Funds Committed to Cash Balance: The second objective of cash management is
to minimize cash balances. In minimizing cash balance, two conflicting aspects have to
reconcile. A high level of cash balances will, as shown above, ensure prompt payment together
with all the advantages. However, it also implies that large funds will remain idle, as cash is non-
earning asset and the firm will have to fore go profits. A low level of cash balance, on the other
hand, may mean failure to meet the payment schedule. The aim of cash management, therefore,
should to have an optimal amount of cash balances.

Written test
Self-check 4
Instruction: Answer the questions listed below

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 1. The Objectives of cash Management?
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Maintaining accurate cash floats

Operation Sheet 1
1. Define the cash safe box.
2. How to internal control over cash?
3. How to control over cash through a bank account?
4. What are the motives for holding cash?
Instructions: Giving the necessary equipment’s and stationary materials you are required to
perform the following tasks within 2 hours.

Practical demonstration
LAP test
Instructions: You are required to perform the following in group with the presence of your
teacher.
Task1. List the benefit of holding adequate cash balance?

LG#42 LO #2- Removing receipts from terminal

Information Sheet 1 Terminal balances are performed in line with organization policies
and procedures

2.1 Terminal balances are organization policies and procedures performed in line
INTERNAL CONTROL OVER CASH
Cash is the most liquid of all assets. It consists coins, currency, checks, and money on hand or in
bank .Generally, anything that the bank accepts for deposit at its face value is said to be cash.
Cash is an asset that is readily convertible into any other type of assets; it is highly 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, various errors may occur in executing and recording cash transactions.
For proper safeguarding of cash and to assure the accuracy of the accounting records for cash,
effective internal control over cash is essential. Internal control is a system designed to safeguard
the assets of a business and to help in ensuring the accuracy and reliability of the accounting
records.
Internal control over cash

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 Internal control is a system designed to safeguard the assets of a business and to ensure the
accuracy and reliability of the accounting records. The accounting system should be organized
and operated in the manner that another, with minimum duplication of effort, checks the work of
one person.
Cash is the most precious and most easily stolen asset of the business. It can easily be
transferred, is most likely to be diverted and used improperly. In addition, many transactions
either directly or indirectly affect the receipts or payments of cash. Therefore, it is necessary that
all the money received from sale of goods or services must be protected to make it available for
payment of expenses, and other obligations. In addition, there must also be control over
payments so that none of the firm’s cash is spent without proper authorization or supervision.
Internal Control over Cash Receipts
Since cash can easily be lost or stolen, management must use special care in safeguarding its
receipts. Management and the accountant must set up a system for the internal control of cash
receipts. One important control procedure is promptly depositing the daily cash receipts in the
bank. Another important control procedure is to divide the duties of receiving, recording, and
depositing cash among different persons.
The following preventive measures may be used to safeguard cash receipts.
1. One person should receive cash, whether it is delivered by mail or in person (over the
counter). After making a record of the receipts, this person should hand the cash over to
another person for deposit in the bank.
2. All daily cash receipts should be deposited in the bank promptly.
3. A person other than the one who receives the cash or the one who deposits it in the bank
should make the entries for cash receipts in the firm’s accounting records.
4. At the end of each month, a person other than the three mentioned above should obtain
the bank statement directly from the bank and should prepare bank reconciliation
Written test
Self-check 1
Instruction: Answer the questions listed below
1. What is internal control over cash? (10)
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Information Sheet 2 Terminal information is recorded appropriately after accurate

checking
2.1 Terminal information is recorded appropriately after accurate checking
Internal Control over Cash Payments

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 The control procedures for cash receipts are only one part of a well-designed system of internal
control. There must also be control over cash payments to ensure that none of the firm’s cash is
spent without proper authorization or supervision.
Internal control over cash payments may be achieved by adopting certain policies and by
planning work assignments. The following are some of the means to enhance internal control
over cash payments.
1. All payments should be made by check, except for minor payments for which petty cash
fund should be established.
2. No check should be issued before a proper approval and authorization of the payment.
3. Only experienced and responsible personnel should approve bills.
4. The one who does not authorizes, Signs and mails checks, should keep the records of
payment
Written test
Self-check 2
Instruction: Answer the questions listed below
1. Means of enhance Internal Control over Cash Payments?
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Information Sheet 3 Security policies and procedures cash float and non-cash documents
Cash float
It is cash put into the cash box at the beginning of the day or week to allow change to be given
to customers. It also defines as money a retailer keeps to give change to customers. Such money
is kept in a range of banknote denominations and coins. Departments in an organization may also
set up cash float accounts to avail change, as University of Toronto does. To handle the change
problem, the institution utilizes the cash float provision to keep track of cash movement from its
account to the requesting department.
Cash Float Accounts
Definition: A bank account specifically set up by a business owner to float money through from
Business A to enhance the perceived value of Business.
A business seller with a lot of money--aside from that generated by the business they're trying to
sell--may float this money through the operation to make it look like sales. This increases the
apparent value of the business for sale and, with it, the purchase price.
Cash floating is usually easiest to conceal if a seller has two different businesses. Money will be
floated from one business (so there are no taxes paid on the operation of that business) to the one
being sold so that taxes are paid on that operation only. This is done in several ways.

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 Floating cash through bank accounts makes it appear as if Business B--the second business--is
taking in money. It can have great impact on the sale price of certain retail businesses, such as
those where a lot of cash changes hands. This is particularly true if the retail business is one with
relatively low-priced items.
Another option is to have Business A paying for invoices coming in for Business B, or to funnel
receivables from Business A--the more profitable business--into Business B--the less profitable
one, thus making a business that doesn't do much volume look good on paper.
In labor-intensive businesses, a seller will take a low salary from Business B or put some of the
employees from Business B on the payroll of Business A; therefore, the payroll expense implicit
in the business for sale (Business B) isn't reflected in the profit and loss statement (P&L). The
seemingly low labor costs in a labor-intensive business can make it extremely attractive to an
unwary buyer. Yet high labor costs may be the very reason that the business is being sold.
Remember the adage, caveat emptor? Buyer bewares! Find out whether the seller of any business
4 you want to buy owns any other businesses, and if so, what kind of businesses they are.
Investigate the financial records with a critical eye to make sure no cash is being floated.
Why is cash flow important?
Positive cash flow is a strong sign a business is in good financial health. Companies rely on cash
to pay bills, protect against risks of negative business cycles and reduce reliance on debt for
payments. Cash flow brings financial and operational stability to an organization Companies
often take on debt to purchase buildings, equipment, assets and inventory used to start and
operate a business.
A positive cash flow allows the company to meet its near-term debt obligations to avoid late
payments and loan defaults. When a company generates cash to fund purchases, it minimizes its
ongoing reliance on debt financing. Being debt-strapped is a restriction on future cash flow.
Positive cash flow also impacts a company's ability to grow. When a company only generates
enough cash to meet its debt and expense obligations, it is difficult to invest in growth initiatives.
Without the ability to generate new revenue sources and customers, a company can become stale.
Cash flow also provides a safety net so company leaders can operate the business without
constant fear of debt pressure and potential bankruptcy.
How to Manage a Cash Float
Adequate cash flow to pay suppliers, employees and creditors is critical to the success of your
business. The way to ensure sufficient cash flow is to properly manage your business's cash,
which requires you to optimize the collection and disbursement of cash. Managing your
company’s cash floats plays an important cash management role.
Cash Float Defined

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 In general, cash float refers to the difference between the cash balance recorded in your
accounting system's cash account and the amount of cash showing in your company's bank
account balances. Disbursement float occurs when you write a check and the recipient has not
yet cashed the check. Collection float occurs when you deposit a check but the bank has not yet
credited your account. The net float is the sum of disbursement and collection floats.

 Bank Account Float

Disbursement float gives you additional monies in your account for one or more days, while
collection float removes the money from your bank account for one or more days. To effectively
manage float, you must increase your disbursement float and decrease your collection float. In
other words, you must slow down disbursements and speed up collections.

 Manage Disbursement Float

For disbursements, opt to mail checks to vendors whenever possible. Although lenders and
certain creditors -- for example, utility companies and your company's landlord -- assess late
charges if they do not receive your check by a certain time, most vendors do not. You will have 5
the mailing time, the processing time and the time it takes for the bank to actually clear the
banking system and transfer funds out of your business's bank account. Even if you mail checks
for receipt one or two days before the due date, the receiver still needs to process the check and
deposit it. This gives you much more float than you would have if you paid via electronic funds
transfer or direct transfer.

 Manage Collection Float

To speed up your collection float, you must compress the time between receiving cash and
checks and depositing them in the bank. To do this, you can designate a post office box for all
invoice payments. This reduces the likelihood that checks get lost in the mail on the way to your
office. In addition, you can set up remote deposit with your bank. This will enable you to deposit
checks on the day they come in, as soon as your bookkeeper or payment clerk records the checks
in your accounting system. Alternatively, for customers who pay the same amount each month,
you can provide payment slips that allow them to direct-deposit their payment into your
company's checking account.
What Is Business Cash Flow?
Profit alone is not always enough to sustain a business. A company must also have enough cash
on hand to pay its bills. A better gauge of a business’s financial health is its cash flow, the money
flowing in and out of the business from sales, expenses, investments, debts collected and credit
extended. Identifying a company’s cash flow can help you predict the company’s future success.
Definition

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 Cash flow is composed of cash inflows and outflows based on three types of activities: operating
activities, investing activities and financing activities. Cash outflows are monies paid out of the
business. Cash inflows are monies paid in. A cash-flow statement only considers monies actually
transferred and does not include assets or liabilities that do not result in an exchange of money
(such as those extended on credit). The Securities and Exchange Commission requires all public
companies to produce a quarterly cash-flow statement.
 Operating Activities

Operating activities include cash used for the company’s day-to-day operations, such as the
production, distribution and sale of goods. Operating activities will likely comprise the largest
source of business income. Activities may include cash received from the sale of goods or
services; cash received from royalties, fees and commission; cash paid to suppliers for materials;
cash spent on advertising; cash paid to employees or on their behalf; and interest paid and earned
on loans.
 Investing Activities

Investing activities include cash flow from activities intended to generate future income. These
may include cash spent to purchase equipment, land or buildings; cash paid to acquire equity;
cash received from the sale of equity; or cash advances and loans made to suppliers or
customers. Investing activities may result in a negative cash flow, but this situation is not always
cause for concern, as heavy investment may translate to greater future cash flow.
 Financing Activities

Cash flow from financing activities measures the flow of cash from the business financers, such
as banks and shareholders. Financing includes cash received from investors, cash paid to
investors, cash received from issuing shares and debt, dividends paid, share repurchases and cash
paid for bonds, notes and mortgages.
Importance
Executives may examine a company’s cash-flow statement to determine whether the business
can afford to expand. Stockholders will use it to determine the likelihood of a company being
able to pay out dividends. Suppliers considering whether to extend credit will want to know that
the business has the cash necessary to repay its debts. Investors may use it to predict future
growth. Although the cash-flow statement can provide great insight into the financial health of a
company, the balance sheet and income statement are equally important tools to help gauge the
business’s success.
How to Maintain Cash Flow in a Business
Cash flow in a business refers to the actual cash that comes into the business and the cash that
exits the business. Cash inflows are payments received from customers and clients for products

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and services, interest payments and other receivables. Cash outflows include anything that
requires the business to pay other than on credit such as leases, taxes, payroll and other business
expenses. Even though the business’ income statement may appear healthy, if the business is not
managing cash flow well, the business could be in real trouble.
Cash Flow Problems in a Business
Adequate cash flow is essential to keeping a business afloat, but a 2010 Discover Small
Business Watch survey found that 50 percent of small business owners claimed cash flow
problems. Entrepreneurs often consider bandaging their cash flow problems with temporary cash
infusions, but a business ultimately needs to fix structural problems in their supply chain to show
positive gains.
 Identification

Cash flow problems mean a business spends more money than it earns. If you spend $4,000 on
rent, supplies and payroll this month, for example, but only take in $3,500 in sales you have a 8
cash flow of negative $500. You also have projected cash flow problems. If your expected
expenses outpace anticipated sales, you have a projected cash flow problem.
 Causes

Most businesses that have cash flow problems do so because they fail to look at their financial
statements until problems become too big to handle. Even a company that makes a profit can
have a negative cash flow because of the lag time shipping out products, when the customer pays
and the posting date of the funds.
 Effects

Poor cash management could end up putting a profitable company out of business. Without cash
on hand, a business may not be able to invest in assets that it needs, such as new equipment and
inventory. Profits are good for a business, but are worth nothing if cash is not coming in. You
may have to look to alternative loans with undesirable interest rates that cost more than a
traditional loan to make up for cash shortfalls.
 Temporary Solution

New businesses can expect some cash flow problems because they have yet to build up the
reserves needed to cover receivables owed to them. Consider taking out a loan against business
assets -- this type of loan costs more because businesses that need secured loans are typically the
closest to failure.
You can sell assets and then lease them. Lease agreements have you pay for the depreciation of
the items, whereas purchasing outright is like pre-paying for the lifetime use of the equipment.

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If you have significant outstanding receivables, some companies specialize in buying these for
less than they are worth, but give you cash in hand.
 Solution

Ultimately, you must get products to customers faster if you want to improve your cash flow.
Always deposit checks as soon as possible. Request customers pay in cash if possible or at least
with a credit card. Offer a discount if a customer pays an order faster than the standard 30 days,
suggests Entrepreneur.com. For suppliers and vendors, keep a good relationship with them in
case you ever need to extend a payment deadline. If you usually pay early, consider sending in
payment on the last day possible.
Security policies and procedures non-cash cash float documents and non-cash
Bank Account as a Tool for Controlling Cash
One of the major devices for maintaining control over cash is the use of a bank account. An
efficient controlling system requires the deposit of all cash receipts in the bank and all payments
by checks drawn on the bank or from special cash funds. When a business strictly follows the
system of depositing all cash receipts in a bank and paying all of its obligations by drawing a
check on the bank, there will be double records for cash: one maintained by the business
(depositor) and the other by the bank.
The forms used by a business in connection with a bank account are the following:
Signature Card: - when a business opens an account in a bank, the person authorized to sign
checks for the firm to make payments will provide his signature to the bank. At the time an
account is opened, the bank will assign an identifying number to the firm’s account and the
authorized person to sign checks drawn on the account will sign on a signature card. The card is
used by the bank to determine the validity of the signature on checks presented to it for payment.
The signature card serves as a contract between the depositor and the bank. It authorizes the bank
to make payments from funds in the depositor’s account on checks that have the authorized
signature.
Deposit Slip/Ticket: – A form, called a deposit slip, or a deposit ticket, must be prepared for
each bank deposit. These forms are provided to the depositor by the bank in which the account is
maintained and are usually preprinted with the assigned account number. The depositor on the
deposit slip lists the details of each deposit and it will be stamped or initialed by the bank’s teller
and given to the depositor as a receipt. The stamped deposit slip gives the depositor written proof
of the date and the total amount of the deposit.
Check: - A check is a written order signed by the depositor or other authorized person (the
drawer) instructing the bank (the drawee) to pay a specific sum of money to the person
designated (the payee). There are three parties to a check. The “drawer,’’ the one who signs the

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check; the “drawee,’’ the bank on which the check is drawn;’’ and the “payee,’’ the one to whom
the payment is made
Example
Suppose AB Boutique issued a Br. 400 check on June1, ordering the Commercial Bank of
Ethiopia to pay the stated amount to B.S. Company. Here, AB Boutique is the drawer, B. S.
Company is the payee, & the commercial bank of Ethiopia is the drawer.
When checks are issued for payments, they are recorded as credits to cash on the day issued,
even if they are not yet presented to the drawer's bank until some latter time. Likewise, when
checks are received from customers, they are recorded as debits to cash, on the assumption that
the customer has enough money on deposit.
In the above example, AB Boutique will credit its cash account on June1, even if B. S. Co. may
not collect the payment from the bank until July 30. On the other hand, B. S. Company will debit
its cash account on June1, with the assumption that AB Boutique have enough money on its
CBE’S account.
Endorsements: - Sometimes a business may receive a check from its customers in payments for
the goods and services it provides. If such a check is to be deposited, it must be endorsed.
Endorsement is a legal process by which the payee (the firm to which the checks are payable),
transfers ownership of the check to the bank. This gives the bank the legal right to collect
payments from the drawers or payers (the persons or firms that issued the checks). In the event
that a check cannot be collected, the endorser guarantees payments to all subsequent holders.
Several forms of endorsement are common in use. Individuals often use a blank endorsement.
This endorsement consists of the signature of the payee written on the back of the check. The
bearer can further endorse a check that has a blank endorsement. A full endorsement is much
safer. Here the payee is indicated as part of endorsement, the name of the payee or firm or bank
to whom the check is to be payable is indicated. Only the person, firm, or bank named in the
endorsement can transfer it to someone else.
The most appropriate form of endorsement for business purposes is the restrictive
endorsement, which limits further use of the check to a stated purpose. Usually, the purpose is
deposit in the firm’s bank account.
The three types of endorsements are illustrated below:
Blank endorsement Full Endorsement Restrictive Endorsement

Belay Solomon Pay to the order of CBE Pay to the order of CBE
80 – 60 - 42269 B. S. Co for deposit only

80 – 60 - 42269 B. S. Co.

15
As it can be seen, the blank endorsed check can easily be transferred to another party. This type
of endorsement carries greater risk. The fact that it can easily be transferred makes it more
susceptible to theft. The fully endorsed check can be transferred to another party only by
commercial bank of Ethiopia. There is no further endorsement of the check that has a restrictive
endorsement. Here, the check is endorsed for the only purpose of deposit at commercial bank of
Ethiopia.
Dishonored Checks:- Sometimes a check that has been sent for deposit may be rejected by
bank. This occurs when the bank on which the check was drawn has refused to honor it, usually
because there are no sufficient funds in the drawer’s account to cover it. The bank usually stamps
the letters NSF for “Not Sufficient Funds’’ on the check. Such a check is said to be
“dishonored.” The depositor’s records must be adjusted (by means of journal entry) to reflect the
dishonored check.
If a firm is notified of a dishonored check by its bank, it must contact the drawer in order to
arrange for collection. For instance, assume that B.S. Co had endorsed the check it received from
AB Boutique for deposit. The bank returned the check back to B.S. Co. stamped NSF because
AB Boutique does not have sufficient fund in its bank account to cover the payment of Br. 400.
In this case, B.S. Co. should adjust its cash records and should contact AB Boutique to collect
the amount it owed to, B.S. Co.
Record of Checks Drawn: - When a Check is issued to make payments, a memorandum record
of the check should be prepared. The record is made on either the check stub from which the
check is detached or in a small booklet designed to be kept with the check forms. Most
individuals & many businesses use checkbooks provided by a bank.

Written test
Self-check 3
Instruction: Answer the questions listed below
1. List the forms used by a business in connection with a bank account?
(10)––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
–––––––––––––––––––––––––––––––––––––––––––––––.

Removing receipts from terminal

Operation Sheet 2
1. How to control internal over cash receipts?
2. How to control internal over cash payments?
3. What are forms used by a business connection in bank account?

16
 Practical demonstration
LAP test
Instructions: You are required to perform the following in group with the presence of your
teacher.
Task1. List means of internal control over cash payments?

LG#43 LO #3- Reconciling takings

Information Sheet 1 Identify Cash and non-cash documents compared with cash and
non-cash transaction
3.1 Identify Cash and non-cash documents compared with cash and cash non- transaction
The Bank Statement
Once a month, the bank sends each depositor, a statement of the deposits received and the checks
paid. The bank statement shows the balance at the beginning of the period, checks withdrawn
and other debits (deductions by the bank) made by the bank on the depositor’s bank account,
deposits and other credits (additions by the bank), and the balance at the end of the period.
Bank Reconciliation
Dear Learners, since the bank and depositor maintain independent records of the depositor’s
checking account, it may seem that the balance as per the two will always agree, but they are not
likely to be equal on any specific date, hence the process of bringing the two balances to one is
called bank reconciliation.
The lack of agreement between the two balances is due to:
 Time lag of one party in recording the transaction.
 Error by either party in recording the transaction.
Some checks may have been written and entered in the firm’s journal but they may not have
been paid by the bank and charged to the depositor's account before the end of the month .A
deposit recorded in the firm’s journal may have reached the bank too late to be included in the
bank statement for the current month. The bank might have deducted service charges or other
items that have not yet been entered on the depositors’ record.
Bank reconciliation procedures
A company's general ledger account cash contains a record of transactions (checks written,
receipts from customers, etc.) that involve its checking account. The bank also creates a record of
the company's checking account when it processes the company's checks, deposits, service
charges, and other items. Soon after the ends of each month, the bank usually mails a bank
statement to the company. The bank statement lists the activity in the bank account during the
recent month as well as the balance in the bank account. When the company receives its bank

17
statement, the company should verify that the amounts on the bank statement are consistent or
compatible with the amounts in the company's cash account in its general
Steps in Reconciliation Process
Step 1. Adjusting the Balance per Bank
The bank reconciliation process is demonstrated by several steps. The first step is to adjust the
balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for
this step are listed in the following schedule:

Step 1. Balance per Bank Statement on Aug 31. 2006

Adjustments:

Add: Deposits in transit

Deduct: Outstanding checks

Add or Deduct : Bank errors

Adjusted/Corrected Balance per Bank

Deposits in transit are deposits already sent to the bank and recorded by the company, but are
not yet recorded by the bank. For example, a retail store deposits its cash receipts of August 31
into the bank's night depository at 10:00 p.m. on August 31. The bank will process this deposit
on the morning of September 1. This is a deposit in transit as of August 31 (the bank statement
date).
Since deposits in transit are already included in the company's cash account, there is no need to
adjust the company's records. However, deposits in transit are not yet appeared on bank
statement. Therefore, they need to be listed on the bank reconciliation as an increase tothe
balance per bank statement in order to report the true amount of cash. A helpful rule of thumb is
"put it where it isn't." A deposit in transit is on the company's book, but it is not on the bank
statement. Put it where it is not: as an adjustment to the balance on the bank statement.
Outstanding checks are checks that have been written and recorded in the company's cash
account, but have not yet cleared the bank. Checks written during the last few days of the month
plus a few older checks is likely to be among the outstanding checks.
As all checks that have been written are immediately recorded in the company's cash account,
there is no need to adjust the company's records for the outstanding checks. However, the
outstanding checks have not yet reached the bank and the bank statement. Therefore, outstanding
checks are listed on the bank reconciliation as a decrease in the balance per bank.

18
Recall the helpful tip "put it where it isn't." An outstanding check is on the company's book, but
it is not on the bank statement. Put it where it is not: as an adjustment to the balance on the bank
statement.
Bank errors are mistakes made by the bank. Bank errors could include the bank recording an
incorrect amount, entering an amount that does not belong on a company's bank statement, or
omitting an amount from a company's bank statement. The company should notify the bank of its
errors. Depending on the error, the correction could increase or decrease the balance shown on
the bank statement. (Since the company did not make the error, the company's records are not
affected).

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Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's cash account
so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in
the following schedule:

Step 2. Balance per Books on Aug, 31 2006

Adjustments:

Add:Interest earned

Add: Notes collected by the bank

Deduct: Check printing charges

Deduct: Bank service charges

Deduct: NSF checks & fees

Add or Deduct: Errors in company's cash account

Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's processing
activities related to the checking account (accepting deposits, posting checks, mailing the bank
statement, etc.) Other types of bank service charges include the fee needs to be decreased by the
amount of the service charges.
Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the bank
statement, but it is not on the company's books. Put it where it is not: as an adjustment to the
cash account on the company's book.
An NSF check is a check that was not honored by the bank of the person or company writing the
check because that account did not have a sufficient balance. As a result, the check is returned
without being honored or paid. (NSF is the acronym for not sufficient funds and the bank
describes the returned check as a return item. Others refer to the NSF check as a "rubber check"
because the check "bounced" back from the bank on which it was written.) When the NSF check
comes back to the bank in which it was deposited, the bank will decrease the checking account of
the company that had deposited the check. The amount charged will be the amount of the check
plus a bank fee.
Since the NSF check and the related bank fee have already been deducted on the bank statement,
there is no need to adjust the balance per the bank. However, if the company has not yet

20
decreased its cash account balance for the returned check and the bank fee, the company must
decrease the balance per books in order to reconcile.
Check printing charges occur when a company arranges for its bank to handle the reordering of
its checks. The cost of the printed checks will automatically be deducted
from the company's checking account.
Since the check printing charges have already been deducted on the bank statement, there is no
adjustment to the balance per bank. However, the check printing charges need to be adjusted to
the company book. They will be a deduction to company's Cash account.
Interest earned will appear on the bank statement when a bank gives a company interest on its
account balances. The amount is added to the checking account balance and is automatically on
the bank statement. Hence, there is no need to adjust the balance per the bank statement.
However, the amount of interest earned will increase the balance in the company's cash account
on its books. Recall "put it where it isn't." Interest earned on the current account in the bank is on
the bank statement, but it is not on the company's books. Put it where it is not: as an adjustment
to the cash account on the company's book.
Notes Receivables are assets of a company. When notes come due, the company might ask its
bank to collect the note receivable. For this service, the bank will charge a fee. The bank
increases the company's checking account for the amount it collected (principal plus interest) and
will decrease the account by the collection fee it charges. Since these amounts are already on the
bank statement, the company must be certain that the amounts appear on the company's book in
its cash account.
Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's fees are on
the bank statement, but they are not on the company's book. Put them where they are not: as
adjustments to the cash account on the company's book.
Errors in the company's cash account result from the company entering an incorrect amount,
entering a transaction that does not belong in the account, or omitting a transaction that should be
in the account. Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the cash
Account on the company's books.
Step 3. Comparing the Adjusted Balances
Dear learners, after adjusting the balance per bank (step 1) and the balance per book (step 2), the
two adjusted amounts should be equal. If they are not equal, you must repeat the process until the
balances are identical. The balances should be the true, correct amount of cash as of the date of
the bank reconciliation.
Step 4. Preparing entries Records of individual takings are recorded accurately

21
Journal entries must be prepared for the adjustments to the balance per book (step 2).
Adjustments to increase the cash balance require a journal entry that debits cash account and
credits another account. Adjustments to decrease the cash balance require a credit to cash and a
debit to another account.
Example: 1
a. On February 28, the V. Trading received a bank statement. The cash balance as per bank
statement was Br. 29,517.72. On the other hand, the firms’ cash ledger has got balance of
Br. 28, 243.15 on the same date.
b. A total debit memorandum was Br .39 of which Br. 25 is NSF check and Br. 14 is for
bank service charge.
c. In verifying the canceled checks, it was found that a Br. 100 check was charged by
mistake to the account of the V. Trading on February 28 and included in the canceled
checks.
d. Outstanding checks were identified and listed as follows:
 Check No. 117, Br.127.56
 Check No. 118, Br.101.01
 Check No. 120, Br.375.00
e. Deposits in transit total Br. 220
f. Note and interest collected by bank Br 1,030.00
Bank reconciliation for V. trading will be prepared as follow:
MalkaQunture Company
Bank Reconciliation
February 28, 19X1
Balance on bank statement……………………………………………..Br. 29, 517.72
Add: Deposit in transit……………………………Br. 220
Bank error ……………………………… 100 320____
Sub total……………………………………………………29,837.72
Deduct: Outstanding checks:
No 117, Feb. 27………………………Br. 127.56
No. 118, Feb.28 ……………………. 101.01
No. 120, Feb 28 ………………….. 375 603.57
Adjusted cash Balance…………………………………………………Br. 29,234.15
Balance as per depositor……………………………………………… Br 28, 243.75
Add Note and interest collected by bank ……………………………… 1,030.00

22
 Sub total …………………………………………………… Br. 29,273.15
Deduct: Bank service charge ………………….. Br…14
NSF check………………………………. 25 39.00
Adjusted cash Balance………………………………………………… Br. 29,234.15
Preparing the journal entries

The last step is passing the journal entries for all data adjusted on cash balance as per book. In
other words, items in the second section of the bank reconciliation require entries on the book of
depositor to correct the cash account balance. The data used for adjustment are those in the bank
reconciliation section that begins with the balance as per book. All information adjusted on the
book balance in the reconciliation should be recorded in the firm’s ledger.
The entries for V. Trading, based on the bank reconciliation above, are as follows:
Feb. 28 Cash in Bank…………………….1030
Notes Receivable………………………….1000
Interest income ………………………………30
(To record collection of receivable and interest by bank on behalf the V.Trading)
Feb. 28 Miscellaneous expense…………………..14
Cash in Ban……………………….14
(To record bank service charge)
Feb. 28 Account receivable……………….25
Cash in Bank………………………..25
(To record NSF check)
After these entries are posted, the cash account balance will be Br. 29,234.15, the same figure as
the adjusted balance on the bank reconciliation. This is the amount of cash available for use as of
Feb.28 for preparation of balance sheet on the same day.
Example: 2
The January bank statement sent by Awash Bank to ABC Company shows Birr5,000.17 assume
also that on January 31, 2012, the Cash account of ABC Company shows a balance of Birr
4,262.83. The accountant of ABC Company has identified the following items:
1. A deposit of Birr 410.90 made after banking hours on Jan. 31 does not appear on the bank
statement.
2. Two checks issued in January have not yet been paid by the bank:

23
 Check No. 301 Birr 110.25
Check No. 342 607.50
3. A credit memorandum was included in the bank statement, which was for proceeds from
collection of a non-interest bearing note receivable to ABC Company Birr 524.74.
4. Two debit memorandums accompanied the bank statement, a check of Birr 50.25 received
from a customer ,XYZ Company & deposited by ABC Company was charged back as NSF
& service charge by the bank for the month January amounts Birr 17.00
5. Check No. 305 was issued by ABC Company for payment of telephone expense in the
amount of Birr 85 but was erroneously recorded in the cash payments journal as Birr 58.
The January 31 bank reconciliation for ABC Company is shown below:
ABC Company
Bank Reconciliation
January 31, 2012
Balance per bank statement, Jan. 31, 2012……………………………..Br. 5,000.17
Add: Deposit of Jan. 31 not recorded by bank-----------------------------------410.90
Subtotal ……………………………………………………… Br.5, 411.07
Deduct: outstanding checks:
No. 301…………………………Br. 110.25
No. 342……………………………..607.50……………………(717.75)
Adjusted bank balance ……………………………………………….Br. 4,693.32
Balance per depositor’s record, Jan. 31, 2012…………………………..Br. 4,262.83
Add: Note Receivable collected by bank……………………………………..524.74
Subtotal………………………………………………………….Br. 4,787.57
Deduct: NSF check of XYZ Company……………..50.25
Bank Service charge………………………………17.00
Error on check stub No. 305………………………….27.00 (94.25)
Adjusted book balance…………………………………………………Br. 4,693.32
The following are journal entries related to the bank reconciliation.
2012 Cash in bank……………….. Birr 524.74
Jan. 31 Notes Receivable…………………..Birr 524.74

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 (To record Note Receivable collected by bank)
2012Miscellaneous Expense………………………….Birr 17.00
Jan.31Accounts Receivable-XYZ Co.…………………..Birr 50.25
Utilities Expense………………………………….Birr 27.00
Cash in bank………………………………………….Birr 94.25
(To record bank service charges, NSF check and error in recording Check No. 305)

Information Sheet 2 Regular cash transaction processing and proofing

3.2 Records of individual takings are recorded accurately Journal entire

What is a Proof of Cash?

A proof of cash is essentially a roll forward of each line item in a bank reconciliation from
one accounting period to the next, incorporating separate columns for cash receipts and cash
disbursements. The columns (and formula) used for a proof of cash are:

Beginning balance + Cash receipts in the period - Cash disbursements in the period =
Ending balance

Understanding a Proof of Cash

When used for each line item in a bank reconciliation, the proof of cash highlights areas in
which there are discrepancies, and which may therefore require further investigation, and
perhaps some adjusting entries . A proof of cash can indicate an array of other reconciliation
issues that will require adjustments to a company's accounting records , including the
following:

 Bank fees not recorded

 Not sufficient funds checks not deleted from the deposit records
 Interest income or interest expense not recorded
 Checks or deposits recorded by the bank in different amounts than what they were recorded
by the company
 Checks cashed by suppliers that the company voided
 Cash disbursements and/or cash receipts recorded in the wrong account

25
A proof of cash can also uncover instances of fraud. If there is a difference between the
totals, it can indicate the presence of unauthorized borrowings and repayments within the
time period covered by a single bank statement. Thus, if a controller were to illegally
withdraw $10,000 from the company accounts near the beginning of the month for his
personal use and replaced the funds before the end of the month, the issue would not appear
in normal bank reconciliation as a reconciling item . However, a proof of cash would be
more likely to flag the extra cash withdrawal and cash return within the period.

A proof of cash is more complicated to complete than a bank reconciliation. However, it

provides a greater degree of detail, and so makes it easier to locate errors than a bank
reconciliation. Thus, it may be cost-effective to use a proof of cash when you expect to find
a large number of different cash-related errors within an accounting period

Proof of transaction

Suppliers must provide a proof of transaction if the consumer asks for one, or automatically for
products or services valued at $75 (excluding GST) or more.

Proof of transaction, commonly a receipt or tax invoice, should be easy to read, in plain language
and state the:

 supplier of the products or services

 supplier's ABN, if they have one
 supplier's ACN, if they have one but do not have an ABN
 date of the transaction
 products or services supplied to the consumer, and
 Price of the products or services.

Consumers will usually need to show proof of transaction in order to make a claim about faulty
products or services. This is so suppliers can be sure they are providing a remedy for a product or
service they actually sold.

If a consumer does not have a receipt or tax invoice, and needs to make a claim, there are other
ways to show proof of where they made the purchase. These include a:

 lay-by agreement
 confirmation or receipt number provided for a telephone or internet transaction
 warranty card showing the supplier's or manufacturer's details and the date or amount of
the purchase
 serial or production number linked with the purchase on the supplier's or manufacturer's
database

26
  credit card statement
 copy or photograph of the receipt.

Sometimes you may need to provide more than one of these things to support your claim – for
example, when a credit card statement does not clearly itemise the product.

Electronic copies

Electronic copies and digital photographs are valid proof of transaction; however, they must be
clear enough to show the purchase details.

If a consumer cannot show where the product or service was purchased, the supplier or
manufacturer does not have to accept the claim, but may still choose to do so.

Gifts

Someone who receives a product as a gift has the same rights to a refund or return as a person
who has bought the product directly. However, they must still be able to prove where the gift
was purchased.

Itemized bills for services

Consumers can ask a supplier for an itemized bill within 30 days of whichever happens last:

 the services are supplied, or

 They receive a bill or account from the supplier for the services.

The supplier has seven days to provide an itemized bill that shows:

 how the price was calculated

 the number of labor hours and the hourly rate (if relevant), and
 a list of the materials used and the amount charged for them (if relevant)

Written test
Self-check 1

Instruction: Answer all the questions listed below

1. What men Bank reconciliation?
(5)–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
––––––––––––––––––––––––––––––––––––––––––––––.

27
2. What is a Proof of Cash? (5)
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
–––––––––––––––––––––––––––––––––––––––––––.

Reconciling takings
Operation Sheet 3

Steps in Reconciliation Process

Step1. Adjusting the Balance per Bank
Step2. Adjusting the Balance per Books
Step3. Comparing the Adjusted Balances
Step4. Preparing entries Records
Instructions: Giving the necessary equipment’s and stationary materials you are required to
perform the following tasks within 3 hours

Practical demonstration
LAP Test
Instructions: You are required to perform the following in group with the presence of your
teacher.
Task1. On February 28, 2012, the cash ledger in Helen Company shows a debit balance of
Birr 19,144.15 while the bank statement provided by Abyssinia bank indicates a balance of
Birr 31,391. 40. A receipt of February 28, for Birr 6,215.50 was not included in February
bank statement. In addition the
Task2. Checks, which were issued but not paid by the bank during this month totals Birr
11,021.50. Credit memorandums sent by the bank indicated that notes receivable left with the
bank for Birr 6,000 had been collected and credited for Birr 6,300 including interest revenue
of Birr300. The bank statement included in debit memorandums for Birr 28.75 as a service
charge for the month of February. Check No- 1334 issued for Birr855 had been recorded by
bank as Birr585. A check for Birr 1,275 had been recorded by Helen Company as Birr 2,175;
it was for the payment of an obligation to Alem Company on account.
Required:
a) Prepare bank reconciliation for Helen Company for the month of February.
b) Make the necessary journal entries.
Task3.On May31, 2010, the cash account in Merry Company shows a debit balance of Birr
13,215.80 while the bank statement provided by Dashen bank indicates a balance of
Birr19,513.90 the following items are identified in order to reconcile the two cash balances:

28
 a) Checks outstanding totaled Birr 7,070.10.
b) A deposit of Birr 3,915.20, representing receipts of May 31, had been made too late
to appear on the bank statement.
c) The bank had collected Birr 3,120 on interest- bearing note left for collection. The
face of the note was Birr 3, 000.
d) A check for Birr 69 returned with the statement had been recorded erroneously in
the check register as Birr 96. The check was for the payment of an obligation to
Helen Company for the purchase of office supplies on account.
e) A check drawn for Birr42 had been wrongly charged by the bank as Birr 24.
f) Bank service charges for May amounted to Birr 21.80.
Required:-
a) Prepare bank reconciliation for Merry Company for the month of May.
b) Make the necessary journal entries.
Task4. Shown below is the information needed to prepare bank reconciliation for Z Company at
December 31.
a) At December 31, cash per the bank statement was Birr 15,981; cash per the company’s
records wasBirr17, 445.
b) Two-debit memorandum accompanied the bank statement: service charges for December
of Birr24, and a Birr 600 check drawn by AMI marked ‘NSF’.
c) Cash receipts of Birr 4,353 on December 31 were not deposited until January.
d) The following checks had been issued in December but were not included among the paid
checks returned by the bank: no. 620 for Birr 978, no. 630 for Birr2,052, and no. 641
forBirr483.
Required:-
1. Prepare a bank reconciliation at December 31
2. Prepare the necessary journal entry or entries to update the accounting records based on
the reconciliation.

29