Fundamental Accounting Principles – Financial Accounting II

8 Internal Control and Cash

Learning Objectives
1 Understanding Petty Cash Fund

2 Reconciling the Bank Account

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Fundamental Accounting Principles – Financial Accounting I

Learning Objective

LO.1:
Understanding Petty Cash Fund
Fundamental Accounting Principles – Financial Accounting II

Petty Cash Fund

Petty cash fund is a common way of handling relatively
small amounts payments using an operation often called
an imprest system that involves:

(1) Establishing the fund

(2) Replenishing the fund.

(3) Closing the fund

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Fundamental Accounting Principles – Financial Accounting II

ESTABLISHING THE PETTY CASH FUND

Illustration: If Laird Company decides to establish a $100 fund
on March 1, the journal entry is:

March 1 Petty Cash 100

Cash 100

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Fundamental Accounting Principles – Financial Accounting II

REPLENISHING THE PETTY CASH FUND

Illustration: On March 15 Laird’s petty cash custodian requests
a check for $87. The fund contains $13 cash and petty cash
receipts for postage $44, freight-out $38, and miscellaneous
expenses $5. The journal entry is:

March 15 Postage Expense 44

Freight-Out 38
Miscellaneous Expense 5
Cash 87

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Fundamental Accounting Principles – Financial Accounting II

Illustration: Assume in the preceding example that the

custodian had only $12 in cash in the fund plus the receipts as
listed. The request for reimbursement would therefore be for
$88, and Laird would make the following entry.

March 15 Postage Expense 44

Freight-Out 38
Miscellaneous Expense 5
Cash Over and Short 1
Cash 88
Fundamental Accounting Principles – Financial Accounting II

DO IT! 1 Petty Cash Fund

Bateer Company established a $50 petty cash fund on July 1. On
July 30, the fund had $12 cash remaining and petty cash receipts for
postage $14, office supplies $10, and delivery expense $15. Prepare
journal entries to establish the fund on July 1 and to replenish the
fund on July 30.
Solution

July 1 Petty Cash 50

Cash 50
30 Postage Expense 14
Supplies 10
Delivery Expense 15
Cash Over and Short 1
Cash 38
Fundamental Accounting Principles – Financial Accounting I

Learning Objective

LO.2:
Reconciling the Bank Account
Fundamental Accounting Principles – Financial Accounting II

Bank Statement

DEBIT MEMORANDUM
◆ Bank service charge.
◆ NSF (not sufficient funds).

CREDIT MEMORANDUM
◆ Collect notes receivable.
◆ Interest earned.
Fundamental Accounting Principles – Financial Accounting II
Reconciling the Bank Account

Reconcile balance per books and balance per bank to

their “correct” or “true” balance.

Reconciling Items:
1. Deposits in transit.

2. Outstanding checks. Time Lags

3. Bank memoranda.

4. Errors.

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Fundamental Accounting Principles – Financial Accounting II
Reconciling the Bank Account

RECONCILIATION PROCEDURES

+ Deposit in Transit + Notes collected by bank

– Outstanding Checks – NSF (bounced) checks
– Bank service charges
+/ – Bank Errors +/ – Company Errors

CORRECT BALANCE CORRECT BALANCE

Fundamental Accounting Principles – Financial Accounting II
RECONCILIATION PROCEDURES
Fundamental Accounting Principles – Financial Accounting II

A bank reconciliation at April 30.

Cash balance per bank statement $15,907.45

Deposit in transit 2,201.40
Outstanding checks (5,904.00)
Adjusted cash balance per bank $12,204.85

Cash balance per books $11,589.45

Error in check No. 443 36.00
NSF check (425.60)
Bank service charge (30.00)
Collection of notes receivable 1,000.00
Interest on notes receivable 50.00
Bank collection fees (15.00)
Adjusted cash balance per books $12,204.85
Fundamental Accounting Principles – Financial Accounting II

ENTRIES FROM BANK RECONCILIATION

Cash-in Entry
Apr. 30 Cash 1086
Accounts Payable 36
Notes Receivable 1,000
Interest Revenue 50

Cash-out Entry
Apr. 30 Accounts Receivable 425.60
Miscellaneous Expense 45.00
Cash 460.60
Fundamental Accounting Principles – Financial Accounting II

End of
Chapter (8)