Chapter 4

Cash and Receivables

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 Chapter 4’s Learning Objectives

1. Account for cash

2. Prepare and use a bank reconciliation
3. Account for accounts receivables
4. Estimate and account for uncollectible accounts
receivable
5. Account for notes receivable
6. Explain how to improve cash flows from sales and
receivables
7. Evaluate a company’s liquidity

• .

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Learning Objective One

Account for cash

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 Accounting for Cash

• Companies usually combine all cash amounts into a single total on

the balance sheet called “Cash & Cash Equivalents”.
 Cash is the most liquid asset because it is the medium of
exchange used to pay bills and employees’ salaries, repay
loans, buy equipment, etc.
 Cash equivalents include liquid assets such as treasury bills,
commercial papers, and money market funds, which are
interest bearing accounts with less than 3 months maturity.

• Usually companies receive and pay funds by way of electronic

funds transfer (EFT) or cheques.

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Learning Objective Two

Prepare and use a bank reconciliation

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 The Need to Control Cash
• Cash is the most liquid asset but it is easy to conceal and relatively
easy to steal.
• Thus, most businesses create specific controls for cash:
1. Keep cash in a bank account.
2. Separation of duties (i.e., the person handling cash should not
be responsible for recording cash transactions).
3. Proper authorization for purchases.
3. Proper authorization for cash payments.
4. Authorize a limited number of people to sign cheques.
5. Require daily deposits of cash receipts.

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 Banks Controls for Safeguarding Cash

• Keeping cash in a bank account helps control cash because banks

have established practices for safeguarding customers’ money.
• The documents used to control a bank account include:
1. Signature card
2. Deposit slip
3. Cheque
4. Bank statement
5. Bank reconciliation

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 Bank Account Documents

• Signature card
 Protects against forgery(fake) by requiring each authorized
signing person to provide a signature card.
• Deposit slip
 Proof of transaction (i.e., deposit receipt). (day, amount of
deposit of cash)
• Cheque
 Maker – signs the cheque
 Payee – to whom the cheque is paid
 Bank – where funds are drawn

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 Bank Account Documents (cont’d)

• Bank statement
 Reports the activity in a
bank account
 Shows the account’s
beginning and ending
balances, cash receipts,
payments, and
electronic fuds transfers
(EFTs)

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 Bank Reconciliation
• There are two records of the cash businesses hold:
1. The Cash account in the company’s general ledger, and
– The cash record is known as “chequebook” or the “books”)
– and subleger, of each category of cash
2. The bank statement.

• The books and bank statement usually have different cash balances
due to time differences, missing items, and recording errors.
• Bank reconciliation explains the differences between the balance on
the bank statement and the balance on the books.
– As an internal control over cash, the person who prepares the
bank reconciliation should have no other cash duties. Otherwise,
he or she can steal cash and manipulate the reconciliation to
conceal the theft.
– when company write a cheque, recod when writing, not gonna
reflect on bank statement until the payee deposit the cheque 10
 Differences Between Books and Bank Statement
Balances
The 3 sources of differences are:
1. Time lag in recording transactions. Examples:
– When you write a cheque, you immediately deduct it in your
books. BUT the bank does not subtract the cheque from your
cash account until the bank pays the cheque a few days later.
– You immediately record cash receipts of your deposits as
additions. BUT it may take a few days for the bank to add
deposits to our balance.
2. Missing items
3. Recording errors
– Bank may erroneously subtract from your account a cheque written
by someone else.

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 Bank Reconciliation Sides

 Bank reconciliation reconciles differences between the

balance on the bank statement and the balance on the cash
general ledger.
 The bank statement balance and cash balance on the books
MUST be reconciled each period.
 Bank reconciliation has two sides:
(1) Bank side, and
(2) Book side
→ Each side must be reconciled to the correct balance. After
the reconciliation, the adjusted bank balance equals the
adjusted book balance.
to be reconciliated before end of period

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 Preparing the Bank Reconciliation – Bank Side
Items to be recorded on the Bank side (i.e., recorded by the
company but not yet by the bank):
1. Deposits in transit (outstanding deposits)
Because these deposits have been recorded by the company
but not yet by the bank Add deposits in transit.

2. Outstanding cheques
Because these cheques have been issued by the company but
not yet paid by the bank  Subtract outstanding cheques.

3. Bank errors.
Correct all bank errors on the Bank side of the reconciliation.
• Ex: the bank may erroneously subtract from your account a
cheque written by someone else or it may transpose
numbers in recording a deposit to your account.
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 Preparing the Bank Reconciliation – Book Side

Book side – adjust for items recorded by the bank but not yet
recorded by the company:

1. Bank collections
Because bank has recorded cash receipts for the company but
the company hasn’t recorded the cash receipt yet  Add it on
the book reconciliation.(account receivable eg)
2. Electronic funds transfers (EFT)
Because bank has received or paid cash on behalf of the
company but the company hasn’t recorded it  Add EFT
receipts or subtract ETF payments on the book reconciliation.
3. Service charges
Bank’s fee for processing your transactions  Subtract service
charges on the book reconciliation.

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Preparing the Bank Reconciliation – Book Side (cont’d)

4. Interest income
Company earns interest on certain types of accounts  Add
interest income on the book reconciliation.
5. Nonsufficient funds (NSF) cheques from Payer's acn
NSF cheques are cash receipts from customers for which there
are not sufficient funds in the bank to cover the amount 
Subtract NSF cheques on the book reconciliation.
6. Cost of printed cheques
This cash payment is handled like a service charge. Subtract this
cost.
7. Book errors
Correct all book errors on the Book side of the reconciliation.
• Ex: You may have recorded a $150 cheque as $510.

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 Summary of Reconciling Items

BANK BALANCE(直接到公司的钱 BOOK BALANCE(直接存在银行

并没有存在银行Yet) 的钱，公司并不知道yet)
Add Add
• deposits in transit • bank collections
• EFT receipts
• interest revenue
Subtract Subtract
• outstanding cheques • EFT payments
• services charges
• NSF cheques
Add or subtract Add or subtract
• correction of bank errors • correction of book errors
equals
Adjusted bank balance Adjusted book balance

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The rest of the slides will be added by
Monday

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