BUSA 100 Chap 9: Cash Receipts, Payments, and Banking

BUSA 100 - Introduction to Accounting
Chapter 9: Cash Receipts, Cash Payments, and Banking Procedures.
Schmidt

Where we have been: We have been discussing the use of special journals. We spent entire class periods discussing the Sales Journal, used for sales of merchandise on account, and the Purchases Journal, used for Purchases of merchandise on account. We also discussed the need for keeping track of the individual account balances due to us from our customers, using the AR Subsidiary Ledger, and we discussed the need for keeping track of individual account balances that we owe to our suppliers or vendors, using the AP Subsidiary Ledger. We demonstrated how the journals are kept and how the postings take place. We also demonstrated the check and balance feature by preparing schedules of AR and AP that had to balance back to their respective controlling accounts in the GL.

Where we are going: To finish off the merchandising cycle, we need to discuss the receipts and payments of cash and introduce the last of the two special journals: The cash receipts and cash payments journal. In addition, this chapter will present topics related to cash and banking functions. The most important of these concepts will be the preparation of a bank reconciliation.

Cash Received from Customers

We have talked about the sales process and how we account for invoices that have been issue. What we haven’t spent too much time is on what happens when the invoices are paid. Cash comes in from customers in several different ways a follows:

Because all of these are common transactions, we will discuss each one a bit more in detail. It’s important that you understand the proper accounting and recording of each before we discuss how they are recorded in a special journal. For each transaction, let’s assume we made a $1 sale and that the sales tax rate is 8%.

Cash Sales at the Counter

The customer would give us $1.08 for the sale. Of this amount, $1 is our revenue and .08 represent the sales tax. This would be recorded as follows:

Credit card sales at the counter – Bank Credit Cards

Do you know how credit cards work? You may know from having a credit card that there may be an annual fee for the card, and that you must pay interest on any outstanding balances not paid off. Did you also know that every time you use your credit card, the merchant is changed a percentage of every sale, including sales tax? This fee is recorded up front when the sales are made. Although the percentage varies among cards, we will assume a rate of 4% of the total transaction amount. The company gets the cash put into their account the same day. It is then up to the bank issuing the credit card to collect from the customers. The fee covers the cost of doing this. Look at the previous transaction. The credits will be the same. We still have $1 in revenue and we still owe .08 in tax. However, because our bank will deduct a fee up front, we cannot expect to get the 1.08 in our bank account. They take it off the top when credit card receipts are deposited. This journal entry would look:

Don’t forget that the credit card fee is changed on the entire transaction amount including the tax.

Credit Card Sales using non-bank credit Cards

Since banks do not issue these cards, the company making the sales does not get instant cash placed in their bank accounts on the day of the sale. Instead the credit card company remits payment to the company. Because of this, the debit to cash placed to Accounts Receivable. The fees for these private company charges a fee of 6%. American Express, Discover, and Diner’s club are the most commonly use private card. The same transaction above would be recorded as follows:

There are various other reasons why cash may come in to a company. The owner may infuse more money into the firm. The bank may collect on a transaction turned over to them for collection. These types of transactions don’t happen on a daily basis, however the other ones described above happen many times over the course of a day.

We previously discussed the meaning of 1/10 net 30 or 2/10 net 30 or net 30. We stated that some firms offer discounts for prompt payment. We will have to become more familiar with how these credit terms work, since we will focus on the receipt of cash in this chapter. (The book assumes that the company is a wholesaler and thus takes sales tax issues out of the picture. We will continue to do this, since it tends to complicate matter.) Let’s assume that we had made a sale o account to a customer for $200 on Jan 1. We offered then terms of 1/10 net 30. At the time of the sale, we recorded the following:

The customer sends in the check 7 days later. How much will it be for? It will be 200 less a discount of 1% or 2. The check will be for $198. How do you record this?

You must get the full amount of 200 off the books because the customer has paid its balance in full. DON’T FORGET THAT ANYTIME YOU TOUCH AR YOU MUST GO UPDATE THE CUSTOMER’S INDIVIDUAL ACCOUNT IN THE AR SUBSIDIARY LEDGER!

Merchandising companies have lots of cash running through their books. The most common sources for the cash sales, credit card sales, and remittances made for sales on account. We use a Cash Receipts Journal (CRJ) to record the incoming cash. The use of this journal cuts down on repetitive postings that would have to be made for each transaction if the journal were not available. See page 285 in your text for an example. A company’s CRJ should contain columns that will handle the majority of their cash transactions. The columns shown on page 285 are quite common for an ordinary merchandising entity. There are some things you need to be careful of:

This is the other side of the house. We must also pay for all the costs necessary to support the revenues of the business. The journal entries for cash payments for a merchandiser are pretty mush the same as for a service-oriented firm. The one exception to this is the discounts for prompt payment that may be offered. Let’s assume we purchased $300 of merchandise on account on terms of 2/10 net 30. Our original journal entry would have been:

If we make the payment within 10 days, we can take a discount of $6. We would record the payment as follows:

You cannot take discounts on any freight. And of course you can’t take discounts against any merchandise that has been returned. We will practice these calculations in class.

There are many other items that we pay cash for: wages, supplies, postage etc. A cash payments journal should be designed to include columns that handle the most common types of cash payment transactions. The example in your book on page 407 is pretty typical for many companies. Because we pay for so many things with cash or check, you will notice that there are quite a few transactions in the “Other Accounts” column. This is also typical. Remember that each line item that falls in this column has to be posted immediately to the GL. Also remember that ANY ITEM FALLING IN THE AP COLUMN MUST BE POSTED TO THE INDIVIDUAL VENDOR CARD IN THE AP SUBSIDIARY LEDGER.

You can see an example of a cash payments journal on page 293 of your text. We will practice using the Cash Payments Journal In Class.

Some General Comments about Cash:

Cash is a very important asset. You can’t do much without it. It is the most liquid of all assets and investments, and therefore tends to be one of the easiest assets to divert if certain controls are not in place. The management of cash, and the ways in which we bank have undergone a good deal of change lately, thanks mainly in part to the increased use of technology. Although the ways in which we bank have changed, many of the fundamental internal controls over cash have not. One of the most important things you can learn in this class is how to properly reconcile your checking account. This will be a major topic of this chapter.

Internal Controls – What are they?

Internal controls are procedures that must take place within a business to help safeguard assets against theft and misappropriations or misuse. These procedures should address an overall plan to safeguard all assets. It should also address specific items like who handles cash, where the cash goes, how it is recorded, and who and how it is reconciled, among a long laundry list of other items.

Some basic internal control safeguards:

(There are many of these. The following are listed as an example of some of them.)

· All payments should be made with checks

· All cash that comes in should be deposited immediately

· Do not write checks when cash is not available (sounds logical…but you wouldn’t believe how many people disregard this one)

· Personal checks should be endorsed immediately

· Signature cards should be maintained and updated annually

· Consideration should be given to requiring more than one signature on checks

· Preprinted deposit slips should be used

· Checks should be pre-numbered and all checks should be accounted for

· Checks should be placed in a locked cabinet with limited access

· Cash should be reconciled at least monthly

· The reconciliation process should be done by someone who does not record or touch cash

· In retail establishments, cash drawers should be reconciled to the sales register tape daily (as we will discuss later in the chapter)

Some basic documents that are important in this chapter: (Your book does a good job of explaining them.)

· Signature Cards

· Deposit Slips

· Checks

· Bank Statements

You should be familiar with the basic purposes and general appearance of all of the above.

The most important practical thing you will learn THIS WHOLE SEMESTER: How to reconcile your cash account (i.e. your checkbook) to the bank statement:

The bank statement represents an independent (or second party) proof of your cash activity. It is one of the most important things you can do to insure the accuracy of your cash. A bank reconciliation is exactly what the name implies…a bringing together (a reconciliation) of the two balances: YOURS AND THE BANKS!

If your cash balance exactly matched the bank’s cash balance, there would not be any reason to reconcile the account. THIS RARELY (IF EVER) HAPPENS. Most of the time, this is due to timing differences between you and the bank. This does not necessarily mean that there are errors…just a lag in time between when items get recorded. What you need to concern yourself with are items that don’t match up between your records and the bank records. You must go through a comparison process to highlight these items as follows:

Steps in the bank reconciliation process: Do the legwork first!

You need your checkbook (or general ledger cash account if you are doing the company’s books) and the bank statement:

· Make sure that any reconciling items (due to timing differences) from the previous month have cleared. If they do, check them off. If not, circle them. These items are still outstanding and must be carried forward to this month’s reconciliation.

· Compare the deposits listed in your records to the deposits listed on bank statement. Check off those that match. Circle those that don’t.

· Compare the checks listed in your checkbook to the checks that cleared the bank, via the bank statement. Check off those that have cleared, and circle those that don’t.

· Compare any debit or credit memos per the bank statement to your records. (Remember that banks have their debits and credits backwards!) Circle any items that don’t match.

· Check out any other items per your checkbook (or G/L) that have not been checked off.

The circled amounts represent differences between you and the bank or reconciling items. These must be placed in the appropriate place of the bank reconciliation as described below:

I know what the differences are – Now What???

Finding the differences is the time consuming part. What you need to remember is where these differences go in the bank reconciliation. I have found that students prefer a side-by-side presentation as shown below:

BANK BOOKS

Balance per Bank XXX Balance per Books or G/L XXX

Add: Deposits In Transit Add: Collections XXX

XXX Interest Earned (not allowed

on corporate accounts)

Less: Outstanding Checks (XXX) Less: Fees (XXX)

Deposited NSF checks

+/- Bank errors +/- Our errors

Adjusted bank balance XXX Adjusted book balance XXX

THESE BALANCES MUST MATCH WHEN YOU ARE DONE!!!

Are my books fixed?

Almost. You have performed the reconciliation. But, as you know from previous chapters, the only way to get something formally into the accounting records is to journalize a transaction. Now, we don’t care about the bank side…these items are the bank’s problems and besides most of them are timing differences that will go away next month. What we must adjust for are any entries made on the right hand side or on the book side.

How do you make the adjustments?
Increases to cash will require that the cash account be debited. Decreases to cash will require that the cash account be credited. The offsetting entry will depend on the nature of the adjustment. We will discuss this further in class.

Petty Cash

We will not cover this topic.

The Change Fund

Simply stated, this is a cash fund that is placed in the cash drawer at the start of each day in order to make change for our customers. The amount and denominations stay the same. This is what’s called an imprest account, because the amount doesn’t change, and the funds are not deposited daily. The cash change fund account is only touched when it is established (for the initial dollar amount). It is not touched again unless it is later decided that the amount needs to be changed. The amount of the change fund is subtracted from the day’s receipts and should be balanced against the sales tape. Small differences are

expected and should be recorded to a cash short and over account. (See details on account below.) Big differences should be investigated.

Cash short and over

Purpose: This account is used to track daily overages and
shortages. The net balance is usually insignificant.

Type of account: Revenue or Expense depending on the balance.

Normal balance of account: Shortages are more common, so a debit balance is
more likely.

Financial Statement Presentation: Income Statement

Other Important Stuff:

Endorsements

An endorsement is required before the bank will accept a check. An endorsement transfers title, but more importantly, it guarantees payment. (If the check bounces, the bank will deduct it from the person’s account who deposited it.) There are several types of endorsements that you need to be familiar with:

· Restrictive Endorsements—restricts who can transfer the check. This is the safest endorsement that a business can use.

· Blank Endorsement –no restriction on who can transfer the check

· Full Endorsement—an endorsement which places a specific restriction on it, usually without recourse. Only the person or business to who it is made out to can transfer it to someone else.

Examples of these endorsements can be found on page 302.

Terms and Definitions

There are a lot of these listed in your text. Be familiar with them. You should be very familiar with the different types of reconciling items, such as:

· Deposits in Transit

· Outstanding Checks

· NSF Checks

· Promissory Notes

· Service Charges

· Debit Memos

· Credit Memos

You should also be familiar with generic terms such as EFTs, ATMs, etc.