petty cash fund and bank recon.docx

Financial Acctg 205B **Petty Cash Fund Reviewer** **Imprest System** - System of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check. - However, there are certain instances when it may be very di...

Financial Acctg 205B **Petty Cash Fund Reviewer** **Imprest System** - System of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check. - However, there are certain instances when it may be very difficult, impractical or impossible to make payments by check, in such a case, payments may be made by the disbursing officer in the form of cash. **Petty Cash Fund** - Money set aside to pay small expenses which cannot be paid conveniently by means of check. - A small amount of company cash often kept on hand (e.g., in a locked drawer or box), to pay for minor or incidental expenses. - refers to a small amount of currency and coins that a company uses to pay small amounts without writing a check **Two methods of handling the petty cash :** a. **Imprest Fund System -** - Usually followed in handling petty cash transaction - The account "Petty cash fund" will remain dormant at a constant amount b. **Fluctuating fund system** - The checks drawn to replenish the fund do not necessarily equal to the petty cash disbursement **Accounting procedures for Imprest fund System** a. **A check is drawn to establish a fund.** Petty Cash fund xx Cash in Bank xx b. **Payment of expenses out of fund.** No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for such payments band simply prepares memorandum entries in the petty cash journal. c. **Replenishment of petty cash payments** Whenever the petty cash fund runs low, a check is drawn to replenish the fund. The replenishment is usually equal to the petty cash disbursements. It is at this time that the petty cash disbursements are recorded Expenses xx Cash in Bank xx It is to be pointed out that the petty cash disbursements should be replenished only by the means of check and not from deposited collections. d. **At the end of the accounting period it is necessary to adjust the unreplenished expenses in order to state the correct petty cash balance.** Expenses xx Petty cash fund xx The adjustment is to be **reversed at the beginning of the next accounting period.** The reversal is made in order that the normal replenishment procedures may be followed simply debiting expenses and crediting cash in bank without distinguishing whether the expenses pertain to the current period or prior period. e. **An increase in the fund is recorded normally** Petty Cash Fund xx Cash in Bank xx f. **A decrease in the fund is recorded normally.** Cash in Bank xx Petty Cash fund xx **Accounting procedures for Fluctuating fund System** a. Establishment of the fund Petty cash fund xx Cash in bank xx b. Payment of expenses out of the petty cash: Expenses xx Petty cash fund xx Under this system, the disbursements from the petty cash fund are immediately recorded in contradistinction with the imprest fund system where the disbursements are recorded upon the replenishment of the fund. c. Replenishment or increase of the fund: Petty cash fund xx Cash in bank xx The replenishment check may or may not be the same as petty cash disbursements d. At the end of the reporting period, no adjustment is necessary because the petty cash expenses are recorded outright. e. Decrease of the fund is reverted to the general cash Cash in bank xx Petty cash fund xx **Unit II. Cash and Cash Equivalent** **Lapping** - Lapping is a practice used for concealing of cash shortage - Lapping consists of misappropriating a collection from one customer and concealing this defalcation by applying a subsequent collection made from another customer. - Lapping involves a series of postponement of the entries for the collection of receivables. **Kiting** - Kiting is another device used to conceal cash shortage - Kiting occurs when a check is drawn against a first bank and depositing the same check in second bank to cover the shortage in the latter bank. **Accounting for cash shortage** Cash shortage= cash count \< the balance per book Cash short or over\-\--xx Cash\-\-\-\-\-\-\-\-\-\-\--xx Cash short or over is only a temporary or suspense account. Thus, if the cashier or cash custodian is held responsible Due from cashier\-\-\--xx Cash short or over\-\-\--xxx However, reasonable efforts fail to disclose the cause of the shortage, adjustment is Loss from cash shortage---xx Cash short or over\-\-\--xx **Accounting for cash overage** Cash overage= cash\> balance per book Cash\-\--xx Cash short or over---xx The cash overage is treated as miscellaneous income if there is no claim. Cash short or over-xx Miscellaneous Income-xx But where the cash overage is properly found to be the money of the cashier Cash short or over----xx Payable to cashier\--xx Financial Acctg 205B Bank Reconciliation Reviewer **Bank Deposits** - **Demand Deposit (Current or checking account)** - Usually a noninterest bearing deposit that are covered by deposit slips and where funds are withdrawable on demand by drawing check against bank. - **Saving Deposit** - Depositor is given a passbook upon initial deposit. It is required when making deposits and withdrawal. - Withdrawals are made anytime but the bank sometimes may require notice of withdrawal - An interest bearing deposit. - **Time Deposit** - Interest bearing and evidenced by a formal agreement called certificate of deposit. **Illustrating some fundamental transactions affecting the depositor and the bank** - Assume that Company X( the depositor) collected P100,000 from a customer in settlement of an account. The collection is deposited at the First Bank. **Journal Entry on Company X books** Cash (Cash in Bank) 100,000 Accounts Receivable 100,000 **On the books of the bank, the journal entry is:** Cash 100,000 Company X 100,000 - **When the account of the depositor increased the same is credited.** **Relationship of bank and the depositor** The **depositor** who deposit money on the bank is the *lender/creditor*. The **bank** is the *debtor.* - There exist a debtor-creditor relationship - Company X subsequently issued a check for P 30,000 in payment of an account payable. **On the books of company X, the journal entry is:** Accounts payable 30,000 Cash 30,000 **The journal entry on the books of the bank is:** Company X 30,000 Cash 30,000 Thus, when the depositor's account is decreased, the same is debited. Cash in Bank on the Depositor's Book = 70,000 Company X balance on bank= 70,000 **Bank Reconciliation** - It is necessary only for a demand deposit or checking account. - Bank Reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank. - Usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month. **Reconciling Items** - **Book reconciling items** a. Credit memos b. Debit memo c. Errors - **Bank reconciling items** a. Deposit in Transit b. Outstanding Checks c. Errors **Book Reconciling items** - ***Recorded by the bank but not yet recorded by the book.*** 1. **Credit Memo** Credited by the bank to the account of the depositor but not yet recorded by the book. INCREASE BANK BALANCE **Typical Examples** 1. Notes receivable collected by the bank in favor of the depositor and credited to the account of the depositor 2. Proceeds of Bank Loan credited to the account of the depositor(interest income) 3\. Matured time deposits transferred by the bank to the current account of the depositor. 2\. **Debit Memos** Items not including checks paid by the bank which are charged or debited by the bank to the account of the depositor. DECREASE BANK BALANCE. **Typical Example:** a. NSF or No sufficient fund checks- checks deposited but returned by the bank because of insufficiency of fund. b. Technically defective checks- checks deposited but returned by the bank because of technical defects such as absence of signature or countersignature , erasures not countersigned, mutilated checks, conflict between amount in words and amount in figures c. Bank service charge d. Reduction of loan **Book Reconciling items** - ***Items recorded by the book but not yet by the bank*** 1. **Deposit In Transit** Collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement. a. Collections already forwarded to the bank for deposit but too late to appear in the bank statement. b. Undeposited collections- cash on hand awaiting delivery to the bank for deposit. 2. **Outstanding Checks** Checks already recorded by the depositor as cash disbursement but not yet reflected on the bank statement. a. Checks drawn and already given to payees but not yet presented for payment. Note: Certified checks- one where the bank has stamped on its face the word "accepted" or "certified" indicating sufficiency of fund. It should be **deducted from outstanding check** because it no longer outstanding. **Forms of Bank Reconciliation** a. **Adjusted Balance Method**- the book and the bank balance are brought to a correct cash balance that must appear on the balance sheet. b. **Book to Bank Method-** book balance is reconciled with bank balance or the book balance is adjusted to equal the bank balance. c. **Bank to Book Method**- bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance - **The first method is prefer over the two.** **Proforma Reconciliation** Adjusted Balance Method: Book Balance xx Bank Balance xx Add: Credit Memos [xx] Add: Deposit in Transit [xx] Total xx Total xx Less: Debit Memos [xx] Less: Outstanding Checks [xx] Adjusted book Balance [xx] Adjusted Bank Balance [xx] **Book to Bank Method** Book Balance xx Add: Credit Memos xx Outstanding Checks [xx] [xx] Total xx Less: Debit Memos xx Deposit in Transit [xx] [xx] **Bank Balance** [xx] **Bank to Book Method** Bank Balance xx Add: Deposit in Transit xx Debit Memos [xx] [xx] Total xx Less: Outstanding Checks xx Credit Memos [xx] [xx] **Book Balance** [xx] Illustration The cash records of De La Cruz Company show the following for the month of January. CASH RECEIPTS CASH DISBURSEMENTS Jan 5 60,000 Jan 6 Check No. 721 5,000 13 20,000 7 Check No. 722 10,000 25 30,000 10 Check No. 723 18,000 31 [40,000] 14 Check No. 724 2,000 [150,000] 28 Check No. 725 37,000 31 Check No. 726 [28,000] [100,000] The general ledger of the company shows the cash in bank account for January as follows Cash in bank- First Bank The balance of the cash in bank on the depositors book is P 50,000. Unadjusted Book Balance / Book Balance- P 50,000 **Bank Statement from First Bank** In account with: No 775 De La Cruz Company **FIRST BANK** Iloilo, City Iloilo, Philippines  Code: CM- Credit Memo DM- Debit Memo SC- Service Charge RT-Returned Check The following data are gathered in connection with the CM and DM appearing on the bank statement: a. The CM of P 15,000 on January 26 represents the proceeds of note collected by the bank in favor of De La Cruz Company. b. The RT of P 5,000 represents check of customer deposited previously but returned by the bank because of "no sufficient fund" or NSF. **Summarizing the given** Unadjusted Bank Balance/Bank Balance= 84,000 Deposit in Transit= 40,000 Outstanding Check= 65,000 Unadjusted Book Balance/Book Balance = P 50,000 Credit Memos- P15,000 Debit Memos: NSF- P5,000 SC- P1,000 P 6,000 **Adjusted Balance Method** Book Balance 50,000 Add: Credit Memo [15,000] Total 65,000 Less: Debit Memo [6,000] **Adjusted Book Balance [59,000]** Bank Balance 84,000 Add: DIT 40,000 Total 124,000 Less: OC [65,000] **Adjusted Book Balance** **[59,000]** **Book to Bank Method** Book Balance 50,000 Add: CM 15,000 OC [65,000] [80,000] Total 130,000 Less: DM 6,000 DIT [40,000] [46,000] **Bank Balance** [84,000] **Prepare adjusting entries:** a. To record collection of the bank. Cash in Bank 15,000 Accounts Receivable 15,000 b\. To record the NSF customer check Accounts Receivable 5,000 Cash in Bank 5,000 c\. To record the bank service charge Bank Service Charge 1,000 Cash in Bank 1,000 **UNIT 3. ACCOUNTS RECEIVABLE** **TRADE AND NONTRADE RECEIVABLE** - **Trade receivables** - claims arising from sale of merchandise or services in the ordinary course of business. Ex. accounts receivable and notes receivable. - **Accounts receivable** -are open accounts arising from the sale of goods and services in the ordinary course of business and not supported by promissory notes. (customers\' accounts, trade debtors, and trade accounts receivable.) - **Notes receivable** - are those supported by formal promises to pay in the form of notes. - **Nontrade receivables** -represent claims arising from sources other than the sale of merchandise or services in the ordinary course of business. **CLASSIFICATION** - **Trade receivables** which are expected to be realized in cash within the normal operating cycle or one year, whichever is longer, are classified as **current assets.** - **Non-trade receivables** which are expected to be realized in cashwithin one year, the length of the operating cycle notwithstanding,are classified as **current assets.** - If collectible beyond one year, non-trade receivables are classified as **non-current assets.** **PRESENTATION** Trade receivables and non-trade receivables which are currently collectible shall be presented on the face of the statement of financial position as one line item called trade and other receivables. However, the details of the total trade and other receivables shall be disclosed in the notes to financial statements. Accounts Receivable 5,000,000.00 Allowance for Doubtful Account (200,000.00) Notes Receivable 1,000,000.00 Accrued Interest on Note Receivable 150,000.00 Advances to Officers and Employees 100,000.00 Dividends Receivable [250,000.00] **Total Trade and other Receivable [6,300,000.00]** **Examples of Non trade Receivable** a\. Advances to or receivables from shareholders, directors, officers or employees. If collectible in one year, such advances or receivables should be classified as current assets. b\. Advances to affiliates are noncurrent investments. c\. Advances to supplier are current assets. d\. Subscriptions receivable should be shown preferably as a deduction from subscribed share capital unless collectible currently. e\. Creditors\' accounts with debit balances as a result of overpayment or returns and allowances are classified as current assets. f\. Special deposits on contract bids normally are classified as noncurrent assets because such deposits are likely to remain outstanding for a considerable long period of time. g\. Dividend receivable, accrued rent receivable, accrued royalties receivable and accrued interest receivable are usually classified as current assets. h\. Claims receivable such as claims against common carriers for losses or damages, claim for rebates and tax refunds are normally classified as current assets. **CUSTOMERS' CREDIT BALANCE** - **CUSTOMERS' CREDIT BALANCE** -- are credit balances in accounts receivable resulting from over payments, returns and allowances, and advance payments from customers. - \- It is classified as current liabilities and are not offset against debit balances in other customers accounts, except when the same is not material in which case only the net accounts receivable may be presented. **INITIAL MEASUREMENT OF ACCOUNTS RECEIVABLE** - PFRS 9, paragraph 5.1.1, provides that a financial asset shall be recognized initially at fair value plus transaction costs that are directly attributable to the acquisition. - The fair value of a financial asset is usually the transaction price, meaning, the fair value of the consideration given. - For short-term receivables, the fair value is equal to the face amount or original invoice amount. - Cash flows relating to short-term receivables are not discounted because the effect of discounting is usually immaterial. - Accordingly, accounts receivable shall be measured initially at face amount or original invoice amount. With respect to accounts receivable, transaction costs are not normally incurred because the accounts simply arise from the act of selling goods in the ordinary course of business. **SUBSEQUENT MEASUREMENT** - In accordance with PFRS 9, paragraph 5.2.1, after initial recognition, accounts receivable shall be measured at amortized cost. - The amortized cost is actually the net realizable value of accounts receivable. - The term amortized cost has more relevance in long-term note receivable. - Thus, the term net realizable value is preferably used in relation to accounts receivable. - The net realizable value of accounts receivable is the amount of cash expected to be collected or the estimated recoverable amount. **NET REALIZABLE VALUE** The initial amount recognized for accounts receivable shall be reduced by adjustments which in the ordinary course of business will reduce the amount recoverable from the customer This is based on the established basic principle that assets shall not be carried at above their recoverable amount. Accordingly, in estimating the net realizable value of trade accounts receivable, the following deductions are made: a. Allowance for **freight charge** b. Allowance for **sales return** c. Allowance for **sales discount** d. Allowance for **doubtful acccounts** **TERMS RELATED TO FREIGHT CHARGE** - **FOB destination** means that ownership of the goods purchased is vested in the buyer upon receipt thereof. Accordingly, the seller shall be responsible for the freight charge up to the point of destination. - **FOB shipping point** means that ownership of the goods purchased is vested in the buyer upon shipment thereof. Thus, it is incumbent upon the buyer to pay for the transportation charge from the point of shipment to the point of destination. - The term **freight collect** means that freight charge on the goods shipped is not yet paid. The common carrier shall collect the same from the buyer. Thus, under this, the freight charge is actually paid by the buyer. - The term **freight prepaid** means that freight charge on the goods shipped is already paid by the seller. **ACCOUNTING FOR FREIGHT CHARGE** - Sometimes, goods are sold [FOB destination but shipped freight collect] with the understanding that the buyer will pay for the freight charge and deduct the same when remittance is made by him. - On the part of the seller, the freight charge is recorded by debiting freight out and crediting allowance for freight charge. **ACCOUNTING FOR FREIGHT CHARGE** **ALLOWANCE FOR SALES RETURNS** - The measurement of accounts receivable shall also recognize the probability that some customers will return goods that are unsatisfactory or will make other claims requiring reduction in the amount due as in the case of shipment shortages and defects.  **SALES DISCOUNT** - Entities usually offer cash discounts to credit customers. A cash discount is a reduction from an invoice price by reason of prompt payment. - A cash discount is known as sales discount on the part of the seller and a purchase discount on the part of the buyer. - A cash discount may be expressed as 5/10, n/30. This means that the customer is entitled to a 5% discount if payment is made in 10 days from the invoice date. - If the customer fails to pay within the 10-day discount period, the gross amount of the invoice price must be paid within 30 days from the invoice date. **METHODS OF RECORDING CREDIT SALES** a. **Gross method** - The accounts receivable and sales are recorded at gross amount of the invoice. The gross method is the common and widely used method because it is simple to apply. b\. **Net method** -The accounts receivable and sales are recorded at net amount of the invoice, meaning the invoice price minus the cash discount whether taken or not taken. **GROSS METHOD** **NET METHOD**  **ALLOWANCE FOR SALES DISCOUNT** - If customers are granted cash discounts for prompt payment, then, conceptually estimates of cash discounts on open accounts at the end of the period based on past experience shall be made. **ACCOUNTING FOR BAD DEBTS** Two Methods: 1. Allowance Method 2. Direct Write off Method **ALLOWANCE METHOD** - If customers are granted cash discounts for prompt payment, then, conceptually estimates of cash discounts on open accounts at the end of the period based on past experience shall be made.  **RECOVERIES OF ACCOUNTS WRITTEN OFF** - If a collection is made on account previously written off as uncollectible, the customary procedure is first to recharge the customer\'s account with the amount collected and possibly with the entire amount previously charged off if it is now expected that collection will be received in full. - The collection is then recorded normally by debiting cash and crediting accounts receivable.   - The recharging of the customer\'s account is usually followed because it is an evidence of the attempt of the customer to reestablish his credit with the entity. - What account should be credited when the customer\'s account is recharged? \- The generally accepted approach is to simply reverse the original entry of write off regardless of whether the recovery is during the year of write off or subsequent thereto. **DIRECT WRITEOFF METHODS** - The direct writeoff method requires recognition of a bad debt loss only when the accounts proved to be worthless or uncollectible. - Worthless accounts are recorded by debiting bad debts and crediting accounts receivable. If the accounts are only doubtful of collection, no adjustment is necessary. - This approach is often used by small businesses because it is simple to apply. - As a matter of fact the Bureau of Internal Revenue recognizes only this method for income tax purposes. - However, the direct writeoff method violates the matching principle because the bad debt loss is often recognized in later accounting period than the period in which the sales reyenue was recognized. - The direct writeoff method is not permitted under IFRS. **DOUBTFUL ACCOUNTS IN THE INCOME STATEMENT** **1. Distribution cost** If the granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution cost. **2. Administrative expense** If the granting of credit and collection of accounts are under the charge of an officer other than sales manager, doubtful accounts shall be considered as administrative expense. In the absence of any contrary statement, doubtful accounts shall be classified as administrative expense.