Cash & Rec - 1
CASH & RECEIVABLES
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INTERNAL CONTROL
 Policies & procedures designed to:
– Protect assets
– Provide accurate records
– Ensure compliance with laws and policies
– Evaluate performance & assist in
accomplishment of strategic objectives
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INTERNAL CONTROL OF CASH
General Policies
 Separate physical custody and record keeping
 Account for all cash transactions (no netting)
 Maintain minimum cash balances on hand
 Conduct periodic test counts of cash
 Prepare appropriate bank reconciliations
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CASH RECEIPTS
 Separate responsibility for handling and
recording receipts
 Close supervision of handling of cash
receipts
 Deposit ALL receipts in a bank account
as frequently as possible (prefer DAILY)
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CASH DISBURSEMENTS
 Separate responsibilities for disbursement
documents, check preparation, check
signing, mailing, and record keeping
 All disbursements (except minor) made by
check
 Close control of petty cash funds
 Adequate source documents to support
ALL disbursements
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COMPOSITION OF CASH
 Coins and currency
– Including change funds
 Petty cash
 Deposits with financial institutions
 Negotiable instruments
– Cashier’s checks
– Certified checks
– Money orders
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CASH EQUIVALENTS
 Short-term, highly liquid investments
– Readily convertible to known amounts of
cash
– Near to maturity (little change in interest)
 Examples
– Treasury bills
– Commercial paper
– Money market funds
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PETTY CASH
 Imprest fund for small routine disbursements
 Examples
–
–
–
–
–
Cab fares
Postage (C.O.D., etc.)
Office supplies
Delivery charges
Pizza for the office
 Balance in the fund = Cash on hand +
receipts = Authorized amount of the fund
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BANK RECONCILIATION
 Explains difference between cash reported
on bank statement and balance reported
on the accounting records
 Basis for adjusting accounting records
 Major control devise
BANK RECONCILIATION
n Two sections of reconciliation:
-- Reconcile bank statement balance to adjusted
(correct) balance.
-- Reconcile book balance to adjusted (correct)
balance.
n The adjusted balances above are equal.
n All reconciling items in book balance section
require adjusting entries.
BANK RECONCILIATION FORMAT
Bank balance
Ending bank bal.
Additions:
Cash on hand
Deposits in transit
Book balance
$ xx
Ending book balance
Additions:
Collections by bank
Deductions:
NSF Checks
Bank service chgs.
$ xx
Correct cash balance $xxx
Correct cash balance
$xxx
Deductions:
Checks outstanding
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RECEIVABLES
 Claims held against customers or others for
money or services
– Current
– Noncurrent
 Trade receivables – amounts owed by
customers for services rendered as part of
normal business operation
 Nontrade receivables – arise from other types
of transactions
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ACCOUNTS RECEIVABLE
Discounts
 Trade discounts
– Granted to encourage a sale
– Reduction in final selling price
– Not recorded (part of negotiation)
 Cash discounts
– Inducement for prompt payment
– Interest rate offered is often significant
– Recording methods
• Gross – only discounts taken are recorded (contra
revenue)
• Net – sale is recorded net of discount (discounts
forfeited shown as “Other revenue”)
ACCOUNTS RECEIVABLE
CASH DISCOUNTS
2/10, n/30
Percentage
Discount
# of Days
Discount is
Available
Otherwise,
Net (or All)
is Due
Net Amount
is Due in this
# of Days
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SALES RETURNS & ALLOWANCES
 Reduction in receivable (or refund) for
items returned or damaged
 Contra revenue
 Methods of recording
– Estimated with an allowance established
– Recorded when actually granted
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ACCOUNTS RECEIVABLE
Valuation
 Net realizable value
 Amount expected to be received in cash
 Uncollectible accounts generally inevitable
 Issue is how to account for “bad debts”
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UNCOLLECTIBLE ACCOUNTS
 Direct write-off method
– No material uncollectibles occur
– Amount of uncollectibles cannot be reliably
estimated
– Bad debts expense recognized in period
when it is determined the account cannot
be collected
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UNCOLLECTIBLE ACCOUNTS
 Allowance method
– Uncollectibles are probable
– Amount can be reasonably estimated
– Bad debt expense is recorded in same
period as the underlying revenue
• MATCHING PRINCIPLE
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ALLOWANCE METHOD
 Adjusting entry for estimate:
Bad debts expense (Debit)
Allowance for doubtful accounts (Credit)
 Allowance for doubtful accounts is a
contra account to Accounts receivable
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ALLOWANCE METHOD
 As accounts become uncollectible, the following
entry is made:
Allowance for Doubtful Accounts (Debit)
Accounts Receivable (Credit)
 This entry has no net effect on Accounts
receivable or total assets
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ALLOWANCE METHOD
 If an account previously written off proves to be
collectible, the following entries are made:
Accounts Receivable (Debit)
Allowance for Doubtful Accounts (Credit)
Cash (Debit)
Accounts Receivable (Credit)
• This approach provides detailed information (in the
subsidiary ledger) of the recovery of this amount
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ESTIMATING BAD DEBTS
 Credit sales method
– Income statement approach
 Accounts receivable method
Past Due
– Balance sheet approach
• Composite rate
• Aging of Accounts receivable balances
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ESTIMATING BAD DEBTS
Credit Sales Method
 Method emphasizes the matching principle and is
considered an income statement approach
 An average percentage relationship between
actual bad debt losses and net credit sales is
determined based on historical information.
 Bad debts expense = Net credit sales x (historical %)
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ESTIMATING BAD DEBTS
Accounts Receivable Method
 Uses the historical relationship between
accounts receivable and bad debt losses
 The historical rate, or multiple rates, is applied to
the net accounts receivable to determine the
balance in the Allowance for Doubtful Accounts.
 Bad Debt Expense is the amount of adjustment
necessary to bring the Allowance account to its
desired ending balance.
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NOTES RECEIVABLE





Unconditional written promise …
Made & signed by the maker (borrower)…
To pay the bearer or stated payee …
A definite amount of money …
Plus a stated interest rate …
– The note does not have to include a stated interest
rate. If none exists, an imputed rate is assumed
 On the maturity date …
– On demand, a specific date, or at the end of a stated
period
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NOTES RECEIVABLE
Valuation
 Short-term
– Generally shown at face value (less
allowances for uncollectibility)
 Long-term
– Reported at present value of cash expected
to be collected
– Face value = NPV if market rate = stated
rate
 Zero-interest notes
– Recorded at NPV (using effective rate)
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SALE OF RECEIVABLES
Factoring
 Acceleration of receipt of cash from
receivables
 Common example is approach used by credit
card companies (MasterCard or VISA)
 Sale without Recourse
– Purchaser assumes risk of uncollectibility
 Sale with Recourse
– Seller assumes risk of uncollectibility