1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Cash and Receivables 7 Insert Book Cover Picture 7-2 Cash Amounts on deposit with financial institutions Coins and currency Petty cash Cashier’s checks Certified checks Money orders 7-3 Cash Equivalents Items very near cash but not in negotiable form Money market funds Treasury bills Commercial paper 2 7-4 Learning Objectives Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. 7-5 Internal Control of Cash Encourages adherence to company policies and procedures Promotes operational efficiency Minimizes errors and theft Enhances the reliability and accuracy of accounting data 7-6 Control of Cash Receipts Separate responsibility for § handling cash, § recording cash transactions, and § reconciling cash balances. Agreed cash amounts deposited with cash amounts received. Close supervision of cash-handling and cash- recording activities. 3 7-7 Control of Cash Disbursements Separate responsibilities for § cash disbursement documents, § check writing, § check signing, § check mailing, and § record keeping. All disbursements, except petty cash, made by check. 7-8 Learning Objectives Explain the possible restrictions on cash and their implications for classification in the balance sheet. 7-9 Restricted Cash and Compensating Balances Restricted Cash Management’s intent to use a certain amount of cash for a specific purpose – future plant expansion, future payment of debt. Compensating Balance Minimum balance that must be maintained in a company’s account as support for funds borrowed from the bank. 4 7-10 Learning Objectives Distinguish between the gross and net methods of accounting for cash discounts 7-11 Credit sales require: § Maintaining a separate account receivable for each customer. § Accounting for bad debts that result from credit sales. Amounts due from customers for credit sales. Accounts Receivable 7-12 Cash Discounts Increase sales. Encourage early payment. Increase likelihood of collections. Cash discounts . . . 5 7-13 2/10,n/30 Number of Days Discount is Available Otherwise, Net (or All) is Due Credit Period Discount Percent Cash Discounts 7-14 Cash Discounts Sales are recorded at the invoice amounts. Sales discounts are recorded if payment is received within the discount period. Gross Method 7-15 Cash Discounts Sales are recorded at the invoice amount less the discount. Sales discounts forfeited Sales discounts forfeited are recorded if payment is received after the discount period. Net Method 6 7-16 Cash Discounts On May 10, Eddy, Inc. sold $5,000 of merchandise to a customer subject to a cash discount of 1/10, n/30. Prepare the journal entry to record the sale if Eddy uses: (a) the gross method. (b) the net method. 7-17 Cash Discounts GENERAL JOURNAL Page 56 Date Description Post. Ref. Debit Credit GROSS METHOD May 10 Accounts Receivable 5,000 Sales Revenue 5,000 NET METHOD May 10 Accounts Receivable 4,950 Sales Revenue 4,950 7-18 Cash Discounts Assume that on May 19, Eddy, Inc. received a check in full payment of the sale made on May 10. Prepare the journal entry to record the cash receipt if Eddy uses: (a) the gross method. (b) the net method. 7 7-19 Cash Discounts GENERAL JOURNAL Page 56 Date Description Post. Ref. Debit Credit GROSS METHOD May 19 Cash 4,950 Sales Discount 50 Accounts Receivable 5,000 NET METHOD May 19 Cash 4,950 Accounts Receivable 4,950 7-20 Cash Discounts Instead of the payment on May 19, now assume that Eddy, Inc. received a check on May 31, in full payment of the sale made on May 10. Prepare the journal entry to record the cash receipt if Eddy uses: (a) the gross method. (b) the net method. 7-21 Cash Discounts GENERAL JOURNAL Page 56 Date Description Post. Ref. Debit Credit GROSS METHOD May 31 Cash 5,000 Accounts Receivable 5,000 NET METHOD May 31 Cash 5,000 Interest Revenue 50 Accounts Receivable 4,950 8 7-22 Learning Objectives Describe the accounting treatment for merchandise returns. 7-23 Sales Returns Merchandise returned by a customer to a supplier. Sales Allowances A reduction in the cost of defective merchandise. Sales Returns and Allowances 7-24 Sales Returns and Allowances On June 1, a customer of LarCo returns $750 of merchandise. The merchandise had been purchased on account and the customer had not yet paid. LarCo uses the periodic method to account for inventory. Record the journal entry for the return of merchandise. 9 7-25 Sales Returns and Allowances GENERAL JOURNAL Page 56 Date Description Post. Ref. Debit Credit Jun 1 Sales Returns and Allowances 750 Accounts Receivable 750 Sales Returns and Allowances is a contra account that reduces Sales Revenue in the current accounting period. 7-26 Learning Objectives Describe the accounting treatment of anticipated uncollectible accounts receivable. 7-27 Uncollectible Accounts Receivable Bad debts result from credit customers who are unable to pay the amount they owe, regardless of continuing collection efforts. PAST DUE 10 7-28 Uncollectible Accounts Receivable In conformity with the matching principle, bad debt expense should be recorded in the same accounting period in which the sales related to the uncollectible account were recorded. 7-29 Uncollectible Accounts Receivable Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period. GENERAL JOURNAL Page 78 Date Description Post. Ref. Debit Credit Dec. 31 Bad Debt Expense #### Allowance for Uncollectible #### Accounts 7-30 Uncollectible Accounts Receivable GENERAL JOURNAL Page 78 Date Description Post. Ref. Debit Credit Dec. 31 Bad Debt Expense #### Allowance for Uncollectible #### Accounts Normally classified as a selling expense and closed at year-end. Contra asset account to Accounts Receivable. [...]... Petty Cash Hawthorne Co established a petty cash fund on May 1 by writing a check for $200 to the petty cash custodian Prepare the May1st journal entry to record the establishment of the fund GENERAL JOURNAL Date Ma y Description Page 64 Post Ref 1 Petty Cash Debit Credit 200 Cash 200 7-89 Petty Cash During May, the petty cash custodian paid bills using cash from the fund totaling $160 as follows: Postage... 34 days 10.75 7-78 Cash Controls Appendix 7 26 7-79 Bank Reconciliation Explains the difference between cash reported on bank statement and cash balance on company’s books Provides information for reconciling journal entries 7-80 Bank Reconciliation Bank Balance Book Balance + Deposits in Transit + Bank Collections - Outstanding Checks - Service Charges - NSF Checks ± Bank Errors ± Book Errors = Corrected... All reconciling + Deposits on the items in Transit book side - Outstanding Checks require an adjusting ± entry to the Bank Errors cash account Balance per Bank = Adjusted Balance Book Balance + Bank Collections - Service Charges - NSF Checks ± Book Errors = Corrected Balance 27 7-82 Bank Reconciliation Let’s prepare a May 31 bank reconciliation for the Hawthorne Company The May 31 bank statement indicated... indicated a balance of $34,680 p The cash general ledger account on that date shows a balance of $35,276 p Additional information necessary for the reconciliation is shown on the next screen 7-83 Bank Reconciliation Œ Cash receipts not yet deposited on May 31 totaled $2,965 • A $1,020 check mailed to the bank for deposit had not reached the bank at the statement date Ž Outstanding checks totaled $5,536... Prepare the entries to adjust the cash account to the corrected balance GENERAL JOURNAL Date Description May 31 Cash Interest Revenue Notes Receivable Page 66 Post Ref May 31 Miscellaneous Expense Accounts Receivable Accounts Payable Cash Debit 1,120 Credit 120 1,000 80 2,187 1,000 3,267 7-87 Petty Cash Used for minor expenditures Petty cash fund Has one custodian Replenished periodically 29 7-88 Petty Cash. .. financial institution that buys receivables for cash, handles the billing and collection of the receivables and charges a fee for the service 7-65 Sale of Accounts Receivable Treat as a sale if all of these conditions are met: ŒReceivables are isolated from transferor •Transferee has right to pledge or exchange receivables ŽTransferor does not have control over the receivables § Transferor cannot repurchase... Differentiate between the use of receivables in financing arrangements accounted for as a secured borrowing and those accounted for as a sale 20 7-61 Financing With Receivables Secured borrowing or Sale of receivables Method depends on the surrender of control over the receivables transferred 7-62 Secured Borrowing – Assigning p The use of specific receivables for collateral, and the promise that any... Nov 1, 2006 Date promise to pay to the order of Payee Principal Westward, Inc Twenty-five thousand and no/100 Dollars plus interest at the annual rate of Interest Rate 12% Maker Janet Lee , Winn,Co 7-53 Interest Computation Face amount of the note × Annual interest rate Fraction of × the annual = Interest period Even for maturities less than 1 year, the rate is annualized 7-54 Interest-Bearing... recourse § An ordinary sale of receivables to the factor § Factor assumes all risk of uncollectibility § Control of receivable passes to the factor § Receivables are removed from the books, cash is received and a financing expense or loss is recognized 22 7-67 Sale of Accounts Receivable With recourse § Transferor (seller) retains risk of uncollectibility, § Must meet the three conditions of determining surrender... 1, 2006, Westward, Inc loans $25,000 to Winn, Co The note bears interest at 12% and is due on November 1, 2007 Prepare the journal entry on November 1, 2006, December 31, 2006, (year-end) and November 1, 2007 for Westward 18 7-55 Interest-Bearing Notes GENERAL JOURNAL Date Description Page 56 Post Ref Debit Credit 2006 Nov 1 Notes Receivable 25,000 Cash 25,000 Dec 31 Interest Receivable 500 Interest . 1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Cash and Receivables 7 Insert Book Cover Picture 7-2 Cash Amounts on deposit with financial institutions Coins and currency Petty. for § handling cash, § recording cash transactions, and § reconciling cash balances. Agreed cash amounts deposited with cash amounts received. Close supervision of cash- handling and cash- recording. petty cash, made by check. 7-8 Learning Objectives Explain the possible restrictions on cash and their implications for classification in the balance sheet. 7-9 Restricted Cash and Compensating