CASH AND CASH EQUIVALENTS LEARNING OUTCOMES

6. CASH AND CASH EQUIVALENTS LEARNING OUTCOMES

At the end of the topic, the student should be able to:

 Draw a Bank Reconciliation Statement  Draw a Petty cash Journal

6.1. INTRODUCTION

For purposes of safekeeping and cash control, all monies received are deposited at a bank. Although a bank is a financial institution it is managed like a business. Every entity that entrusts its money to a bank is a creditor of the bank. People or entities can also borrow money from a bank and will then be debtors of the bank. The bank will issue, as often as requested or at least once a month, a statement to the entity showing their record of transactions with the entity.

The following will be reflected on the bank statement:  the opening balance (beginning of the month)

 deposits credited during the month  cheques paid (debited) during the month  bank charges for the month  interest charged (debit) on overdraft or paid on a favourable (credit) bank

balance  debit and stop orders for the month

 dishonoured cheques for the month (cheques deposited, but not paid by the drawers' bank)  correction of errors made by the bank in the previous month

6.2. BANK RECONCILIATION STATEMENT

If the bank and the entity keep record of the same transactions the balance of the bank statement and the bank account in the books of the business must be the same.

In order to ascertain that the bank account in the books of the entity corresponds to the bank statement, a bank reconciliation statement is prepared. This means the balance of the bank account in the books of the entity is reconciled with the balance on its bank statement.

The reconciliation process has two steps: first the entity's records are updated to account for actual transactions reflected by the bank statement, and secondly record those transactions to which the bank must still attend to in the bank reconciliation statement.

The bank reconciliation could be seen as an extension of the bank statement. An outstanding item that will be credited on the bank statement must be credited on the bank reconciliation statement and vice versa.

You must always remember this:  A favourable bank account balance is on the debit side of the bank account

as well as on the bank reconciliation statement.  An unfavourable or overdrawn bank account balance is on the credit side of

the bank account as well as on the bank reconciliation statement.  A favourable bank statement balance is on the credit side of the bank

statement as well as on the bank reconciliation statement.  Transactions or corrections which the entity must react on, must be recorded in the two cash journals of the entity, e.g. bank charges, interest,

debit/stop orders, errors in the books of the entity, stale cheques, etc.  Transactions or corrections which the bank must (or will) react on, must be recorded in the bank reconciliation, e.g. deposits not yet credited, unpaid

cheques and errors made by the bank to be corrected.

Example: Bank Reconciliation Statement at 28 January 2009

Dr

Cr

Cr Balance as per bank 30

account Dr Outstanding cheques: No.001

Cr Outstanding Deposit

Dr Balance as per cash 4306 book

CASH RECEIPT JOURNAL FOR FEBRUARY 2009 Doc No

7 Rent Income

20 A. Thunder

CASH PAYMENT JOURNALFOR FEBRUARY 2009 DOC NO

81 6 Petrol expense

84 20 S. Zero

86 27 Rent Expense

87 28 S. Khan

PC MOVERS BANK STATEMENTS –FEBRUARY 2009

Cheque No.79

Deposit(Rent)

Service fees

Cheque No.80

Cheque No.81

Interest on overdraft

Service fees

Cheque No.82

Cheque No.83

Cheque No.85

Deposit

R/D Cheque (S.Tsung) Balance

Cheque no.86 was lost and payment was stopped

Required:

Complete the necessary entries in the CRJ and CPJ. Post the balances to the bank account in the ledger and draw up a bank reconciliation statement.

Solution:

CRJ Details

Analysis of

Bank

Sundry Accounts

Receipts Amount Fol Details

Totals 13300 XYZ

Rent Income

CPJ Details

Bank

Debtor

Sundry Accounts

Control

Amount Fol Detail

Totals 16438 AB Bank

38 38 Bank Charges

AB Bank

24 24 Interest on overdraft

Cheque R/D 286

Bank Account

Balance

16786 Total Receipts

Total payment

Balance

Balance

Bank Reconciliation Statement as at 28 February 2009

CR Balance as per Bank 2044

Statement DR. Outstanding cheques 001

CR. Outstanding

DR. Balance as per Bank 1300 Account

6.3. THE PETTY CASH JOURNAL

For purposes of control, all payments in a business are made by cheque.

There are, however, smaller amounts to be paid daily, for example for postage, carriage, wages for day workers, etc., for which payment by cheque is too expensive.

Entities usually cash a cheque to provide for a petty cash float to pay for these types of expenses.

Items purchased out of the petty cash float are recorded in the petty cash journal, which is part of the cash records but is separate from the cash payments journal. Recording is done from suitable petty cash vouchers authorised by responsible officials of the entity.

The so-called imprest system is preferable for controlling petty cash. The petty cashier is provided with a float of say R1000. During the month payments are made and when necessary a cheque is issued to restore the float to R1000.

Exercise

Books of Tyt-pc Traders - June 2009 Cash cheque 727 for R300 for petty cash on 1 June

PETTY CASH PAYMENTS - JUNE 2009

Date Details

Cash voucher

Amount (R)

12 Cleaner's wages

17 Pro-advertising poster

19 Cleaner's wages

26 Cleaner's wages

27 Taxi fare for messenger 009

Cash cheque number 790 is issued on 30 June 2009 to restore the petty cash float to R300.

Required:

Prepare a petty cash journal for June 2009 with the following payment analysis columns: total, wages, postage, stationery and sundries.

REVIEW QUESTIONS

QUESTION 1 Bank Reconciliation Statement as at 31 March 2009

DR

CR

Debit balance according to bank

statement Credit deposit not credited by bank

21120 Debit cheques not presented for payment: No. 222

No. 288

No. 290

No. 291

Debit balance according to bank account

Cash ‘e eipts Jou al: Totals o 0 Ap il 009

SUNDRY BANK SALES

COST OF DEBTORS

Cash Payments Journal: Totals on 30 April 2009

Sundry Accounts Stock

A comparison of the Bank statement with the Bank Reconciliation Statement on

31 March 2009 and the CRJ and CPJ for April 2009 revealed the following differences.

 The Bank statement showed a credit balance of R4450 on 30 April 2009.  Cheque 288 was recorded correctly on the Bank statement as R860. The

cheque .has been issued to Chaplin & Co. for packing material purchased.  Cheque 290 was recorded correctly on the bank statement as R1360. The

cheque had been issued to Killin Auto for repairs to the delivery motor cycle.  Cheque 222 had been issued in February 2009 to Brass Printers for an

advertisement. The advertisement had not been placed and the cheque was stopped at the bank and must be cancelled in our books.

 The following cheques had not been presented for payment: No. 291

 The deposit of R19750 on 30 April 2009 has not been credited on the Bank statement.

 An amount of R2500 was deposited directly in the current account of Gill Traders by Laird Agencies for the tenant, Bosman Boerwors.

 Brickett Bank charged the current account of Gill Traders with the following amounts: credit card levy R236, Service fees R372, Sundry debits R48,

Interest on overdraft R20.  A cheque R690 received from C. Roberts, a debtor, was dishonoured on

account of insufficient funds.  A cheque for R512 received on 25 April 2009 from J.Bergh, a debtor, was

dishonoured by the bank because it had been post-dated for 11 June 2009.

The cheque was held back to be deposited on the date of the cheque  The Bank statement showed a debit order of R466 in favour of the City

Treasurer for water, electricity and rates.  The Bank statement showed a monthly stop order in favour of Beilby

Insurers for the insurance premium, R224

Required: Prepare the following:

 The Cash Receipts Journal for April 2009  The Cash Payments Journal for April 1994  General Ledger  Bank Reconciliation Statement as at 30 April 2009

QUESTION 2

A comparison of the Cash Receipts Journal and Cash Payments Journal Whispers Limited with its bank statement at 30 June 2001 reveals the following: Balances

Rand

Bank account in the General Ledger (Debit) 01/06/2001

Bank statement (Overdraft) 30/06/2001

Totals 30/06/2001 Cash Receipts Journal

30 675 Cash Payments Journal

Additional Information:

1. A debtor, A Simmons paid an amount of R750 directly into the bank account of Whispers Limited.

2. The a k e o eousl de ited Whispe s Li ited s a ou t ith a he ue fo R2 250 drawn by Whiskers Limited.

3. According to the Bank statement a cheque for R285 received from S York in settlement of his account of R300 was dishonoured and returned on 27 June 2001.

4. Sundry bank debits and per bank statement: Interest

R45

Service fees

R69

Cheque book

R6

5. A stop order for the annual fire insurance premium of R405, payable to MY Insurance Company, appeared on the bank statement but not in the relevant cash journal.

6. A deposit of R1 170 on 30 June 2001 in the cash receipts journal was in fact deposited on 1 July 2001.

7. Outstanding cheques not yet presented to the bank for payment amounted to R2 475.

Required:

a) Prepare adjustment journal entries at 30 June 2001.

b) Show the Bank account for June 2001 in the general ledger, properly balanced.

c) Prepare a Bank Reconciliation Statement as at 30 June 2001

TOPIC 7 ________________________________________________________________