Cash

The amount a company reports as cash in the current assets section on its balance sheet  must be available to pay current obligations.

Cash and Cash Equivalents

Some companies use Cash and Cash Equivalents as a title on their balance sheet.

Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates.

Cash Management

 

Each company must ensure that adequate cash resources are available to meet its current obligations.
Cash planning systems consist of those methods and procedures adopted to ensure that a company has adequate cash available to meet maturing and obligations that it invests any unused or excess cash.

Cash control systems are the methods and procedures adopted to ensure the safeguarding of the company’s funds.

Internal Control is the process (policies and procedures) a company uses to enhance the reliability of its financial reports, promote the effectiveness and efficiency of its operations ( including safeguarding its assets), and ensure its compliance with applicable laws and regulations.

Cash control systems have two main functions:

• control over receipts
• control over payments

 

Petty Cash System involves a cash fund placed under the control of an employee to allow a company to pay for small amounts that might be impractical or impossible to pay by check.

The design and operation of a petty cash system includes the following steps:

• An employee is appointed petty cash custodian.
• Petty cash vouchers are printed, prenumbered, and given of the custodian of the fund.
• When the amount of cash in the petty cash fund becomes low and/or at the end of an accounting period, the vouchers are sorted into expense categories and the remaining cash is counted.

 

A Bank Reconciliation is a schedule prepared by a company to analyze the difference between the ending cash balance in the company’s accounting records and the ending cash balance reported by its bank in a bank statement in order to determine the correct ending balance.

Causes of Difference between cash balance and the company’s bank statement:

• Compare the deposits listed on the company’s records with the deposits shown on the bank statement.
• Compare the checks listed on the company’s records with the checks shown on the bank statement.
• Identify any deposits or charges made directly by the bank that are not included on the company’s records.
• Determine the effect of any errors.
• Complete the bank reconciliation

 

After the company completes the bank reconciliation it makes  journal entries to bring its accounts up to date.
Electronic Funds Transfers (EFT) – funds are transferred between parties electronically without need of a check.

Compensating Balances -  a portion of any amount loaned to a company that a bank requires to remain on deposit in the bank for the loan period.

Receivables

 

Receivables – consist of various claims against customers and other parties arising form the operations of the company. Those receivable expected to be collected or satisfied within one year or the current operating cycle, whichever is longer, are classified as current assets; the remainder are classified as noncurrent assets.

Trade Receivables – arise from the sale of the company’s products or services to customers.

 

Nontrade Receivables – arise from transactions that are not directly related to the sale of the company’s goods and services.

Valuation Issues

Most trade receivables are recorded initially at their maturity values.

Accounts Receivable

Trade accounts receivables result from credit sales.

Cash (sales) Discounts

Cash Discount (Sales Discount) – is frequently expressed as 2/10, n/30 or perhaps 2/10, n/EOM (end of month). In both cases the first component refers to the discount rate and period and the second to the invoice due date.

If a selling company extends cash discounts to its customers, it may use one of two methods:

• Accounts Receivable and Sales Recorded at Gross Price.
• Accounts Receivable and Sales Recorded at Net Price.

 

Sales Returns and Allowances

• When goods are sold that are found to be defective, the customer may retain the goods and be allowed a reduction in the purchase price.
• When goods are returned to the seller, the exchange is called a sale return.
• Record the estimated amount of future returns and allowances in the period of sale so as to correctly report net sales revenue and value ending accounts receivable.

 

Valuation of Accounts Receivable for Uncollectible Accounts

Not all A/R will be collected. The following are two methods used to record uncollectible accounts:

• In the year of sale, based upon an estimate of the amount of uncollectible accounts, or
• When it determines that a specific customer account is uncollectible.

 

 

Estimated Bad Debts Method

• A company studies the historical data about the actual bad debts it has incurred as a result of a particular credit policy.
• These relationships provide the information the company needs to prepare the adjusting entry to record the estimated bad debt expense for the year.
• Offsetting Allowance for Doubtful Accounts against Account Receivable informs financial statement users of the net realizable value (the amount of cash expected to be collected) of the company’s receivables.

 

Percentage of Sales (or Net Credit Sales)

• A percentage of total sales may be used of the estimated when there is a stable relationship between cash and credit sales.
• Since this method focuses on an expense account, any existing balance in the allowance account is ignored when determining the amount of adjusting entry.

 

Bad Debt Expense                                                          
Allowance for Doubtful Accounts                           

Percentage of Accounts Receivable

• In using this method, the goal is to determine the ending balance in Allowance for Doubtful Accounts.
• To determine the amount of its adjusting entry, a company must consider the existing balance (prior to adjustment) in the allowance account.

 

Same journal entry.

Aging of Accounts Receivable

• A company that “ages” its accounts receivable first classifies the individual accounts based upon the length of time they have been outstanding, and then applies a historically developed bad debts percentage to each category.
• Since the objective in an aging analysis is to determine the ending allowance account balance, a company also considers the previous balance of the allowance account in recording the amount of bad debt expense at the end of the period.

 

Writing Off Uncollectible Accounts

• If a company records bad debt expense based on an estimate, it writes off an individual account when it determines that the account is uncollectible.
• The journal entry for the write off is:

 

Allowance for Doubtful Accounts                                
Accounts Receivables                                                                      

Collection of an Account Previously Written Off

• Occasionally a company will receive payment from a customer whose account it has already written off.
• The first journal entry “reverses” the initial write-off and the second entry records the cash collection in the usual manner:

 

Account Receivable                                                       
Allowance for Doubtful Accounts                                       

Cash                                                                               
Accounts Receivable                                                            

Direct Write-Off Method

• When the company uses the direct write-off method, it records bad debt expense when it determines that a specific customer account is uncollectible
• At that time, it writes off the account by debiting Bad Debt Expense and crediting Accounts Receivable.

 

Generating Immediate Cash from Accounts Receivable

There are three basic forms of financing agreements to obtain cash from accounts receivable:

• Pledging
• Assigning
• Factoring (sale)

 

Pledging – when a company pledges accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts.

Assigning – when a company assigns its accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts.

Journal entry to record assignment:

Cash                                                                                
Assignment Service Charge Expense Note Payable      
Note Payable                                                                        

Accounts Receivable Assigned                                      
Accounts Receivable                                                            

This journal entry reclassifies the receivables as assigned A/R:

Cash                                                                                
Account Receivable Assigned                                             

Note Payable                                                                  
Interest Expense                                                             
Cash                                                                                      

Factoring (Sale) of Accounts Receivable

• When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor).
• Factoring Agreements focus on:
• Notification of the credit customers to remit the amounts owed directly to the factor.
• Assumption by the factor of all collection activities, setting of credit policies, and losses from uncollectible accounts.
• The journal entry for factoring A/R:

 

Cash                                                                   
Receivable from Factor                                      
Factoring Expense                                                          
Accounts Receivable                                                

 

 

Notes Receivable

Note Receivable – is an unconditional written agreement to collect a certain sum of money on a specific date. Notes receivable generally have two attributes that are not found in accounts receivable:

• They are negotiable instruments, which means that they are legally and readily transferable among parties and may be used to satisfy debts by the holders of these instruments.
• They usually involve interest, requiring the separation of the receivable into its principal and interest components.

 

• Notes can be long-term or short-term.
• They can also bear interest or be non-interest bearing

 

Notes Receivable Discounted
           

• When a company discounts a customer’s note receivable at the bank, it is transferring the note to the bank with recourse.
• When a customer’s note receivable is discounted the proceeds (cash received) are determined to by multiplying the discount rate times the maturity value of the note (face value of the not plus interest) for the discount period, and deducting the resulting discount from the maturity value.
• The following journal entry records the discounting of a note:

Discount Date

Interest Receivable                                                         
Interest Revenue                                                                  

Cash                                                                               
Loss from Discounting of Note                                     
Notes Receivable Discounted                                                          
Interest Receivable                                                               

Payment by Customer Date

 Notes Receivable Discounted                                       
Notes Receivable                                                                  

In the scenario where the note is dishonored the party that discounted the note would record the following entry when notified by the bank:

Notes Receivable Dishonored                                       
Notes Receivable Discounted                                        
Notes Receivable                                                                  
Cash