Review Class for ACT111-0 and ACT112-0
E.T Yuchengco School of Business and Management
MODULE 7 PETTY CASH FUND AND BANK RECONCILIATION
Petty Cash Fund A petty cash cash fund is a cash fund fund used to pay relatively relatively small small amounts. amounts. a. The operation of the fund, often called an imprest system, involves three steps: (1) establishing the fund, (2) making payments from the fund and (3) replenishing the fund. b. Accounting entries are required when (1) the fund is established, (2) the fund is replenished and (3) the amount of the fund is changed. Use of a Bank Account The use of a bank account minimizes the amount of currency that must be kept on hand and therefore contributes significantly to good internal control over cash. A check is a written order signed by the depositor directing the bank bank to pay a specified sum of money to a designated recipient. The three parties to a check are as follows: a. The drawer who who issues the check. b. The bank (or payer) on on which the check is drawn. c. The payee to whom the check is payable. A bank statement shows (a) checks paid and other debits and transfers that r educe the balance in the account, (b) deposits and other credits and transfers that increase the balance in the account and (c) the account balance after each day's transactions. A bank statement memoranda memoranda is usually included to explain debits made by the bank against the depositor's account such as a bank service charge, cost of printing checks, issuing traveller's checks, when a previously deposited customer's check "bounces" because of insufficient funds (NSF check), and the transfers of funds to other locations. The bank statement memoranda also explain the credits made by the bank to the depositor’s account such as the collection of a note receivable for the depositor by the bank, and the transfers of funds into the account from other locations. Reconciling the Bank Account A reconciliation reconciliation of a bank account is necessary because the balance per bank and balance per books are seldom in agreement. The lack of agreement may be the result of time lags and errors. To obtain the maximum benefit from reconciling the bank account, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. In reconciling the bank statement, it is customary to reconcile the balance per books and balance per bank to their adjusted (correct) cash balances. The reconciliation schedule consists of two sections. The steps in preparing a bank reconciliation are: (a) Determine outstanding deposits. (b) Determine unpresented checks. (c) Note any errors discovered. (d) Note all direct debits and credits. Each reconciling item used in determining the adjusted cash balance per books should be recorded by the depositor. Proforma bank reconciliation: Name of the Company Bank Reconciliation Date Balance per bank statement Add: Deposit in transit Less: Outstanding check Add/Less: Bank errors Adjusted balance balance
xx xx (xx) xx xx
Balance per books (or per ledger) Add: Note collected collected and interest interest Wire transfers (deposits) Less: NSF checks Bank service service charge Wire transfers (withdrawals) (withdrawals) Add/Less: Book errors Adjusted balance
xx xx xx (xx) (xx) (xx) xx xx
Review Class for ACT111-0 and ACT112-0
E.T Yuchengco School of Business and Management
Sample Theory Questions 1. The entry to replenish a petty cash fund includes a A. Debit to Cash and a credit to Petty Cash. B. Debit to Petty Cash Fund and a credit to Cash. C. Debits to various expense accounts and a credit to Petty Cash Fund. D. Debits to various expense accounts and a credit to Cash. 2. Which of the following items is subtracted from the unadjusted bank balance to determine the company's true cash balance? A. Deposits in transit. B. Outstanding checks. C. Debit memo for the monthly bank service charge. D. Credit memo for the collection of the company's accounts receivable by the bank. 3. The proper treatment on the bank reconciliation of an NSF check of a customer that is returned with the bank statement is to show it as a(an) A. Addition per book balance of cash. C. Addition per bank statement balance. B. Deduction per book balance of cash. D. Deduction per bank statement balance. 4. If a check written by a firm is not canceled by the bank and returned with the month's bank statement, the firm should A. Adjust the balance in the firm's checkbook to reflect the data that appears in the bank's records. B. Immediately notify the bank requesting that it correct its records. C. Consider this check as outstanding when preparing the bank reconciliation. D. Consider this check to be lost and issue a replacement check. 5. The following items appear on the company's bank reconciliation: a deposit in transit, outstanding checks, an NSF check from a customer, and a bank service charge. The items that must be recorded by the company in journal entries include the A. Deposit in transit, the outstanding checks, the NSF check, and the bank service charge. B. Deposit in transit, the NSF check, and the bank service charge. C. Outstanding checks and the bank service charge. D. NSF check and the bank service charge. Computational Drills 1. On March 31, 2014, Nick Company had a cash balance per books of P6,781.50. The bank statement from State Bank on that date showed a balance of P6,804.60. A comparison of the statement with the cash account revealed the following facts. a. The statement included a debit memo of P40 for the printing of additional company checks. b. Cash sales of P836.15 on March 12 were deposited in the bank. The cash receipt journal entry and the deposit slip were incorrectly made for P886.15. The bank credited Nick Company for the correct amount. c. Outstanding checks at March 31 totaled P276.25. Deposits in transit were P1,916.15. d. On March 20, the company issued check No. 121 for P685 to Lim Company, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Nick Company for P658. e. A P3,000 note receivable was collected by the bank for Nick Company on March 31 plus P80 interest. The bank charged a collection fee of P20. No interest has been accrued on the note. f. Included with the cancelled check was a check issued by Stone Store to Sand Company for P600 that was incorrectly charged to Nick Company by the bank. g. On March 31, the bank statement showed NSF charge of P680 for a check issued by Linda, a customer to Nick Company on account. Required: Prepare a bank reconciliation. 2. Provided below is a bank reconciliation prepared by Santa Fe, Inc. Balance per bank statement P11,800 Add: Deposit in transit 1,200 Less: Outstanding checks 200 Less: Bank error-wrong deposit amount recorded 100 Adjusted bank balance, May 31 ?
Balance per books, May 1 Add: Interest earned Less: Customer's NSF check
Adjusted book balance, May 31
? 40 300 _______ ?
Required: Complete the bank reconciliation and answer the following questions: b. How much should Santa Fe report on its balance sheet as “Cash” at May 31? c. How much is the amount of Santa Fe’s “net” adjustment to the cash account? Indicate whether this amount is a decrease or increase.
