Cash and Cash Equivalents
FAC1502 - Financial Accounting Principles, Concepts, and Procedures · ACCOUNTABILITY FOR CURRENT AND NON-CURRENT ASSETS
Cash and Cash Equivalents
The Nature of Cash and Cash Equivalents
Cash includes coins, notes, postal orders, cheques, and credit card transactions. It is crucial for businesses as it represents the primary legal tender. Cash equivalents are investments that can be converted into cash within 12 months. For example, savings accounts are considered cash equivalents. Both cash and cash equivalents are classified as current assets on the balance sheet.
Remember: Cash must be handled carefully. A lack of cash can lead to serious problems for a business.
Internal Control Over Cash
Internal controls are essential for managing cash effectively. Here are some key measures:
- Duties should be divided among employees to ensure that errors can be detected.
- Record cash receipts to verify actual cash received against a daily record.
- Bank cash receipts daily.
- Make all payments by cheque, except for petty cash payments.
- Compare the bank statement with cash receipts and payments journals.
- Reconcile the bank statement balance with the bank account balance.
Bank Reconciliation
Introduction
Entities deposit all received cash into a bank for safekeeping. The bank issues a statement showing the entity's transactions. This statement includes:
- The opening balance
- Deposits credited
- Cheques paid (debited)
- Bank charges
- Interest on overdrafts
- Dishonoured cheques
- Corrections of previous errors
Why a Bank Reconciliation is Necessary
To ensure that the bank account records match the bank statement, a bank reconciliation statement must be prepared. This process involves:
- Updating the entity’s records for transactions reflected by the bank statement.
- Recording transactions that the bank still needs to address in the reconciliation statement.
Remember: A favourable bank balance is shown as a debit in the bank account and bank reconciliation statement.
Procedure for Reconciliation
Follow these steps for bank reconciliation:
- Compare the current bank statement with the previous month's reconciliation statement to check outstanding items.
- Match amounts in the cash receipts journal with entries on the bank statement.
- Match amounts in the cash payments journal with entries on the bank statement.
Remember: Transactions requiring action by the entity must be recorded in the cash journals, while those requiring action by the bank must be noted in the bank reconciliation.
The Petty Cash Journal
For smaller daily expenses, businesses use a petty cash float. Payments for items like postage or wages are made from this float. The petty cash journal records these expenses separately from the cash payments journal. An imprest system is often used, where the petty cashier is given a fixed amount, say R100, and a cheque is issued to restore this amount when it runs low.
Example of Bank Reconciliation
Consider a business with the following July 20.0 bank reconciliation:
Bank Reconciliation Statement
Benson Traders Bank Reconciliation Statement as at 30 June 20.0
| Debit | Credit |
|---|---|
| Favourable balance per bank statement | R 11,350 |
| Deposit not yet credited | R 2,000 |
| Cheques not yet presented | R 200 |
| Favourable balance per bank account | R 12,800 |
In this example, the favourable balance per bank statement is R 11,350, and the total of deposits and outstanding cheques must be reconciled to find the balance in the bank account.
Conclusion
Understanding cash and cash equivalents is essential for managing a business's financial health. Proper internal controls and regular bank reconciliations help ensure accuracy in financial reporting.
Check your understanding
- What are cash equivalents?
- Why is internal control over cash important?
- What steps are involved in bank reconciliation?
- What is the purpose of a petty cash journal?