Accounting for Assets

1. Accounting for Assets Accounting for Cash

2. Cash • Objective of the Session • Discuss the composition, management, and control of cash, including the use of a bank reconciliation.

3. Items Classified as Cash • Coins and currency, • Petty cash, • Certain negotiable instruments accepted by financial institutions for immediate deposit and withdrawal e.g., • Ordinary cheques, • Personal cheques, • Money orders etc. • The balance of the cash control account reflects all items included in cash.

4. Cash Equivalents • Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. • They include: • Treasury bills, • Commercial paper, • Money market funds. • An overdraft - a negative bank account balance reported as a current liability.

5. Compensating Balances • In connection with financing arrangements, it is common practice for a company to agree to maintain a minimum or average balance on deposit with a bank. • Compensating balance is the minimum balance that must be maintained in a depositor’s account as support for funds borrowed. • Not included in the cash account.

6. Example 1 • Assume that a firm borrows Shs. 1.5 million for one year at 10% but must maintain a Shs. 50,000 compensating balance in an account with the bank. • The compensating balance increases the effective interest rate to 10.34% (Shs. 150,000/1,450,000) • The compensating balance is an example of a restricted cash balance.

7. Restricted cash • This refers to cash held for a specific purpose and not intended for general payment use. • Examples include: • Compensating balance, • Minimum account balance for savings account • Sinking fund – an amount set aside for debt settlement.

8. EABL Cash & cash equivalents disclosure • Below are the cash and cash equivalents for EABL for the periods ending 2005 & 2004 respectively:

10. Management and Control of Cash • Basic characteristics of a cash control system are: • Specifically assigned responsibilities for handling cash receipts, • Separation of handling and recording cash receipts, • Daily deposit slips of all cash received, • Voucher system to control cash payments, • Internal audits at irregular intervals, • Double record of cash—bank and books, with reconciliations performed by someone outside the accounting function.

11. Controls over cash • There should be controls and budgeting procedures for monitoring cash balances and estimating future cash needs. • Effective cash management can be achieved by striking a delicate balance between; • risk and • profitability. There are two important specific controls for cash • Maintenance of the petty cash fund • Through bank accounts

12. Petty cash funds • It is a type of an imprest fund, which provides ready currency for routine disbursments. • A large company can have petty cash fund in a number of offices and production facilities. • The fund caters for small payments e.g., • Employee transportation, • Postage, • Office supplies, • Delivery charges.

13. Example 2 • Assume that a Shs. 100,000 petty cash fund is established in company Y in May 2011. • The journal entry will be: Dr: Petty cash 100,000 Cr: Cash 100,000 • During the month of May 2011, the following individual vouchers accompany the fund: • Postage: Shs. 10,000; office supplies: Shs. 25,000; Taxi fares: Shs. 12,000; Other petty expenses: Shs. 50,000 • Prepare the journal entry to capture these disbursements.

14. Cash control through bank accounts • Bank accounts are advantageous because: • Cash is physically protected by the bank, • A separate record of cash is maintained by the bank, • Cash handling and theft is minimized, • Customers may remit payments directly to the bank, • Financial institutions provide cash management services e.g. investment advice, interest revenue on accounts

15. Bank Reconciliation • A comparison of the bank balance with the book balance is usually made monthly by means of a summary known as a bank reconciliation. Book balance Bank balance

16. Why bank Reconciliation? • Determine whether bank account and the company’s cash balance are in agreement after taking into consideration unrecorded items. • Isolate recording errors and other problems in the bank records or company’s recording system, • Establish the correct ending cash balance, • Supply information for adjusting entries.

17. Bank Reconciliation Statement • Reasons for differences: • Unpresentedcheques; • Dishonouredcheques. • Standing orders • Bank Debits • Bank credits • Accounting Errors • Time period differences.

18. Class Exercise MIS Notes

19. Q&A 19