This is a summary of Chapter 4 in the Financial Accounting book. It is explained in easy and understandable language. It is perfect for getting the needed knowledge for your exam.
Financial Accounting Summary
Chapter 4-Payment for Goods and Services: Cash and
Accounts Receivables
Controlling Cash
In this chapter, we will discuss the operating activities involved in earning and collecting revenue. So,
when a company does business and sells goods or provides services to its customers, they have two
options to pay for them: cash or credit. The company will analyze the methods and use them in a way
that is most beneficial for the company. Then the company will put control in place to minimize the
risks associated with them. For example, if a company has a lot of cash it will make sure to keep it in
a safe, so it is protected from robbery. Also, companies hire specialists, who make sure all the
revenue from credit sales is collected and nothing is lost.
Safeguarding cash
Cash is a valuable asset the ownership of which may be hard to identify, so its safeguarding is crucial.
That's why companies use cash registers to keep it safe.
Assignment of Responsibilities for Cash
A key control for cash that companies is segregation of duties, which means that the person who has
physical responsibility for an asset is not the same person who has the record-keeping responsibility
for that asset. If both of the tasks were done by the same person there is the risk of theft, so physical
control and bookkeeping must be assigned to different people.
Bank Reconciliation
Companies use banks in their course of business to help them keep track of their cash. So, the bank
assists them by providing them with a bank statement, which is a summary of the activity in a bank
account sent each month to the account holder.
Each month someone in the company prepares a bank reconciliation, which is a comparison between
the cash balance on the bank statement and the cash balance on the firm's accounting records. The
purpose of this reconciliation is to control the cash in the company, as often some transaction are
recorded only in one of the places due to timing differences.
Steps in reconciliation:
1)Start with the monthly bank statement (balance per bank) and male adjustment with all the
transactions that:
have been recorded on the firm's books but do not appear on the bank's books, because the bank did
not get the transactions recorded as of the date of the bank statement.
2)Start with the firm's cash balance(balance per book) and make adjustments for all the transactions
that the bank has recorded but are not yet on the firm's books.
Adjustments:
1)The bank statements to match with the firm' records:
a)deposit in transit are added to the balance per book
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