Integrating Cash, Petty Cash, and Bank Reconciliation in Financial Accounting: Part 2

Scenario

Imagine a business with the following financial activities in a given month:

Cash Management:

  • Opening Cash Balance: $10,000
  • Cash Sales: $5,000
  • Payments Received from Debtors: $3,000
  • Payments to Creditors: $4,000
  • Wages Paid: $2,000

Petty Cash Management:

  • Opening Petty Cash Balance: $500
  • Expenditures from Petty Cash (office supplies, postage): $150
  • Petty Cash Replenishment: $150

Bank Reconciliation:

  • Bank Statement Ending Balance: $12,100
  • Outstanding Checks (not yet cleared by the bank): $600
  • Deposit in Transit (not yet reflected in the bank statement): $500
  • Bank Service Fee: $50

Step-by-Step Integration Process

1. Cash Management Accounting:

  • Calculate Closing Cash Balance (excluding petty cash and bank):
    • Starting Cash: $10,000
    • Add: Cash Sales (5,000)+PaymentsReceived(3,000)
    • Subtract: Payments to Creditors (4,000)+WagesPaid(2,000)
    • Closing Cash Balance: $12,000

2. Petty Cash Accounting:

  • Adjust Petty Cash Balance:
    • Starting Petty Cash: $500
    • Subtract: Petty Cash Expenditures ($150)
    • Add: Petty Cash Replenishment ($150)
    • Closing Petty Cash Balance: $500

3. Bank Reconciliation:

  • Adjust Bank Statement Balance:
    • Bank Statement Balance: $12,100
    • Add: Deposit in Transit ($500)
    • Subtract: Outstanding Checks ($600)
    • Adjusted Bank Statement Balance: $12,000

4. Integration in Financial Statements:

  • Cash Balance on Balance Sheet:
    • Total Cash (Bank + Hand): $12,000 (from Cash Management)
    • Add: Petty Cash Balance: $500
    • Total Cash Reported on Balance Sheet: $12,500
  • Bank Reconciliation Adjustments:
    • Adjusted Bank Statement Balance matches the Cash Balance on books after accounting for Petty Cash, Outstanding Checks, and Deposit in Transit.
  • Notes to Financial Statements should include details about Petty Cash Expenditures and Replenishment, as well as a summary of the Bank Reconciliation process.

Cash Management

Cash Sales:

When the company makes sales in cash, the Cash account is increased (debited) by the sales amount, and simultaneously, the Sales Revenue account is increased (credited) by the same amount. This entry reflects the income earned from cash sales.

1. Cash Sales

Debit Cash: $5,000

Credit Sales Revenue: $5,000 (Recording cash received from sales)

2. Payments Received from Debtors

Upon receiving payments from debtors, the company increases its Cash account (debit) and decreases the Accounts Receivable account (credit) by the amount received. This entry records the cash inflow from customers who had previously purchased on credit.

Debit Cash: $3,000

Credit Accounts Receivable: $3,000 (Recording cash received from debtors)

3. Payments to Creditors

When the company pays its creditors, it decreases its Cash account (credit) and also decreases its Accounts Payable account (debit) by the amount of the payment. This entry shows the company is paying off its debts or obligations.

Debit Accounts Payable: $4,000

Credit Cash: $4,000 (Recording payment made to creditors)

Wages Paid

The payment of wages is recorded by increasing the Wages Expense account (debit) and decreasing the Cash account (credit) by the wage amount. This reflects the cash outflow for employee compensation.

Debit Wages Expense: $2,000

Credit Cash: $2,000 (Recording wages paid in cash)

Petty Cash Management

Expenditures from Petty Cash

Expenses paid using petty cash, like office supplies and postage, are recorded by increasing the respective expense accounts (debit) and decreasing the Petty Cash account (credit) by the total expenditure. This shows the use of petty cash for minor business expenses.

Debit Office Supplies Expense: $100

Debit Postage Expense: $50

Credit Petty Cash: $150 (Recording expenses paid from petty cash)

 Petty Cash Replenishment

Replenishing the petty cash involves increasing the Petty Cash account (debit) and decreasing the main Cash account (credit) by the replenishment amount. This entry restores the petty cash fund to its set balance.

Debit Petty Cash: $150

Credit Cash: $150 (Replenishing the petty cash fund)

Bank Reconciliation Process

The bank reconciliation process is about ensuring that the company’s recorded cash balances match the bank’s records. This process is essential because it helps identify any discrepancies between the company’s books and the bank statement.

Outstanding Checks

Outstanding checks are checks that the company has issued and recorded in its books, but which have not yet been cleared or deducted from its bank account. These checks are identified during the reconciliation process and are crucial for understanding the true cash position. They are not recorded as a separate journal entry but are used to adjust the cash balance during reconciliation.

Deposits in Transit

Deposits in transit refer to cash or checks that the company has received and recorded in its books but which the bank has not yet processed. Like outstanding checks, these are also identified during reconciliation. They are important for ensuring that the company’s cash records accurately reflect all the cash that should be available in its bank account. Similar to outstanding checks, these do not require a journal entry at this point but are considered in adjusting the bank balance.

Adjusted Bank Balance

After accounting for outstanding checks and deposits in transit, the company adjusts its bank balance. This adjusted balance should match the company’s book balance, assuming there are no errors or unauthorized transactions. If there are discrepancies after these adjustments, the company needs to investigate and resolve them.

Bank Reconciliation Adjustments

Bank Service Fee

The bank service fee charged to the company’s account is recorded by increasing the Bank Charges Expense account (debit) and decreasing the Cash account (credit) by the fee amount. This reflects the expense incurred for bank services.

Debit Bank Charges Expense: $50

Credit Cash: $50 (Recording the bank service fee charged)

Note: Outstanding checks and deposits in transit are not recorded as journal entries at this point. They are part of the bank reconciliation process and affect the cash balance on the balance sheet, but they do not require a journal entry until the transactions are cleared or recognized by the bank.

Conclusion

These journal entries reflect all the cash transactions in the business over the period. The final cash balance on the books should match the adjusted bank statement balance once outstanding checks clear and deposits in transit are processed by the bank. Accurate journal entries are crucial for maintaining reliable financial records and ensuring that financial statements accurately reflect the business’s cash position.


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