Accmounting financial st according pronounced

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1. CHAPTER ONE
1. Acct for Cash and Receivables
Cash is a medium of exchange that is
available immediately for payment of
current debts.
It will be accepted by a bank at face value
and immediately credited to the depositors
account
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2. .
•Components of cash
Coins
Paper money
CPO
Money on hand
Certified Check
Checking account
Petty cash fund
•None components of
cash
NSF (not sufficient
fund) check
Outdated check
Postage stamp
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3. .
Internal Control over Cash
Cash is more exposed to theft than any other
assets. Further more, a large portion of the
total transactions of a business involved the
receipts or disbursement of cash.
For both these reasons,
Internal control over cash is a great important
to management and also the employees of a
business.
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4. .
Internal control system is a set of polices
and procedures designed to protect
assets.
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5. . •Internal control over cash should include
the following procedures:
The individuals who receive cash should not
also disburse (pay) cash
The individuals who handle cash should not
access accounting records
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6. -
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Cash receipts are immediately recorded and
deposited and are not used directly
to make payments.
Disbursements are made by serially
numbered checks, only upon proper
authorization by someone other than the
person writing the check
 Bank accounts are reconciled monthly.

7. •The following are the most common
elements of internal control over cash:
1. Maintaining a bank account system,
2. Maintaining a petty cash fund,
3. Change fund, and

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8. Control over cash through a bank account
There are different methods
1.Signature card
2. Deposit ticket
3. check

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9. .
•Signature Card: At the time the account is
opened, an identifying number is assigned to
the account, and a signature card must be
signed by each person authorized to sign
checks drawn on the account.
•Deposit Ticket: The details of a deposit are
listed by the depositor on a printed form
supplied by the bank.
•Checks: A check is a written instrument
signed by the depositor, ordering the bank to
pay a certain sum of money to the order of
the designated person.
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10. .
•There are three parties in a check transaction:
1. Drawer: the one who signs the check;
2. Drawee: the bank on which the check is
drawn; and
3. Payee: the one to whose order the check is
drawn.
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11. .
•A bank account is one of the most important
means of controlling cash that provide
several advantages such as:
Cash is physically protected by the bank,
A separate record of cash is maintained by
the bank, and
Customers may remit payments directly to
the bank.
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12. .
.Bank statement : the document received
from a bank which summaries deposits,
other credits, and checks and other debits to
a bank account.
Debit memo: the transaction that decrease
the depositor’s account
Credit memo: the transaction that increase
the depositor’s account

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13. Bank Reconciliation
•A controlling procedure to establish &
verify the correct cash balance through
identification of errors, irregularities and
adjustment


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14. If there is no any problem, at the end of
the period , the balance of a checking
account reported on the bank statement
must be equal to the balance in the
depositor’s accounting records.
The purpose of bank reconciliation is
that prove the accuracy of both the
depositor’s records and the bank
records.
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15. . •Common items that cause d/ce b/n the banks
balance and the depositor's balance are::
1.items recorded by the depositor but not yet
recorded by the bank.
A)Deposit in transit: these are deposits which
has been recorded by the depositor but not
yet by the bank.
B)Outstanding check: checks which has been
recorded by the depositor but not yet by the
bank.
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16. .
2. items recorded by the bank but not yet by
the depositor.
A) bank collection: these are collections which
has been made by the bank in behalf of the
depositor.
-Banks may collect notes receivable and
related investment from customers of the
depositor.
B) Service charge: this is the amount of the
bank’s fee for processing the depositor’s
transactions.
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17. 17
C) Interest revenue: interest provide by the
bank to the depositor for the balance of the
depositor account.
D) NSF(not sufficient fund) checks: a
customer check returned because of lack of
funds, or the customer's check does not
have sufficient funds in his/her account.

18. . A check may be returned to the payee(recipient)
by the bank for different reasons other than
NSF.
The maker account has closed.
The signature is not authorized
The check form is improper.
account for all returned check is the same as for
NSF checks.

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19. .
•Errors made by either by the depositor
or the bank.
A)Errors committed by the depositor that
understate or overstate the depositor’s
cash ledger balance.
e.g. a check written by the depositor as birr
225 may be journalized by the depositor as
birr 252.
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20. .
B) Errors committed by the bank that
understate or overstate the depositor’s cash
ledger balance in the bank statement .
e.g. a check which has been written by the
depositor as birr 252 may be drawn by the
bank as birr 225.

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21. .
•Bank reconciliation is usually prepared by the
depositor and dated at specific date at the
end of the month.
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22. .
•Form of bank reconciliation
ABC Company
Bank Reconciliation
January 31, 2015
Bank Balance ……………………………………xx
Add: Deposit in transit…………….xx
Bank error(under state)……………xx………... xx
Subtotal …………………………………………xx
Less : outstanding checks………….xx
Bank error(overstate)………………xx……….. xx
Adjusted bank balance ………………………XXX
Depositor’s balance……………………………xx
Add: Collection of N/R & interest...xx
Depositor error(under state)……….xx……xx
Subtotal………………………………….......xx
Less: NSF check…………………….xx
Bank Service charge………………..xx
Depositor error(over state)…...……xx…….xx
Adjusted depositor’s balance…………….XXX
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23. .
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•Illustration:
•The bank statement for XYZ Company
reported indicates a balance of Birr 3,359.78
as of Meskerem 30, 2008. The balance of the
cash in Bank account in XYZ's ledger as of the
some date is Birr 2,234.99 and while accessing
the records of the company and the bank
statement by using the above steps or
procedures, the following items were
discovered.

24. 1. A deposit of Birr 816.20 made after
banking hours on Meskerem 30 does not
appear on the bank statement.
2. Two checks issued in Meskerem have not
yet been paid by the bank:
Check No. 301 Birr 1109.60
Check No. 309 435.39
3. A credit memorandum was included
in the bank statement, which was for
proceeds from collection of a non-interest
bearing note receivable to XYZ Company
Birr 408.
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25. 4. Debit memorandum /Bank service
charge/ was sent to XYZ Company along
with Bank statement and this was not recorded
in XYZ Co. Cash payment journal Birr 3.00.
5. Check No. 315 was issued by XYZ
Company for payment of telephone expense
in the amount of Birr 732.26 but was
erroneously recorded in the cash payments
journal as B irr 723.26. Then the Bank
reconciliation based on the above information is
as follows.



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26. ABC Company
Bank Reconciliation
January 31, 2012
•Bank Balance ------------------------------------ Br. 3,359.75
•Add: Deposit------------------------------------- 816.20
• Subtotal ------------------- ------------------ Br.4,175.98
•Deduct: outstanding checks:
•No. 301 Br. 1109.60
•No. 309 435.36 -----------------------(1,544.99)
•Adjusted bank balance ------------------------Br. 2,630.99
•depositor’s balance-----------------------------------Br. 2,234.00
•Add: Note pus interest collected-----------------------408.00
•Subtotal --------------------------------------------------Br. 2,642.99
•Deduct: Bank Service charge----------------3.00
•Depositor's error ---------------------------------9.00-----(12.00)
•Adjusted book balance---------------------------------Br. 2,630.99

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27. •The following are journal entries related to the bank
reconciliation.
Cash in bank………Birr 408.00
Notes Receivable………. Birr 400.00
Interest revenue…………………8.00
(To record Note Receivable collected by bank)
Miscellaneous Expense…………….Birr 3.00
utilities expense.…….............................9.00
Utilities Expense…………………….Birr 27.00
Cash in bank…………………………………….Birr 12.00

(To record bank service charges, and error in recording
Check No. 315)

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28. Petty cash and change funds
Petty cash fund is a fund used for making
payments for small amount of expenditure.
There are three steps in operating of a petty
cash fund.
1.Establishing the petty cash fund
i.Appointing a petty cash custodian
ii.Determining the size of the fund
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29. Custodian: an employee who is responsible for
the operation of the petty cash fund.
A journal entry at the time of establishment is:
petty cash ………………..xxx
cash in bank…………………xxx
Note: no other entry will be made that affect a
petty cash account unless the petty cash fund
is changed.(increase or decrease)
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30. 2. making payment from the petty cash fund:
the custodian will make payment if an employee
is request for expenditure, which is in
accordance with the polices and procedure of
management standards..
•Note: no entry will be made to record the
payments made by the custodian rather
journal entry to record the payment is made
when the petty cash is replenished.

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31. 3. replenishing the petty cash fund
When cash in the fund is decreased usually a
petty cash fund custodian requests for
replenishment.
A journal entry at the time of replenishment is:
Various Expenses………xxx
Cash in bank………xxx
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32. Illustration:
Assume on Hedar 1, 2008, Hiwot Company
established a petty cash fund for Birr 600. At
the end of the month count of cash on hand
indicate that Birr 61.50 cash remained in the
fund. Sorting of petty cash receipts disclosed
that the following expenditures were made
from the fund.
Postage expenses………………… Birr 189.75
Office supplies………………………… 192.70
Miscellaneous expenses……………… 156.05
Total…………………………………Birr 538.50
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33. Required: - Prepare the necessary entries to
record the petty cash transaction for the month
of Hedar, 2008.

Petty cash………………Birr 600
Cash in bank…………………. Birr 600
(To establish the petty cash fund)
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34. Postage expenses………Birr 189.75
Office supplies………………192.70
Miscellaneous expenses……156.05
Cash in bank……………………….Birr 538.50
(To replenish the petty cash fund)
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35. Change Fund
Some businesses that receive cash directly from
customers should maintain a fund of currency
and coins in order to make change. This fund,
which is part of the total cash balance, is called
change fund. A change fund is established by
issuing a check to then bank and transferring the
cash to the custodian. The issuance of a check
to establish a change fund is recorded by
debiting cash on hand/change fund and
crediting cash in bank account.
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36. Classification of Receivables
It is grouped under current asset.
Receivable is an amount received from another
person. It originates from various type of
transaction
e.g.
credit sales of goods
Granting loans
Advance to employees and companies
Providing service on account




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37. Receivables consists of:
A) account receivable: resulted from sale of
merchandise or service on credit.
Account receivable is expected to collected in
a short period of time
B) not receivable: a written promise from a
client or customer to pay a definite amount of
money on a specific future date.
N/R: can be crated
In a lending or borrowing transaction
To settle account receivable which is past due

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38. .
C) Other receivable: it may involved
Interest receivable
Tax receivable
Receivable from officials and for employees
Rent receivable
All receivable that are expected to realized in
cash with in a year are presented in the current
asset section of the business sheet.

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39. .
Internal control of receivables
There are d/t controlling techniques over
receivables
1.Separation of business operation and the
accounting for receivable
2.Separation of responsibilities for related
functions
3.Supporting the general leger notes
receivable account
4.Authorized and assigning responsibilities
for key tasks related to receivables 39

40. . 5. establishing effective collection procedures
6. proper use of controlling account and A/R
ledger
In any credit transaction there are at least two
parties involved
a)creditor: the one who sells merchandise or
services on credit and obtain receivables
b)Debtor: the one who purchase merchandise
or services on credit and crates payable

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41. -
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Accounting for uncollectable accounts
Due to different reasons, some sales on
account may not be collected. The business
enterprise incurred operating expense b/c of
the failure to collect receivable is called
Uncollectible account expense or
Bad debt expense or
Doubtful account expense or
Loss from uncollectible

42. There are two methods of accounting for
receivable that appear to be uncollectible.
1)The allowance method
2)The direct write-off method
1) The allowance method: estimating
uncollectible account by taking sales and
receivables.
Adjusting entries will be made to record
uncollectible

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43. Uncollectible account expense…..XX
allowance for doubtful account….XX
Net receivable= A/R - allowance for doubtful
account
Ex: the balance of A/R ledger indicates $50,000,
the estimated amounts of uncollectible on
December 31, is $2,000.
Uncollectible account expense…..2,000
allowance for doubtful account….2,000

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44. .
Estimating uncollectible account expense
There are two basic methods to estimate
uncollectible accounts for the period.
A) percentage of sales method
B) percentage of receivable method
A) percentage of sales method: assume a given
percent of a firm’s sales are uncollectible:
EX:
total net sales=$100,000, receivable at year
end $60,000
Estimated percentage of uncollectible is 2% of
sales


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45. .
Required: record the necessary journal entry
Uncollectible account expense….2,000
allowance for doubtful account…………2,000
b)Percentage of receivable method: assume a
given percentage of a company’s receivable
are uncollectible.
EX: receivable at year end $60,000
Estimated percentage of uncollectible is 4% of
receivables.
Required: record the necessaries journal entries
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46. .
Uncollectible account expense….2,400
Allowance for doubtful account………..2,400
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47. .
2) The Direct Write Off Method: there is no
estimation. This method recognizes uncollectible
when specific account is believed to be
uncollectible.
EX: assume that a $200 accounts for mr x is
considered as uncollectible .
Allowance for doubtful accounts…..200
A/R…………………………………..200
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48. .
•Accounting for notes receivable
Note is a written promise from a client to pay a
specified amount of money on a specific period
of time.
It must be payable to the order of a specific
person.
It must be signed by the person of a firm that
makes a promise.
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49. Characteristics of a promissory note are as
follows:
1. The maker: is the party making the
promise to pay.
2. The payee: is the party to whom the note
is payable.
3. The face amount: is the amount the note i
s written for on its face.

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50. .
4. The issuance date: is the date a note is
issued.
5. The due date or maturity date: is the date the
note is to be paid.
6. The term of a note: is the amount of time
between the issuance and due dates.
7. The interest rate: is that rate of interest that
must be paid on the face amount for the term
of the note.
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51. .
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EX: The maker of the note is Selig Company, and the payee
is Pearland Company. The face value of
the note is $2,000, and the issuance date is March 16,
2009. The term of the note is 90 days,
Required:
a.compute due date
b.Compute interest and maturity value
a) Term of the note……90
March days(31)
Date of the note(16)..15
Remaining days……..75
April days(30)……….30
Remaining days…….45
May days(31)………..31
Remaining days………14(June 14)

52. Interest: is the cost of borrowing money.
It is the revenue for the payee, it is expense
for the maker.
Interest=principal x interest rate x time
b) Interest =2,000x10%x90/360=50
Mv= principal + interest =2,000 + 50=2,050
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53. Accounting for note receivable
•Illustration : Assume that on January 10,
Nile Company sales merchandise on
account to Tana Company and receive
a Birr 5,000, 90 day, 12% promissory note.
This transaction is recorded as:
January 10 Notes Receivable ----5000
Sales --------------------------------- 5000
(To record the sales of merchandise on
account).
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54. •The maker of the note usually honors the
note and pays it in full. The entry required
to record the receipt of cash by Nile
Company from Tana Company is as
follows:
April 10 Cash--------------5150
Notes Receivable---------------5000
Interest Revenue ---------------------150
(To record the receipt of cash).


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55. Accounting for dishonored N/R
If the maker paid the maturity value of the note to the
payee, a note is said to be honored note.
If the maker fails to pay the maturity value of the note to
the payee, a note is said to be dishonored note.
Ex: assume that y-company didn’t pay the note at
maturity.
A/R company……………xx
Notes receivable………………xx
Interest revenue………………xx
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