9. Cash

Question 1

Suggest strategies (1) on the internal controls over cash.

Answer 1

Custody of cash

Secure cash and valuable items in a locked storage

Question 2

Suggest strategies (2) on the internal controls over cash.

Answer 2

Authorization

Obtain proper approvals for all payments from authorized personnel from at least 2 different people.

Question 3

Suggest strategies (3) on the internal controls over cash.

Answer 3

Bank reconciliation

Compare cash at bank balance to the bank statement balance and make sure all differences can be accounted for.

Question 4

Suggest strategies (4) on the internal controls over cash.

Answer 4

Segregation of duties

Make sure there is different employees to handle cash and recording duties.

Question 5

Explain why the entries in the Bank Statement is opposite of that in the Cash in bank account.

Answer 5

In the cash at bank account, receipts of cash or cheques are recorded as debits because they are regarded as business assets. The bank records such deposits as credits in the Bank Statement to reflect them as liabilities because the funds belong to the business and not the bank.

Question 6

Why is the ending balance of the CAB account and the BS not the same?

Answer 6

1. Due to the different in timing of recording transaction by the business and the bank
   a) The bank has recorded the transaction but the business has not recorded.

b) The business has recorded the transaction but the bank has not recorded.
2. Due to error in recording in cash at bank account or in bank statement.

Question 7

What should the business do if the ending balance of the CAB account and the BS is not the same?

Answer 7

Business would need to prepare a bank reconciliation to account for the different in the ending balance of cash at bank and ending balance of bank statement.

Question 8

What is the purpose of preparing a bank reconciliation statement?

Answer 8

To account for the difference between the ending balance of the cash at bank balance and the bank statement balance.

Question 9

What are the steps to update Cash at bank account. (no need to memorise)

Answer 9

1. Check if beginning balance of the CAB account and BS are the same. If diff, find the diff amt in BK stt and cancel the figure.
2. Check if there is any error (additional information) given in question. Is yes, cancel both figures in CAB and BS, do correction at place where the error occurs.
3. Compare Cash at Bank account with Bank Statement. Cancel similar circle not similar figure.
4. Prepare updated Cash at Bank Account.
5. Prepare Bank reconciliation statement.

Question 10

What is the format of the bank reconciliation statement?

Answer 10

Bank Reconciliation Statement as at (date)…
$ $
Balance as per bank statement 100
Add: Deposits in transit
John 10
Ali 10 20
120
Less: Cheques not yet presented
Peter 15
Ahmad 15 30
Adjusted balance as per cash at bank 90

Question 11

Definition of these bank’s terms (Don’t use these term in the cash at bank account)

a. direct deposit /debit credit / credit transfer
b. Direct payment
c. standing orders
d. bank charges
e. dishonoured cheque

Answer 11

a. Direct deposit / direct credit / credit transfer
- Money received directly by bank

b. Direct payment
- Payments made by bank

c. Standing orders
- Instructions to bank to make regular payments of a fixed amount at a fixed date

d. Bank charges
- Charges by the bank for services rendered

e. Dishonoured cheques
- Cheques that are rejecte .d by the bank.

Question 12

What are the reasons for the cheque to be dishonored?

Answer 12

• Inconsistent information in the cheque.
• Information on cheque not competed
• Payer’s has not enough money in his bank account to pay the cheque.
• Post-dated cheque
• Cheque is expired.

Question 13

What is the journal entries for dishonored cheque

i) No cash discount
ii) with cash discount (e.g 10%) given to creditor customer

Answer 13

i) Dr Trade receivable
Cr Cash at bank

ii) Dr Trade receivable 100%
Cr Cash at bank (dishonoured) 90%
Cr Discount allowed (withdrawn) 10%

Question 14

Give example of transactions that cause the cash at bank account to be higher than the bank statement balance.

Answer 14

Deposit in transit
Interest on deposit
Direct deposit / credit transfer
Dividend

Question 15

Give example of transactions that cause the cash at bank account to be lower than the bank statement balance.

Answer 15

Cheque not yet presented
Interest charge / bank charges
Dishonoured cheque
Direct payment/ standing order

Question 16

Define deposits in transit

Answer 16

Business received cheque and banked in the cheque, and recorded it in cash at bank account. But bank has recorded it as deposit in the bank statement.

Question 17

Define cheques not yet presented

Answer 17

Business issued a cheque and recorded in the cash at bank account but the bank, thus bank has not recorded as withdrawal in the bank statment.

Question 18

Differentiate between the cash in hand and cash at bank accounts.

Answer 18

Cash in hand account refers to the amount of money kept in the office while cash at bank account refers to the amount of money kept in the business bank account.

Question 19

Differentiate between the cash at bank and bank overdraft.

Answer 19

Cash at bank is positive amount in the business bank account indicating business has money in the business bank account while bank overdraft is a negative figure in the business bank account indicating business overdrawn that it has in the bank account.

Question 20

Explain purpose of internal control

Answer 20

To reduce the possibility of theft or the likelihood of error in order to ensure cash is well-protected and accuracy reported.

Question 21

How to identify the effects of preparing bank reconciliation of cash at bank and profit?

Answer 21

Take all income minus expenses from the updated cash at bank account.