Cash
Cash includes currency and coins, balances in checking accounts, and items acceptable for deposits in these accounts, such as checks and money orders received from customers.
Cash Equivalents
Money market funds, treasury bills, commercial paper.
MUST HAVE A MATURITY DATE NO LONGER THAN THREE MONTHS FROM THE DATE OF PURCHASE.
Short-term, highly liquid investments that can be readily converted to cash with little risk of loss.
Internal Control
1. Encourages adherence to company policies and procedures
2. Promotes operational efficiency
3. Minimizes errors and theft
4. Enhances the reliability and accuracy of accounting data
Internal Control Procedures
Cash Receipts
1.Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash
balances.
2. Match the amount of cash received with the amount of cash deposited.
3. Close supervision of cash-handling and cash-recording activities.
Internal Control Procedures
Cash Disbursements
1. All disbursements, except petty cash, made by check.
2. Separate responsibilities for cash disbursement documents, check authorization, check signing, and record keeping.
3. Checks should be signed only by authorized individuals.
Restricted Cash and Compensating Balance
Restricted Cash
Managementâs intent to use a certain amount of cash for a specific purpose â future plant expansion, future payment of debt.
Restricted Cash and Compensating Balance
Compensating Balance
Minimum balance that must be maintained in a companyâs bank account as support for funds borrowed from the bank.
Cash & Cash Equivalents - US GAAP vs IFRS
US GAAP (FASB) - Bank overdrafts are treated
as liabilities.
IFRS - Bank overdrafts may be offset against other cash accounts.
Bank Reconcilliation

1. A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the companyâs own records.
2. A companyâs cash balance as recorded in its books rarely equals the cash balance reported in the bank statement.
3. Differences in these balances occur because of either timing differences or errors.
4. It is the possibility of these errors, or even outright fraudulent activities, that make the bank reconciliation a useful cash control tool.
Uncollectible Accounts Receivable
The allowance for doubtful accounts is a reduction of the total amount of accounts receivable appearing on a company’s balance sheet, and is listed as a deduction immediately below the accounts receivable line item. This deduction is classified as a contra asset account.
Net Realizable Value (NRV)
Accounts Receivable-- the total amount-- minus your estimate of how much you're not going to collect. The difference between those is your accounts receivable at net or net realizable value.
Bad Debt Expense
Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period. (FASB requires)
Bad Debt Expense
Normally classified as a selling expense and
closed at year-end.
Bad debt expense.....................xxx
Allowance for uncollectible accounts...xxx
Contra asset to accounts receivable.
Income Statement Approach
1. Focuses on past credit sales to make estimate of bad debt expense.
2. Emphasizes the matching principle by estimating the bad debt expense associated with the current periodâs credit sales.
FORMULA
Income Statement Approach - BDE
Current Period Credit Sales
x Estimated Bad Debt %
----------------------------------
= Estimated Bad Debt Expense
Journal Entry:
Bad debt expense..............2,400
Allowance for uncollectible accounts.....2,400
Balance Sheet Approach
ï¼ Focuses on the collectability of accounts
receivable to make the estimate of uncollectible
accounts.
ï¼ Involves the direct computation of the desired
balance in the allowance for uncollectible
accounts.
FORMULA
Balance Sheet Approach
Desired Balance in allowance for uncollectible amounts
MINUS
Existing year-end balance in allowance for uncollectible accounts
EQUALS
Estimated bad debt expense
Accounts Receivable Aging Schedule (Balance Sheet Approach)
Assumes older accounts are more likely to prove uncollectible.
Accounts Receivable Aging Schedule
1. EastCoâs unadjusted balance in the allowance account is $500.
2. Per the previous computation, the required balance is $1,350.
Journal Entry:
Bad debt expense .................. 850
Allowance for uncollectible accounts........850
then (if deemed uncollectible "write-off"):
Allowance for uncollectible accounts...500
Accounts receivable.........................500
If customer makes a payment after account has been written off, two journal entries are required:
Accounts receivable..............500
Allowance for uncollectible accounts.........500
Cash.............................500
Accounts receivable..........................500
Direct Write-Off Method
If uncollectible accounts are immaterial (for example: multi-million dollar company and customer owes $20), bad debts are simply recorded as they occur (without the use of an allowance account).
Bad debts expense.....................xxx
Accounts receivable.........................xxx
Notes Receivable
FORMULA
A written promise to pay a specific amount at a specific future date.
Face
amount
of the
note
Ã
Annual
interest
rate (Even for maturities less than 1 year,
the rate is annualized.)
Ã
Fraction
of the
annual
period
= Interest
Interest Bearing Notes Math Example

On November 1, 2014, West, Inc., loans $25,000 to Winn Co. The note bears interest at 12% and is due on November 1, 2015.
Prepare the journal entry on November 1, 2014, December 31, 2014, (year-end) and November 1, 2015, for West.
Non-Interest Bearing Notes
1. Actually do bear interest.
2. Interest is deducted (discounted) from the face
value of the note.
3. Cash proceeds equal face value of note less discount.
Non-Interest Bearing Notes Math Example

On Jan. 1, 2014, West, Inc., accepted a $25,000
noninterest-bearing note from Winn Co. as
payment for a sale. The note is discounted at
12% and is due on Dec. 31, 2014.
Prepare the journal entries on Jan. 1, 2014, and
Dec. 31, 2014.
Financing w/Receivables

Companies may use their receivables to obtain immediate cash.
Secured Borrowing:
Under this approach, the transferor (borrower) simply acts like it borrowed money from the transferee (lender), with the receivables remaining in the transferor's balance sheet and serving as collateral for the loan. On the other side of the transaction, the transferee recognizes a note receivable.
Sales of Receivables:
Under this approach, the transferor (seller) âderecognizesâ (removes) the receivables from its balance sheet, acting like it sold them to the transferee (buyer). On the other side of the transaction, the transferee recognizes the receivables as assets in its balance sheet and measures them at their fair value.
FORMULA
Receivables turnover ration
Receivables turnover ratio =
Net sales / Average accounts receivable (net)
Average collection period =
365 Days / Receivables turnover ratio
Factoring Arrangements
A factor is a financial institution that buys
Receivables for cash, handles the billing and collection of the receivables, and charges a fee for the service.
Sale of Receivables (without recourse)
ï½ An ordinary sale of receivables to the factor.
ï½ Factor assumes all risk of uncollectibility.
ï½ Control of receivable passes to the factor.
ï½ Receivables are removed from the books, fair value of cash and other assets received is recorded, and a financing expense or loss is recognized.
Sale of Receivables (with recourse)
ï½ Transferor (seller) retains risk of
uncollectibility.
ï½ If the transaction fails to meet the three
conditions necessary to be classified as a
sale, it will be treated as a secured
borrowing.
Bad debt and accounts receivable math example
Colorado Rocky Cookie Company offers credit terms to its customers. At the end of 2013, accounts receivable totaled $675,000.
The company estimates bad debts by applying a percentage of 10% to accounts receivable at the end of the year.
How would a/r be shown in the 2013 year-end balance sheet?
Solution:
675,000 x 10% = 67,500
675,000-67,500 = 607,500
Gross Accounts Receivable
Accounts receivable represents sums owed to the business that the business records as revenue. Gross accounts receivable is accounts receivable before the business deducts uncollectable accounts to calculate the true value of accounts receivable.
Write offs & Allowance for Doubtful Accounts
The entry to write off a bad account affects only balance sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable.