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.

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.

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

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.

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

Management’s intent to use a certain amount of cash for a specific purpose – future plant expansion, future payment of debt.

Compensating Balance

Minimum balance that must be maintained in a company’s bank account as support for funds borrowed from the bank.

US GAAP (FASB) - Bank overdrafts are treated
as liabilities.

IFRS - Bank overdrafts may be offset against other cash accounts.

1. A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company’s own records.
2. A company’s 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.

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.

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.

Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period. (FASB requires)

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.

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 period’s credit sales.

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

 Focuses on the collectability of accounts
receivable to make the estimate of uncollectible
accounts.
 Involves the direct computation of the desired
balance in the allowance for uncollectible
accounts.

Desired Balance in allowance for uncollectible amounts
MINUS
Existing year-end balance in allowance for uncollectible accounts
EQUALS
Estimated bad debt expense

Assumes older accounts are more likely to prove uncollectible.

1. EastCo’s 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

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

A written promise to pay a specific amount at a specific future date.

Face
amount
of the
note

×
Annual
interest
rate (Even for maturities less than 1 year,
the rate is annualized.)

×
Fraction
of the
annual
period
= Interest

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.

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.

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.

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) “derecognizes” (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.

Receivables turnover ratio =
Net sales / Average accounts receivable (net)

Average collection period =
365 Days / Receivables turnover ratio

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.

 An ordinary sale of receivables to the factor.
 Factor assumes all risk of uncollectibility.
 Control of receivable passes to the factor.
 Receivables are removed from the books, fair value of cash and other assets received is recorded, and a financing expense or loss is recognized.

 Transferor (seller) retains risk of
uncollectibility.
 If the transaction fails to meet the three
conditions necessary to be classified as a
sale, it will be treated as a secured
borrowing.

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

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.

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.