CHAPTER. Cash Receipts, Cash Payments, and Banking Procedures. Chapter Opener: Thinking Critically

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1 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 253 CHAPTER 9 Cash Receipts, Cash Payments, and Banking Procedures Chapter Opener: Thinking Critically Office expenditures may include petty cash disbursements for office supplies and postage. Cash expenditures might also include payments for rent and utilities. Receipts might include cash sales for services or payments for services on account. Fast Facts H&R Block worked with the IRS to file the first electronic tax returns in 1986, 22,000 in all. In 2006, over 72 million tax returns were filed electronically. The company s 90,000 tax professionals have an average of five years experience and more than 300 hours of training. In 2007 H&R Block generated $4.0 billion in revenues. Managerial Implications: Thinking Critically Discussion Questions Answers will vary, but should include a recognition of need to weigh the earning power (interest income) and the need for liquidity (access to the cash). These questions are designed to check students understanding of new terms, concepts, and procedures presented in the chapter. 1. Access to checkbook is restricted; use of prenumbered check forms; checks examined by someone who did not prepare them before they are signed; bank statement reconciled by someone other than employees who handle cash. 2. To record items that have not yet been entered in firm s records. 3. Outstanding checks, deposits in transit, service charges. 4. Balance of Cash account in the general ledger. 5. To reconcile any difference between depositor s checkbook, Cash account, and bank statement. 6. Day-by-day checking account activity, as well as beginning and ending balances. 7. Date, amount, payee, current balance, purpose of check. Stub should be prepared before the check so that it will not be forgotten. 8. Signed, authorized written order instructing a bank to pay a specific sum of money to a designated person. 9. Electronic processing of documents. 10. Restrictive endorsement. 11. Shortages are debited and overages are credited to the Cash Short or Over account. 12. Use only for minor payments; establishment check made out to person to be in charge of funds; keep funds locked; payments made from funds should be documented with signatures of recipient. 13. At month-end or when petty cash is replenished. 14. Contra cost account, deduction from Purchases. 15. Cash Payments Journal: total amount of purchase is a debit to Accounts Payable. Discount is recorded as a credit to Purchases Discounts. Amount of cash paid is recorded as a credit to Cash. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 253

2 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page Cash Receipts Journal: Original sale was recorded as a Credit to Accounts Receivable; amount of the discount is recorded as a debit to Sales Discounts. Amount of cash received is recorded as a debit to Cash. 17. Encourages fast payment. 18. Written promise to pay amount on specific date. Cr. Notes Rec., Cr. Int. Inc., Dr. Cash. Cash receipts journal. 19. Payments made by check and issued only with approved invoice; invoices approved only by designated personnel; checks prepared and recorded in the checkbook or check register by someone different from the person who approves the payments; use prenumbered checks. 20. Employees are investigated by an insurance company, and, if their backgrounds are satisfactory, their employer is insured against losses that may occur because of employee theft or mishandling of funds. 21. Only approved employees can handle cash; keep cash in locked location; record cash receipts as they arrive; check funds against receipt log before bank deposits are made; make deposits promptly; separation of cash deposits, recording, reconciliation duties. 22. See Glossary for terms and definitions. 254 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 255 EXERCISES 9.1, 9.2 EXERCISE 9.1 CASH RECEIPTS JOURNAL PAGE 12 CASH AMOUNT DEBIT ACCOUNTS SALES TAX OTHER ACCOUNTS CREDIT RECEIVABLE PAYABLE SALES POST. CREDIT CREDIT CREDIT ACCOUNT NAME DATE DESCRIPTION POST. Sept. 1 Cash sales Cash Short or Over James Floyd Cash sales Investment by owner Susan Anderson, Capital Cash sales Cash Short or Over ( ) EXERCISE 9.2 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter CASH PAYMENTS JOURNAL PAGE 15 CASH CREDIT ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT DATE CK. DESCRIPTION POST. NO. Sept September rent Rent Expense Carter Company Bought equipment Equipment Paid sales tax Sales Tax Payable Waller Company Cash purchase Purchases Withdrawal by owner Susan Anderson, Drawing

4 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 256 EXERCISES 9.3, 9.4 EXERCISE 9.3 CASH PAYMENTS JOURNAL PAGE 1 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT Jan Established petty cash fund Petty Cash CASH CREDIT EXERCISE 9.4 CASH PAYMENTS JOURNAL PAGE 1 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT Jan Replenished petty cash fund Supplies Delivery Expense Miscellaneous Expense CASH CREDIT 256 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

5 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 257 EXERCISE 9.5 Chin Corporation Bank Reconciliation October 31, Balance on bank statement Additions: Deposit in transit Deductions for outstanding checks: Check Check Check Total outstanding checks Adjusted bank balance Balance in books Deductions: Bank service charge NSF check Adjusted book balance GENERAL JOURNAL PAGE 14 DATE DESCRIPTION POST. Oct. 31 Miscellaneous Expense Cash 2000 Bank service charge for October 31 Accounts Receivable/James Dear Cash To record NSF check returned by bank Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 257

6 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 258 EXERCISE 9.6 Bank Balance 1. X X X Book Balance X X X X Accounting Entry X X X X 258 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

7 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 259 EXERCISE 9.7 Cantu Office Supply Company Bank Reconciliation Statement March 31, Balance on bank statement Additions: Deposit in transit Check incorrectly charged Deduction for outstanding checks: Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Noninterest-bearing note collected by bank Deductions: Bank collection fee for note NSF check Adjusted book balance Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 259

8 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 260 EXERCISE 9.7 (continued) GENERAL JOURNAL PAGE 8 DATE DESCRIPTION POST. March 31 Cash Notes Receivable To record receipt of note collected by bank Miscellaneous Expense Cash 5000 To record bank collection fee Accounts Receivable/Wilson Construction Company Cash To record NSF check returned by bank Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

9 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 261 PROBLEM 9.1A CASH RECEIPTS JOURNAL PAGE 4 DATE DESCRIPTION POST. ACCOUNTS SALES TAX OTHER ACCOUNTS CREDIT RECEIVABLE PAYABLE SALES POST. CREDIT CREDIT CREDIT ACCOUNT NAME CASH AMOUNT DEBIT Feb. 3 Danielle Pelzel Refund for damaged goods Supplies Cash Sales Cash Short or Over 620 ( ) Additional Investment Jason Wilson, Capital Kyela Jones Cash Sales Cash Short or Over Sadie Nelson Collected promissory Notes Receivable note and interest Interest Income Cash Sales Alfred Herron Cash Sales Cash Short or Over 620 ( ) Totals (111)0 (231)0 (401)0 ( ) (101) Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 261

10 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 262 PROBLEM 9.1A (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 Feb. 1 Balance CR Notes Receivable ACCOUNT NO. 109 Feb. 1 Balance CR Accounts Receivable ACCOUNT NO. 111 Feb. 1 Balance CR Supplies ACCOUNT NO. 129 Feb. 1 Balance CR Sales Tax Payable ACCOUNT NO. 231 Feb. 1 Balance CR Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

11 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 263 PROBLEM 9.1A (continued) GENERAL LEDGER Jason Wilson, Capital ACCOUNT NO. 301 Feb. 1 Balance CR Sales ACCOUNT NO. 401 Feb. 28 CR Interest Income ACCOUNT NO. 491 Feb. 19 CR Cash Short or Over ACCOUNT NO. 620 Feb. 7 CR CR CR Analyze: Total Accounts Receivable collected was $1,910. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 263

12 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 264 PROBLEM 9.2A CASH PAYMENTS JOURNAL PAGE 8 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT June Monthly rent Rent Expense Tax remittance Sales Tax Payable Perfect Timing Watch Co Established petty cash fund Petty Cash Fund Paid promissory note and Notes Payable Interest to Perry Corporation Interest Expense Cash refund Sales Returns & Allowances Monthly telephone bill Telephone Expense International Jewelery Co Store supplies Supplies Nelson s Jewelry and Accessories Classy Creations Monthly salaries Salaries Expense Withdrawal by owner Larry Jennings, Drawing Replenish petty cash fund Supplies Delivery Expense Miscellaneous Expense Larry Jennings, Drawing Totals (205)0 ( ) 0 0 CASH CREDIT 264 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

13 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 265 PROBLEM 9.2A (continued) PETTY CASH ANALYSIS SHEET PAGE 8 DATE DISTRIBUTION OF PAYMENTS VOU. DESCRIPTION RECEIPTS PAYMENTS SUPPLIES DELIVERY MISC. OTHER ACCOUNTS DEBIT NO. DEBIT EXPENSE EXPENSE DEBIT DEBIT ACCOUNT NAME AMOUNT June 4 Establish fund Office supplies Postage stamps Delivery service Personal withdrawal Larry Jennings, Drawing Store windows washed Delivery service Totals Balance on hand Balance on hand Replenish fund Carried forward Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 265

14 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 266 PROBLEM 9.2A (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 June 1 Balance CP Petty Cash Fund ACCOUNT NO. 105 June 4 CP Supplies ACCOUNT NO. 129 June 1 Balance CP CP Notes Payable ACCOUNT NO. 201 June 1 Balance CP Accounts Payable ACCOUNT NO. 205 June 1 Balance CP Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

15 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 267 PROBLEM 9.2A (continued) GENERAL LEDGER Sales Tax Payable ACCOUNT NO. 231 June 1 Balance CP Larry Jennings, Drawing ACCOUNT NO. 302 June 30 CP CP Sales Returns and Allowances ACCOUNT NO. 451 June 10 CP Purchases Discounts ACCOUNT NO. 504 June 30 CP Delivery Expense ACCOUNT NO. 611 June 30 CP Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 267

16 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 268 PROBLEM 9.2A (continued) GENERAL LEDGER Rent Expense ACCOUNT NO. 620 June 1 CP Salaries Expense ACCOUNT NO. 623 June 30 CP Telephone Expense ACCOUNT NO. 626 June 12 CP Interest Expense ACCOUNT NO. 634 June 7 CP Miscellaneous Expense ACCOUNT NO. 635 June 30 CP Analyze: Total Payments from the Petty Cash Fund for the month were $ Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

17 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 269 PROBLEM 9.3A SALES JOURNAL PAGE 7 ACCOUNTS RECEIVABLE DR./ SALES CR. DATE INVOICE CUSTOMER S NAME POST. NO April Soprano Music Center Music Warehouse Eagleton Music Center Contemporary Sounds, Inc Total (1 1 1/ 4 01) Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter CASH RECEIPTS JOURNAL PAGE 7 CASH DEBIT ACCOUNTS OTHER ACCOUNTS CREDIT SALES RECEIVABLE SALES POST. DISCOUNTS CREDIT CREDIT ACCOUNT NAME AMOUNT DEBIT DATE DESCRIPTION POST. April 3 Music Supply Store Cash sales Soprano Music Center Sounds From Yesterday Eagleton Music Center Totals (111)0 (401)0 (452)0 (101)0

18 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 270 PROBLEM 9.3A (continued) GENERAL JOURNAL PAGE 17 DATE DESCRIPTION POST. April 15 Sales Returns and Allowances Accounts Receivable/Music Warehouse Accepted a return of damaged merchandise, Credit Memo 105, sale originally made on Invoice 9313, April Notes Receivable Accounts Receivable/Country Music Store Received a 2-month, 12% note from Country Music Store to replace open account GENERAL LEDGER (PARTIAL) Cash ACCOUNT NO. 101 April 1 Balance CR Notes Receivable ACCOUNT NO. 109 April 26 J Accounts Receivable ACCOUNT NO. 111 April 1 Balance J J S CR Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

19 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 271 PROBLEM 9.3A (continued) GENERAL LEDGER (PARTIAL) Sales ACCOUNT NO. 401 April 30 S CR Sales Returns and Allowances ACCOUNT NO. 451 April 15 J Sales Discounts ACCOUNT NO. 452 April 30 CR Unlimited Sounds Partial Income Statement Month Ended April 30, Revenue Sales Less: Sales Returns and Allowances Sales Discounts Net Sales Analyze: Total sales on account before returns and allowances were $28,700. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 271

20 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 272 PROBLEM 9.4A PURCHASES JOURNAL PAGE 8 DATE PURCHASED FROM INVOICE INVOICE TERMS POST. NUMBER DATE PURCHASES DR./ ACCOUNTS PAYABLE CR. June 3 Perfect Fit Shoe Shop 746 5/30 2/10, n/ Juanda s Coat Shop /9 n/ Motor Speedway /20 2/10, n/ Jogging Shoes Store /26 1/10, n/ Total (50 1 / 2 05) GENERAL JOURNAL PAGE 20 DATE DESCRIPTION POST. June 5 Equipment Accounts Payable/Middleton Company Purchased new store equipment, Invoice 9067 dated June 4, payable in 30 days Accounts Payable/Juanda s Coat Shop Purchases Returns and Allowances Returned defective goods, receiving Credit Memo 203, original purchase made on Invoice 9922, June Equipment Notes Payable Issued 3-month, 12% note to Warren Company to purchase new store equipment Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

21 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 273 PROBLEM 9.4A (continued) CASH PAYMENTS JOURNAL PAGE 8 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT June Monthly rent Rent Expense Leisure Wear Clothing Company Perfect Fit Shoe Shop Monthly telephone bill Telephone Expense Jaunda s Coat Shop Motor Speedway Monthly salaries Salaries Expense Totals (205)0 ( ) (504)0 (101)0 CASH CREDIT Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 273

22 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 274 PROBLEM 9.4A (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 June 1 Balance CP Equipment ACCOUNT NO. 131 June 1 Balance J J Notes Payable ACCOUNT NO. 201 June 21 J Accounts Payable ACCOUNT NO. 205 June 1 Balance J J P CP Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

23 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 275 PROBLEM 9.4A (continued) GENERAL LEDGER Purchases ACCOUNT NO. 501 June 30 P Purchases Returns and Allowances ACCOUNT NO. 503 June 18 J Purchases Discounts ACCOUNT NO. 504 June 30 CP Rent Expense ACCOUNT NO. 611 June 1 CP Salaries Expense ACCOUNT NO. 614 June 30 CP Telephone Expense ACCOUNT NO. 617 June 15 CP Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 275

24 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 276 PROBLEM 9.4A (continued) Hiker and Biker Outlet Center Partial Income Statement Month Ended June 30, Purchases Less: Purchases Returns and Allowances Purchases Discount Net Purchases Analyze: Total liabilities at month-end were $19, Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

25 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 277 PROBLEM 9.5A Vacation Paradise Bank Reconciliation Statement April 30, Balance on bank statement Additions: Deposit of April 30 in transit Deductions for outstanding checks: Check 1214 of April Check 1215 of April Total outstanding checks Adjusted bank balance Balance in books Deductions: NSF check Bank service charge Adjusted book balance GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. April 30 Accounts Receivable/Doris Fisher Cash To record NSF check returned by bank 30 Miscellaneous Expense 6 00 Cash 600 To record bank service charge for April Analyze: Outstanding checks are 1214 and 1215 totaling $ Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 277

26 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 278 PROBLEM 9.6A Irvine Inn Bank Reconciliation Statement August 31, Balance on bank statement Additions: Deposit of August 30 in transit Deposit of August 31 in transit Deductions for outstanding checks: Check Check Check Check Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted bank balance Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 279 PROBLEM 9.6A (continued) GENERAL JOURNAL PAGE 10 DATE DESCRIPTION POST. Aug. 31 Cash Notes Receivable Interest Income To record receipt of amount due on note plus interest collected by bank in August Accounts Receivable/Neal Woodson Cash To record NSF check returned by bank Miscellaneous Expense 8 00 Cash 800 To record bank service charge for August Analyze: Net effect on the accounting equation of the journal entries recorded as a result of the bank reconciliation was an increase in assets by $61 and an increase in equity by $61. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 279

28 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 280 PROBLEM 9.7A Albert Company Bank Reconciliation Statement April 30, Balance in books Additions: Check 2104 dated April 15 was recorded as $600; check was actually written for $ Deductions: Check 2147 dated April 20 was recorded as $190; check was actually written for $ Adjusted book balance GENERAL JOURNAL PAGE 11 DATE DESCRIPTION POST. Apr. 30 Cash Supplies To correct error in entry for check 2104 of April Utilities Expense Cash 4900 To correct error in entry for check 2147 of April Analyze: Net income would have been understated by $539 ($588 $49). 280 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

29 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 281 PROBLEM 9.1B CASH RECEIPTS JOURNAL PAGE 14 DATE DESCRIPTION POST. ACCOUNTS SALES TAX OTHER ACCOUNTS CREDIT RECEIVABLE PAYABLE SALES POST. CREDIT CREDIT CREDIT ACCOUNT NAME CASH AMOUNT DEBIT June 3 Clear Images Copy Center Collected note and interest Notes Receivable Interest Income 791 ( ) Refund for damaged supplies Office Supplies Cash sales Linda James Additional investment Sergio Guzman, Capital Cash sales Karen Carter Nelsy Marroquin Cash sales Alexander Neal Totals (111)0 (231)0 (401)0 ( ) (102) Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 281

30 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 282 PROBLEM 9.1B (continued) GENERAL LEDGER Cash ACCOUNT NO. 102 June 1 Balance CR Accounts Receivable ACCOUNT NO. 111 June 1 Balance CR Notes Receivable ACCOUNT NO. 115 June 1 Balance CR Office Supplies ACCOUNT NO. 129 June 1 Balance CR Sales Tax Payable ACCOUNT NO. 231 June 1 Balance CR Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

31 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 283 PROBLEM 9.1B (continued) GENERAL LEDGER Sergio Guzman, Capital ACCOUNT NO. 302 June 1 Balance CR Sales ACCOUNT NO. 401 June 30 CR Interest Income ACCOUNT NO. 791 June 4 CR Analyze: Total Assets for the Avid Reader at June 30, are $27,810 ($23,630 $3,540 $640). Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 283

32 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 284 PROBLEM 9.2B CASH PAYMENTS JOURNAL PAGE 12 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT Sept Tax remittance Sales Tax Payable Monthly rent Rent Expense Established petty cash Petty Cash Fund Elegant Glassware Store equipment Equipment Taylor Company Sales Returns & Allowances Cash refund Monthly telephone bill Telephone Expense African Imports Paid promissory note Notes Payable and interest Interest Expense Atlantic Ceramics Personal withdrawal Fred Lin, Drawing Monthly salaries Salaries Expense Replenish petty cash Delivery Expense Miscellaneous Expense Fred Lin, Drawing Totals (205)0 ( ) (504) (101)0 CASH CREDIT 284 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

33 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 285 PROBLEM 9.2B (continued) PETTY CASH ANALYSIS SHEET PAGE 12 DATE DISTRIBUTION OF PAYMENTS VOU. DESCRIPTION RECEIPTS PAYMENTS DELIVERY MISC. OTHER ACCOUNTS DEBIT NO. EXPENSE EXPENSE DEBIT DEBIT ACCOUNT NAME AMOUNT Sept. 4 Establish fund Delivery service Bought office supplies Personal withdrawal Fred Lin, Drawing Bought stamps Delivery service Totals Balance on hand Balance on hand Replenish fund Carried forward Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 285

34 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 286 PROBLEM 9.2B (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 Sept. 1 Balance CP Petty Cash Fund ACCOUNT NO. 105 Sept. 4 CP Equipment ACCOUNT NO. 141 Sept. 1 Balance CP Notes Payable ACCOUNT NO. 201 Sept. 1 Balance CP Accounts Payable ACCOUNT NO. 205 Sept. 1 Balance CP Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

35 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 287 PROBLEM 9.2B (continued) GENERAL LEDGER Sales Tax Payable ACCOUNT NO. 231 Sept. 1 Balance CP Fred Lin, Drawing ACCOUNT NO. 302 Sept. 28 CP CP Sales Returns and Allowances ACCOUNT NO. 451 Sept. 14 CP Purchases Discounts ACCOUNT NO. 504 Sept. 30 CP Delivery Expense ACCOUNT NO. 511 Sept. 30 CP Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 287

36 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 288 PROBLEM 9.2B (continued) GENERAL LEDGER Interest Expense ACCOUNT NO. 611 Sept. 24 CP Miscellaneous Expense ACCOUNT NO. 614 Sept. 30 CP Rent Expense ACCOUNT NO. 620 Sept. 2 CP Salaries Expense ACCOUNT NO. 623 Sept. 30 CP Telephone Expense ACCOUNT NO. 626 Sept. 18 CP Analyze: Total debits made to general ledger liability accounts during the month of September were $6, Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

37 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 289 PROBLEM 9.3B SALES JOURNAL PAGE 10 ACCOUNTS RECEIVABLE DR./ SALES CR. DATE INVOICE CUSTOMER S NAME POST. NO Aug Jamison Builders Branch Construction Company Contemporary Homes Denton County Builders Total (1 1 1/ 4 01) Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter CASH RECEIPTS JOURNAL PAGE 10 CASH DEBIT ACCOUNTS OTHER ACCOUNTS CREDIT SALES RECEIVABLE SALES POST. DISCOUNTS CREDIT CREDIT ACCOUNT NAME AMOUNT DEBIT DATE DESCRIPTION POST. Aug. 1 Construction Supply Company Jamison Builders Cash Sales Branch Construction Company Garica Homes Center Totals (111)0 (401)0 (452)0 (101)0

38 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 290 PROBLEM 9.3B (continued) GENERAL JOURNAL PAGE 24 DATE DESCRIPTION POST. Aug. 4 Notes Receivable Accounts Receivable/Davis Custom Homes Received a 3-month, 12% note from Davis Custom Homes to replace open account Sales Returns and Allowances Accounts Receivable/Contemporary Homes Accepted a return of damaged merchandise, Credit Memo 101; sale originally made on Invoice 2980, August GENERAL LEDGER Cash ACCOUNT NO. 101 Aug. 1 Balance CR Notes Receivable ACCOUNT NO. 109 Aug. 4 J Accounts Receivable ACCOUNT NO. 111 Aug. 1 Balance J J S CR Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

39 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 291 PROBLEM 9.3B (continued) GENERAL LEDGER Sales ACCOUNT NO. 401 Aug. 31 S CR Sales Returns and Allowances ACCOUNT NO. 451 Aug. 26 J Sales Discounts ACCOUNT NO. 452 Aug. 31 CR Royal Construction Company Partial Income Statement Month Ended August 31, Revenue Sales Less: Sales Returns and Allowances Sales Discounts Net Sales Analyze: Total sales on account in August were $61,740. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 291

40 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 292 PROBLEM 9.4B PURCHASES JOURNAL PAGE 12 DATE PURCHASED FROM INVOICE INVOICE TERMS POST. NUMBER DATE PURCHASES DR./ ACCOUNTS PAYABLE CR. Dec. 1 Alexis Products for Homes /28 2/10, n/ Baxter Corporation /7 2/10, n/ Household Appliance Center /16 3/10, n/ Zale Corporation /19 n/ Total (50 1 / 2 05) GENERAL JOURNAL PAGE 30 DATE DESCRIPTION POST. Dec. 4 Equipment Notes Payable Issued 2-month, 10% note to Kesterson Company to purchase new store equipment Equipment Accounts Payable/Safety Security Systems, Inc Purchased new store equipment, Inv. 536, dated December 17, payable in 45 days Accounts Payable/ Zale Corporation Purchases Returns and Allowances Returned damaged goods, receiving Credit Memo 201; original purchase made on Invoice 3161, December Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

41 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 293 PROBLEM 9.4B (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 Dec. 1 Balance CP Equipment ACCOUNT NO. 131 Dec. 1 Balance J J Notes Payable ACCOUNT NO. 201 Dec. 4 J Accounts Payable ACCOUNT NO. 205 Dec. 1 Balance J J P CP Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 293

42 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 294 PROBLEM 9.4B (continued) GENERAL LEDGER Purchases ACCOUNT NO. 501 Dec. 31 P Purchases Returns and Allowances ACCOUNT NO. 503 Dec. 28 J Purchases Discounts ACCOUNT NO. 504 Dec. 31 CP Rent Expense ACCOUNT NO. 611 Dec. 2 CP Salaries Expense ACCOUNT NO. 614 Dec. 31 CP Telephone Expense ACCOUNT NO. 617 Dec. 13 CP Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

43 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 295 PROBLEM 9.4B (continued) Contemporary Appliance Center Partial Income Statement Month Ended December 31, Purchases Less Purchases Returns and Allowances Purchases Discount Net Purchases Analyze: Business expense transactions took place on December 2, 13, and 31. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 295

44 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 296 PROBLEM 9.4B (continued) CASH PAYMENTS JOURNAL PAGE 12 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNT DEBIT ACCOUNT NAME AMOUNT CREDIT Dec Monthly rent Rent Expense Alexis Products for Homes Monthly telephone bill Telephone Expense Baxter Corporation Chain Lighting and Appliances Household Appliance Monthly salaries Salaries Expense Totals (205)0 ( ) (504)0 (101)0 CASH CREDIT 296 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

45 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 297 PROBLEM 9.5B Peter Chen, Attorney at Law Bank Reconciliation Statement September 30, Balance on bank statement Additions: Deposit of September 28 in transit Deductions for outstanding checks: Check 108 of September Check 112 of September Total outstanding checks Adjusted bank balance Balance in books Deductions: NSF check Bank service charge Adjusted book balance GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. Sept. 30 Accounts Receivable/Annette Cole Cash To record NSF check returned by bank 30 Miscellaneous Expense 7 50 Cash 750 To record bank service charge for September Analyze: Seven checks were paid. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 297

46 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 298 PROBLEM 9.6B Wells Builders Bank Reconciliation Statement June 30, Balance on bank statement Additions: Deposit of June 30 in transit Deductions for outstanding checks: Check Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted bank balance Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

47 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 299 PROBLEM 9.6B (continued) GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. June 30 Cash Notes Receivable Interest Income To record receipt of amount due on note plus interest collected Accounts Receivable/Robert Boley Cash To record NSF check returned by bank Miscellaneous Expense Cash 1434 To record bank service charge for June Analyze: After all journal entries have been posted, the balance in the Cash account is $7, Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 299

48 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 300 PROBLEM 9.7B Little Guy Movers Bank Reconciliation Statement February 28, Balance in books Additions: Check 1201 dated February 8 was recorded as $316; check was actually written for $ Deductions: Check 1222 dated February 24 was recorded as $404; check was actually written for $ Adjusted book balance GENERAL JOURNAL PAGE 1 DATE DESCRIPTION POST. Feb. 28 Cash 8 00 Hauling Expense 8 00 To correct error in entry for check 1201 of February Telephone Expense Cash 3600 To correct error in entry for check 1222 of February Analyze: The net change to the Cash account was a decrease of $ Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

49 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 301 CRITICAL THINKING PROBLEM 9.1 SALES JOURNAL PAGE 12 SALES ACCOUNTS SALES TAX DATE SLIP CUSTOMER S NAME POST. RECEIVABLE PAYABLE SALES NO. DEBIT CREDIT CREDIT 1 1 Sept Pam Lawrence Henry Tolliver Rachel Carter Mesia Davis Totals (111)0 (231)0 (401) PURCHASES JOURNAL PAGE 12 ACCOUNTS DATE PURCHASED FROM INVOICE INVOICE TERMS POST. PAYABLE PURCHASES FREIGHT IN NUMBER DATE CREDIT DEBIT DEBIT Sept. 6 Reed Millings Company 827 9/3 2/10, n/ Wells Products /11 n/ Nelson Craft Products 677 9/18 2/10, n/ Booker, Inc /23 n/ Totals (205)0 (501)0 (502)0 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 301

50 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 302 CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL JOURNAL PAGE 32 DATE DESCRIPTION POST. Sept. 8 Supplies Accounts Payable/Rocker Company Bought store supplies, Invoice 4204 dated September 6, net amount due in 30 days Notes Receivable Accounts Receivable/Jason Williams Received a 2-month, 10% note from Jason Williams to replace open account Accounts Payable/McNight Corporation Notes Payable Issued a 2-month, 12% note to McNight Corp. to replace open account Sales Returns and Allowances Sales Tax Payable Accounts Receivable/Rachel Carter Granted allowance for damaged lamps, Credit Memo 151; original sale made on Sales Slip 1852, September Accounts Payable/Nelson Craft Products Purchases Returns and Allowances Returned a damaged rug, receiving Credit Memo 110; original purchase made on Invoice 677, September Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

51 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 303 CRITICAL THINKING PROBLEM 9.1 (continued) CASH RECEIPTS JOURNAL PAGE 12 DATE DESCRIPTION POST. ACCOUNTS SALES TAX OTHER ACCOUNTS CREDIT RECEIVABLE PAYABLE SALES POST. CREDIT CREDIT CREDIT ACCOUNT NAME CASH AMOUNT DEBIT Sept. 1 David Prater Additional investment Sergio Cortez, Capital Cash sales Cash Short or Over 611 ( ) Cash sales Mesia Davis Cash sales Cash Short or Over 611 ( 9 00) Robert Kent Cash sales Cash sales Cash Short or Over Totals (111)0 (231)0 (401)0 ( ) (101)0 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 303

52 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 304 CRITICAL THINKING PROBLEM 9.1 (continued) CASH PAYMENTS JOURNAL PAGE 12 DATE CK. DESCRIPTION POST. NO. ACCOUNTS OTHER ACCOUNTS DEBIT PURCHASES PAYABLE POST. DISCOUNTS DEBIT ACCOUNT NAME AMOUNT CREDIT Sept Sadler Floor Coverings Monthly rent Rent Expense Freight charge Freight In Reed Millings Utility bill Utilities Expense Cash purchase Purchases Nelson Craft Products Wells Products Monthly salaries Salaries Expense Totals (205)0 ( ) 00 (504)0 (101)0 CASH CREDIT 304 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

53 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 305 CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 Sept. 1 Balance CR CP Notes Receivable ACCOUNT NO. 109 Sept. 11 J Accounts Receivable ACCOUNT NO. 111 Sept. 1 Balance J J S CR Supplies ACCOUNT NO. 121 Sept. 1 Balance J Inventory ACCOUNT NO. 131 Sept. 1 Balance Notes Payable ACCOUNT NO. 201 Sept. 17 J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 305

54 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 306 CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER Accounts Payable ACCOUNT NO. 205 Sept. 1 Balance J J J P CP Sales Tax Payable ACCOUNT NO. 231 Sept. 23 J S CR Sergio Cortez, Capital ACCOUNT NO. 301 Sept. 1 Balance CR Sales ACCOUNT NO. 401 Sept. 30 S CR Sales Returns and Allowances ACCOUNT NO. 451 Sept. 23 J Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

55 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 307 CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER Purchases ACCOUNT NO. 501 Sept. 25 CP P Freight In ACCOUNT NO. 502 Sept. 6 CP P Purchases Returns and Allowances ACCOUNT NO. 503 Sept. 24 J Purchases Discounts ACCOUNT NO. 504 Sept. 30 CP Cash Short or Over ACCOUNT NO. 611 Sept. 6 CR CR CR Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 307

56 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 308 CRITICAL THINKING PROBLEM 9.1 (continued) GENERAL LEDGER Rent Expense ACCOUNT NO. 614 Sept. 2 CP Salaries Expense ACCOUNT NO. 617 Sept. 30 CP Utilities Expense ACCOUNT NO. 619 Sept. 22 CP ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME Rachel Carter TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 19 Sales Slip 1852 S Credit Memo 151 J NAME Mesia Davis TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance CR Sales Slip 1853 S Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

57 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 309 CRITICAL THINKING PROBLEM 9.1 (continued) ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER NAME Robert Kent TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance CR NAME Pam Lawrence TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 3 Sales Slip 1850 S NAME David Prater TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance CR NAME Henry Tolliver TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 8 Sales Slip 1851 S NAME Jason Williams TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance Transferred to Notes Receivable J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 309

58 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 310 CRITICAL THINKING PROBLEM 9.1 (continued) Interior Designs Specialty Shop Schedule of Accounts Receivable September 30, Rachel Carter Mesia Davis Pam Lawrence Henry Tolliver Total ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME Booker, Inc. TERMS n/45 DATE DESCRIPTION POST. BALANCE Sept. 27 Invoice 1368, 9/23/10 P NAME McKnight Corporation TERMS 1/10, n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance J NAME Nelson Craft Products TERMS 2/10, n/30 DATE DESCRIPTION POST. BALANCE Sept. 21 Invoice 677, 9/18/10 P Credit Memo 110 J CP NAME Reed Millings Company TERMS 2/10, n/30 DATE DESCRIPTION POST. BALANCE Sept. 6 Invoice 827, 9/3/10 P CP Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

59 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 311 CRITICAL THINKING PROBLEM 9.1 (continued) NAME Rocker Company TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 8 Invoice 4204, 9/6/10 J NAME Sadler Floor Coverings TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance CP ACCOUNTS PAYABLE SUBSIDIARY LEDGER NAME Wells Products TERMS n/30 DATE DESCRIPTION POST. BALANCE Sept. 1 Balance Invoice 9453, 9/11/10 P CP Interior Design Specialty Shop Schedule of Accounts Payable September 30, Booker, Inc Rocker Company Wells Products Total Analyze: Total cash disbursements for the month of September were $24,235. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 311

60 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 312 CRITICAL THINKING PROBLEM 9.2 Julius Wells Bank Reconciliation Statement August 31, Balance on bank statement Addition: Deposit in transit, August Deductions for outstanding checks Check Check Check Check Check Check Total outstanding checks Adjusted bank balance Balance in books Deduction: Bank service charge Adjusted book balance Less: Cash shortage Corrected adjusted book balance The cash shortage is the difference between the adjusted bank balance of $16,509 and the adjusted book balance of $18,776, or the amount needed to have both parts of the bank reconciliation be equal. Gloria Harris concealed her theft by omitting checks 1590 ($263), 1680 ($1,218), and 1724 ($486). The total amount of these checks is $1,967. Added to the $300 error made in adding the outstanding checks on Gloria Harris bank reconciliation, the total cash shortage is $2,267. Since Gloria Harris handled all cash records, it was relatively easy for her to conceal her theft. Julius should separate the jobs of receiving cash, making disbursements, maintaining accounting records, and preparing bank reconciliations. If the company is not large enough to permit different people to handle these jobs, then Julius should oversee the cash/accounting functions more closely, including reconciliation of the bank account. If Julius does not have the time to do this, he could hire an independent accountant to review the cash/accounting records on a monthly basis and then report any discrepancies to him. 312 Chapter 9 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

61 pri30597_sm_ch09.qxd 8/2/08 11:16 AM Page 313 Business Connections Managerial Focus: 1. a. No assurance money taken actually accounted for. b. A gap in the control of cash exists, and unauthorized expenditures can be made. c. Increases the opportunity for theft; no current cash position is known. d. Increases risk of theft. e. Weakens internal control over cash receipts. 2. Payment of bills in timely fashion, anticipation of fund shortages or overages, take advantage of investment opportunities. 3. Loss of control and check-and-balance system. 4. a. Yes. Blank endorsements are not secure. b. Yes. Checkbook should be kept in a locked drawer and should be available only to specified employees. c. Yes. To deter fraud, different tasks should be assigned to different employees. d. Yes. Reconciliation should be done soon after receiving bank statement. e. Yes. Financial records should be maintained for a reasonable number of years in case of a tax audit or if records are destroyed. f. No. The task would be impractical for a large firm. 5. Essential assets should be safeguarded against loss and theft. 6. Up-to-date cash position; information for day-to-day business decisions. 7. Insures again losses. 8. Control of cash; audit trail. Ethical Dilemma: Daniel should be sure to pay this $30 to petty cash immediately. He can then record cash short/over the next month. Daniel should be sure to never borrow money from petty cash, as it is not his money. Streetwise: 1. January 28, 2007 $600 million; January 29, 2006 $793 million; decreased by 24.3%. 2. 1,330,000,000 transactions. The average sale was $ Financial Statement Analysis: % 2. Increased by $1,228 million. 3. The balance reported for Cash and cash equivalents would be understated by $125,000. Extending the Thought: Answers will vary. Students may suggest the following checks and balances for stronger internal control over Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 9 313