7 Cash and Bank Transaction UD (%%%)

Chapter 7
Cash and Bank Transactions
Definition and importance of cash

Cash consists of coins and currency on hand and in bank accounts, cheques, bank drafts and money
orders received from customers and other sources. Cash balances are presented in the Balance Sheet as
current assets.
Cash is an important item for business entities because at some stage most transactions involve
movement of cash. This could be collections from customers, payments to creditors for purchases or
meeting of operating expenses like salaries and wages. Business entities therefore, must ensure they
have sufficient cash balances in order to meet:
a) needs of current operations,

b) maturing obligations as they fall due, and
c) any unforeseen contingencies.
However, business entities should not have excessive cash balances such that cash is idle. Idle cash
earns no return and in fact its value is eroded by inflation. Therefore adequate balances should be
maintained where there is no shortage or excess of cash. Cash budgets are prepared to project cash
flows and plan for eventual deficiencies or surpluses. There are also more complex financial modeling
techniques that are employed in determining cash balances.
Cash is the most liquid asset; it can be transferred easily and is susceptible to theft and
misappropriation. Therefore, sound cash management involves setting up of administrative and
accounting procedures to safeguard cash. These procedures are known as internal controls over cash.
Internal controls
Internal control procedures adopted for cash follow the general internal control framework that could
be applied for other assets of the business, like debtors, investments and fixed assets. Following are
the most important internal control procedures over cash:
Employment Procedures
At the time personnel are employed hiring procedures should be able to establish competency and
trustworthiness of an applicant. Seeking references and conducting historical investigations are some
of the avenues employed to verify an applicant’s record.
128 Introductory Financial Accounting
Insurance
Because employee behavior and future events cannot be guaranteed it is wise to take out fidelity
guarantee insurance cover on employees handling cash.
Use of bank accounts
The use of a bank account is a major control device over cash. Maximum benefits are obtained from
the use of a bank account if all cash collections are banked intact as received and all payments are
made by cheque. This means there will be no payments made out of daily collections.
Adequate documentation, approval and authorization procedures
Adequate supporting documents should be maintained for all cash transactions. Transactions should
be checked for completeness and approved by relevant officers before they are effected. Setting of
authorization limits is one of the general control tools.
Separation of duties
Separation of duties is achieved when no single individual has control over a complete cycle of a
transaction. The purpose of separation of duties is such that another can check each person’s work. A
cashier for example, should not be recording the Cash Receipts Journal.
Use of physical, mechanical and electronic devices
Access to sensitive locations where cash and sensitive documents ought to be restricted and
controlled. Such access control could employ physical, mechanical or electronic devices. Also certain
devices like an electronic cash register at a sales counter reinforce internal control. A cash register, for
example, will produce a receipt and automatically accumulate total collections for a day. The daily
running total can then be checked with remittances made by the cashier. This may prevent pilferage
and enhance accuracy of records.
Bank reconciliation
When all cash receipts are deposited with the bank and all payments are made by cheque the cash
book becomes a mirror image of the account maintained by the bank. For every deposit made the
business will debit the bank account in its books, whereas the banker will credit the business
(depositor’s) account. It should be possible to compare the balance of the cash book with the balance
as per the banker's books. Since the bank is an external independent entity, bank reconciliation is a
very reliable control procedure.
Use of Petty Cash Fund
It is not always practical to make all payments by cheque. A taxi driver dropping an executive at the
main gate in the morning does not expect a company cheque. For certain payments it is practical, cost
effective and convenient to pay in currency and coin. The Petty Cash Fund is a pre-determined
amount retained in the office to handle payments of such miscellaneous items.
Cash and Bank Transactions 129
Not all firms employ all internal controls all the time, as these control procedures, although desirable,
they cost money and there is a limit as to what entities can afford. The basic rule is that generally,
controls should be adopted as long as the benefits derived from their use justify the costs.
Impact of Electronic Technology on Internal Control
Advances in electronic technology allow keyless access to restricted locations using electronic codes
or electronic readable identity cards. It is now even possible to install facial recognition facilities to
restrict access to certain locations in office premises. Electronic surveillance of premises and offices
through covert and overt cameras is a common aid in observing activities of employees, customers
and other individuals in office premises.
Finally on a routine operational scale computers using integrated accounting packages can undertake
most of the processing of accounting information. Computing technology has its advantages and
disadvantages in the area of control. On one hand, computers are reliable, accurate and consistent.
On the other hand certain control procedures like separation of duties are difficult to institute in a
computer environment. Computer fraud results from breakdown of such control. New developments
are successfully containing incidences of fraud by instituting input, processing and output controls.
Operating a bank account

A bank account is an arrangement with a bank where on the basis of funds deposited the depositor is
permitted to withdraw money and authorize payments. An account retains a unique number
identifying it, known as the account number. An entity can therefore, operate more than one bank
account at one or more branches of a bank. There are many types of accounts, but the current and
savings account are the most basic types. The current account allows the account holder to issue an
order to the bank by using cheque leaves to authorize payments.
Cheques
A cheque is a written order signed by the depositor ordering the bank to pay a sum of money to a
designated person. The writer of the cheque is known as a drawer. The person to whom payment is
made is known as a payee. Cheques are normally printed by banks and issued to account holders. It is
not unusual however for some account holders to have customized cheque books. Cheques are always
pre-numbered sequentially to facilitate internal control by the account holder and the banker. A
sample cheque leaf is shown on Fig. 7.1.
Paying-In Slip
When an account holder deposits cash with a bank she has to record details of cash and cheques
deposited on a printed form supplied by the bank. This form is known as a paying-in slip. It is
prepared and filled by the depositor in duplicate. A copy is stamped and initialed by the bank teller
(cashier) and given back to the depositor as a receipt. A sample pay-in slip is as shown on Fig. 7.1.
Bank Debit and Credit Notes
Banks will occasionally decrease or increase a depositor's account before the depositor is made aware
of that action. Usually banks will charge a service fee for maintaining a bank account by deducting
bank charges from a depositor's account balance at a certain date, normally the end of a month. The
bank then sends a debit note to notify the depositor of the deduction.
Similarly a bank may collect amounts from third parties on behalf of the depositor. On receipt of these
amounts the bank will increase a depositor's account balance. Afterwards, the bank sends a credit note
to inform the depositor of the increase.
Bank Statement
At the end of each month or less, a bank will usually prepare, in a statement format, all entries made
in a depositor's account in chronological order. This document known as a Bank Statement is sent to
the depositor, as desired. A bank statement usually contains the following information:-
a) An opening balance at the beginning of the month. A good balance in a depositor's account is
shown as a credit balance. This is because the bank is keeping the depositor’s money, which
may be taken out on demand. Therefore, a depositor is a creditor in the banker's books.
b) All cheques paid during the month as debits to the depositor's account.
c) All deposits made during the month as credits to the depositor's account.
d) Any other debits, which include items like bank charges, ledger fees and reversal entries for
dishonored cheques.
e) Any other credits which include bank interest income, credit transfers and other items. Credit
transfer is a facility where a bank receives money directly on behalf of an account holder. A
debtor for example could pay the amount owing directly to a supplier's bank account.
f) Closing balance at the end of the month.
If the bank has effected all transactions during one month appearing in an entity’s Cash Book in the
same month, the closing balance of the bank statement must be the same as the closing balance of the
Cash Book. However, this rarely happens because there will normally be differences between
transactions effected by the bank and those appearing in an entity's Cash Book. The purpose of bank
reconciliation is to reconcile the two balances to full agreement.
Bank reconciliation
Bank reconciliation is the process of comparing and bringing into agreement the closing balance
shown in the cash book and the closing balance as reported on the bank statement. Bank reconciliation
is an important part of internal control because through comparison between a depositor's transactions
and bank's transactions errors and irregularities can be found and corrected. Sound internal control
requires a bank reconciliation to be undertaken by an employee who is not a custodian of cash or
records cash transactions.
There are four main reasons for the disagreement between the Cash Book and Bank Statement
balances. These are as follows:
Time lag differences
A bank will record deposits, cheques drawn and other items on the date they are received at the bank,
which may be different from the date when they were recorded in the depositor's accounting records.
For example, Ado wrote a cheque to Biye on 20th November and Biye presented the cheque to the
bank for payment on 5th December. Biye's cash book will show a payment on 20th November but the
bank will record that payment on 5th December. At the end of November that outstanding cheque
will result in a difference between closing balance of the bank and that of Ado's cash book. Time lag
differences occur with deposits as well.
Other debits and credits in bank books
The bank would have made certain entries but without being communicated to the depositor until the
date the bank statement is issued. Examples are bank charges, dishonored cheque entries, credit
transfers, etc.
Errors in depositor's books
In the course of recording cash transactions in the Cash Book errors may be committed. These will be
reflected in a difference between the bank statement and cash book closing balances. Usually these
errors will be corrected before a reconciliation statement is prepared.
Errors in bank records
Sometimes banks make errors in recording transactions in a depositor's account. The depositor cannot
correct such errors but should notify the bank of the errors and include the errors in a reconciliation
statement as reconciling items.
The process of preparing bank reconciliation
The following boxes summarise six steps that are usually taken in preparing bank reconciliation.
Steps in Bank Reconciliation

Step One
Compare deposits as shown in the Bank Statement with deposits according to the Cash
Book. Tick off items recorded in both records and establish if there are any deposits in
transit for the current month. Normally, deposits in transit at the end of the previous
month will show up in the bank statement on the first few days of the current month.
Tick off these ones as well, because although they caused a difference in the previous
month, they cease to have an effect by their appearing on the Bank Statement.
Step Two
Compare cheques paid as per the Bank Statement with cheques written during the month
and recorded in the Cash Book. Find out if there are outstanding cheques. These are
cheques issued which the payees have not yet presented to the bank. Verify that
outstanding cheques during the previous month have cleared through the bank during the
current month, otherwise they remain outstanding cheques. Reference to cheque numbers
will guide as to which ones remain outstanding.
Step Three
Find if there are any credits on the Bank Statement not recorded in depositor's Cash
Book. Enumerate these. For example, credit transfers, bank interest income, etc.
Step Four
Find if there are any debits on the bank statement not in depositor's books. Enumerate
these as well.
Step Five
Record all items appearing on the Bank Statement which ought to be recorded in the
depositor's Cash Book. All items except those resulting from time difference and errors
by bankers must be adjusted in the books of the depositor before a bank reconciliation
statement is prepared. This step will result in a Cash Book with an adjusted balance.
Step Six
Prepare a Bank Reconciliation Statement. A bank reconciliation statement contrasts the

Cash Book balance with the balance as per Bank Statement
Items which explain the difference between the Cash Book balance and the Bank Statement balance
are known as reconciling items. If all adjustable items have been recorded in the depositor’s books,
the only reconciling items will be those resulting from time difference and errors by bankers.
It is not unusual however, for examiners to require the preparation of a bank reconciliation statement
before adjustments have been made in the Cash Book. In such circumstances, all items including
adjustable items become reconciling items.
A bank reconciliation statement must have a title with the following components:
 the name of the business,

 the title of the statement, in this case “Bank Reconciliation Statement”, and
 the period covered by the statement, such as “for the month ending 31st July, 20X1”.
The format of a bank reconciliation statement is as follows:
Bank Reconciliation Statement

for the month ending 31st May 20X2
Amount
Shs Shs
Balance as per Adjusted Cash Book 400,000
add: Cheques drawn not presented
Masoli, A 75,000
Masele,B 125,000
200,000
less: Deposits in transit 300,000
Balance as per Bank Statement 300,000
Example:
Kibibi Bamkuu, who runs a food stall at Ferry – Magogoni - renown for her pilau has provided the
following information. On advice by the Small Business Section of CRDB she opened a bank
account towards the end of April.
Summaries of her records show the following:
Date Details Amount

1-May Balance as per Cash Book 10,000
Deposits
2-May Deposit 31,800
30-May Deposit 260
Payments
3-May Cheque no. 50 12,610
21-May Cheque no. 55 190
The following bank statement has been received from CRDB for the month of May:
Bank Statement
Account No. JX 69325
Kibibi Bamkuu Azikiwe Branch
Date Details Debits Credits Balance
1-May Balance 15,000
2-May Deposit 31,800 46,800
2-May Deposit 4,000 50,800
4-May Cheque no. 50 12,610 38,190
5-May Cheque no. 49 9,000 29,190
5-May Cheque no. 51 27,920 1,270
5-May Deposit 26,500 27,770
16-May Deposit 65,130 92,900
21-May Cheque no. 52 19,000 73,900
21-May Cheque no. 53 59,450 14,450
12-May Deposit 38,780 53,230
22-May Cheque no. 55 190 53,040
22-May Deposit 3,640 56,680
25-May Direct Credit - Business Loan 40,000 96,680
29-May Bank charges 200 96,480
Note: All entries in the bank statement are correct and there are no errors.
In order to prepare a bank reconciliation statement the following must be done:
a) Calculate the Cash Book balance before adjustments, that is, before taking account of the
effect of entries found in the bank statement. This is found by adding all deposits during the
month to the opening balance and then deducting all cheque payments made during the
month, thus 10,000 + 166,110 - 214,070 = -37,960. On initial examination this is an
overdrawn balance.
b) Compare deposits as per Kibibi's books with those of the bank statement. The following
deposit is found to be in transit:
Deposit of 30 May shs. 260.
c) Compare cheque payments made by Kibibi during the month with those presented at the
bank. The following cheques appear to be outstanding;
Cheque no. 54 of 19th May shs. 75,410.

Cheque no. 56 of 29th May shs. 19,490.
d) Examine the debit column of the bank statement for items which have not been ticked such as
the following:
Cheque no. 49 shs. 9,000.

Bank charges shs. 200.
But notice that cheque No. 49 was written in April; therefore it must have been outstanding
since April 30. As such it simply needs to be ticked off now that it has been presented and
ceased to be a reconciling item.
e) Examine the credit column of the bank statement for items which have not been dealt with,
such as the following:
2nd May, Deposit shs. 4,000.

25th May Business Loan – direct credit shs. 40,000.
The deposit on 2 May must have been in transit since the end of April. Now that it has been
entered in the bank statement, it is simply acknowledged and ticked off.
f) Now that comparison of the two records is complete, items that need adjustment in the Cash
Book can be identified and recorded in the Cash Book. These are:
i) Bank charges, shs. 200.

ii) Business Loan, shs. 40,000.
Journal entries to record these would be as follows:
Date Description Folio Debit Credit

20X2
May 29 Bank charges 200
Cash at Bank 200
To record bank charges for May
Cash at Bank 40,000
Business Loan 40,000
To record a business loan advanced
directly through the bank account
After the journal entries are posted an adjusted cash book balance can be established as follows:
Cash at Bank Account

20X2 20X2
May29 Business Loan 40,000 May30 Balance b/f 37,960
Bank charges 200
Balance c/f 1,840
40,000 40,000
A bank reconciliation statement is prepared as follows:
Kibibi Bamkuu
Amount
shs shs
Adjusted Balance as per Cash Book 1,840
Add: Cheques drawn not presented
Cheque no. 54 75,410
Cheque no. 56 19,490
94,900
less: Deposits in transit 260
It is tempting to memorize the format of a bank reconciliation statement. However, it is more

beneficial to understand the guiding criteria in treatments of the reconciling items in the reconciliation
statement. Depending on which balance one begins with, all reconciling items which make the
balance at the top of the statement (e.g. Cash Book balance) look smaller when compared to the
balance at the bottom (e.g. Bank Statement balance) are added to the balance at the top. This explains
why outstanding cheques are added back to the Cash Book balance.
On the other hand, all reconciling items, which make the balance at the top of the statement (e.g. Cash
Book balance) look larger when compared to the balance at the bottom (e.g. Bank Statement balance),
are deducted from the balance at the top. This explains why deposits in transit are deducted from the
Cash Book balance.
Bank Overdraft Situations
In a bank overdraft situation where the cash book shows a credit balance a bank reconciliation format
is the complete opposite of the illustrated format. All items which are usually added to a good balance
would now be deducted and all items, which are usually deducted, would now be added to an
overdraft balance. Such a statement would look as follows:

Amount
Shs shs
Overdraft per Adjusted Cash Book 400,000
Add: Deposits in transit 300,000
Less: Cheques drawn not presented
Masoli, A 75,000
Masele,B 125,000
200,000
The reconciling items have been dealt with, consistent with the guiding criteria. Outstanding cheques
make an overdraft balance look larger so they are deducted as reconciling items, when the balance at
the top is the Cash Book balance. Similarly, deposits in transit make an overdraft balance look smaller
so they are added as reconciling items, when the balance at the top is the Cash Book balance.
If one does not want to reverse the bank reconciliation statement format, all that needs to be done is to
record the overdraft as a negative amount and continue with the bank reconciliation as if it were a
good balance. In the Balance Sheet an overdraft is shown as current liability and should not be netted
off against good balances.
Dishonored and stale cheques
When a cheque is received from a debtor it is debited in the Cash Book and sent to the bank. The
bank will credit the depositor's account with the amount of the cheque. The cheque clearing system
takes normally a minimum of three days. The drawer’s banker for a number of reasons may not honor
a cheque. Some of the reasons for a cheque to be dishonored are:
a) Errors on the cheque itself in date, name of payee, signature differences and amount variance
between figures and words, etc.
b) Lack of sufficient funds in the account of the drawer. In Tanzania it is unlawful to write a
cheque which is not supported by funds in the bank.
c) Stale cheques are also automatically dishonored. A cheque goes stale after six months have
elapsed from the date indicated on the cheque.
When a cheque is dishonored, the depositor's balance is decreased by the amount of that cheque. The
banker debits the depositor’s account to effect the decrease which cancels the earlier credit made when
that cheque was deposited.
Example
On 1 November Dudu & Co received a cheque of shs. 100,000 from Bum Enterprises on account of a
two year old debt. It was banked on the same day. On the fourth day after the banking, a debit note
was received attached to the cheque marked "Refer to Drawer - Insufficient Funds".
The following general journal entries would be made in the books of Dudu & Co.

20X2
Nov 1 Cash at Bank 100,000
Debtors – Bum Enterprises 100,000
To record receipt of cheque in
settlement of a debt.
Nov 5 Debtors – Bum Enterprises 100,000
Cash at Bank 100,000
To record a cheque from Bum
Enterprises dishonored.
Note that the 5th November entry is a reverse of the 1st November entry.
Cash at Bank and Bum Enterprises accounts will look as follows in the ledgers:
Bum Enterprises Account

20X2 20X2
Jan 1 Balance b/f 100,000 Nov 1 Cash at Bank 100,000
Nov 5 Cash at Bank 100,000 Balance c/f 100,000
200,000 200,000
Cash at Bank Account

20X2 20X2
Nov 1 Bum Enterprises 100,000 Nov 5 Bum Enterprises 100,000
Petty Cash Fund

Payments of relatively small sums by cheque may be cumbersome resulting in delay and
inconvenience. For such transactions a petty cash fund system is a cost effective and flexible approach
of making payments.
Based on experience of past payments and future expense projections, management decides on an
amount that shall be a petty cash fund. The significance of this step is that the petty cash at any one
time should not exceed the set amount, also known as a ceiling. Special management consent would
be required for increase of the fund.
Management will also select an employee who will be a custodian of the fund. The custodian
maintains record of every payment made to enable categorization and summarization of the payments.
Petty cash payments are made on the basis of a petty cash voucher that normally is approved by a
designated officer before a payment is made.
A Petty Cash Voucher contains the following details:

 date of the transaction,

 a serial number,
 name of person paid
 amount paid in number and words,
 expense category,
 approval signature, and
 acknowledgement of receipt by payee, usually by signature.
Accounting entries for petty cash transactions
There are four events that require attention for recording purposes in maintaining a petty cash fund.
These are:
i) The establishment of the petty cash fund,

ii) Payments through the petty cash fund,
iii) Replenishment of the fund, and
iv) Recording of expenses in the general ledger.
Establishing the petty cash fund
On the date a fund is established a cheque is drawn in order to take out money from the bank for the
petty cash fund. This entry will normally be recorded in the Cash Payments Journal or the Cash Book.
If a general journal were used the entry would be as follows:

20X2
Jan 1 Petty Cash 100,000
Cash at Bank 100,000
To record establishment of a petty
cash fund.
Making payments through the petty cash fund
When payments are made the petty cash voucher is filled with details and any supporting documents
like taxi receipts, etc. if available. Petty cash vouchers are accumulated and categorized by major
expense groups. Depending on complexity of an organization’s accounting system the accumulation
and categorization could be a few envelopes each containing petty cash vouchers of an expense group.
Alternatively this process may involve maintaining a Petty Cash Book which then becomes a book of
original entry similar to a Cash Book. The Petty Cash Book however, records only miscellaneous
payments and has only one source of receipts - the main cash book. A petty cash book format is as
shown on Table 7.1.
Table 7.1: Petty Cash Book Format

Receipts Fol. Date Details Voucher Total Transport Postage Overtime General
No.
Similar to a Cash Book, a petty cash book has the receipts and payments sides. It also has columns for
categorization of expense groups. This format is what makes what is known as the columnar petty
cash book.
Replenishment and posting of the petty cash book
When payments are made out of petty cash, the fund gets exhausted and periodically it needs
replenishment. Since the fund has a maximum limit, the amount of replenishment will always be
equal to the total of amounts paid up to the date of replenishment. A cheque will be drawn for this
amount. On the replenishment date, all expense categories are summed and totals are posted to
relevant expense accounts in the general ledger.
The entry to record replenishment of the petty cash fund is, in principle, similar to the entry made to
establish the fund, except that the amounts are different. In general journal form the entry would be as
follows:

20X2
Jan 7 Petty Cash 90,000
Cash at Bank 90,000
To record replenishment of the petty
cash fund.
Posting of the petty cash book
Totals of the different expense groups are posted as debit entries to the expense accounts in the general
ledger. The credit entry was completed when recording in the petty cash book. If the recording of
expenses were to be recorded in a general journal form, it would be as follows:

20X2
Jan 7 Expenses[various accounts] 90,000
Petty Cash 90,000
To record expenses paid by petty
cash in the ledger.
Taking together the general journal entries for replenishment and recording of expenses we notice
Petty Cash was debited and credited with the same amount. This has often been a basis for
compounding the two entries into one.
Example:
The following are transactions undertaken by Mama Mora, custodian of the petty cash fund of
Biashara Institute.
1992
Nov 1 Received shs. 30,000 to set up the petty cash fund.
2 Paid for Dean's entertainment expenses shs. 3,500.
3 Photocopy charges shs. 300.
5 Postage stamps shs. 1,000.
7 Overtime paid to messenger shs. 2,000.
9 Office tea shs. 3,600.
13 Photocopy charges shs. 600.
15 Taxi fares refunded to the Dean shs. 15,000.
21 Overtime paid to messenger shs. 2,000.
25 Postage stamps shs. 1,200.
30 Received replenishment for the amount spent during the month.
The above transactions would be recorded in a columnar petty cash book as follows:
Columnar Petty Cash Book 01

Receipts Fol. Date Details Voucher Total Transport Postage Overtime General
No.
30,000C Nov1 Cash

B01 at
Bank
2 Entert 01 3,500 3,500

ainme
nt
3 Photo 02 300 300

copy
5 Postag 03 1,000 1,000

e
stamp
s
7 Overti 04 2,000 2,000

me
9 Office 05 3,600 3,600

tea
13 Photo 06 600 600

copy
15 Taxi 07 15,000 15,000

fare
21 Overti 08 2,000 2,000

me
25 Postag 09 1,200 1,200

e
stamp
s
29,200 15,000 2,200 4,000 8,000
29,200C 30 Cash GL42 GL43 GL44 GL45

B02 at
Bank
30 Balan 30,000
ce c/f
59,200 59,200
30,000 Dec1 Balance b/f
Posting to the general ledger
General ledger accounts would be as follows:
Cash at Bank Account no. 01

Date Details Fol. Debit Date Details Fol. Credit
20X2 20X2
Balance c/f 400,000 Nov1 Petty Cash PC01 30,000
30 Petty Cash PC01 29,200

Transport Expense Account no. 42

20X2
Nov30 Petty Cash PC01 15,000
Postage Expense Account no. 43

20X2
Overtime expense Account no. 44

20X2
Nov30 Petty Cash PCJ01 4,000
Office expense Account no. 45

20X2

Appendix I: Reconciliation of Opening and Closing Cash balances

It is possible to prove that items appearing on the bank statement on the first few days of a new month
are reconciling items from the preceding month. This is done by preparing a bank reconciliation of
opening balances.
In the example of Kibibi Bamkuu on page ??, cheque no. 49 shs. 9,000 was observed to be
outstanding from April. Deposit in transit shs. 4,000 which appeared in the Bank Statement on 2 May
was also observed to be a reconciling item from April.
The reconciliation statement of opening balances will be as follows:
Kibibi Bamkuu
Opening Balance Bank Reconciliation Statement
1st May 20X2
Amount
shs shs
Adjusted Balance as per Cash Book 10,000
Add: Cheques drawn not presented
Cheque no. 49 9,000
less: Deposits in transit 4,000
Review questions
1. Define cash and indicate items you would include under cash.
2. Why is cash given so much attention in the design of internal control systems?
3. List the essential internal controls over cash.
4. Why should a person maintaining the cash book not prepare the bank reconciliation?
5. Under what circumstances would additional internal control measures become undesirable?
6. Why does a bank credit a depositor's account when a deposit is made?
7. State four reasons for differences between the Cash Book and Bank Statement closing
balances.
8. When a bank reduces an account holder's balance for bank charges, it sends the account
holder a debit note. Why is the note called a debit note when the Cash Book is always
credited for such an item?
9. What is the purpose of preparing a bank reconciliation statement?
10. If the balance as per bank statement agrees with the balance as per Cash Book when the
statement is received, do you think bank reconciliation will be necessary? Explain your
position.
11. At the time when bank reconciliation is prepared, there are usually more outstanding cheques
than there are deposits in transit. Why?
12. What is the purpose of petty cash? How is it related to a Cash Book?
13. Why is it necessary for management to set up a ceiling for a petty cash fund?
14. What account or accounts are debited and credited when:

a) Establishing a petty cash fund?
b) Replenishing a petty cash fund?
Exercises
1. For each of the following items indicate the required adjustment to correct the cash at bank
account by writing the word "increase" or "decrease" followed by the amount by which the
cash balance should be increased or decreased. If no adjustment is required, write the words
"no entry".
a) A shs. 45,000 deposit was recorded in the books as shs. 54,000.
b) A shs. 60,000 deposit made on the last day of the month does not appear on the Bank
Statement.
c) A shs. 450 bank charges appears on the bank statement but has not been recorded in
the books.
d) A customer's cheque for shs. 8,500 that had been deposited was returned by the bank
marked "Refer to Drawer - Insufficient Funds".
e) Cheque No. 2037 of shs. 4,600 was not among cheques presented to the bank.
2. Mambula Furniture Mart has manufacturing facilities in several towns and has cash on hand
on several locations, as well as several bank accounts. The general ledger at the end of 20X2
showed the following accounts:
Headquarters: Petty Cash shs. 50,000

NBC City Branch shs. 570,000
Cash on Hand shs. 10,000
Tanga Office: Petty Cash shs. 10,000
NBC Ngamiani shs. 400,000
Mwanza Office: Petty Cash shs. 60,000
CRDB- Mwanza shs. 2,000,000
NBC Fixed deposit shs. 1,000,000
Arusha Office: Petty Cash shs. 40,000
NBC Bank Overdraft shs. 2,000,000
Required:
How would cash balances of Mambula Furniture Mart be reported in the Balance Sheet at the
end of 20X2?
3. Make general journal entries to record the following events:
May 1 Established a shs. 15,000 petty cash fund.

30 Replenished the petty cash fund for May payments as follows:
Travel expenses shs. 4,900.
Postage expenses shs. 1,800.
Entertainment expenses shs. 2,700.
4. The following information relates to Kiazi Adventures' bank reconciliation at May 30:
a) Deposits in transit at May 30 shs. 28,000.

b) There was an unrecorded bank charge of shs. 150.
c) Outstanding cheques shs. 37,000.
d) Shs. 96,000 cash sale was wrongly recorded as shs. 69,000.
e) Shs. 49,000 payment to a supplier of canned goods was recorded in error as shs.
94,000.
Required:
Make adjusting journal entries to correct the company's Cash Book.
5. Use the following information to calculate the correct balance in the cash at bank account:
a) Cash at bank July 31, before adjustments, shs. 118,400.

b) Deposits in transit, shs. 12,000.
c) Outstanding cheque, shs. 8,500.
d) Unrecorded bank charges, shs. 110.
e) Cheque No. 110 recorded as shs. 8,900 instead of shs. 9,800.
f) Credit transfer made by a customer of the company, shs. 50,000 not yet recorded in
the depositor’s books.
6. Babujinga & Co. is a young business that has grown rapidly. The company's bookkeeper,
who was hired two years ago left town suddenly after the owner discovered that money had
been disappearing over the past eighteen months. An audit disclosed that the bookkeeper had
routinely written and signed cheques made payable to his cousin, and then recorded the
cheques as salaries expense. The cousin, who cashed the cheques but had never worked for
the company, left town with the bookkeeper. As a result, the business incurred a loss of shs.
3,600,000. On reporting to the police, it was revealed to the owner that the bookkeeper was
wanted by the police for a similar offence with a previous employer.
Required:
Evaluate Babujinga & Co.'s internal controls over cash, indicating the principal controls
which you think have been ignored and make recommendations for improvement.
Problems
1. During an interim audit at 31st December 1989, you are instructed by your principal to
reconcile the bank balance shown in the books of accounts with the balance shown in the
bank statement. From the particulars, prepare a reconciliation statement.
- Balance per bank statement as at 31st December 1989 shs. 85,110 dr

- Cheques drawn as on 31st December 1989 but not cleared until January 1990:
Cheque no. C001 shs. 20,000

- Bank overdraft interest at 20th December 1989 not entered in the Cash Book is shs.
1,257.
- Sum received on 30th December 1989 but not lodged in the bank till 3rd January
1990 shs. 165,980.
- A bank debit for shs. 50 being cost of cheque book in November 1989 was entered in
the Cash Book twice in error.
- A bill receivable due on 29th December 1989 was passed to the bank for collection
on 28th December 1989, and was entered in the Cash Book forthwith, whereas the
proceeds of shs. 25,000 were not credited to the bank statement till 1st January 1990.
- Bill stamps amounting to shs. 31 had been debited in the bank statement, but no
entries were made in the Cash Book.
- Dar es Salaam Chamber of Commerce subscription of shs. 5,000 paid by banker's

order on 1st Dec. 1989 had not been entered in the cash book.
Note: Assume that you do not alter the Cash Book balance at 31st December, 1989; all entries
being made in January 1990.
(NABOCE, May 1991)
2. A Trading, Profit and Loss Account of Malimali & Company for the year ended 31 May
20X1, showed a net profit of shs. 246,800. The balance at the bank at 31 May 20X1,
according to the cash book was shs. 32,200.
You are informed that:-
a) Cheques from customers, amounting to shs. 24,900 which were entered in the Cash
Book on 31 May were not credited by the bank until after June, 20X1.
b) Cheques written by Malimali & Co. on 28 May, in favor of creditors amounting to a

total of shs. 37,100 were not paid by the bank until after May 31.
c) On 15 May Ngosha, a customer had paid shs. 11,700 into Malimali's bank account in
full settlement of a debit balance of shs. 12,000 in Malimali's Debtors ledger. No
entry had been made in Malimali & Co. books of this payment.
d) On 1 April 20X1 the bank paid, in accordance with a standing order from Malimali,
shs. 18,000 for the rent of business premises from where Malimali operates. The
payment was for the three months to 30 June 20X1. No entry for this payment had
been made in the books.
e) A cheque for shs. 4,200 from Mami, a former customer had been paid into the bank
by Mami and credited by the bank on 20 May. Mami had lost his business some
years ago and went into a serious drinking problem. Malimali had written off
whatever balance he owed to the company. Mami intends to revive his business.
f) On 30 May a cheque for shs. 2,400 was received from a customer in settlement of a
sales invoice for shs. 2,400. The cheque was paid into Malimali's bank and both the
sale of the goods and the cheque were entered in the books. On May 31 the customer
returned the goods to Malimali and instructed his bank not to pay the cheque but no
entries in respect of these matters have been made in the books. Moreover, the
returned goods which cost shs. 1,600, were not included in Malimali's closing stock.
Required:
a) Make all necessary corrections and adjustments in the cash book and show the
adjusted cash book balance as at 31 May.
b) Prepare a statement reconciling the adjusted cash book balance with the balance
shown by the bank statement.
c) Re-state Malimali's net profit for the year ending 31 May 20X1, taking account of all
items in the body of the question.
3. On examining the bank statement of Kigogo Company it is discovered that the balance shown
on December 31, 1990, the closing date of the company's financial year differs from the bank
balance shown by the cash book. On that date the cash book showed an overdraft balance of
shs. 493,500. From a detailed examination of the entries in the Cash Book it is found that:
i) Cheques drawn on 24.12.90 amounting to shs. 44,500 were cashed by the bank on
2.1.91.
ii) Cash and cheques amounting to shs. 15,500 deposited with the bank on 29.12.90
were cleared by the bank on 2.1.91.
iii) According to the standing orders, the bank has, on 30.12.90, paid shs. 9,200
as a monthly installment to THB in respect of a housing loan owed by Kigogo
Company. On the same day the bank also paid quarterly insurance premium for shs.
1,600. No entries were made in the cash book of the company in respect of these
transactions.
iv) The bank also received shs. 9,500 from the insurance company being an amount of
insurance claim recovered by Kigogo Company. A bank commission of shs. 150 on
this transaction was charged by the bank. No entry has been entered in the cash book
for these amounts. Shs. 16,000 in respect of a dishonored cheque appears in the bank
statement but not in the cash book.
Required:
a) Show the necessary corrections in the cash book of Kigogo Company.
b) Prepare a statement reconciling the cash book balance as corrected, with the balance
which should appear in the bank statement as at 31.12.90.
(ATEC- I, May 1991).
4. Listed below are nine errors or problems which might occur in the processing of cash
transactions. Also shown is a separate list of internal control procedures.
Possible Errors or Problems:
a) In serving customers who do not appear to be attentive, a sales clerk often records a
sale at less than the actual sales amount and then removes the additional cash
collected from the customer.
b) Jani who has prepared bank reconciliation for Kibibi & Co. for several years has
noticed that some cheques issued by the company are never presented for payment.
Jani therefore, has formed the habit of dropping any cheques outstanding for more
than six months from the outstanding check list and removing a corresponding
amount of cash from the cash receipts. These actions taken together have left the
ledger account for cash in agreement with the adjusted bank balance and have
enriched Jani substantially.
c) A voucher was circulated through the system twice, causing the supplier to be paid
twice for the same invoice.
d) Koba, an employee of Mabogini & Co. frequently has trouble in getting the bank
reconciliation to balance. If the book balance is more than the bank balance, she
writes a cheque payable to cash and cashes it. If the book balance is less than the
bank balance, she makes an accounting entry debiting cash and crediting cash surplus
account.
e) Without fear of detection, the cashier sometimes takes cash forwarded to him from
the registry or the sales department instead of depositing these collections in the
company's bank account.
f) All cash received from Monday through Thursday was lost in a burglary on Thursday
night.
g) The official designated to sign cheques is able to steal blank cheques and issue them
for unauthorized purposes without fear of detection.
Internal Control Procedures:
i) Periodic reconciliation of bank statements to accounting records.
ii) Adequate separation of duties
iii) Depositing each day's cash receipts intact in the bank.
iv) Use of electronic cash registers equipped with optical scanners to read magnetically
coded labels on merchandise.
v) Immediate preparation of a daily control list when cash is received, and the
comparison of this list to daily bank deposits.
vi) Cancellation of paid vouchers marking them "PAID".
vii) Requirement that a voucher be prepared as advance authorization of every payment.
viii) None of the above control procedures can effectively prevent this type of error from
occurring.
Required:
Match the letters (a through g) designating each possible error or problem with the roman
numeral indicating the internal control procedure that should prevent this type of error or
problem from occurring.
5. Wared Consultants Ltd. operates a petty cash account on the cash imprest system. The
maximum cash float allowed is shs. 12,000 and re-imbursements are done immediately after
80 percent of the cash float is expended.
During June 20X1, Monica made the following payments:-
31/5/X1 Petty cash balance shs. 3,390

1/6/X1 Re-imbursement shs. ?
1/6/X1 Ruled paper shs. 2,350
1/6/X1 Daladala fare shs. 1,030
3/6/X1 Postage stamps shs. 1,755
4/6/X1 Accountant Journal magazine shs. 670
7/6/X1 Business magazine shs. 1,200
8/6/X1 Correcting fluid shs. 1,770
10/6/X1 Ball pens shs. 1,628
11/6/X1 Typewriter ribbons shs. 669
12/6/X1 Meal allowance shs. 2,000
15/6/X1 Daily News and Uhuru newspapers shs. 2,250
15/6/X1 Parcel postage shs. 2,500
15/6/X1 Paper clips shs. 1,260
16/6/X1 Repair of typewriter shs. 3,000
17/6/X1 Loan to a friend shs. 2,020
18/6/X1 Tea bags for office shs. 654

20/6/X1 Office cleaning shs. 3,050
20/6/X1 Best worker prize shs. 5,000
23/6/X1 Cello tape shs. 1,566
23/6/X1 Hand bag for owner’s wife shs. 2,250
25/6/X1 Photocopy paper shs. 4,340
25/6/X1 Typing paper shs. 1,980
25/6/X1 Rubber band shs. 798
26/6/X1 Meal allowance shs. 2,000
27/6/X1 Daily News, Uhuru newspapers shs. 2,250
30/6/X1 Casual labour wages shs. 3,250
Required:
a) Open the firm's Petty Cash Book and record payments for the month of June 20X1.
b) Analyse the expense items individually into suitably labeled columns.
c) Post the Petty Cash Book to the general ledger.
6. The CRDB Azikiwe Branch Theft Case Problem.
Gang robs bank 1.4m dollars in Dar

Saturday, November 16, 2002.
By Ramadhani Kabale

Acting with lightning speed, an armed gang of three smartly dressed men yesterday morning robbed
1.4million US dollars (1.4bn/-) from the CRDB Azikiwe Branch in Dar es Salaam, in what can only
be described as “drama in real life.” The incident, which had all the hallmarks of a Hollywood thriller
movie, took place at about 7 a.m. According to the Dar es Salaam Regional Police Commander
(RPC), SACP Alfred Tibaigana the whole drama started when the bank’s branch staff were reporting
for duty.
The three men apparently sneaked into the bank premises unnoticed by taking advantage of the
relaxed and tranquil atmosphere through a rear door exclusively used by staff and sometimes
customers who take large sums of money. The RPC revealed that after getting into the bank, one of
the robbers ordered all staff to lie on the ground face down. At the same time, another of the robbers
took the branch manager at gunpoint ordering him to identify strong-room key-keepers and lead them
into the cash room. “At gunpoint, the manager or supervisor identified as Mhango, appealed to Boaz,
a strong-room key-keeper to stand up and lead the gangsters into the strong-room to save the lives of
other staff,” explained Tibaigana.
He added that after the CRDB officials opened the cash room, the armed robbers further ordered them
open a cash box containing 1m US dollars brought at the bank on Thursday. As if the gunmen knew
about dollars being kept in the strong room, they further collected an extra 400,000 dollars from a
shelf before taking unspecified bundles of Tanzania shillings. “According to the bank staff, the armed
men were talking in Kenyan like Kiswahili accent. However we are not sure if they are actually
Kenyans or that they just imitated the accent to conceal their identity,” noted Tibaigana. He requested
people to volunteer information about people handling an unusual amount of dollars.
When asked to give his views on whether the theft was a possible in-house job, police negligence or
failure to employ proper security measures at the bank, Tibaigana said it was not easy for police to
ensure adequate security measures at the bank because the building also housed several other offices
besides the bank. “It is not negligence on the part of the police force. The point is, as the building
houses several other offices, it is difficult to restrict the movement of people,” he said, adding that
given the situation, the robbers could have driven in and out like any other tenants of the building.
Tibaigana conceded that yesterday’s incident had demonstrated that bankers sharing buildings with
other tenants have to be careful. Otherwise the banking sector in the country might risk similar
attacks. Asked if anyone was injured during the robbery Tibaigana said no single shot was fired and
neither did anyone get injured during the 15 or so minutes drama. “The robbers carried out their
operation so swiftly that no one outside the building knew what was happening inside the bank until
they saw me and the Director of Criminal Investigations (DCI) Adadi Rajabu arriving at the bank,”
added Tibaigana.
When The Guardian visited the bank at 9.00 some people who were present during the drama
conceded that the robbers were smart. “I was here chatting with someone for quite a long time before
getting into my office when I saw a vehicle coming in and later on leaving the building only to be told
it was the robbers’ vehicle. I think if the police force has to succeed in preventing such a type of crime
they need extra training and equipment,” pointed out a middle aged man who preferred anonymity.
The CRDB Managing Director, Dr Charles Kimei has meanwhile appealed to the public to volunteer
information about anyone they suspect to be party to yesterday’s bloodless robbery. A reward of
25m/- in cash would be given to such a person. “Today’s incident has proved CRDB right on urging
CRDB customers and non-customers to make use of the recently introduced TemboCard which even
if stolen the customer’s money will be safe. The card is protected by CRDB PIN number,” explained
the MD. He assured the Bank’s customers of continued services at the branch, saying every thing is in
order and the bank would soon open for business after police complete their enquiries.
Source: http://ipp.co.tz/guardian/2002/11/16/guardian1.asp
Required:
a. Having read this news item and taking account of your knowledge of accounting, identify and
discuss aspects of internal control that you find as lacking at CRDB Azikiwe Branch at the
time of this robbery.
b. Suggest measures that will prevent future loss of money as incurred by CRDB Azikiwe
Branch.

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Chapter 7

Cash and Bank Transactions

Definition and importance of cash

a) needs of current operations,

Use of bank accounts

Adequate documentation, approval and authorization procedures

Use of physical, mechanical and electronic devices

Use of Petty Cash Fund

Impact of Electronic Technology on Internal Control

Operating a bank account

Bank Debit and Credit Notes

f) Closing balance at the end of the month.

Time lag differences

Other debits and credits in bank books

Errors in depositor's books

Errors in bank records

The process of preparing bank reconciliation

Steps in Bank Reconciliation

Prepare a Bank Reconciliation Statement. A bank reconciliation statement contrasts the

 the name of the business,

The format of a bank reconciliation statement is as follows:

Bank Reconciliation Statement

Summaries of her records show the following:

Date Details Amount

In order to prepare a bank reconciliation statement the following must be done:

Deposit of 30 May shs. 260.

Cheque no. 54 of 19th May shs. 75,410.

Cheque no. 49 shs. 9,000.

2nd May, Deposit shs. 4,000.

i) Bank charges, shs. 200.

Journal entries to record these would be as follows:

Date Description Folio Debit Credit

Cash at Bank Account

May29 Business Loan 40,000 May30 Balance b/f 37,960

Bank charges 200

Balance c/f 1,840

A bank reconciliation statement is prepared as follows:

It is tempting to memorize the format of a bank reconciliation statement. However, it is more

Bank Overdraft Situations

Bank Reconciliation Statement

Balance as per Bank Statement 500,000

Dishonored and stale cheques

Date Description Folio Debit Credit

Bum Enterprises Account

Jan 1 Balance b/f 100,000 Nov 1 Cash at Bank 100,000

Nov 5 Cash at Bank 100,000 Balance c/f 100,000

Cash at Bank Account

Nov 1 Bum Enterprises 100,000 Nov 5 Bum Enterprises 100,000

Petty Cash Fund

A Petty Cash Voucher contains the following details:

 date of the transaction,

Accounting entries for petty cash transactions

i) The establishment of the petty cash fund,

Establishing the petty cash fund

Date Description Folio Debit Credit

Making payments through the petty cash fund

Table 7.1: Petty Cash Book Format

Replenishment and posting of the petty cash book

Date Description Folio Debit Credit

Posting of the petty cash book

Date Description Folio Debit Credit

Columnar Petty Cash Book 01

30,000C Nov1 Cash