Chapter 7: Cash and Receivables

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Henry Dauderis and David Annand
Athabasca University via Lyryx Learning

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Learning Objectives

LO1 – Define internal control and explain how it is applied to cash.
LO2 – Explain and journalize petty cash transactions.
LO3 – Explain the purpose of and prepare a bank reconciliation, and record related adjustments.
LO4 – Explain, calculate, and record estimated uncollectible accounts receivable and subsequent write-offs and recoveries.
LO5 – Explain and record a short-term notes receivable as well as calculate related interest.
LO6 – Explain and calculate the acid-test ratio.
LO7 – Explain and calculate the accounts receivable turnover.

This chapter focuses on the current assets of cash and receivables. Internal control over cash involves processes and procedures that include the use of a petty cash fund and the preparation of a bank reconciliation. Receivables can be determined to be uncollectible. To match the cost of uncollectible accounts and the related revenue, uncollectible accounts, more commonly referred to as bad debts, must be estimated. Bad debts are accounted for using the allowance approach, applied using either the income statement method or balance sheet method. When uncollectible accounts are specifically identified, they are written off. Write-offs can be subsequently recovered. The journalizing of short-term notes receivable and related interest revenue is also discussed in this chapter. To help in the analysis of cash and receivables, two ratios are introduced: the acid-test and accounts receivable turnover.