7.1 Cash, Receivables, and Reconciliations

Cash, Receivables, and Reconciliations

The 2026 AICPA Financial Accounting and Reporting (FAR) Blueprint lists cash and cash equivalents and trade receivables in Area II, Select Balance Sheet Accounts, which carries a 30-40% content allocation, the heaviest single area on the section. FAR is a four-hour exam of 50 multiple-choice questions and 7 task-based simulations, and Area II is tested up to Bloom's analysis level. Expect exhibits: bank statements, cut-off items, aged receivables schedules, credit memos, lockbox activity, and subledger reports. The skill being measured is rarely a definition; it is your ability to convert raw evidence into a defensible balance.

Cash: What Is Reportable

Reportable cash includes currency on hand, demand deposits, petty cash, and qualifying cash equivalents. A cash equivalent is a short-term, highly liquid investment readily convertible to a known amount of cash with an original maturity to the holder of three months or less, so interest-rate risk is insignificant. A 90-day Treasury bill qualifies; a 6-month certificate of deposit does not.

Restricted cash (for example, a compensating balance or a bond sinking fund) is still cash but may require separate presentation or disclosure, and ASU 2016-18 requires restricted cash to be included with cash in the statement of cash flows reconciliation.

Bank Reconciliations

Start by separating timing differences from items that require book entries. Deposits in transit and outstanding checks reconcile the bank side and never hit the general ledger. Book-side items (service charges, nonsufficient-funds (NSF) checks, automatic collections, interest earned, and recording errors) require adjusting journal entries.

Worked example. Per-bank balance $48,200; deposits in transit $6,500; outstanding checks $9,100. Adjusted bank balance = $48,200 + $6,500 - $9,100 = $45,600. Per-book balance $46,030; service charge $30; NSF check $400. Adjusted book balance = $46,030 - $30 - $400 = $45,600. The two adjusted balances must agree; that agreement is the reportable cash figure.

Receivables: Gross, Allowance, and Net

Trade receivables are presented at the net amount expected to be collected. Gross accounts receivable is reduced by an allowance for credit losses and, where relevant, by allowances for sales returns or price concessions. Under ASC 326 (CECL), the allowance is a forward-looking expected-loss estimate, not an incurred-loss trigger, so even current receivables can carry an allowance.

A classic simulation gives an aging schedule and asks for the adjusting entry. Always compute the required ending allowance first, then reconcile it to the unadjusted allowance balance; the plug is bad debt expense.

• Required ending allowance $42,000; allowance has a $9,000 credit balance before adjustment -> bad debt expense = $42,000 - $9,000 = $33,000.
• Required ending allowance $42,000; allowance has a $9,000 debit balance (write-offs exceeded prior estimates) -> bad debt expense = $42,000 + $9,000 = $51,000.

Write-offs do not affect net receivables or expense: the entry debits the allowance and credits accounts receivable, leaving net unchanged because both gross and the allowance fall by the same amount.

Rollforward Logic

A receivables rollforward explains activity, not just the ending number:

1. Begin with beginning gross trade receivables.
2. Add credit sales and other billings.
3. Subtract cash collections.
4. Subtract write-offs of specific accounts.
5. Add recoveries only if the account was reinstated before collection.
6. Tie ending gross receivables to the subledger and the general ledger control account.

The allowance rollforward is separate: beginning allowance + provision - write-offs + recoveries = ending allowance. Net receivables = ending gross - ending allowance.

Transfers of Receivables

FAR tests factoring, assignment, pledging, and secured borrowings under ASC 860. Derecognition (treating the transfer as a sale) requires that the transferred receivables be isolated from the transferor, the transferee can pledge or exchange them, and the transferor surrenders effective control (no obligation or right to repurchase). If those control-surrender tests fail (for example, a recourse provision that requires repurchase of defaulted accounts), the transfer is a secured borrowing: the receivables stay on the books and the cash creates a liability.

• Pledging / assignment: receivables remain assets and serve as collateral; disclose the pledge.
• Factoring without recourse, control surrendered: sale; derecognize, record a loss/financing fee and any holdback receivable.
• Factoring with recourse retaining effective control: secured borrowing.

Exam Workflow

• Identify the source: bank statement, subledger, aging, invoice register, or transfer agreement.
• Decide whether the item affects the bank balance, the book balance, gross receivables, the allowance, or only disclosure.
• Compute the required ending balance before writing the entry.
• Reconcile the subledger total to the general ledger control account.
• Investigate unexplained differences rather than forcing them into bad debt expense.

On FAR, the cleanest answer leaves a clear audit trail from source data to ending balance to journal entry.