Chapter Seven

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Chapter Seven

• Bank Accounts and Cash Funds

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Performance Objectives

1. Describe the procedure for depositing checks
2. Reconcile a bank statement
3. Record the required journal entries directly from
   the bank reconciliation
4. Record journal entries to establish and reimburse
   a Petty Cash Fund

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Performance Objectives

1. Complete petty cash vouchers and petty cash
   payments records
2. Record the journal entries to establish a Change
   Fund
3. Record journal entries for transactions involving
   Cash Short and Over

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Cash Is King

• Why is the saying cash is king true?
• Because without cash, a business will go bankrupt
  (out of business)
• Therefore, accountants must accurately and
  efficiently account for cash
• Cash Is King, yes, buthow about
• Cash Is Queen!

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Cash

• Currency
• Coins
• Checks (until proven not to be good)
• Money orders
• Travelers checks
• Bank drafts
• Bank cashiers checks

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Rules for Cash

• All cash received during a day should be
  deposited at the end of the day
• So it wont get stolen
• So you can earn interest
• All cash paid (disbursements), should be paid by
  check
• Check is best record of transaction

• Business must have internal controls over cash
  that separate duties
• Receipts of cash
• Disbursements of cash
• Custody, recording, and authorization must always
  be separated

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Internal Controls
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Checking Accounts

• Deposit money with bank
• Recorded as an asset for depositor
• Recorded as a liability for bank
• Withdraw money by check, ATM machine, wire
  transfer, on-line transfer, or bill pay

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Signature Card
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Signature Card

• The form a depositor signs to give the bank a
  copy of the official signatures of any persons
  authorized to sign checks
• Used to verify depositors signatures on checks

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Check

• Drawers printed address
• Check number
• Date
• ABA transit number
• Pay to the order of
• Payees name
• Amount line
• Write close to dollar sign

• Amount in words
• Use and between dollars and fraction of dollars
• Use entire line ----------
• Words supersede numerals for amount
• Banks address
• Signature line
• Should match signature on signature card

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Check
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ABA Number
68-420 1210

• The number assigned by the American Bankers
  Association to a given bank
• The first part of the numerator denotes the city
  or state in which the bank is located
• The second part denotes the bank on which the
  check is drawn
• The denominator indicates the Federal Reserve
  District in which the check is cleared and the
  routing number used by the Federal Reserve Bank

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MICR

• Magnetic ink character recognition
• The characters the bank uses to print the number
  of the depositors account and the banks number
  at the bottom of checks and deposit slips
• The bank also prints the amount of the check in
  MICR when the check is deposited
• A number written in these characters can be read
  by electronic equipment used by banks in clearing
  check

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Writing Checks

• Who is the drawer?
• Person who writes check
• Who is the payee?
• Person to whom the payment is made
• What is a check?
• Order by drawer for bank to make payment to payee
• Check stub or check carbon copy
• Basis for journal entry

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Performance Objective 1

• Describe the procedure for depositing checks

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Depositing Checks

• Deposit Slips
• Printed forms provided by a bank on which
  customers can list all items being deposited
• Also known as deposit tickets
• List currency, coin, and checks
• List checks by ABA transit number
• Fraction located in upper right corner of check

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Deposit Slips
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Endorsing Checks

• Endorsements
• Must be made by signing or stamping on back left
  end of check
• Transfer legal title (allows bank to collect for
  depositor)
• Authorize the payment of the check

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Types of Endorsements

• Restrictive endorsement
• Restricts or limits further transfer of title
• Example for deposit only
• Blank endorsement
• Signature of payee only does not restrict
  further transfer
• Qualified endorsement
• Pay to the order of
• Without recourse
• Frees endorser (original payee) from future
  liability if drawer does not honor the check

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Endorsements
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What Is It?

• Q Check that has not been filled out?
• A Paper
• Q Signed check made out to you?
• A Asset
• Q Canceled check that has been returned to you?
• A Record of business transaction
• A Proof that you paid someone

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Bank Statement

• A periodic statement that a bank sends to the
  drawer/depositor of a checking account listing
  deposits received and checks paid by the bank,
  debit and credit memos, and beginning and ending
  balances

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Bank Statement Shows

• Beginning balance
• Additions to your account
• Deposits
• Credit memos (from banks point of view)
• Deductions from your account
• Written checks
• Debit memos (from banks point of view)
• Ending balance

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Debit Memo/Credit Memo

• From banks point of view
• Your account is a liability
• When they decrease the cash in your account,
  banks debit their liability
• When they increase the cash in your account,
  banks credit their liability

• Debit/credit memos may come in the mail as a
  separate document
• Debit/credit memos may appear on the monthly bank
  statement

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Banks Liability Is the Depositors Asset (page
223)
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Deductions on Bank Statements

• Canceled checks (checks written)
• Debit memos
• NSF (not sufficient funds) check
• Someone elses check bounces
• Also called dishonored check
• ATM withdrawals
• Service charges (amount depends on type of
  account)
• Monthly charge
• Printed check charge
• Money transfer charge
• PBP (pay by phone)
• OD (overdraft protection balance appears
  negative)
• EC (error correction)

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Increases on Bank Statements

• Deposited checks
• Interest earned
• Credit memos
• Bank collects from customer on your (firms)
  behalf
• EC (error correction)

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Canceled Checks

• Checks issued by the depositor that have been
  paid (cleared) by the bank and listed on the bank
  statement
• Canceled by a stamp or perforation, which
  indicates that they have been paid
• Canceled checks in the firms possession
  furnishes the best proof that an amount has been
  paid!

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Performance Objective 2

• Reconcile a bank statement

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Definitions

• Service Charge
• Fee the bank charges for handling checks,
  collections, and other items
• In the form of a debit memorandum
• NSF (Not Sufficient Funds) Checks
• Checks drawn against an account in which there
  are not sufficient funds and returned by the
  payees bank to the drawers bank because of
  nonpayment
• Also known as
• Dishonored checks
• Bounced checks

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Definitions

• Collections
• Payments collected by the bank and added to the
  customers bank account in the form of a credit
  memorandum
• Promissory Note
• A written promise to pay a definite sum at a
  definite future time

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Ledger Balance of Cash

• The balance of the Cash account in the general
  ledger before it is reconciled with the bank
  statement

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Firms Point of View(Your Point of View)

• Are the records you keep for the Cash account the
  same as the banks records?
• Before you received your bank statement, did you
  record in the journal and then post to the ledger
  accounts the following items
• Service charge?
• Interest earned?
• Bounced check?

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Bank Reconciliation

• A process by which a person determines whether
  and why there is a difference between the balance
  shown on the bank statement and the balance of
  the Cash account in the firms general ledger
• The object is to determine the adjusted (or true)
  balance of the Cash account

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The Essence of Bank Reconciliation Made Simple

• There are some things listed on the bank
  statement that are not listed in the firms
  journal and ledger
• You must find them in the bank statement and put
  them into the journal and ledger

• There are some things in the firms journal and
  ledger that are not listed on the bank statement
• You must find them and use them in reconciling
  the bank statement's balance and the firms
  ledger balance of Cash

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Items That Cause the Difference

• Items listed on bank statement, but not in ledger
• Collections (CM)
• Bank collections not recorded by you
• Interest income (CM)
• Revenue not recorded by firm yet
• NSF (DM)
• Not recorded by firm (decrease cash, increase
  A/R)
• Service charge (DM)
• Not recorded by firm
• Errors

• Items listed in ledger, but not on bank statement
• Deposits in transit
• Deposits not received by bank
• Outstanding checks
• Written checks not received by bank
• Errors

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Definitions

• Deposit in transit
• A deposit not recorded on the bank statement
  because the deposit was made between the time of
  the banks closing date for compiling items for
  its statement and the time the statement is
  received by the depositor
• Also known as a late deposit
• Outstanding checks
• Checks that have been written by the drawer and
  deducted on his or her records but have not
  reached the bank for payment and are not deducted
  from the bank balance by the time the bank issues
  its statement

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Separation of Duties

• Always Remember
• The person who does the reconciliation should not
  have access to the accounting records or custody
  of (access to) the cash
• In smaller firms, one person may do all the tasks

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Reconciliation at a Firm

• Canceled Checks
• Look at canceled checks and make sure that the
  amounts listed on statement or on lower
  right-hand corner of check are the same as in the
  ledger
• In checkbook next to check number, write bank
  statement date (makes it easy to track potential
  disputes)
• Deposits
• Compare deposits in transit from last bank
  reconciliation to deposits listed on current
  statement
• Notify bank if all past DIT are not listed
• Compare deposits listed on statement to
  accounting records checks not listed are
  considered DIT

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Reconciliation at a Firm

• Outstanding checks
• Arrange canceled checks by check number
• Compare last months outstanding check list to
  canceled checks and cleared checks
• Make sure amounts are the same on bank side and
  ledger side
• Mark correctly paid checks with a check mark (the
  ones remaining without a check mark are
  outstanding)
• Review endorsements to insure that the correct
  payee got paid
• Bank memoranda
• Trace to journal to avoid any duplicate entries
  (in case an earlier memo had been sent)

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Steps in Reconciling
Journal Entries Come from This Side
Bank side
Depositor side

• Start with
• Bank statement balance
• Add
• Deposits in transit
• Bank errors that understate balance
• Deduct
• Outstanding checks
• Bank errors that overstate balance
• Arrive at
• Adjusted bank statement balance

• Start with
• Ledger balance of Cash
• Add
• Credit memos
• Book errors that understate balance
• Deduct
• Debit memos
• Book errors that overstate balance
• Arrive at
• Adjusted ledger balance of Cash

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Back of Your Bank Statement

• Usually, the back of the statement will have
  step-by-step directions for completing a bank
  reconciliation

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L.A. Compton Company An Example
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L.A. Compton Company An Example
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Reconcile a Bank Statement

• Example of bank reconciliation

• Bank statement balance 8,966.00
• Ledger balance of Cash 8,330.50
• After verifying canceled checks
• DIT 1,303.00
• Outstanding checks
• 1916 461.00
• 2022 119.00
• 2023 827.00
• 2024 67.00
• Credit memo on bank statement note collected by
  bank from Lee Brock
• Promissory note repayment 600.00
• Interest on note 6.00
• Ck. No. 2001 mistakenly recorded in journal as
  532.00 (correct amount 523.00) for payment
  on account to Davis, Inc.
• Debit memo on bank statement
• Collection/service charge 5.50
• NSF check from D. M. Scott 125.00
• ATM withdrawal not recorded in journal 20.00

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Performance Objective 3

• Record the required journal entries directly from
  the bank reconciliation

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Journal Entries Come from the Firm's Side!
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Journal Entries Come from the Firm's Side!
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Journal Entries Come from the Firm's Side!
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Bank charges for this textbook are Misc. Expense
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Journal Entries Come from the Firm's Side!
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Journal Entries Come from the Firm's Side!
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Cash Funds (Assets)

• Separately held reserves of cash set aside for
  specific purposes
• Examples
• Petty cash
• A cash fund used to make small immediate cash
  payments
• Change fund
• A cash fund used by a firm to make change for
  customers who pay cash for goods or services

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Petty Cash Fund

• Used for small cash payments
• Buying stamps
• Newspapers
• Duplicate keys
• A maximum amount set for payment from petty cash
• Listed on the balance sheet below Cash

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Performance Objective 4

• Record journal entries to establish and reimburse
  a Petty Cash Fund

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Establish Petty Cash Fund

• Journal entry to establish Petty Cash Fund
• Once the account is created, the account is not
  increased (debited ) again unless the ceiling is
  increased by the authorized employee

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Payments from Petty Cash Fund

• Designated employee keeps the petty cash in
  locked box
• Designated employee is the only person who can
  make payments from the fund
• Receipts for purchases are returned to the
  designated employee and kept with the petty cash
  fund

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Performance Objective 5

• Complete petty cash vouchers and petty cash
  payments records

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Petty Cash Voucher

• Form stating who requested cash from the petty
  cash fund
• Signed by
• The person in charge of the fund
• The person who received the cash
• Indicates the purpose of the petty cash payment

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Petty Cash Payments Record

• Record indicating
• The amount of each petty cash voucher
• The accounts to which it should be charged
• The purpose of the expenditure

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Partial Petty Cash Payments Record(Page 235)
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Journal Entry to Reimburse a Petty Cash Fund
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Performance Objective 6

• Record the journal entries to establish a Change
  Fund

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Change Fund

• The person in charge decides
• How much money should be in account
• What denomination bills and coins are needed
• Only debited once, when first created
• Listed on the balance sheet after the Petty Cash
  Fund (if Petty Cash Fund gt Change Fund)

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Journal Entries to Establish a Change Fund
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Change Fund in Operation

• Used to make change during the day
• As sales are made and cash is received, the new
  cash (sales revenue) is added to the cash
  register
• At the end of the day (or shift), all cash in the
  register is counted the beginning amount (Change
  Fund amount) is subtracted to get the total sales
  (revenue) amount
• Total sales (revenue) amount should equal the
  printed cash register tape

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Change Fund Account An Example
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Performance Objective 7

• Record journal entries for transactions
  involving Cash Short and Over

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Cash Short and Over

• Human beings inevitably make mistakes
• The accounting system must deal with this
  situation

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Cash Short and Over

• Human beings inevitably make mistakes
• The accounting system must deal with this
  situation

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Cash Short and Over
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Cash Short and Over Account

• Revenue or expense?
• Shortages are expenses
• Debit side of Cash Short and Over
• Classified as Miscellaneous Expense
• Overages are revenue
• Credit side of Cash Short and Over
• Classified as Miscellaneous Revenue

• No plus or minus, only debits and credits
• Similar to Income Summary
• No normal balance
• Like a holding tank until the end of the fiscal
  period

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Journal Entries for Cash Short and Over
If debit balance (net shortage)
If credit balance (net overage)
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Bank DraftsVs.Bank Cashiers Checks

• Cashier's Check -- a check written by a bank or
  thrift institution on its own funds and signed by
  a cashier. It is payable to a third party named
  by the customer who pays for the check at the
  time it is written. A cashier's check, which is
  drawn against the funds of the institution
  itself, differs from a certified check, which is
  drawn against the funds in a specific depositor's
  account.

• Bank Draft -- a check written by one bank on its
  account with another bank.