Chapter Seven Bank Accounts and Cash Funds Accounting is Fun! 7 - 2 Performance Objectives 1.Describe the procedure for depositing checks 2.Reconcile.

Chapter Seven

Bank Accounts and Cash Funds

Accounting is Fun! 7 - 2

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


Performance Objectives

5. Complete petty cash vouchers and petty cash payments records

6. Record the journal entries to establish a Change Fund

7. Record journal entries for transactions involving Cash Short and Over


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, but…how about:– Cash Is Queen!


Cash

• Currency

• Coins

• Checks (until proven not to be good)

• Money orders

• Traveler’s checks

• Bank drafts

• Bank cashier’s checks …


Rules for Cash

• All cash received during a day should be deposited at the end of the day– So it won’t 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


Internal Controls


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


Signature Card


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


Check

• Drawer’s printed address

• Check number• Date• ABA transit number• Pay to the order of:

– Payee’s 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

• Bank’s address• Signature line

– Should match signature on signature card


Check


ABA Number

• 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

68-420

1210


MICR

• Magnetic ink character recognition• The characters the bank uses to print the

number of the depositor’s account and the bank’s 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


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


Performance Objective 1

Describe the procedure for depositing checks


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


Deposit Slips


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


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


Endorsements


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


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


Bank Statement Shows

• Beginning balance

• Additions to your account– Deposits– Credit memos (from bank’s point of view)

• Deductions from your account– Written checks– Debit memos (from bank’s point of view)

• Ending balance


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


Bank’s Liability Is the Depositor’s Asset (page 223)


Deductions on Bank Statements

• Canceled checks (checks written)• Debit memos

– NSF (not sufficient funds) check• Someone else’s 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)


Increases on Bank Statements

• Deposited checks

• Interest earned

• Credit memos– Bank collects from customer on your

(firm’s) behalf• EC (error correction)


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 firm’s possession furnishes the best proof that an amount has been paid!



Reconcile a bank statement


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 payee’s bank to the drawer’s bank because of nonpayment

– Also known as:• Dishonored checks• Bounced checks


Definitions

• Collections– Payments collected by the bank and added

to the customer’s bank account in the form of a credit memorandum

• Promissory Note– A written promise to pay a definite sum at a

definite future time


Ledger Balance of Cash

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


Firm’s Point of View(Your Point of View)

• Are the records you keep for the Cash account the same as the bank’s 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?


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 firm’s general ledger

• The object is to determine the adjusted (or true) balance of the Cash account


The Essence of Bank Reconciliation Made Simple

• There are some things listed on the bank statement that are not listed in the firm’s 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 firm’s 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 firm’s ledger balance of Cash


Items That Cause the Difference

Items listed on bank statement, but not in ledger

1.Collections (CM)• Bank collections not

recorded by you

2.Interest income (CM)• Revenue not recorded by

firm yet

3.NSF (DM)• Not recorded by firm

(decrease cash, increase A/R)

4.Service charge (DM)• Not recorded by firm

5.Errors

Items listed in ledger, but not on bank statement

1.Deposits in transit• Deposits not received

by bank

2.Outstanding checks• Written checks not

received by bank

3.Errors


Definitions

• Deposit in transit– A deposit not recorded on the bank statement

because the deposit was made between the time of the bank’s 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


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


Reconciliation at a Firm

1. 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)

2. 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


Reconciliation at a Firm

3. Outstanding checks– Arrange canceled checks by check number– Compare last month’s 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

4. Bank memoranda– Trace to journal to avoid any duplicate entries (in case an

earlier memo had been sent)


Steps in Reconciling

• 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

Must Be EqualMust Be Equal

Journal Entries Journal Entries Come from Come from

This SideThis SideBank sideBank side Depositor sideDepositor side


Back of Your Bank Statement

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


L.A. Compton Company: An Example


L.A. Compton Company: An Example


Reconcile a Bank StatementExample of bank reconciliation: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


Bank Statement Balance $8,966.00

Adjusted Bank Statement Balance

Ledger Balance of Cash $8,330.50

Adjusted Ledger Balance of Cash

Bell VideoBank Reconciliation

October 31, 2002

Proper heading and date!


Bank Statement Balance $8,966.00Add:

Deposit in transit 1,303.00$10,269.00





October 31, 2002



Deposit in transit 1,303.00 $10,269.00

Deduct:Outstanding checksNo. 1916 $461.00No. 2022 119.00 No. 2023 827.00 No. 2024 67.00 1,474.00





October 31, 2002




Deduct:Outstanding checksNo. 1916 $461.00No. 2022 119.00No. 2023 827.00No. 2024 67.00 1,474.00

Adjusted Bank Statement Balance $8,795.00




October 31, 2002






Ledger Balance of Cash $8,330.50Add:

Note collected by bank from Lee & Brock $606.00Error amount for Ck. No. 2001 payable to Davis, Inc. 9.00 615.00

$8,945.50



October 31, 2002








$8,945.50Deduct:

Bank service/collection charge $5.50NSF check from D. M. Scott 125.00ATM withdrawal for personal use 20.00 150.50



October 31, 2002








$8,945.50Deduct:


Adjusted Ledger Balance of Cash $8,795.00


October 31, 2002

Must Must BeBe

EqualEqual



Record the required journal entries directly from the bank reconciliation








$8,945.50Deduct:




October 31, 2002

Journal Entries Come fromthe Firm's Side!


DescriptionPost.Ref. Debit Credit

2002Oct. 31 Cash 606.00

Notes Receivable 600.00Interest Income 6.00

Bank collected note signed by Lee and Brock.

General Journal Page 13

Date








$8,945.50Deduct:




October 31, 2002




2002Oct. 31 Cash 606.00



31 Cash 9.00Accounts Payable 9.00

Error in recording Ck. No. 2001 to Davis, Inc.


Date








$8,945.50Deduct:




October 31, 2002




2002Oct. 31 Cash 606.00





31 Miscellaneous Expense 5.50Cash 5.50

Bank service/collection charge.


Date

Bankchargesfor this

textbookare Misc.Expense








$8,945.50Deduct:




October 31, 2002




2002Oct. 31 Cash 606.00







31 Accounts Receivable 125.00Cash 125.00

NSF check received from D. M. Scott.


Date








$8,945.50Deduct:




October 31, 2002




2002Oct. 31 Cash 606.00







31 Accounts Receivable 125.00Cash 125.00

NSF check received from D. M. Scott.

31 Marsha C. Bell, Drawing 20.00Cash 20.00

Withdrawal for personal use.


Date


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


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



Record journal entries to establish and reimburse a Petty Cash Fund


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


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



Complete petty cash vouchers and petty cash payments records


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



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


Special columns for frequent types of expenditures are included in the Distribution of Payments section

Partial Petty Cash Payments Record(Page 235)


Journal Entry to Reimburse a Petty Cash Fund



Record the journal entries to establish a Change Fund


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 > Change Fund)


Journal Entries to Establish a Change Fund


2002Sept. 1 Change Fund 120.00

Cash 120.00Establish a Change Fund.


Date


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


Change Fund Account: An Example

Does this always equal the cash register receipts?


2002 Cash Count $537Sept. 1 Cash in Bank 417.00 - Change Fund $120

Video Rental Income 417.00 = Amount to Deposit $417Revenue earned for video rentals.

Date




Record journal entries for transactions involving Cash Short and Over


Cash Short and Over

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

this situation

Cash ShortCash Short DRDR Like an ExpenseLike an Expense



Cash Short and Over 3.00 = Amount to Deposit $487Video Rental Income 490.00

Revenue earned for the dayinvolving cash shortage of $3. Amount to Deposit $487

- Cash Register Tape $490 = Cash Short and Over ($3)

Date



Cash Short and Over

• Human beings inevitably make mistakes

• The accounting system must deal with this situation

Cash OverCash Over CRCR Like a RevenueLike a Revenue



Video Rental Income 559.00 = Amount to Deposit $560Cash Short and Over 1.00

Revenue earned during the dayinvolving cash overage of $1. Amount to Deposit $560

- Cash Register Tape $559 = Cash Short and Over $1

Date



Cash Short and Over

•At the end of each day:At the end of each day:Cash Count $1,000

- Change Fund $100 = Amount to Deposit $900

Amount to Deposit $900 - Cash Register Tape $890

= Cash Short and Over $10

Deposited in BankDeposited in Bank

Recorded as RevenueRecorded as Revenue

Difference Recorded asDifference Recorded asCash Short and OverCash Short and Over


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


Journal Entries for Cash Short and Over

If debit balance (net shortage)

If credit balance (net overage)


2002Sept. 30 Cash Short and Over 15.00

Miscellaneous Income 15.00To record month's ending Cash Shortand Over balance as Revenue.


Date


2002Sept. 30 Miscellaneous Expense 21.00

Cash Short and Over 21.00To record month's ending Cash Short and Over balance as Expense.

Date



Bank DraftsVs.

Bank Cashier’s 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.

Chapter Seven Bank Accounts and Cash Funds Accounting is Fun! 7 - 2 Performance Objectives 1.Describe the procedure for depositing checks 2.Reconcile.

Documents

cash cash

check slide

cash funds slide

check check

cash short

saying cash

petty cash fund slide

bank accounts