Chapter Seven Bank Accounts and Cash Funds

March 22, 2024

30 Less than a minute

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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 Accounting is Fun! 7-2

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 Accounting is Fun! 7-3

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! Accounting is Fun! 7-4

Cash Currency Coins Checks (until proven not to be good) Money orders Traveler’s checks Bank drafts Bank cashier’s checks Accounting is Fun! 7-5

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 Business must have “internal controls over cash” that separate duties – Receipts of cash – Disbursements of cash – Custody, recording, and authorization must always be separated – Check is best record of transaction Accounting is Fun! 7-6

Internal Controls Accounting is Fun! 7-7

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 Accounting is Fun! 7-8

Signature Card Accounting is Fun! 7-9

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 Accounting is Fun! 7 - 10

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 Accounting is Fun! 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 7 - 11

Check Accounting is Fun! 7 - 12

ABA Number 68-420 The number assigned by the American 1210 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 Accounting is Fun! 7 - 13

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 Accounting is Fun! 7 - 14

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 Accounting is Fun! 7 - 15

Performance Objective 1 Describe the procedure for depositing checks Accounting is Fun! 7 - 16

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 Accounting is Fun! 7 - 17

Deposit Slips Accounting is Fun! 7 - 18

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 Accounting is Fun! 7 - 19

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 Accounting is Fun! 7 - 20

Endorsements Accounting is Fun! 7 - 21

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 Accounting is Fun! 7 - 22

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 Accounting is Fun! 7 - 23

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 Accounting is Fun! 7 - 24

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 Accounting is Fun! Debit/credit memos may come in the mail as a separate document Debit/credit memos may appear on the monthly bank statement 7 - 25

Bank’s Liability Is the Depositor’s Asset (page 223) Accounting is Fun! 7 - 26

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) Accounting is Fun! 7 - 27

Increases on Bank Statements Deposited checks Interest earned Credit memos – Bank collects from customer on your (firm’s) behalf EC (error correction) Accounting is Fun! 7 - 28

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! Accounting is Fun! 7 - 29

Performance Objective 2 Reconcile a bank statement Accounting is Fun! 7 - 30

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 Accounting is Fun! 7 - 31

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 Accounting is Fun! 7 - 32

Ledger Balance of Cash The balance of the Cash account in the general ledger before it is reconciled with the bank statement Accounting is Fun! 7 - 33

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? Accounting is Fun! 7 - 34

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 Accounting is Fun! 7 - 35

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 Accounting is Fun! 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 7 - 36

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) 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 4.Service charge (DM) Not recorded by firm 5.Errors Accounting is Fun! 7 - 37

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 Accounting is Fun! 7 - 38

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 Accounting is Fun! 7 - 39

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 Accounting is Fun! 7 - 40

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) Accounting is Fun! 7 - 41

Steps in Reconciling Bank side Start with – Bank statement balance Add Journal Entries Come from Depositor side This Side Start with – Ledger balance of Cash Add – Deposits in transit – Bank errors that understate balance Deduct – Credit memos – Book errors that understate balance Deduct – Outstanding checks – Bank errors that overstate balance Arrive at – Debit memos – Book errors that overstate balance Arrive at – Adjusted bank statement balance – Adjusted ledger balance of Cash Must Be Equal Accounting is Fun! 7 - 42

Back of Your Bank Statement Usually, the back of the statement will have step-by-step directions for completing a bank reconciliation Accounting is Fun! 7 - 43

L.A. Compton Company: An Example Accounting is Fun! 7 - 44

L.A. Compton Company: An Example Accounting is Fun! 7 - 45

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 Accounting is Fun! 7 - 46

Proper heading and date! Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance 8,966.00 Adjusted Bank Statement Balance Ledger Balance of Cash 8,330.50 Adjusted Ledger Balance of Cash Accounting is Fun! 7 - 47

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit 8,966.00 1,303.00 10,269.00 Adjusted Bank Statement Balance Ledger Balance of Cash 8,330.50 Adjusted Ledger Balance of Cash Accounting is Fun! 7 - 48

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,330.50 Adjusted Ledger Balance of Cash Accounting is Fun! 7 - 49

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,795.00 8,330.50 Adjusted Ledger Balance of Cash Accounting is Fun! 7 - 50

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash Add: Note collected by bank from Lee & Brock Error amount for Ck. No. 2001 payable to Davis, Inc. 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,795.00 8,330.50 606.00 9.00 615.00 8,945.50 Adjusted Ledger Balance of Cash Accounting is Fun! 7 - 51

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash Add: Note collected by bank from Lee & Brock Error amount for Ck. No. 2001 payable to Davis, Inc. Deduct: Bank service/collection charge NSF check from D. M. Scott ATM withdrawal for personal use Adjusted Ledger Balance of Cash Accounting is Fun! 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,795.00 8,330.50 606.00 9.00 5.50 125.00 20.00 615.00 8,945.50 150.50 7 - 52

Bell Video Bank Reconciliation October 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash Add: Note collected by bank from Lee & Brock Error amount for Ck. No. 2001 payable to Davis, Inc. Deduct: Bank service/collection charge NSF check from D. M. Scott ATM withdrawal for personal use Adjusted Ledger Balance of Cash Accounting is Fun! 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,795.00 8,330.50 606.00 9.00 5.50 125.00 20.00 615.00 8,945.50 Must Be Equal 150.50 8,795.00 7 - 53

Performance Objective 3 Record the required journal entries directly from the bank reconciliation Accounting is Fun! 7 - 54

Bell VideoCome from Journal Entries Bank Reconciliation the October Firm's Side! 31, 2002 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 1916 No. 2022 No. 2023 No. 2024 Adjusted Bank Statement Balance Ledger Balance of Cash Add: Note collected by bank from Lee & Brock Error amount for Ck. No. 2001 payable to Davis, Inc. Deduct: Bank service/collection charge NSF check from D. M. Scott ATM withdrawal for personal use Adjusted Ledger Balance of Cash Accounting is Fun! 8,966.00 1,303.00 10,269.00 461.00 119.00 827.00 67.00 1,474.00 8,795.00 8,330.50 606.00 9.00 5.50 125.00 20.00 615.00 8,945.50 150.50 8,795.00 7 - 55

General Journal Date Description 2002 Oct. 31 Cash Notes Receivable Interest Income Bank collected note signed by Lee and Brock. Accounting is Fun! Page 13 Post. Ref. Debit Credit 606.00 600.00 6.00 7 - 56

General Journal Date Description 2002 Oct. 31 Cash Notes Receivable Interest Income Bank collected note signed by Lee and Brock. 31 Cash Accounts Payable Error in recording Ck. No. 2001 to Davis, Inc. Accounting is Fun! Page 13 Post. Ref. Debit Credit 606.00 600.00 6.00 9.00 9.00 7 - 58

General Journal Date Description 2002 Oct. 31 Cash Notes Receivable Interest Income Bank collected note signed by Lee and Brock. 31 Cash Accounts Payable Error in recording Ck. No. 2001 to Davis, Inc. 31 Miscellaneous Expense Cash Bank service/collection charge. Accounting is Fun! Page 13 Post. Ref. Debit Credit 606.00 600.00 6.00 9.00 Bank charges for this textbook are Misc. Expense 9.00 5.50 5.50 7 - 60

General Journal Date Description 2002 Oct. 31 Cash Notes Receivable Interest Income Bank collected note signed by Lee and Brock. Page 13 Post. Ref. Debit Credit 606.00 600.00 6.00 31 Cash Accounts Payable Error in recording Ck. No. 2001 to Davis, Inc. 9.00 31 Miscellaneous Expense Cash Bank service/collection charge. 5.50 31 Accounts Receivable Cash NSF check received from D. M. Scott. Accounting is Fun! 9.00 5.50 125.00 125.00 7 - 62

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 Accounting is Fun! 7 - 65

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 Accounting is Fun! 7 - 66

Performance Objective 4 Record journal entries to establish and reimburse a Petty Cash Fund Accounting is Fun! 7 - 67

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 Accounting is Fun! 7 - 68

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 Accounting is Fun! 7 - 69

Performance Objective 5 Complete petty cash vouchers and petty cash payments records Accounting is Fun! 7 - 70

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 Accounting is Fun! 7 - 71

Accounting is Fun! 7 - 72

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 Accounting is Fun! 7 - 73

Partial Petty Cash Payments Record (Page 235) Special columns for frequent types of expenditures are included in the Distribution of Payments section Accounting is Fun! 7 - 74

Journal Entry to Reimburse a Petty Cash Fund Accounting is Fun! 7 - 75

Performance Objective 6 Record the journal entries to establish a Change Fund Accounting is Fun! 7 - 76

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) Accounting is Fun! 7 - 77

Journal Entries to Establish a Change Fund General Journal Date Description 2002 Sept. 1 Change Fund Cash Establish a Change Fund. Accounting is Fun! Page 6 Post. Ref. Debit Credit 120.00 120.00 7 - 78

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 Accounting is Fun! 7 - 79

Change Fund Account: An Example General Journal Date Description 2002 Sept. 1 Cash in Bank Video Rental Income Revenue earned for video rentals. Page 11 Post. Ref. Debit Credit Cash Count 537 417.00 - Change Fund 120 417.00 Amount to Deposit 417 Does this always equal the cash register receipts? Accounting is Fun! 7 - 80

Performance Objective 7 Record journal entries for transactions involving Cash Short and Over Accounting is Fun! 7 - 81

Cash Short and Over Human beings inevitably make mistakes The accounting system must deal with this situation General Journal Page 12 Date Description 2002 Sept. 1 Cash in Bank Cash Short and Over Video Rental Income Revenue earned for the day involving cash shortage of 3. Cash Short Accounting is Fun! Post. Ref. Debit Credit Cash Count 607 - Change Fund 120 Amount to Deposit 487 487.00 3.00 490.00 Amount to Deposit 487 - Cash Register Tape 490 Cash Short and Over ( 3) DR Like an Expense 7 - 82

Cash Short and Over Human beings inevitably make mistakes The accounting system must deal with this situation General Journal Page 12 Date Description 2002 Sept. 1 Cash in Bank Video Rental Income Cash Short and Over Revenue earned during the day involving cash overage of 1. Cash Over Accounting is Fun! Post. Ref. Debit Credit 560.00 559.00 1.00 Cash Count 680 - Change Fund 120 Amount to Deposit 560 Amount to Deposit 560 - Cash Register Tape 559 Cash Short and Over 1 CR Like a Revenue 7 - 83

Cash Short and Over At the end of each day: Cash Count - Change Fund Amount to Deposit 1,000 100 900 Amount to Deposit - Cash Register Tape Cash Short and Over 900 890 10 Accounting is Fun! Deposited in Bank Recorded as Revenue Difference Recorded as Cash Short and Over 7 - 84

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 Accounting is Fun! 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 7 - 85

Journal Entries for Cash Short and Over If debit balance (net shortage) General Journal Date Description 2002 Sept. 30 Miscellaneous Expense Cash Short and Over To record month's ending Cash Short and Over balance as Expense. Page 22 Post. Ref. Debit Credit 21.00 21.00 If credit balance (net overage) General Journal Date Description 2002 Sept. 30 Cash Short and Over Miscellaneous Income To record month's ending Cash Short and Over balance as Revenue. Accounting is Fun! Page 22 Post. Ref. Debit Credit 15.00 15.00 7 - 86

Bank Drafts Vs. 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. Accounting is Fun! Bank Draft -- a check written by one bank on its account with another bank. 7 - 87

March 22, 2024

30 Less than a minute

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