College Accounting 11 th Edition

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2. 6 chapter College Accounting 11th Edition Bank Accounts and Cash Funds 6–2

3. Learning Objectives After you have completed this chapter, you will be able to do the following: 6–3

4. Learning Objective 6–4

5. Internal Control • Internal control is the system of policies and procedures that is designed to: • Protect assets against fraud and waste • Provide for accurate accounting data • Promote efficient operation • Encourage adherence to management policies 6–5

6. Managing Cash Receipts • Maintain separation between cash handling and cash recording. • Designate someone other than the bookkeeper to open mail. • Make a record of cash received. • Endorse checks immediately upon receipt with the stamp, “For Deposit Only.” • Deposit cash daily. • Journalize cash receipts as soon as possible, preferably by someone different than the person who first received the cash. • Post cash receipts to the Accounts Receivable account as soon as possible. 6–6

7. Managing Cash Payments • Make certain that all checks are pre-numbered. • Make sure that all cash payments are made by check (with the exception of petty cash). • Keep check supplies under lock. • Assign someone different than the signer of the checks to prepare the checks. • Keep petty cash under lock with access limited to one person other than the bookkeeper. • Appoint someone other than the person preparing checks to prepare the bank reconciliation. 6–7

8. Internal Control of Cash is critical activity in any business. Divide the cash activities among several people to deter mishandling. Don’t allow the same person to receive the cash, account for the cash and pay the bills! 6–8

9. Practice Exercise 1 3–9

10. Learning Objective 6–10

11. Using a Checking Account • When a person opens a bank account, that person fills out a signature card for the bank’s files. • The bank provides printed deposit slips on which customers record the amount of coins and currency they are depositing and list each individual check being deposited. • The ABA (American Bankers Association) numberis the small series of numbers located in the upper right corner of a check. 3–11

12. 6–12

13. ABA number – Roland’s Delivery Services 6–13

14. Substitute Checks and Remote Deposit • The Check Clearing for the 21st Century Act (or Check 21 Act) allows banks to create a two-sided digital version of the original check, called a substitute check. • Included in the Check Clearing for the 21st Century Act, it now is legal for anyone to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit. 6–14

15. Automated Teller Machines • Deposits, withdrawals, and transfers can be made at all hours at bank with ATMs (automated teller machines). • Each depositor uses a plastic card that contains a coded number and has a personal identification number or PIN. 6–15

16. Electronic Funds Transfers • A transfer of funds initiated through an electronic terminal is an Electronic Funds Transfer (EFT). • There is no paper document, such as a check or deposit slip. • The monthly bank statement will list the EFT deposits and payments. 6–16

17. Endorsements • The endorsement (1) transfers title to the money and (2) authorizes the payment of the check. 6–17

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19. Writing Checks • The party who writes the check is called the drawer. • The party to whom payment is to be made is the payee. • The information recorded on the check stub is the basis for the journal entry. • Checks should be written carefully so that no one can successfully alter them. • Canceled checks are checks that have been paid or cleared by the bank. 6–19

20. Steps for Writing Checks 6–20

21. Step 2: Amount in figures Step 3: Written amount Step 1: Payee Drawer 6–21

22. Bank routing number Number of Check Amount of check Roland’s Delivery Services account number 6–22

23. Bank Statements • The bank prepares the bank statement, which is created from the bank’s viewpoint. The following legends are found on bank statements: • CM (credit memo):Increases in or credits to the account. • DM (debit memo):Decreases in or debits to the account. • OD (overdraft): The withdrawal of more than the cash balance in the account. • EC (error correction): Correction of errors made by the bank. 6–23

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26. Bank Statements • The canceled checks (checks that have been paid or cleared by the bank) are listed on the bank statement. • They are called canceled checksbecause they are canceled by a stamp on the back, indicating that they have been paid. 6–26

27. Recording Deposits or Withdrawals Debit Memos Credit Memos 6–27

28. Practice Exercise 2

29. Learning Objective 6–29

30. Need for Reconciling Bank Balance and Ledger Balance • Since the bank statement balance and the ledger balance of cash are not equal, a business prepares a bank reconciliation. • The person performing the bank reconciliation will be making sure— • the dollar amount of each check matches the check entry in the company’s ledger, • all of the charges, checks and electronic transfers belong to the company, and • deposits are made in a timely manner 6–30

31. Reasons for Differences Between the Bank Statement Balance and the Customer’s Cash Balance • Deposits in transit– A deposit made after the bank statement was issued. • Outstanding checks – Checks that have been written by the company but not yet received for payment by the time the bank sends out its statements. • Collections – Money collected by the bank for the customer. • Interest income Interest earned for keeping cash in the bank account. • NSF (not sufficient funds) check – A deposited check that the bank cannot process because the check writer’s account does not contain enough money. • Service charge – A bank charge for services rendered by the bank. • Errors – Mistakes made by the customer or the bank. 6–31

32. Steps in Reconciling the Bank Statement • Compare the amount of each canceled check on the bank statement with the ledger entries in the company’s cash account. • Any differences between the amount on the bank statement and the amount on the company’s books should be noted. 6–32

33. Steps in Reconciling the Bank Statement • Compare the deposits in transit (deposits not recorded by the bank at the time of the statement) listed on last month’s bank reconciliation with the deposits shown on the bank statement. • All of last month’s deposits in transit should be listed on this month’s bank statement. If they are not, notify the bank immediately. • Compare the remaining deposits listed on this month’s bank statement with deposits written in the company’s accounting records. Consider any deposits not shown on the bank statement as deposits in transit. 6–33

34. Steps in Reconciling the Bank Statement • Review the list of outstanding checks left over from last month’s bank reconciliation and note the checks that have since been returned or cleared. • For each canceled check, compare the amount recorded on the bank statement with the amount recorded in the checkbook or general ledger cash account. • Use a check mark () to indicate that the check has been paid and that the amount is correct. • Any payments that have not been marked off, including the outstanding checks from last month’s bank reconciliation, are the present outstanding checks. 6–34

35. Steps in Reconciling the Bank Statement • Trace the credit memos and debit memos to the journal. If the memos have not been recorded, make separate entries for them. 6–35

36. W. Carson Company Bank Reconciliation • The bank statement indicates a balance of $6,446 as of March 31. • The Cashaccount as of March 31 is $4,650. • A deposit made on March 31 was not recorded on the bank statement, $2,174. • Outstanding checks: no. 920, $1,695; no. 975, $325; no. 976, $1,279. • Credit memo: Note collected by the bank from T. Landon, $700, not recorded in the journal. • Debit memo: Collection charge and service charge not recorded in journal, $2. 6–36

37. Activities or transactions we knew about but the bank did not know about Activities or transactions the bank knew about but we did not know about 700.00 700.00 When the reconciliation process is complete, the adjusted bank statement balanceandadjusted ledger balance MUST EQUAL. These require journal entries 29.00 29.00 6–37

38. Practice Exercise 3 6–38

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40. Learning Objective 6–40

41. Required Journal Entries 6–41

42. Required Journal Entries • After the entries have been posted, the T account for Cashlooks like this: The balance in the T account is now equal to both the adjusted bank statement balance and the adjusted ledger balance of Cash. 6–42

43. Form of Bank Reconciliation 6–43

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45. Bank statement shows a final balance of $17,249.61 17,249.61 1,012.00 18,261.61 687.00 185.00 367.00 110.00 1,349.00 16,912.61 Cash account shows a balance of $16,296.11 16,296.11 1,010.00 1,010.00 9.00 9.00 1,019.00 These all require journal entries 19.50 19.50 When the reconciliation process is complete, the adjusted bank statement balanceandadjusted ledger balance MUST EQUAL. 283.00 283.00 402.50 100.00 100.00 16,912.61 Roland’s Delivery Services 6–45

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48. Practice Exercise 4 6–48

49. Learning Objective 6–49

50. Establishing the Petty Cash Fund • To write a check for a small amount is not economically practical. For many businesses the cost of writing each check is more than $10. • A business keeps a cash fund for petty(or small) items. This cash fund is known as the Petty Cash Fund. • A business will set the maximum amount of payment from the fund before a check is required. 6–50