Banking Procedures and Control of Cash

Banking Proceduresand Control of Cash Chapter 6

Internal Control of Cash Internal Control Procedures • separation and rotation of duties • cash receipts deposited daily • setting up a petty cash fund • all other payments made by check • authorization required for activities • checks and other documents prenumbered

Depositing, writing, and endorsing checks for a checking account. Learning Objective 1

Learning Unit 6-1 Opening a checking account • A signature card is required for validation to protect against forgery and unauthorized signing. • Duplicate deposit tickets are used. • ATM cards and personal identification numbers are protected.

Learning Unit 6-1 Check endorsement What is a check endorsement? • It is the signing or stamping of one’s name on the back left-hand side on the check. • Checks must be signed by the person to whom the check is made out.

Learning Unit 6-1 Types of Endorsements Full endorsement Blank endorsement Restrictive endorsement

Learning Unit 6-1 The checkbook • A check is a written order. • The drawer is the one who writes the check. • The drawee is the one who pays the money to the payee (bank).

Learning Unit 6-1 The checkbook • The payee is the one to whom the check is payable. • Write checks properly to ensure that amounts and payee cannot be changed.

Learning Unit 6-1 The bank reconciliation • This is a process that verifies the cash balance in the business records to the ending bank balance for the month. • Deposits in transit are deposits not recorded by the bank before the report (add to the bank balance).

Learning Unit 6-1 The bank reconciliation • Outstanding checks are issued checks that have not yet cleared the bank (subtract from the bank balance). • Service charges are fees charged by a bank (subtract from the bank balance).

Learning Unit 6-1 The bank reconciliation • Nonsufficient funds (NSF) checks are those which are received, deposited in the bank, and returned because the drawer did not have funds in their account (subtract from bank balance). • The check and a collection fee is charged back to the drawer.

Learning Unit 6-1 Terminology • Bank credits are when a bank credits the account, which is an increase to the cash balance in the business. • What are some examples? • bank errors • funds collected by the bank on behalf of the business

Learning Unit 6-1 Terminology • Bank debits are a deduction from the cash balance in the business. • What are some examples? • bank errors • NSFs • service charges

Reconciling a bank statement. Learning Objective 2

The Bank Reconciliation Process • On August 2, Clara J. Accounting Practice received the July’s bank statement. • It indicated the following: • The bank balance was $25,225. • The bank had collected a note receivable from one of Clara’s customers in the amount of $1,000.

The Bank Reconciliation Process • The bank paid the electric bill of $300. • There was a $200 check returned for NSF. • Interest earned on the account was $15. • Bank service charges were $6.

The Bank Reconciliation Process • Clara’s books indicates a cash balance of $26,647. • A deposit of $3,250 was mailed to the bank on June 30. • Checks issued in June for $1,319 have not yet been paid by the bank.

The Bank Reconciliation Process Balance per bank, June 30 $25,225 Add deposit in transit 3,250 $28,475 Less outstanding checks 1,319 Adjusted bank balance $27,156

The Bank Reconciliation Process Balance per books, June 30 $26,647 Add: Note receivable collected by the bank 1,000 Interest income 15 $27,662 Less: Payment of electric bill 300 NSF check 200 Service charge 6 Adjusted book balance $27,156

Balance per books Balance per bank $27,156 $27,156 The Bank Reconciliation Process Amounts are the same

Establishing and replenishing a petty cash fund; setting up an auxiliary petty cash record. Establishing and replenishing a change fund. Learning Objectives 3 and 4

Learning Unit 6-2 Petty cash fund • This is an account used for paying small day-to-day expenses. • The only time petty cash is entered in the journal is to establish the fund (or to change the level of cash in the fund). • Expenses are debited and Cash credited to replenish the fund.

Learning Unit 6-2 What is the entry to record the establishment of a $150 petty cash fund? • Petty Cash 150 Cash in bank 150 To open the petty cash fund

Learning Unit 6-2 Forty dollars were taken out of the petty cash fund for coffee and other miscellaneous expenses. What is the journal entry to record the replenishment of the fund? • Miscellaneous expense 40 Cash in bank 40 To replenish the petty cash fund

Handling transactions involving cash short and over. Learning Objective 5

Cash Short and Over How are small cash errors recorded? • Beginning change fund • Cash register total • Correct amount of cash • Counted cash • Shortage or overage of cash

End of Chapter 6

Banking Procedures and Control of Cash