Maximizing Business Cash Flow with Checking Accounts

1. LESSON 5-1 How are checking accounts utilized in a sole proprietorship?

2. How do businesses use cash? • Most major payments are made by check • Small cash payments for items such as postage and some supplies may be made from a cash fund kept at the place of business. • Risk of error due to the frequency of cash transactions • Checking account – business form ordering a bank to pay cash from a bank account • Signature card kept aon filet bank LESSON 5-1

3. Depositing Cash • Bank customer prepares deposit slip • Vary from bank to bank but contain same basic information • Checks are listed according to bank routing numbers on each check • Bank customer receives a receipt • Copy of slip with printed verification LESSON 5-1

4. DEPOSITING CASH page 119 LESSON 5-1

5. DEPOSIT RECORDED ON A CHECK STUB page 119 • After deposit is recorded on check stub, subtotal is calculated • Cash receipts are journalized at the time cash is received, but they are deposited later • No journal entry needed because it has already been recorded LESSON 5-1

6. Endorsements • Endorsement – signature or stamp on the back of a check transferring ownership (must be within space indicated) • Should be signed exactly as the person’s name appears on the front of the check (Pay to the order of) • Ownership might be transferred multiple times LESSON 5-1

7. Blank Endorsement Blank Endorsements • signature of endorser only • Whomever is in possession of the check is the subsequent owner • Should be used only when the person is at the bank ready to cash or deposit a check LESSON 5-1

8. Special Endorsement Special Endorsements • endorsement in full – indicates a new owner • Includes “Pay to the order of (name of new owner)” • Only the new owner can cash/deposit/transfer check LESSON 5-1

9. Restrictive Endorsement Restrictive Endorsements • Restrictive endorsement – restricts further transfer of the check • Prevents unauthorized persons from cashing the check if it is lost or stolen LESSON 5-1

10. Check stub • Business’s record of each check written for a cash payment transaction • Objective evidence • To avoid forgetting to prepare a check stub, the check stub is prepared BEFORE the check is written LESSON 5-1

11. COMPLETED CHECK STUB page 121 1 1. Write the amount of the check. 2 3 2. Write the date of the check. 4 3. Write to whom the check is to be paid. 4. Record the purpose of the check. 5. Write the amount of the check. 6. Calculate the new checking account balance. 5 6 LESSON 5-1

12. 7. Write the date. COMPLETED CHECK page 121 7 8 9 10 11 12 10. Write the amount in words. 8. Write to whom the check is to be paid. 11. Write the purpose of the check. 12. Sign the check. 9. Write the amount in figures. LESSON 5-1

13. Voided checks • Banks usually refuse to accept altered checks • If an error is made, a new check should be written • All checks should be retained (not thrown away) to help account for all checks and make sure none have been lost or stolen • Void the check that contains an error by writing “VOID” across the check and stub • Voided check is journalized to avoid questions about whether or not all checks have been journalized LESSON 5-1

14. 5 RECORDING A VOIDED CHECK page 122 1 3 2 4 1. Record the date in the Date column. 2. Write the word VOID in the Account Title column 3. Write the check number in the Doc. No. column. 4. Place a check mark in the Post. Ref. column. 5. Place a dash in both the Debit and Credit columns. LESSON 5-1

15. TERMS REVIEW page 123 • code of conduct • checking account • endorsement • blank endorsement • special endorsement • restrictive endorsement • postdated check LESSON 5-1

16. LESSON 5-2 What is a bank reconciliation? Why is it an important accounting procedure?

17. BANK STATEMENT page 124 LESSON 5-2

18. Bank Statement • Bank statement - report of deposits, withdrawals, and bank balances sent to a depositer by a bank • Why might a bank’s records and a customer’s records differ? • Service charge may not have been recorded in customer’s records • Outstanding deposits may be recorded in the customer’s records but not the bank’s • Outstanding checks may be recorded in the customer’s records but not on a bank statement • A customer may have made math or recording errors LESSON 5-2

19. Bank statement reconciliation • Bank statement is reconciled by verifying that information on a bank statement agrees with the checkbook • Reconciling immediately is an important part of cash control • Reconciling the bank statement • For each check listed on the bank statement, place a check mark on the corresponding check stub • outstanding check = check stub with no check mark (these have been issued by the customer but not yet reported on bank statement) • For each deposit on the bank statement, place a check mark on the corresponding check stub • Outstanding deposits = deposits made at the bank but not yet on the bank statement • Service charge – deduct service charge from the check stub LESSON 5-2

20. 10 BANK STATEMENT RECONCILIATION page 125 1. Date 1 2. Check Stub Balance 2 5 3. Service Charge 6 4. Adjusted Check Stub Balance 3 7 5. Bank Statement Balance 6. Outstanding Deposits 8 4 9 7. Subtotal 8. Outstanding Checks 9. Adjusted Bank Balance 10. Compare Adjusted Balances LESSON 5-2

21. RECORDING A BANK SERVICE CHARGE ON A CHECK STUB page 126 1. Write Service Charge $8.00 on the check stub under the heading “Other.” 2. Write the amount of the service charge in the amount column. 3. Calculate and record the new subtotal on the Subtotal line. 1 2 3 LESSON 5-2

22. 2 3 JOURNALIZING A BANK SERVICE CHARGE page 127 August 31. Received bank statement showing August bank service charge, $8.00. Memorandum No. 3. 1 4 1. Write the date. 2. Write the title of the account debited. Record the debit amount. 3. Write the title of the account credited. Record the credit amount. 4. Write the source document number in the Doc. No. column. LESSON 5-2

23. TERM REVIEW page 128 • bank statement LESSON 5-2

24. LESSON 5-3 How do you record dishonored checks and an Electronic Funds Transfer?

25. DISHONORED CHECKS page 129 • Dishonored check – check that the bank refuses to pay • Why are checks dishonored? • Person who wrote the check has insufficient funds to pay (illegal) • Check appears to be altered (also illegal!) • Signature of person who signed check doesn’t match signature card • Amounts written in figures do not match amounts written in words • Check is postdated • Person who wrote check has stopped payment on the check • Dishonored checks can affect credit score of person who wrote the check

26. What happens when a check is dishonored? • Sometimes the money can be collected directly from the person or business that wrote the check • Often the money cannot be collected and becomes an expense to the business • Additionally, banks usually charge a fee for handling dishonored checks that also become an expense of the business LESSON 5-3

27. 1. Write Dishonoredcheck $105.00 on the line under the heading “Other.” RECORDING A DISHONORED CHECK ON A CHECK STUB page 129 2. Write the total of the dishonored check in the amount column. 3. Calculate and record the new subtotal on the Subtotal line. 1 2 3 LESSON 5-3

28. 2 3 JOURNALIZING A DISHONORED CHECK page 130 November 29. Received notice from the bank of a dishonored check from Campus Internet Café, $70.00, plus $35.00 fee; total, $105.00. Memorandum No. 55. 4 1 1. Write the date. 2. Write the title of the account debited. Write the debit amount. 3. Write the title of the account credited. Write the amount credited. 4. Write the source document number in the Doc. No. column. LESSON 5-3

29. Electronic Funds Transfer • Computerized cash payments system that transfers funds without the use of checks, currency, or other paper documents • Many businesses use EFT to pay vendors (via phone or internet) • Person in charge of EFT should be given a password to safeguard cash LESSON 5-3

30. 2 3 JOURNALIZING AN ELECTRONIC FUNDS TRANSFER page 131 September 2. Paid cash on account to Kelson Enterprises, $350.00, using EFT. Memorandum No. 10. 1 4 1. Write the date. 2. Write the title of the account debited. Record the amount debited. 3. Write the title of the account credited. Record the amount credited. 4. Write the source document number in the Doc. No. column. LESSON 5-3

31. Debit Card • Bank card that automatically deducts the amount of a purchase from the checking account of the cardholder • Eliminates the need to write a check • How is this different than a credit card? • Businesses must record these transactions promptly and update the check stub • Recorded on the check stub as “other” • Debit card transactions are verified as part of the bank reconciliation process LESSON 5-3

32. 2 3 JOURNALIZING A DEBIT CARD TRANSACTION page 132 September 5. Purchased supplies, $24.00, using debit card. Memorandum No. 12. 1 4 1. Write the date. 2. Write the title of the account debited. Record the amount debited. 3. Write the title of the account credited. Record the amount credited. 4. Write the source document number in the Doc. No. column. LESSON 5-3

33. TERMS REVIEW page 133 • dishonored check • electronic funds transfer • debit card LESSON 5-3

34. LESSON 5-4 How/why do businesses use a petty cash fund?

35. Petty Cash • An amount of cash kept on hand and used for making small payments • Businesses use petty cash when it is not cost/time effective to write a check • What is considered a “small” payment varies among businesses • Asset account LESSON 5-4

36. 2 3 ESTABLISHING A PETTY CASH FUND page 134 August 19. Paid cash to establish a petty cash fund, $100.00. Check No. 8. 1 4 1. Write the date. 2. Write the title of the account debited. Record the amount debited. 3. Write the title of the account credited. Record the amount credited. 4. Write the source document number in the Doc. No. column. LESSON 5-4

37. MAKING PAYMENTS FROM A PETTY CASH FUND WITH A PETTY CASH SLIP page 135 • Petty cash slip – form showing the purpose and amount taken from the petty cash fund (proof of payment) • Number, date of payment, payee, reason, amount, account, signature • Slips are kept in the petty cash box until the fund is replenished (no entries for individual petty cash payments) LESSON 5-4

38. Replenishing Petty Cash • Petty cash is replenished when the funds are low or at the end of the fiscal period (usually monthly) • Before petty cash is replenished, a proof of the fund is completed by comparing the total of the slips to the amount remaining in the fund • Record entry to replenish fund • Debit expense accounts (slips) and credit cash (write check to replenish) LESSON 5-4

39. 2 3 REPLENISHING PETTY CASH page 136 August 31. Paid cash to replenish the petty cash fund, $30.00: miscellaneous expense, $20.00; advertising, $10.00. Check No. 12. 1 4 1. Write the date. 2. Write the title of the first account debited. Write the debit amount. Write the title of the second account. Record the debit amount. 3. Write the title of the account credited. Record the credit amount. 4. Write the source document number in the Doc. No. column. LESSON 5-4

40. TERMS REVIEW page 138 • petty cash • petty cash slip LESSON 5-4