College Accounting

1. College Accounting Heintz & Parry20th Edition

2. Accounting for Cash

3. CASH • Includes: • Currency, coins, and checking accounts • Checks received from customers • Money orders • Bank cashier’s checks • Because cash plays such a central role in operating a business, it must be carefully managed and controlled.

4. INTERNAL CONTROL • A set of procedures designed to ensure proper accounting for transactions • Good internal control for cash transactions: • All cash received should be deposited DAILY in a bank • All disbursements, except for payments from petty cash, should be made by CHECK

5. 1 Describe how to open and use a checking account.

6. OPENING A CHECKING ACCOUNT • Each person authorized to sign checks must complete and sign a signature card. • This card is used to verify the depositor’s signature on any banking transactions.

7. MAKING DEPOSITS • A deposit ticket is a form showing a detailed listing of items being deposited • Currency, coins, and checks are listed separately • Each check should be identified by its ABA (American Bankers Association) number • Found in upper right-hand corner of each check • Also shown in magnetic ink character recognition (MICR) code on the lower left side of the front of each check • The code is used to sort and route checks

8. ENDORSEMENTS • Each check being deposited must be endorsed by the depositor • Consist of stamping or writing the depositor’s name and sometimes other information on the back of the check • Blank endorsement • The depositor simply signs the back of the check • This makes the check payable to any bearer • Restrictive endorsement • The depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Daryl Beck only” for payment restriction

9. AUTOMATED TELLER MACHINES • Each depositor has a plastic card and a personal identification number (PIN). • Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs. • It is important for the depositor to keep an accounting record of ATM withdrawals and deposits.

10. WRITING CHECKS • A check is a document ordering a bank to pay cash from a depositor’s account. • There are three parties to every check: • Drawer—the depositor who orders the bank to pay the cash • Drawee—the bank on which the check is drawn • Payee—the person being paid the cash • Business checks often have a check stub.

11. THREE STEPS IN PREPARING A CHECK • Complete the check stub or register. • Enter the date, payee name, and amount on the check. • Sign the check. The check should not be signed until the check signer has verified that all aspects of the check are correct.

12. BANK STATEMENT • The statement shows: • The balance at the BEGINNING of the period • Deposits and other amounts ADDED during the period • Checks and other amounts SUBTRACTED during the period • The balance at the END of the period

13. BANK STATEMENT • Sent with bank statement • Canceled checks, “imaged” sheets of check faces, or a listing of checks • Any other forms representing items added to or subtracted from the account

14. 2 Prepare a bank reconciliation and related journal entries.

15. BANK RECONCILIATION EXAMPLE Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23. We need to prepare a BANK RECONCILIATION.

16. Maple Consulting Bank ReconciliationNovember 21, 20-- Heading includes: Name of Company Bank Reconciliation Date

17. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 The bank reconciliation begins with the balance according to the bank statement.

18. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Reconciling items are listed as additions or subtractions from the bank balance.

19. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Once all reconciling items are listed, the adjusted bank balance is computed.

20. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Now the reconciliation turns to adjusting the BOOK balance.

21. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Additions and subtractions will be made to the book balance. Deduct:

22. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: The adjusted book balance is computed. Deduct: Adjusted book balance

23. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: We say it is “reconciled” when the adjusted BANK and adjusted BOOK balances agree. Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Deduct: Adjusted book balance

24. REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES • Deposits in transit • Deposits that have not reached the bank or been recorded by the bank before the statement is prepared • Outstanding checks • Checks that have not been presented to the bank for payment before the statement is prepared • Service charges • Bank charges for services such as check printing and processing

25. REASONS FOR DIFFERENCES BETWEEN BANK AND BOOK BALANCES (CONT.) • Collections • Collections of promissory notes or charge accounts made by the bank on behalf of the depositor • Not sufficient funds (NSF) checks • Checks deposited but not paid because the drawer did not have sufficient funds • Errors • Errors made by the bank or by the depositor in recording cash transactions

26. BANK RECONCILIATION THREE STEPS:

27. STEP #1Identify deposits in transit and related errors. • Compare the bank statement with: • Last month’s deposits in transit • They should all be on the bank statement • Deposits listed in the accounting records • If not found on the bank statement, the deposit is considered a deposit in transit • $ amounts for deposits in the accounting records • If they differ, the error needs to be corrected.

28. STEP #1 EXAMPLE A deposit in the accounting records of $637.02, dated November 21, had not been received by the bank. DEPOSIT IN TRANSIT

29. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 DEPOSITS IN TRANSIT are added to the bank balance. Deduct: Adjusted bank balance $2,393.23 Book balance, November 21 Add: Deduct: Adjusted book balance

30. STEP #2Identify outstanding checks and related errors. • Compare canceled checks with the bank statement and accounting records. • If they differ, the error needs to be corrected.

31. STEP #2 EXAMPLE Check no. 214 was written for $18.98 but was entered on the check stub and on the books as $19.88. $0.90 ERROR

32. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $0.90 is added back to the book balance. Deduct: Adjusted bank balance $2,393.23 Book balance, November 21 error on check no. 214 Add 0.90 Deduct: Adjusted book balance

33. STEP #2Identify outstanding checks and related errors. • Compare canceled checks with the bank statement and accounting records. • If they differ, the error needs to be corrected. • Check mark the stub or accounting records to indicate that the check has cleared. • Checks written but not cleared are OUSTANDING CHECKS. • These are subtracted from the bank balance on the reconciliation.

34. STEP #2 EXAMPLE Check numbers 219, 224, and 227 do not appear on the bank statement. OUTSTANDING CHECKS

35. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,393.23 Book balance, November 21 Add 0.90 error on check no. 214 Outstanding checks are deducted from the bank balance. Deduct: Adjusted book balance

36. STEP #3Identify additional reconciling items. • Compare any additions and deductions on the bank statement that are not deposits or checks with the accounting records. • Items ADDED to the account by the bank are credit memos. • Items DEDUCTED from the account by the bank are debit memos.

37. STEP #3 EXAMPLE Maple used an ATM machine to make a withdrawal from his account of $100.00 for personal use. However, he forgot to record this withdrawal on the books. Deduct $100.00 from the book balance.

38. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 Adjusted book balance

39. STEP #3 EXAMPLE The bank returned an NSF check of $200.00 written by one of Maple’s clients. Deduct $200.00 from the book balance.

40. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 200.00 NSF check Adjusted book balance

41. STEP #3 EXAMPLE The bank deducted $1.80 from Maple’s account for service charges. Deduct $1.80 from the book balance.

42. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add 0.90 error on check no. 214 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

43. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 The bank balance section of the reconciliation is totaled. Add 0.90 error on check no. 214 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

44. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: Then the book balance section is totaled. No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 Add 0.90 error on check no. 214 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33

45. EXAMPLE We now know that the actual amount of cash is $2,092.33, but the general ledger cash account still shows $2,393.23. JOURNAL ENTRIES ARE NEEDED!!!

46. BANK RECONCILIATION JOURNAL ENTRIES • Only two kinds of items appearing on a bank reconciliation require journal entries: • Errors in the depositor’s books • Bank additions and deductions that do not already appear in the books • ALL items in the book balance section of the reconciliation require a journal entry.

47. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 These 4 items will require journal entries. Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 0.90 Add error on check no. 214 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33

48. BANK RECONCILIATION JOURNAL ENTRIES DATE DESCRIPTION DEBIT PR CREDIT 20-- 1 Cash 0 90 Nov. 21 2 3 When check no. 214 was written, the cash account was credited for $0.90 more than the check amount of $18.98. This entry puts $0.90 back in the Cash account. 4 5 6 7 8 9 10 11

49. BANK RECONCILIATION JOURNAL ENTRIES DATE DESCRIPTION DEBIT PR CREDIT 20-- Cash 0 90 1 Nov. 21 2 Accounts Payable 0 90 3 Error in recording check 4 5 Accounts Payable was originally debited for $19.88. This was $0.90 more than the actual telephone bill of $18.98. This entry removes the extra $0.90. 6 7 8 9 10 11

50. BANK RECONCILIATION JOURNAL ENTRIES DATE DESCRIPTION DEBIT PR CREDIT 20-- Cash 0 90 1 Nov. 21 2 Accounts Payable 0 90 3 Error in recording check 4 J. M., Drawing 5 100 00 21 6 Since the ATM withdrawal was for “personal expenses,” the drawing account should be debited. 7 8 9 10 11