Managing Cash Transactions in Business Operations

1. CHAPTER SEVEN ACCOUNTING FOR CASH

2. 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.

3. 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.

4. 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.

5. MAKING DEPOSITS • 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 number. • American Bankers Association number • Found in upper right hand corner of check • Also shown in MICR code on the lower left side of front of each check • ABA number is used to sort and route checks.

6. MAKING DEPOSITS • Endorsements--each check being deposited must be endorsed by the depositor. • Blank endorsement--the depositor simply signs the back of the check. • Check becomes payable to any bearer. • Restrictive endorsement--depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Mary Adams only.”

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

8. WRITING CHECKS • Check is a document ordering a bank to pay cash from a depositor’s account. • 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.

9. 3 STEPS IN PREPARING A CHECK • Step #1 Complete the check stub or register. • Step #2 Enter the date, payee name, and amount on the check. • Step #3 Sign the check. The check should not be signed until the check signer has verified that all aspects of the check are correct.

10. BANK STATEMENT • Includes: • 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

11. 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

12. EXAMPLE Bank statement shows a balance of $4,350. But the general ledger account has a balance of $3,800. We need to prepare a BANK RECONCILIATION.

13. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Heading includes: Name of Company Bank Reconciliation Date

14. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Reconciliation begins with balance according to the bank statement.

15. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: Deduct: Reconciling items are listed as additions or subtractions from the bank balance.

16. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Once all reconciling items are listed, the “Adjusted Bank Balance” is computed.

17. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book balance, October 31 $3,800 Now the reconciliation turns to adjusting the BOOK balance.

18. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book balance, October 31 $3,800 Add: Additions and subtractions will be made to the book balance. Deduct:

19. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: Deduct: Adjusted Bank Balance Book balance, October 31 $3,800 Add: “Adjusted book balance” is computed. Deduct: Adjusted Book Balance

20. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: We say it is “reconciled” when the Adjusted BANK and Adjusted BOOK balances agree. Deduct: Adjusted Bank Balance Book balance, October 31 $3,800 Add: Deduct: Adjusted Book Balance

21. REASONS FOR DIFFERENCES • Outstanding checks • Checks that have not been presented to the bank for payment • Deposits in transit • Deposits that have not reached the bank or been recorded by the bank before the statement is prepared • Service charges • E.g., check printing and processing, account fees

22. REASONS continued • Collections • Made by the bank on behalf of the depositor • Not sufficient funds (NSF) checks • Checks deposited but not paid because drawer did not have sufficient funds • Errors • Made by bank or by the depositor in recording cash transactions

23. BANK RECONCILIATION THREE STEPS:

24. STEP #1 Identify deposits in transit and related errors. Compare 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.

25. STEP #1 EXAMPLE A deposit in the accounting records of $635, dated October 31, had not been received by the bank. DEPOSIT IN TRANSIT

26. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit Deduct: DEPOSITS IN TRANSIT are added to the bank balance. Adjusted Bank Balance $3,800 Book balance, October 31 Add: Deduct: Adjusted book balance

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

28. STEP #2 EXAMPLE Check # 862 payable to XYZ Telephone Company was written for $46.25 but was entered on the check stub and on the books as $64.25. $18.00 ERROR

29. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit $18.00 is added back to the book balance. Deduct: Adjusted Bank Balance Book balance, October 31 $3,800 Error on check #862 Add: 18 Deduct: Adjusted book balance

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

31. STEP #2 EXAMPLE Check numbers 890, 892, and 893 do not appear on the bank statement. OUTSTANDING CHECKS

32. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance Outstanding checks are deducted from the bank balance. $3,800 Book balance, October 31 Add: 18 Error on check #862 Deduct: Adjusted book balance

33. STEP #3 Identify 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.

34. STEP #3 EXAMPLE Mary used an ATM machine to make a withdrawal from her account of $200 for personal use. However, she forgot to record this withdrawal on the books. Deduct $200 from the book balance.

35. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,800 Book balance, October 31 Add: 18 Error on check #862 Deduct: Unrecorded ATM withdrawal $200 Adjusted book balance

36. STEP #3 EXAMPLE The bank returned an NSF check of $350 written by one of Mary’s clients. Deduct $350 from the book balance.

37. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,800 Book balance, October 31 Add: 18 Error on check #862 Deduct: Unrecorded ATM withdrawal $200 NSF check 350 Adjusted book balance

38. STEP #3 EXAMPLE The bank deducted $10 from Mary’s account for service charges. Deduct $10 from the book balance.

39. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,800 Book balance, October 31 Add: 18 Error on check #862 Deduct: Unrecorded ATM withdrawal $200 NSF check 350 Bank service charge 10 Adjusted book balance

40. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit $4,985 Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,258 Book balance, October 31 $3,800 The Bank section of the reconciliation is totaled. Add: 18 Error on check #862 Deduct: Unrecorded ATM withdrawal $200 NSF check 350 Bank service charge 10 Adjusted book balance

41. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit $4,985 Then the Book section is totaled. Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,258 Book balance, October 31 $3,800 Add: 18 Error on check #862 $3,818 Deduct: Unrecorded ATM withdrawal $200 NSF check 350 Bank service charge 10 $560 Adjusted book balance $3,258

42. EXAMPLE We now know that the actual amount of cash is $3,258. But the General Ledger Cash account still shows $3,800. JOURNAL ENTRIES NEEDED

43. BANK RECONCILIATIONJOURNAL ENTRIES • Only two kinds of items appearing on a bank reconciliation require journal entries: • Errors in the books • Bank additions and deductions that do not already appear in the accounting records • ALL items in the BOOK section of the reconciliation

44. Mary Adams Consulting Bank ReconciliationOctober 31, 2000 Bank statement balance, October 31 $4,350 Add: $635 Deposit in transit $4,985 These 4 items will require journal entries. Outstanding checks Deduct: No. 890 $598 334 No. 892 No. 893 795 1,727 Adjusted Bank Balance $3,258 Book balance, October 31 $3,800 Add: 18 Error on check #862 $3,818 Deduct: Unrecorded ATM withdrawal $200 NSF check 350 Bank service charge 10 $560 Adjusted book balance $3,258

45. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 2000 Cash 18 00 1 31 Oct. 2 3 When check #862 was written, the Cash account was credited for $18.00 more than the check amount of $46.25. This entry puts back $18.00 in the Cash account. 4 5 6 7 8 9 10 11

46. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 2000 Cash 18 00 1 Oct. 31 2 Telephone Expense 18 00 3 Error on Check #862 4 5 Telephone Expense was originally debited for $64.25. This was $18.00 more than the actual telephone bill of $46.25. This entry removes the extra $18.00. 6 7 8 9 10 11

47. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 2000 18 00 Cash 1 Oct. 31 18 00 2 Telephone Expense 3 Error on Check #862 4 M.A., Drawing 200 00 5 31 6 7 Since the ATM withdrawal was for “personal expenses,” Drawing should be debited. 8 9 10 11

48. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 2000 18 00 Cash 1 Oct. 31 18 00 2 Telephone Expense 3 Error on Check #862 4 M.A., Drawing 200 00 5 31 Cash 6 200 00 7 The $200 withdrawal was never recorded. This entry will remove the $200 from the Cash account. 8 9 10 11

49. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 2000 18 00 Cash 1 Oct. 31 18 00 2 Telephone Expense 3 Error on Check #862 4 M.A., Drawing 200 00 5 31 Cash 6 200 00 7 Unrecorded ATM 8 withdrawal 9 10 11

50. GENERAL JOURNAL cont. DATE DESCRIPTION DEBIT PR CREDIT 350 00 Accounts Receivable 10 31 350 00 11 Cash 12 NSF check 13 14 The amount of the bounced check is placed into Accounts Receivable and Cash is reduced. 15 16 17 18 19 20