CHAPTER 6 – CASH CONTROL SYSTEMS

1. CHAPTER 6 – CASH CONTROL SYSTEMS

2. OBJECTIVES: • Define accounting terms related to using a checking account and petty cash fund. • Identify accounting concepts and practices related to using a checking account. • Prepare business papers related to using a checking account. • Journalize dishonored checks and electronic banking transactions. • Establish and replenish a petty cash fund.

3. CHAPTER 6-1 • More money… more problems! • Businesses use cash MOST often in transactions • Must be EXTREMELY careful in recording these transactions

4. Ch 6-1: Checking Accounts • Check: A business form ordering a bank to pay cash from a bank account • Checking Account: A bank account from which payments can be ordered by a depositor. • Banks may pay interest on funds deposited. • To open account, the depositor(s) must: • Sign a signature card: Authorizes person(s) that may sign checks for the business • Use bank forms to complete transactions

5. Check information: • Date • Name • Check Number - Magnetic Ink Characters • ABA number - identifies the bank

6. Depositing Cash • Deposit slip – form prepared each time cash and/or checks are placed in account • No universal ‘deposit slip’ • Each bank’s is similar, but different • Deposit slips are different to fit each bank’s recording machine

7. DEPOSITING CASH • 63-108 – Bank • $10,000 – amount • Aug 1 20-- – D10000.00 RDS – printed verification that total was deposited and accepted by RDS (bank employee)

8. Deposits must be recorded in checkbook. • Deposits have already been journalized in separate entries. • Cash receipts are journalized at time cash is received (ie: cash / sales, cash / A/R) • Later, cash receipts are deposited No NEW journal entry is needed

9. DEPOSIT RECORDED ON A CHECK STUB Balance brought forward from previous transaction Amount Deposited Lesson 6-1, page 120

10. Endorsements • Transfer ownership of a check • Contains a signature or stamp on back of check • Should be signed exactly as name is stated on front of check • Are confined to back of check at the top • Federal regulations limit amount of space at top of check • Endorsing a check guarantees payment • If bank does not receive payment from person who signed the FRONT of the check, each endorser is individually responsible for payment • Should be written in ink

11. Three Types of Endorsements • 1. Blank - signature only • Should only be used when person is at the bank ready to cash/deposit • Why? • 2. Special Endorsements (AKA Full endorsements) - restricts who can cash, deposit, or transfer check. • Pay to the order of __________

12. Types of Endorsements • Restrictive Endorsements - limit the use of the check. It can no longer be transferred. • Prevents unauthorized person from cashing if lost or stolen • Most companies use restrictive endorsements. • FYI- FDIC insures up to $100,000 per depositor • Federal Deposit Insurance Corporation

13. BLANK ENDORSEMENT, SPECIAL ENDORSEMENT, AND RESTRICTIVE ENDORSEMENT Blank Endorsement Special Endorsement Restrictive Endorsement Lesson 6-1, page 121

14. Writing a Check • Check stub is filled out first. • Business’s record of each check written for cash payment • For = Account debited • Word and figure amount should match • Checks are printed with consecutive numbers. • Helps YOU keep track of each check • No other significant purpose

15. COMPLETED CHECK STUB AND CHECK 1 2 7 3 4 8 9 10 11 12 5 6 Preparing checks Preparing check stubs 7. Write the date. 1. Write the amount of the check. 8. Write to whom the check is to be paid. 2. Write the date of the check. 3. Write to whom the check is to be paid. 9. Write the amount in figures. 10. Write the amount in words. 4. Record purpose of the check. 11. Write the purpose of the check. 5. Write the amount of the check. 6. Calculate the new account balance. Lesson 6-1, page 122-123 12. Sign the check.

16. Postdated Check • A check with a future date on it. • Most banks will not accept a postdated check. • If banks don’t accept postdated checks, what are they used for?

17. Voided Check • A check that will not be cashed at the bank. • Reasons - altered check (changes in name, date, amount), check you made a mistake in writing • VOID is written on check stub and checkbook and check is kept for records • Must be accounted for in General journal.

18. RECORDING A VOIDED CHECK 4 1 2 3 5 1. Record the date. 2. Write the word VOID in the account title. 3. Write the check number. 4. Place a check mark in the Post. Ref. column. 5. Place a dash in both the Debit and Credit columns. Lesson 6-1, page 123

19. TO DO: • Work Together, pg 124 • On Your Own, pg 124

20. CHAPTER 6-2 – Bank Reconciliation • Bank Statement: • a report of deposits, withdrawals, and bank balances sent to a depositor by a bank

21. Bank Statement • Prepared once a month by bank • Can be mailed or accessed online • When banks received check amount is deducted from account • Bank stamps check to indicate it has been canceled and returns canceled checks to depositor with bank statement • Information Shown: • Canceled checks - paid by the bank and returned to depositor • Deposits • Charges • Interest paid OUTDATED

22. Timing • At times, there will be discrepancies in balances because of timing. • Outstanding check: issued by depositor, but not yet reported on bank statement • YOU wrote the check, but according to your bank statement, it does not yet exist • It hasn’t yet been taken out of your account on the statement • Outstanding deposit: made at bank, but not yet shown on statement • YOU deposited cash/checks, but it has not appeared on your statement yet

23. BANK STATEMENT Lesson 6-2, page 125

24. Verifying a Bank Statement • Reconciliation: You must determine if the bank statement balance is correct. SHOULD BE COMPLETED IMMEDIATELY UPON RECEIVING BANK STATEMENT. • WHY?!? Differences exist because of: • Outstanding checks- checks not cashed • Outstanding deposits- not recorded yet at bank • Charges (service charge not recorded by depositor) • Fees – ie: ? • Depositor’s errors (math or recording) • Bank errors • Checks/deposits might be recorded in a wrong account • Data entry errors

25. Steps to Reconcile a Bank Statement • Arrange returned checks in numeric order. • Canceled check place check mark on check stub • Determine outstanding checks(no check mark). • Determine outstanding deposits. • Determine bank charges (SC). • Determine if interest was paid (INT). • Prepare reconciliation

26. 10 BANK STATEMENT RECONCILIATION 1. Date 1 2. Check Stub Balance 2 5 3. Service Charge 3 6 4. Adjusted Check Stub Balance 7 8 5. Bank Balance Statement 6. Outstanding Deposits 4 7. Subtotal 9 8. Outstanding Checks 9. Adjusted Bank Balance Lesson 6-2, page 126 10. Compare Adjusted Balances

27. RECORDING A BANK SERVICE CHARGE ON A CHECK STUB 1. Write Service Charge. 2. Write the amount of the service charge. 3. Calculate and record the new subtotal. 2 1 3 Lesson 6-2, page 127

28. Entries to Journalize Service Charge and/or Interest Income • MUST journalize and post service charges to the cash account so that it is up to date • No check written– amount was automatically deducted by bank • Source DOC: MEMORANDUM • JOURNAL: • Service Charges • Debit Miscellaneous Expense • Credit Cash • Interest Paid • Debit Cash • Credit Interest Income

29. TO DO: • Work Together, pg 129 • On Your Own, pg 129 • Application Prob 6-1, 6-2 – pg 140

30. CHAPTER 6-3 • Dishonored Checks and Electronic Banking

31. Dishonored Check: • A check the bank refuses to pay because…. • Check appears to be altered • Altering/forging is illegal in ALL states • Signature does not match signature card • Amounts do not agree (words and figures) • It is postdated • The person who wrote the check ordered a ‘stop payment’ (after the check is written, you change your mind, usually a $30 fee) • Insufficient funds by depositor • Illegal in most states • May affect credit rating • Stores post signs with consequences

32. Dishonored Check: • Can try to collect directly from person/business • Fee is charged to payee AND depositor • When you receive a check it is deposited and ADDED to account NOW: • Subtract check AND bank charge from checkbook • Journal entry must be made • Debit - Accounts Receivable (of payee) • Credit - Cash • Source Doc: Memo

33. RECORDING A DISHONORED CHECK ON A CHECK STUB 1. Write Dishonored Check $50.00. 2. Write the amount of the dishonored check. 3. Calculate and record the new subtotal. Original check: $35 Service Fee: $15 2 1 3 Lesson 6-3, page 130

34. Accounts Rec.—Learn N Play Cash JOURNALIZING A DISHONORED CHECK – pg 131 November 29. Received notice from the bank of a dishonored check from Learn N Play, $35.00, plus $15.00 fee; total, $50.00. Memorandum No. 55. 1. Which accounts are affected? Accounts Receivable—Learn N Play Cash Debit Normal Balance 50.00  2. How is each account classified? Accounts Receivable—Learn N Play is an asset account. Cash is an asset account. Debit Normal Balance 3. How is each classification changed? Assets are increased. Assets are decreased. 50.00  4. How is each amount entered in the accounts? Assets increase on the debit side. Assets decrease on the credit side. Lesson 6-3, page 131

35. Journalizing an EFT Transfer – pg 132 • EFT: computerized cash payments that uses electronic impulses to transfer funds • Arrangements must be made between business, bank, and vendor (password) • same journal entry as when check is written for payment, but source doc is a memo **********************************************

36. Journalizing an EFT Transfer – pg 132 Transaction: Paid cash on account to Kelson Enterprises, $350.00, EFT, Memo No. 10 • Date • Debit: Accounts Payable – Kelson Enterprises • Credit: Cash • Source: M10 • no check was written for source doc • Recorded on Check Stub as OTHER – to keep checkbook balanced • Identified on bank stmt by EFT instead of Check No.

37. Journalizing a Debit Card Transaction – pg 133 • Debit card: bank card that automatically deducts amount of purchase from account • Same effect as checks • Eliminates the need to carry a checkbook • Journal: • Debit: Supplies • Credit: Cash • Source: Memo • Recorded on Check Stub as OTHER • Identified on Bank Stmt as Purchase w/date, time, location, and amount of transaction

38. TO DO: • Work Together, pg 134 • On your own, pg 134

39. Chapter 6-4 Petty Cash: • Small amount of cash kept on hand for making small payments. • Asset with DR balance • Petty Cash Slips: Vouchers used to account for money paid from the fund. • Kept in lock box • Most companies set a limit for the max. amount allowed to be paid with petty cash per transaction • Encore $20 max payments / $200 fund

40. New Account • Petty Cash – Asset • To Establish fund: • Debit Petty Cash • Credit Cash Petty Cash Debit Normal Balance + Credit -

41. Petty Cash Cash ESTABLISHING A PETTY CASH FUND – pg 135 August 17. Paid cash to establish a petty cash fund, $200.00. Check No. 8. 1. Which accounts are affected? Petty Cash Cash Debit Normal Balance 200.00  2. How is each account classified? Petty Cash is an asset account. Cash is an asset account. Debit Normal Balance 3. How is each classification changed? Assets are increased. Assets are decreased. 200.00  4. How is each amount entered in the accounts? Assets increase on the debit side. Assets decrease on the credit side. Lesson 6-4, page 135

42. Making Payments from Petty Cash Fund • Vouchers are used to account for money paid from the fund Petty cash slips • slip number • date of pymt • to whom paid • reason for pymt • amount paid • account to which amount is to be recorded (at the end of month) • Signature of person approving payment • NO journal entries are needed for individual payments • will be recorded later • Control feature: slip must be approved before cash is paid out

43. Petty Cash Paid Out • As petty cash is paid out, the amount in the box decreases • It gets replenished at the end of the month or when significantly reduced

44. Replenish Petty Cash – pg 137 • Some businesses set a minimum amount for when to replenish (or end of each month) • Determine balance of Petty Cash Fund. • Cash remaining + slips total • Determine amount needed to bring it back to original balance. • Journalize the entry. • Debit EACH Account petty cash was spent on (expenses or assets) • Credit Cash • Balance should always be the same as the original amount of the fund (unless business decides to increase/decrease fund)

45. Example of Replenishment entry: DR CR • Supplies 13.00 • Miscellaneous Expense 20.00 • Advertising Expense 25.00 • Cash 58.00 To journalize: Date – of replenishment Debit – each individual account Credit – Cash account – total amount Source doc: Check issued to replenish petty cash ALWAYS CREDIT CASH – NOT PETTY CASH. *EXAMPLE - Journal entry – pg 137

46. TO DO • Work Together, pg 138 • On your own, pg 138 • Application Prob 6-3, 6-4 Chapter 6 Summary: • Mastery 6-5 • Challenge 6-6 • Ch. 6 Study Guide • Extra Problem 6-1