Cash and Bank Accounts 101 - A Guide to Managing Cash Transactions

1. Chapter Seven Bank Accounts and Cash Funds

2. Performance Objectives • Describe the procedure for depositing checks • Reconcile a bank statement • Record the required journal entries directly from the bank reconciliation • Record journal entries to establish and reimburse a Petty Cash Fund Accounting is Fun!

3. Performance Objectives • Complete petty cash vouchers and petty cash payments records • Record the journal entries to establish a Change Fund • Record journal entries for transactions involving Cash Short and Over Accounting is Fun!

4. Cash Is King • Why is the saying “cash is king” true? • Because without cash, a business will go bankrupt (out of business) • Therefore, accountants must accurately and efficiently account for cash • Cash Is King, yes, but…how about: • Cash Is Queen! Accounting is Fun!

5. Cash • Currency • Coins • Checks (until proven not to be good) • Money orders • Traveler’s checks • Bank drafts • Bank cashier’s checks … Accounting is Fun!

6. Rules for Cash All cash received during a day should be deposited at the end of the day So it won’t get stolen So you can earn interest All cash paid (disbursements), should be paid by check Check is best record of transaction Business must have “internal controls over cash” that separate duties Receipts of cash Disbursements of cash Custody, recording, and authorization must always be separated Accounting is Fun!

7. Internal Controls Accounting is Fun!

8. Checking Accounts • Deposit money with bank • Recorded as an asset for depositor • Recorded as a liability for bank • Withdraw money by check, ATM machine, wire transfer, on-line transfer, or bill pay Accounting is Fun!

9. Signature Card Accounting is Fun!

10. Signature Card • The form a depositor signs to give the bank a copy of the official signatures of any persons authorized to sign checks • Used to verify depositors’ signatures on checks Accounting is Fun!

11. Check Drawer’s printed address Check number Date ABA transit number Pay to the order of: Payee’s name Amount line: Write close to dollar sign Amount in words Use “and” between dollars and fraction of dollars Use entire line ---------- Words supersede numerals for amount Bank’s address Signature line Should match signature on signature card Accounting is Fun!

12. Check Accounting is Fun!

13. ABA Number 68-420 1210 • The number assigned by the American Bankers Association to a given bank • The first part of the numerator denotes the city or state in which the bank is located • The second part denotes the bank on which the check is drawn • The denominator indicates the Federal Reserve District in which the check is cleared and the routing number used by the Federal Reserve Bank Accounting is Fun!

14. MICR • Magnetic ink character recognition • The characters the bank uses to print the number of the depositor’s account and the bank’s number at the bottom of checks and deposit slips • The bank also prints the amount of the check in MICR when the check is deposited • A number written in these characters can be read by electronic equipment used by banks in clearing check Accounting is Fun!

15. Writing Checks • Who is the drawer? • Person who writes check • Who is the payee? • Person to whom the payment is made • What is a check? • Order by drawer for bank to make payment to payee • Check stub or check carbon copy • Basis for journal entry Accounting is Fun!

16. Performance Objective 1 Describe the procedure for depositing checks Accounting is Fun!

17. Depositing Checks • Deposit Slips • Printed forms provided by a bank on which customers can list all items being deposited • Also known as deposit tickets • List currency, coin, and checks • List checks by ABA transit number • Fraction located in upper right corner of check Accounting is Fun!

18. Deposit Slips Accounting is Fun!

19. Endorsing Checks • Endorsements • Must be made by signing or stamping on back left end of check • Transfer legal title (allows bank to collect for depositor) • Authorize the payment of the check Accounting is Fun!

20. Types of Endorsements • Restrictive endorsement • Restricts or limits further transfer of title • Example: “for deposit only” • Blank endorsement • Signature of payee only – does not restrict further transfer • Qualified endorsement • “Pay to the order of…” • “Without recourse • Frees endorser (original payee) from future liability if drawer does not honor the check Accounting is Fun!

21. Endorsements Accounting is Fun!

22. What Is It? Q: Check that has not been filled out? A: Paper Q: Signed check made out to you? A: Asset Q: Canceled check that has been returned to you? A: Record of business transaction A: Proof that you paid someone Accounting is Fun!

23. Bank Statement • A periodic statement that a bank sends to the drawer/depositor of a checking account listing deposits received and checks paid by the bank, debit and credit memos, and beginning and ending balances Accounting is Fun!

24. Bank Statement Shows • Beginning balance • Additions to your account • Deposits • Credit memos (from bank’s point of view) • Deductions from your account • Written checks • Debit memos (from bank’s point of view) • Ending balance Accounting is Fun!

25. Debit Memo/Credit Memo From banks’ point of view Your account is a liability When they decrease the cash in your account, banks debit their liability When they increase the cash in your account, banks credit their liability Debit/credit memos may come in the mail as a separate document Debit/credit memos may appear on the monthly bank statement Accounting is Fun!

26. Bank’s Liability Is the Depositor’s Asset (page 223) Accounting is Fun!

27. Deductions on Bank Statements • Canceled checks (checks written) • Debit memos • NSF (not sufficient funds) check • Someone else’s check bounces • Also called dishonored check • ATM withdrawals • Service charges (amount depends on type of account) • Monthly charge • Printed check charge • Money transfer charge • PBP (pay by phone) • OD (overdraft protection – balance appears negative) • EC (error correction) Accounting is Fun!

28. Increases on Bank Statements • Deposited checks • Interest earned • Credit memos • Bank collects from customer on your (firm’s) behalf • EC (error correction) Accounting is Fun!

29. Canceled Checks • Checks issued by the depositor that have been paid (cleared) by the bank and listed on the bank statement • Canceled by a stamp or perforation, which indicates that they have been paid • Canceled checks in the firm’s possession furnishes the best proof that an amount has been paid! Accounting is Fun!

30. Performance Objective 2 Reconcile a bank statement Accounting is Fun!

31. Definitions • Service Charge • Fee the bank charges for handling checks, collections, and other items • In the form of a debit memorandum • NSF (Not Sufficient Funds) Checks • Checks drawn against an account in which there are not sufficient funds and returned by the payee’s bank to the drawer’s bank because of nonpayment • Also known as: • Dishonored checks • Bounced checks Accounting is Fun!

32. Definitions • Collections • Payments collected by the bank and added to the customer’s bank account in the form of a credit memorandum • Promissory Note • A written promise to pay a definite sum at a definite future time Accounting is Fun!

33. Ledger Balance of Cash • The balance of the Cash account in the general ledger before it is reconciled with the bank statement Accounting is Fun!

34. Firm’s Point of View(Your Point of View) • Are the records you keep for the Cash account the same as the bank’s records? • Before you received your bank statement, did you record in the journal and then post to the ledger accounts the following items: • Service charge? • Interest earned? • Bounced check? Accounting is Fun!

35. Bank Reconciliation • A process by which a person determines whether and why there is a difference between the balance shown on the bank statement and the balance of the Cash account in the firm’s general ledger • The object is to determine the adjusted (or true) balance of the Cash account Accounting is Fun!

36. The Essence of Bank Reconciliation Made Simple There are some things listed on the bank statement that are not listed in the firm’s journal and ledger You must find them in the bank statement and put them into the journal and ledger There are some things in the firm’s journal and ledger that are not listed on the bank statement You must find them and use them in reconciling the bank statement's balance and the firm’s ledger balance of Cash Accounting is Fun!

37. Items That Cause the Difference Items listed on bank statement, but not in ledger Collections (CM) Bank collections not recorded by you Interest income (CM) Revenue not recorded by firm yet NSF (DM) Not recorded by firm (decrease cash, increase A/R) Service charge (DM) Not recorded by firm Errors Items listed in ledger, but not on bank statement Deposits in transit Deposits not received by bank Outstanding checks Written checks not received by bank Errors Accounting is Fun!

38. Definitions • Deposit in transit • A deposit not recorded on the bank statement because the deposit was made between the time of the bank’s closing date for compiling items for its statement and the time the statement is received by the depositor • Also known as a late deposit • Outstanding checks • Checks that have been written by the drawer and deducted on his or her records but have not reached the bank for payment and are not deducted from the bank balance by the time the bank issues its statement Accounting is Fun!

39. Separation of Duties • Always Remember • The person who does the reconciliation should not have access to the accounting records or custody of (access to) the cash • In smaller firms, one person may do all the tasks Accounting is Fun!

40. Reconciliation at a Firm • Canceled Checks • Look at canceled checks and make sure that the amounts listed on statement or on lower right-hand corner of check are the same as in the ledger • In checkbook next to check number, write bank statement date (makes it easy to track potential disputes) • Deposits • Compare deposits in transit from last bank reconciliation to deposits listed on current statement • Notify bank if all past DIT are not listed • Compare deposits listed on statement to accounting records; checks not listed are considered DIT Accounting is Fun!

41. Reconciliation at a Firm • Outstanding checks • Arrange canceled checks by check number • Compare last month’s outstanding check list to canceled checks and cleared checks • Make sure amounts are the same on bank side and ledger side • Mark correctly paid checks with a check mark (the ones remaining without a check mark are outstanding) • Review endorsements to insure that the correct payee got paid • Bank memoranda • Trace to journal to avoid any duplicate entries (in case an earlier memo had been sent) Accounting is Fun!

42. Steps in Reconciling Start with Bank statement balance Add Deposits in transit Bank errors that understate balance Deduct Outstanding checks Bank errors that overstate balance Arrive at Adjusted bank statement balance Start with Ledger balance of Cash Add Credit memos Book errors that understate balance Deduct Debit memos Book errors that overstate balance Arrive at Adjusted ledger balance of Cash Must Be Equal Journal Entries Come from This Side Bank side Depositor side Accounting is Fun!

43. Back of Your Bank Statement • Usually, the back of the statement will have step-by-step directions for completing a bank reconciliation Accounting is Fun!

44. L.A. Compton Company: An Example Accounting is Fun!

45. L.A. Compton Company: An Example Accounting is Fun!

46. Reconcile a Bank Statement • Bank statement balance = $8,966.00 • Ledger balance of Cash = $8,330.50 • After verifying canceled checks • DIT = $1,303.00 • Outstanding checks • #1916 = $461.00 • #2022 = $119.00 • #2023 = $827.00 • #2024 = $67.00 • Credit memo on bank statement: note collected by bank from Lee & Brock • Promissory note repayment = $600.00 • Interest on note = $6.00 • Ck. No. 2001 mistakenly recorded in journal as $532.00 (correct amount = $523.00) for payment on account to Davis, Inc. • Debit memo on bank statement • Collection/service charge = $ 5.50 • NSF check from D. M. Scott = $125.00 • ATM withdrawal not recorded in journal = $20.00 Example of bank reconciliation: Accounting is Fun!

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