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Happiness is having all homework up to date Homework assignment Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60 Points. Prepare for Chapters 7, 8, and 9 for revision and third exam. Happiness is having all homework up to date Atef Abuelaish

Bank Activities Write a check, endorse checks, prepare a bank deposit slip, and maintain a checkbook balance. Objective 4 discusses proper banking procedures involving checks, deposits and maintaining a checkbook. Let’s talk about checks first. A check is a written order signed by an authorized person instructing a bank to pay a specific sum of money to a designated person or business. The drawer is the person or firm issuing a check. The drawee is the bank on which a check is written. The payee is the person or firm to whom a check is payable.

This check is a negotiable financial instrument. Checks and Check Stubs Here are two checks. The firsts check to The Maxx-Out Sporting Goods was written for two months rent equaling $1,500. See if you can identify the parties on a check as previously described. Keep in mind that a check is a negotiable instrument. A financial instrument is negotiable if ownership can be transferred to another person or business. This check is a negotiable financial instrument.

Check Stubs Before writing the check, complete the check stub. The check stub shows: The check stub will show the balance before the check was written and then the balance in the checking account, after the check is subtracted. To be valid, checks need an authorized signature. For Maxx-Out Sporting Goods only Max Ferraro, the owner is authorized to sign checks. Debit cards (also called check cards) look like credit cards or ATM (automated teller machine) cards, but operate like cash or a personal check. Balance brought forward: $12,025.50 Check amount: $1,500 Balance: $10,525.50

Endorsements Maxx Ferraro 38-14-98867 Full Endorsement PAY TO THE ORDER OF FIRST TEXAS NATIONAL BANK Maxx-Out Sporting Goods 38-14-98867 Blank Endorsement Restrictive Endorsement An endorsement is a written authorization that transfers ownership of a check. There are three types of endorsements: Blank endorsement Full endorsement Restrictive endorsement Make sure you know the difference between the three. Here are examples of all three endorsements. Maxx Ferraro 38-14-98867 PAY TO THE ORDER OF FIRST TEXAS NATIONAL BANK FOR DEPOSIT ONLY Maxx-Out Sporting Goods 38-14-98867

Preparing the Deposit Slip The deposit slip for Maxx-Out Sporting Goods shows the date, January 8. Currency is the paper money, $1,810.00. Coin is the amount in coins, $219.80. The checks and money orders are individually listed. Some banks ask that the American Bankers Association (ABA) transit number for each check be entered on the deposit slip. The transit number appears on the top part of the fraction that appears in the upper right corner of the check. The transit number is 1210-8640. Occasionally a business will receive a postdated check. A postdated check is dated some time in the future. If the business receives a postdated check, it should not deposit it before the date on the check. Otherwise, the check could be refused by the drawer’s bank.

Reconcile the monthly bank statement. The difference between the bank balance and the book balance is due to errors. Errors made by banks Errors made by businesses Arithmetic errors Arithmetic errors Giving credit to the wrong depositor Not recording a check or deposit Objective 5 is to prepare a bank reconciliation. This is done by comparing the bank statement to the accounting records maintained by the company. The bank reconciliation reconciles the two balances. Sometimes the difference between the bank balance and the book balance is due to errors. Sometimes it is due to timing errors. It is important to understand the basic types of reconciling items. Charging a check against the wrong account Recording a check or deposit for the wrong amount Many banks require that errors in the bank statement be reported within a short period of time, usually 10 days.

Why balances may not equal Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank statement. 1. Outstanding checks. 2. Deposit in transit. 3. Service charges and other deductions not recorded in the business records. 4. Deposits, such as the collection of promissory notes, not recorded in the business records. Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank statement. It is important that you know the definition of each of these and how they would be recorded on a typical bank reconciliation. Outstanding checks are checks that have been recorded in the cash payments journal but have not yet been paid by the bank. Deposit in transit is a deposit that is recorded in the cash receipts journal but that reaches the bank too late to be shown on the monthly bank statement.

Format of a bank reconciliation statement Bank statement balance First Section Second Section = Bank statement balance Book balance + deposits in transit + deposits not recorded – outstanding checks – deductions Here is the format of a typical bank reconciliation. + or – bank errors + or – errors in books Adjusted bank balance = Adjusted book balance

The Bank Side of the Bank Reconciliation Steps to prepare the bank reconciliation statement: First Section Enter the balance on the bank statement. Compare the deposits in the checkbook with the deposits on the bank statement. List the outstanding checks. List any bank errors. Compute the adjusted bank balance. Let’s prepare the first section. First, enter the end of month bank statement balance listed on the bank statement, then compare the deposits in the checkbook with the deposits on the bank statement. Next, list the outstanding checks. If the bank has incorrectly debited an account or made any other errors, list those. Finally, compute the adjusted bank balance.

The Book Side of the Bank Reconciliation Steps to prepare the bank reconciliation statement: Second Section Enter the balance in books from the Cash account. Record any deposits made by the bank that have not been recorded in the accounting records. Record deductions made by the bank. Record any errors in the accounting records that were discovered during the reconciliation process. Compute the adjusted book balance. Now it is time to prepare the second section of the bank reconciliation. First, enter the balance in books from the Cash account. Second, total and record any deposits made by the bank have not been recorded in the accounting records. Next, record deductions made by the bank, for example, a service charge. Fourth, record any errors uncovered during the reconciliation process. Finally, compute the adjust book balance. The adjusted bank balance and the adjusted book balance should agree.

Record any adjusting entries required from the bank reconciliation. For Maxx-Out Sporting Goods, two entries must be made. GENERAL JOURNAL PAGE 17 DATE DESCRIPTION POST. DEBIT CREDIT REF. Jan 31 Accts. Rec./David Newhouse 525.00 Bank Fees Expense 25.00 Cash 550.00 To record NSF check and service charge In the bank reconciliation process, steps 2 and 3 in section 2 involve recording additions or deductions made by the bank that are not yet included in the accounting records. Journal entries must be prepared to account for these items. For Maxx-Out Sporting Goods, two entries must be made: Debit Accounts Receivable for the NSF check from David Newhouse and credit the Cash account. Debit Bank Fees Expense for the monthly bank charges and credit Cash for the same $25. In the above entry, the two charges are entered as one adjusting entry. The first entry is for the NSF check from David Newhouse, a credit customer. The second entry is for the bank service charge. The effect of the two items is a decrease in the Cash account balance.

Many businesses now manage many transactions online: Understand how businesses can use online banking to manage cash activities. Using On-line Banking Many businesses now manage many transactions online: Electronic Funds Transfers – EFT’s Payments to government agencies Payments from customers Payments to vendors More and more businesses are managing a significant portion of their cash transactions online. Online banking offers efficient features including electronic fund transfers, payments for taxes to government agencies, receipt of EFT payments from customers and payments to vendors. There are usually no source documents for the transactions listed above. Careful attention must be paid to insure all EFT and other transactions initiated electronically are recorded in the accounting records.

Recording Sales for Cash and On Account. The journal entry to record a sale of $500 for cash on January 2 The Sales account is the primary revenue account for a merchandising company. Let’s suppose Maxx-Out Sporting Goods sells merchandise for cash and on account. The journal entry to record a sale of $500 for cash on January 2 is provided in this slide.

Recording Sales for Cash and On Account On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record the sale Maxx-Out Sporting Goods also grants credit terms to certain customers. One of those customers is Roy Anderson. On January 3, Maxx-Out Sporting Goods sold merchandise on credit to Roy Anderson, issuing Sales Slip 1101 for $400. The journal entry to record that sale is presented in this slide.

Recording Sales for Cash and On Account The journal entry records Roy Anderson’s payment of the amount due on January 31. The journal entry presented in the slide records Roy Anderson’s payment of the amount due on January 31.

Recording Sales with Sales Tax Payable for Cash and On Account The journal entry to record a sale of $500 plus tax for cash follows. Most state and many local governments impose a sales tax on the sale of certain goods and services. Businesses are required to collect this tax from their customers and pay to tax agency. When taxable goods and services are sold on credit, the sales tax is usually recorded at time of sale, even though it will be collected from the customer later. A liability account called Sales Tax Payable is credited for the sales tax charged. If Maxx-Out Sporting Goods was required to charge its customers an 8 percent sales tax, the amount collected for the sales tax on a $500 sale for cash would be $40 ($500 * 8% = $40). The amount collected from the customer would be $540 ($500 for the merchandise, plus $40 for the sales tax). The journal entry to record a sale of $500 plus tax for cash is presented in the slide.

Recording Sales with Sales Tax Payable for Cash and On Account The journal entry to record the sale of merchandise on credit. If Maxx-Out Sporting Goods sold merchandise on credit to Ann Anh on January 8 for $600 plus tax, it would bill Ann Anh for $600 plus tax of $48 (600 * 8% = $48). The total amount billed would be $648 ($600 for the merchandise, plus $48 for the sales tax). The journal entry to record that sale is presented in the slide.

Cash Refund The journal entry to record a cash refund: The journal entry to record a cash refund for a return on January 2 of $100 in merchandise sold for cash, plus sales tax of $8, is presented in the slide.

Credit Card Transactions Journal entry to record the sales made to customers using bank credit cards on January 15. This is how a journal entry to record the sales made to customers using bank credit cards on January 15 should look.

Maxx-Out Sporting Goods sells merchandise on January 16 totaling $1,000 to customers paying with American Express, plus 8 percent sales tax. American Express charges a 7 percent discount fee. The discount withheld by American Express would be $75.60 ($1,080.00 X 7%). This is an example of sales to customers using nonbank credit cards

American Express Charges and Payments Journal entry to record the sales on January 16 and the subsequent payment on January 23 by American Express This is how a journal entry to record the sales of a payment by American Express should look.

Compute and record cash discounts on sales. Modern Sportsman, a wholesaler, records the sale and subsequent payment received follow. Modern Sportsman, a wholesaler, offers credit terms of 1/10, n/30 to its customers. On January 20, Modern Sportsman sold merchandise for $2,000 on account to Maxx-Out Sporting Goods, issuing Invoice 909. Modern Sportsman received payment for Invoice 909, less the cash discount of $20 ($2,000 1%), on January 29.

Purchasing Procedures The Sales Department sends an authorized purchase requisition to the Purchasing Department The Purchasing Department issues an authorized purchase order and sends to the selected supplier A receiving report is prepared when the merchandise is received For good internal control, normally three departments will be involved in purchasing merchandise for a company. You should study basic internal documents that are needed in the purchasing department and become familiar with them. These documents include a purchase requisition, a purchase order, a receiving report, and an invoice. The Accounting Department receives the invoice and copies of the purchase order and receiving report

Cost of Goods Sold Price of goods (debit Purchases) $4,760.00 Total invoice (credit Accounts Payable) $5,120.00 Freight charge (debit Freight In) 360.00 Purchases + Freight In = Accounts Payable Dr. 4,760 Cr. Dr. 360 Cr. Dr. Cr. 5,120 The account is treated as a Cost of Goods Sold account because it increased the cost of the merchandise purchased. The Cost Of Goods Sold accounts have normal debit balances

Purchases with Freight Maxx-Out Sporting Goods purchased merchandise from Modern Sportsman on January 15. Modern Sportsman paid the freight charge and included it on their invoice 1100. Maxx-Out Sporting Goods enters three elements in the accounting records: Price of goods Freight charge Total invoice The journal entry to record the purchase of merchandise on credit in a general journal and posting to respective accounts is presented in the slide. 29

Payment of Invoice with freight The journal entry to record payment of this invoice on January 30 using check number 152 appears below: This is how the journal entry to record this payment should appear. 30

Recording Purchases Returns And Allowances On January 15 Maxx-Out Sporting Goods received merchandise costing $4,760 from Modern Sportsman with freight charges of $360 paid by Modern Sportsman. This is the original entry that was made on January 15. This is how the journal entry to record the transaction should look. 31

Recording Purchases Returns And Allowances Some goods received from the January 15 purchase were damaged, and the supplier granted a $476 purchase allowance on their credit memo #103 dated January 27. Notice the entry to record the receipt of the credit memorandum from Modern Sportsman reduces Accounts Payable by debiting it for $476. 32

Recording the payment on account: Accounts Payable Purchases Returns and Allowances 476 476 The amount owed to Modern Sportsman, after the purchase allowance, is $4,644 ($5,120 - $476 = $4,644). The entry to pay the amount owed to Modern Sportsman on January 31 with check number 153 is presented in the slide. 33

Purchases Discounts Net 30 days or n/30: Payment in full is due 30 days after the date of the invoice. Net 10 days EOM, or n/10 EOM: Payment in full is due 10 days after the end of the month in which the invoice was issued. 2% 10 days, net 30 days; or 2/10, n/30: If payment is made within 10 days of the invoice date, the customer can take a 2 percent discount. Otherwise, payment in full is due in 30 days. A business may be able to take advantage of an early payment discount if it pays the invoice within a certain period of time. Here are some examples of credit terms which a seller might give a firm on a purchase. Take a moment to review the most common ones. Cash discounts are given to encourage early payment. A cash discount is a discount offered by suppliers for payment received within a specified period of time. If a customer pays within a period of time it may receive a “cash discount” called a purchase discount. 34

Recording Purchases Discounts Maxx-Out Sporting Goods received merchandise costing $3,000 from The Modern Sportsman on January 10, Invoice 880, terms 2/10, n/30, with freight charges of $200 paid by Modern Sportsman and added to the invoice. Maxx-Out Sporting Goods recorded the purchase as presented in the slide.

Recording Purchases Discounts Maxx-Out Sporting Goods paid the amount due, after deducting a $60 discount ($3,000 * 2%), on January 19 with check number 150. The balance owed to Modern Sportsman was paid using check 150.

Purchase return processed within the discount period If there is a purchase return processed within the discount period, the buyer is entitled to take the cash discount only on the balance owed after the return. To illustrate, a purchase of $500 from Modern Sportsman on January 11, terms 2/10, n/30, with freight of $25 added, Invoice 910; a return of $100 on January 12, credit memorandum 112; and the final payment on January 20, check 149. The amount to be paid on January 20 is $417, calculated as follows: Original amount owed $525 Less: purchase return 100 Difference 425 Less: discount ($400 X 2%) 8 Amount paid $417

Recording Merchandise Purchased with a Trade Discount The journal entry to record the purchase on January 20 is presented in the slide. If Maxx-Out Sporting Goods pays the invoice within 10 days, it will be entitled to a $14.40 discount (2% X $720). The amount paid will be $705.60 ($720 - $14.40 = $705.60). The journal entry to record the payment on January 29 with check number 151 is presented in the slide.

The Accounts Payable Ledger Post transactions to the accounts payable subsidiary ledger. The Accounts Payable Ledger An accounts payable ledger is a subsidiary ledger that contains a separate account for each creditor. Many businesses use an accounts payable subsidiary ledger to track amounts owed, to whom they are owed, when they are due, and discount terms. This ensures that the firms will have enough cash to pay for obligations. Let’s review what an accounts payable subsidiary ledger looks like. It is similar to the accounts receivable subsidiary ledger discussed in the previous chapter. The accounts payable ledger has three money columns. The Balance column is presumed to contain credit amounts. 39

Posting to the subsidiary ledger: Posting from the general journal to the accounts payable ledger is similar to posting the accounts receivable subsidiary ledger. The posting to the vendor’s account in the accounts payable subsidiary ledger is signified by entering a “/ ”, followed by a check mark, after the account number for accounts payable in the chart of accounts.

Account for Cash Short or Over Royal Jewelry Store, a retail business, keeps a $200 change fund in its cash register. Royal Jewelry Store started business on September 29. The cash sales as per the cash register tape on September 29 were $2,200. The cash count was $2,397. The cash register was short by $3, calculated as follows. Here is an example of how to calculate cash short at the end of the trading day. On September 29,the change fund was $200, cash sales was $2,200, and at the end of the day cash count was $2,397. So the cash short is $3.

Account for Cash Short or Over Journal entry to record the sales and cash shortage: This is how the journal entry to record the sales and the cash shortage should look. In this case there is a shortage, and so the cash short or over account is debited for three dollars.

Account for Cash Short or Over The cash sales as per the cash register tape on September 30 were $2,100. The cash count was $2,301. The cash register was over by $1, calculated as follows. Here is an example of how to calculate cash over at the end of the trading day. On September 30, the change fund was $200, cash sales was $2,100 , and at the end of the day, the cash count was $2,301. So the cash over is $1.

Account for Cash Short or Over Journal entry to record the sales and cash overage To record the overage computed on the previous slide, the cash short or over account is credited for one dollar. After these journal entries have been posted, the balance in the Cash Short or Over account on September 30 is a $2 debit. This will be reported as an expense on the income statement for the period ended September 30. If the Cash Short or Over account would have had a credit balance. It would have been reported as a revenue on the income statement for the period ended September 30.

Cash Received on Account Generally a business makes sales on account and bills customers once after a specified period (say, a month.) It sends a statement of account that shows the transactions during the month and the balance owed. Checks from credit customers are journalized and posted, and then the checks are deposited in the bank. Maxx-Out Sporting Goods makes sales on account and bills to customers once a month. It sends a statement of account that shows the transactions during the month and the balance owed. Customers are asked to pay within 30 days of receiving the statement. Checks from credit customers are journalized and posted, and then the checks are deposited in the bank.

Promissory Note A promissory note is a written promise to pay a specified amount of money on a certain date. Promissory notes are specified interest bearing notes. They are used by businesses to extent credit. Also used to replace an accounts receivable balance when an account is overdue. A promissory note provides a more legal protection than an account receivable. The next slide shows a promissory note.

Collection of a Promissory Note and Interest On July 31 Maxx-Out Sporting Goods accepted a six-month promissory note from Stacee Fairley, who owed $800 on account. Sometimes promissory notes are issued on account to satisfy an overdue account. Here is a promissory note accepted from one of Maxx-Out’s customers. The note is due in six months and the customer will have to pay interest at the rate of 9% on the amount of $800.

On July 31, Maxx-Out Sporting Goods recorded a general journal entry to increase notes receivable and to decrease accounts receivable for $800. The asset account, Notes Receivable, was debited. The Accounts Receivable account was credited. This is the journal entry in the general journal to record receipt of the note from the customer that owed $800. This is sometimes referred to as a conversion journal entry.

Computation of Interest Amount owed = $800 Interest rate = 9% per year Rate for six-month period = (9%) ÷ 2 = 4.5% Interest amount = $800 x 4.5% = $36 Total amount with interest = $800 + $36 = $836 At the end of the note, we will need to compute interest. The interest on the note will be $36 and so the total amount due upon maturity of the note will be $836.

Establishing the fund The amount of petty cash fund depends upon the need of the business. The cashier is responsible for the petty cash. The establishment of petty cash fund should be recorded as: Here is an example of the establishment of a petty cash fund by Maxx-Out Sporting Goods. Maxx-Out Sporting Goods wrote a $175 check to the cashier on February 1, using check number 160.

The Petty Cash Analysis Sheet Used to record transactions involving petty cash. Contains two major columns: Receipts and Payments. Contains special columns such as: Supplies, Delivery Expense, and Miscellaneous Expense. Other Accounts Debit column for entries that do not fit in a special column. Most businesses use a petty cash analysis sheet to record transactions involving petty cash. In addition to the main columns Receipts and Payments, the analysis sheet also contains special columns for accounts that are used frequently and an Other Accounts Debit column for entries that do not fit in a special column.

Replenishing the Fund The total vouchers plus the cash on hand should always be equal to the amount of the fund. Replenish the petty cash fund at the end of each month or sooner if the fund is low. A check is written to restore the petty cash fund to its original balance. A journal entry is prepared to record the check. The total vouchers plus the cash on hand should be always equal to the amount of the fund. The fund should be “replenished” at the end of each month or sooner if the fund is low.

The Petty Cash Analysis Sheet Total Payment equal Total of individual expense accounts This slide shows an example of the Petty Cash Analysis sheet. The total payments during the month are replenished at the end of the month or when needed with the total amount of payments made. Replenish fund equals the Total Payments

Happiness is having all homework up to date Homework assignment Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60 Points. Prepare for Chapters 7, 8, and 9 for Exam # 3, On… Happiness is having all homework up to date Atef Abuelaish

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