0 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Protecting Cash In any business, cash is used in daily transactions; it is important to track cash received and paid out. Cash should be protected. There are two ways to protect cash:  internal controls  Limiting number of people handling cash  Separating accounting tasks that involve cash  Bonding employees who handle cash  Using a cash register and a safe  Depositing cash receipts in the bank daily  Making all cash payments by check  Reconciling the bank statement  external controls – done by bank (e.g. verify accuracy of signatures on checks) Banking Procedures SECTION 11.1

1 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Checking Account A checking account holds cash deposits made by the depositor, whether a person or business, and allows them to write a check against the balance. Banking Procedures SECTION 11.1 Opening a Checking Account A checking account helps a person or business  protect cash, and  provides a record of cash transactions.

2 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Signature Card A signature card and a cash deposit are needed to open a checking account. A signature card is kept on file at the bank to verify that signatures on checks are valid. Banking Procedures SECTION 11.1

3 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Checkbook A checkbook is a group of printed checks packaged together and numbered in sequential order. Banking Procedures SECTION 11.1

4 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The ABA Number Each check is printed with a check number, the bank account number, and an American Bankers Association (ABA) number. The ABA number:  identifies the bank.  speeds the hand sorting of checks. Banking Procedures SECTION 11.1

5 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Making Deposits Most businesses make daily deposits to protect the cash it receives. A deposit slip containing a detailed record of the deposits accompanies them. To complete a deposit slip:  Write the date on the Date line.  Indicate the total currency and coins on the Cash line.  List checks separately by their ABA numbers.  Add the amounts and enter the total on the Total line. Banking Procedures SECTION 11.1

6 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Endorsing Checks A business acquires the right to a check when it receives a check. The depositor’s endorsement is needed to deposit the check in the checking account. The endorsement transfers check ownership to the bank. There are three types of endorsements a business can use.  A blank endorsement does not indicate the new owner of the check.  A special endorsement transfers ownership of the check to a specific individual or business.  a restrictive endorsement places limitations on how a check may be handled after ownership is transferred. Banking Procedures SECTION 11.1

7 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording Deposits To record a deposit in the checkbook, follow these steps:  Enter the date of deposit in the Add deposits line on the check stub for the next unused check.  Enter the total amount of the deposit.  Add the deposit amounts to the amount on the Balance brought forward line and enter the total on the Total line. Banking Procedures SECTION 11.1

8 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Writing Checks Here are a few important rules to writing checks:  Complete checks in ink.  Complete the check stub before writing the check. Banking Procedures SECTION 11.1

9 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Check Stub The stub serves as a permanent record of the check and must be complete and accurate. The two parts to the check stub include  the upper part containing the amount of the check, the date, the name of the payee, and the purpose of the check, and  the lower part containing a record of how the transaction affects the checking account. Banking Procedures SECTION 11.1

10 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Check Stub The check stub is completed in the order corresponding to the numbers below. Banking Procedures SECTION 11.1

11 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Filling Out the Check To write a check, follow these steps: 1.Write the date the check is being issued. 2.Enter the payee’s name on the Pay To The Order Of line. 3.Enter the amount of the check in numbers. 4.On the next line, write the dollar amount of the check in words. 5.The drawer signs the check. The drawee is the bank on which the check is written. Banking Procedures SECTION 11.1

12 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Filling Out the Check Banking Procedures SECTION 11.1

13 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Voiding a Check Voiding a check is necessary if a mistake is made while writing a check. Write Void in big letters across the front in ink and prepare a new check. Banking Procedures SECTION 11.1

14 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Proving Cash Comparing the Cash in Bank account balance with the checkbook is called proving cash. If the two amounts do not match, there is probably an error in the checkbook. Common checkbook errors are:  faulty addition or subtraction  failure to record a deposit or a check  a mistake in copying the balance forward amount to the next check stub Reconciling the Bank Statement SECTION 11.2

15 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Bank Statement A bank statement contains an itemized record of all transactions in a depositor’s account. A bank returns the canceled checks, usually as imaged checks, with the bank statement. When these are received, the statement is compared to the checkbook, called reconciling the bank statement or bank reconciliation. A checkbook can be out of balance due to:  outstanding checks  outstanding deposits  bank charges Reconciling the Bank Statement SECTION 11.2

16 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Outstanding Checks and Deposits Outstanding checks are checks that have been written, but have not been presented to the bank for payment. Outstanding deposits are deposits that have been made and recorded but do not appear on the bank statement. Reconciling the Bank Statement SECTION 11.2

17 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Bank Service Charges A bank service charge is a fee for maintaining bank records and processing bank statement items for the depositor. This fee is subtracted from the depositor’s account and must be subtracted from the checkbook balance before reconciling. Reconciling the Bank Statement SECTION 11.2

18 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Interest Paid Some checking accounts earn interest on account funds. The interest amount must be recorded in the checkbook, journalized, and posted. Reconciling the Bank Statement SECTION 11.2

19 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Bank Reconciliation Reconciling the Bank Statement SECTION 11.2

20 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Journalizing Bank Service Charges Bank service charges must be recorded in the accounting records. An example of recording a bank service charge follows: Reconciling the Bank Statement SECTION 11.2

21 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Reconciling the Bank Statement SECTION 11.2

22 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Special Banking Procedures Three problems may occur when checks are written or received and deposited:  A business does not want the bank to pay an issued check.  A business receives and deposits a check from a customer whose account does not have enough money to cover the check.  A customer presents a check that has a date in the future. Reconciling the Bank Statement SECTION 11.2

23 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Stopping Payment on a Check A stop payment order is issued when a drawer instructs the drawee not to pay a check. To record a stop payment order:  Write Stopped Payment on the check stub for the stopped check.  Add the amount of the stopped check on the next unused check stub. Reconciling the Bank Statement SECTION 11.2

24 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording NSF Checks An NSF check is returned to the depositor because the drawer’s account does not have enough funds to cover the amount. NSF stands for Not Sufficient Funds. The Check Clearing for the 21 st Century, known as Check 21, allows the conversion of a paper check to an electronic image that can be processed quickly. A bank can pay a check on the same day it is written, instead of several days later. Reconciling the Bank Statement SECTION 11.2

25 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Postdated Checks A check that has a future date instead of the actual date is called a postdated check. It should not be deposited until the date that appears on the check. Reconciling the Bank Statement SECTION 11.2

26 Glencoe Accounting Unit 2 Chapter 11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Electronic Funds Transfer System The electronic funds transfer system (EFTS) handles large volume of funds transfers and allows banks to transfer funds among accounts quickly and accurately. There are several ways EFTS impacts banking activities:  direct payroll deposit  automated bill paying  bankcards used at automated teller machines (ATMs)  bank-by-phone  online banking Reconciling the Bank Statement SECTION 11.2