1. Chapter Seven Bank Accounts and Cash Funds

2. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 2 Performance Objectives 1.Complete process of depositing checks 2.Reconcile a bank statement 3.Record the required journal entries directly from the bank reconciliation 4.Record journal entries to establish and reimburse a Petty Cash Fund 5.Complete petty cash vouchers and petty cash payments records 6.Record the journal entries to establish a Change Fund 7.Record journal entries for transactions involving Cash Short and Over

3. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 3 Cash Is King Why is the saying “cash is king” true? Because without cash, a business will go bankrupt (out of business) –The MAIN ACCOUNT! Therefore, accountants must accurately and efficiently account for cash

4. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 4 Cash Currency Coins Checks (until proven not to be good) Money orders Traveler’s checks Bank drafts Bank cashier’s checks

5. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 5 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 Business must have “internal controls over cash” that separate duties –Receipts of cash –Disbursements of cash –Custody, recording, and authorization must always be separated

6. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 6 Internal Controls

7. Opening a Bank Account What you provide –Signature card –Initial deposit –Identification (with proof of address) –Social Security # What you get –Checkbook w/ starter checks Check Register Deposit Slips –Debit Card Copyright © Houghton Mifflin Company. All rights reserved. 7 - 7 *Businesses will buy other materials as needed- Large Receipt books, Petty Cash Logs, and Business Check Books.

8. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 8 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

9. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 9 Signature Card

10. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 10 Checking Accounts Basics DEPOSITS –Deposit money with bank: at Bank, ATM, or Direct Deposit Cash is debited WITHDRAWALS –Withdraw money by: check, ATM machine, wire transfer, on-line transfer, or bill pay. Cash is credited

11. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 11 Depositing Checks Deposit Slips –Printed forms provided by a bank on which customers can list all items being deposited Also known as deposit tickets 1.List cash deposits and checks 2.List checks by ABA transit number (or check number) –Fraction located in upper right corner of check

12. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 12 Deposit Slips

13. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 13 ABA Number 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 68-420 1210

14. Worksheet Students will complete the “Sample Deposits, Checks, and Register sheet with the instructor. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 14

15. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 15 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

16. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 16 ATM (Automated Teller Machine) A machine that enables depositors to make: –Deposits –Transfers –Withdrawals –statements

17. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 17 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

18. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 18 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 (Special) –“Pay to the order of…” –“Without recourse –Frees endorser (original payee) from future liability if drawer does not honor the check

19. BLANK ENDORSEMENT, SPECIAL ENDORSEMENT, AND RESTRICTIVE ENDORSEMENT Blank Endorsement Restrictive Endorsement Special Endorsement Lesson 6-1, page 127

20. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 20 Endorsements

21. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 21 Check

22. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 22 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

23. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 23 How to fill out a 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

24. Preparing checks 7.Write the date. Preparing check stubs COMPLETED CHECK STUB AND CHECK 1.Write the amount of the check. 5 3 4 2 98 10 1112 1 7 6 6.Calculate the new account balance. 5.Write the amount of the check. 4.Record purpose of the check. 2.Write the date of the check. 3.Write to whom the check is to be paid. 12.Sign the check. 8.Write to whom the check is to be paid. 9.Write the amount in figures. 10.Write the amount in words. 11.Write the purpose of the check. Lesson 6-1, page 128-129

25. Personal Banking Personal checks do not have “check stubs” so instead we fill out a: check register- which is a log book of all incoming and outgoing cash transactions Copyright © Houghton Mifflin Company. All rights reserved. 7 - 25

26. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 26 Check Writer A machine that imprints the amount of a check in figures and words on the check itself

27. Assignment- Complete the sample sheet using the notes and slide examples provided thus far: –Completing Deposit Slips –Writing Checks –Adding Transactions to the check Register. For more help visit the following sites http://www.enchantedlearning.com/economics/check s/ http://www.themint.org/kids/writing-a-check.html Copyright © Houghton Mifflin Company. All rights reserved. 7 - 27

28. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 28 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

29. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 29 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

30. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 30 Debit Memo/Credit Memo Memos that come from the bank that show changes have been made to your account –Come in Mail –Come on a monthly statement

31. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 31 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)

32. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 32 Increases on Bank Statements Deposited checks Interest earned Credit memos –Bank collects from customer on your (firm’s) behalf

33. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 33 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

34. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 34 Performance Objective 2 Reconcile a bank statement

35. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 35 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

36. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 36 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

37. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 37 Ledger Balance of Cash The balance of the Cash account in the general ledger before it is reconciled with the bank statement –Which is the same as the balance in your check register for personal banking

38. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 38 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?

39. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 39 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

40. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 40 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

41. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 41 Items That Cause the Difference Items listed on bank statement, but not in ledger 1.Collections (CM) Bank collections not recorded by you 2.Interest income (CM) Revenue not recorded by firm yet 3.NSF (DM) Not recorded by firm (decrease cash, increase A/R) 4.Service charge (DM) Not recorded by firm 5.Errors Items listed in ledger, but not on bank statement 1.Deposits in transit Deposits not received by bank 2.Outstanding checks Written checks not received by bank 3.Errors

42. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 42 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

43. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 43 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

44. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 44 Reconciliation at a Firm 1.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) 2.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

45. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 45 Reconciliation at a Firm 3.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 4.Bank memoranda –Trace to journal to avoid any duplicate entries (in case an earlier memo had been sent)

46. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 46 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

47. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 47 Back of Your Bank Statement Usually, the back of the statement will have step-by-step directions for completing a bank reconciliation

48. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 48 L.A. Compton Company: An Example

49. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 49 L.A. Compton Company: An Example

50. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 50 Reconcile a Bank Statement Example of bank reconciliation: 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 by 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

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58. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 58 Must Be Equal 20--

59. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 59 Performance Objective 3 Record the required journal entries directly from the bank reconciliation

60. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 60 Journal Entries Come from the Firm's Side!

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63. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 63 Bank charges for this textbook are Misc. Expense 20--

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67. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 67 Cash Funds (Assets) Separately held reserves of cash set aside for specific purposes Examples: –Petty cash A cash fund used to make small immediate cash payments –Change fund A cash fund used by a firm to make change for customers who pay cash for goods or services

68. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 68 Petty Cash Fund Used for small cash payments –Buying stamps –Newspapers –Duplicate keys A maximum amount set for payment from petty cash Listed on the balance sheet below Cash

69. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 69 Performance Objective 4 Record journal entries to establish and reimburse a Petty Cash Fund

70. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 70 Establish Petty Cash Fund Journal entry to establish Petty Cash Fund –Once the account is created, the account is not increased (debited ) again unless the ceiling is increased by the authorized employee

71. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 71 Payments from Petty Cash Fund Designated employee keeps the petty cash in locked box Designated employee is the only person who can make payments from the fund Receipts for purchases are returned to the designated employee and kept with the petty cash fund

72. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 72 Performance Objective 5 Complete petty cash vouchers and petty cash payments records

73. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 73 Petty Cash Voucher Form stating who requested cash from the petty cash fund Signed by –The person in charge of the fund –The person who received the cash Indicates the purpose of the petty cash payment

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75. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 75 Petty Cash Payments Record Record indicating –The amount of each petty cash voucher –The accounts to which it should be charged –The purpose of the expenditure

76. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 76 Special columns for frequent types of expenditures are included in the Distribution of Payments section Partial Petty Cash Payments Record

77. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 77 Journal Entry to Reimburse a Petty Cash Fund

78. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 78 Performance Objective 6 Record the journal entries to establish a Change Fund

79. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 79 Change Fund The person in charge decides –How much money should be in account –What denomination bills and coins are needed Only debited once, when first created Listed on the balance sheet after the Petty Cash Fund (if Petty Cash Fund > Change Fund)

80. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 80 Journal Entries to Establish a Change Fund 20--

81. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 81 Change Fund in Operation Used to make change during the day As sales are made and cash is received, the new cash (sales revenue) is added to the cash register At the end of the day (or shift), all cash in the register is counted; the beginning amount (Change Fund amount) is subtracted to get the total sales (revenue) amount Total sales (revenue) amount should equal the printed cash register tape

82. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 82 Change Fund Account: An Example Does this always equal the cash register receipts? 20--

83. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 83 Performance Objective 7 Record journal entries for transactions involving Cash Short and Over

84. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 84 Cash Short and Over Human beings inevitably make mistakes The accounting system must deal with this situation Cash Short DR Like an Expense 20--

85. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 85 Cash Short and Over Human beings inevitably make mistakes The accounting system must deal with this situation Cash Short CR Like an Expense 20--

86. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 86 Cash Short and Over At the end of each day:At the end of each day: Deposited in Bank Recorded as Revenue Difference Recorded as Cash Short and Over

87. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 87 Cash Short and Over Account Revenue or expense? –Shortages are expenses Debit side of Cash Short and Over Classified as Miscellaneous Expense –Overages are revenue Credit side of Cash Short and Over Classified as Miscellaneous Revenue No plus or minus, only debits and credits –Similar to Income Summary No normal balance Like a holding tank until the end of the fiscal period

88. Copyright © Houghton Mifflin Company. All rights reserved. 7 - 88 Journal Entries for Cash Short and Over If debit balance (net shortage) If credit balance (net overage) 20--