Cash Control and Banking
Activities
Chapter 11
Protecting Cash
Pg 278
• Cash dangers are ever present: loss, waste, theft, forgery,
and embezzlement
• Internal Control Protection
1. Limiting the number of persons handling cash
2. Separating accounting tasks involving cash (receipt,
payments, records)
3. Bonding (insuring) employees who handle cash or cash
records
4. Using a cash register and a safe
5. Depositing cash in the bank daily
6. Making all cash payments by check
7. Reconciling the bank statement
• External Control Protection – the measures and procedures
provided outside the business to protect cash and other
assets. Ex. Banking controls
The Checking Account
• A checking account allows a person or
business to deposit cash/checks in a bank and
to write checks against the account balance.
• A check is a written order from a depositor
telling the bank to pay a stated amount of
cash to the person or business named on the
check
• A depositor is a person or business that has
cash on deposit in a bank (account holder)
Pg 278
Opening a Checking Account
• *Shop around to find an
account that fits your needs
and that is affordable
• Signature Card – all new
account holders are required
to sign a signature card. It
contains the signatures of the
person(s) authorized to write
checks on the account. It is
used to compare signatures on
checks if there is a question of
fraud
– *The signature card also acts
as your contract with the bank
as to your personal information
and your agreement to follow
the rules of the account
Pg 279
Checks
• The Checkbook – Using checks with preprinted
numbers helps a business keep track of every
check that is written
• The ABA Number – On all preprinted checks is a
MICR encoded number at the top and bottom of
each check. It identifies the bank the account is
drawn off of and allows for electronic processing
of checks to speed the process
Pg 279
Making Deposits
• A business makes regular deposits to protect the
currency, coins and checks it receives.
• Deposit Slips are made and given to the bank
along with the items being deposited. It details
what is being deposited, number of items, and
amounts. (another way to control cash flow)
• Deposit slips consist of
1.
2.
3.
4.
The Date
The amount of Cash
A list of Checks
A total for the deposit
Endorsing Checks
• Endorsement is an authorized signature written or stamped
on the back of a check that transfers ownership of the
check.
• A business can use 3 types of endorsements
1.
2.
3.
•
Blank Endorsement – includes only the signature or stamp of
the depositor. It transfers ownership of the check, but it
doesn’t not indicate who the new owner is. This is not a safe
endorsement because the check can be cashed by anyone
who presents it for payment.
Special Endorsement – transfers ownership of the check to a
specific person or business
Restrictive Endorsement – transfers ownership to a specific
owner and then limits, or restricts, how a check may be
handled even after ownership is transferred.
To protect checks being cashed by anyone else,
Roadrunner uses a restrictive endorsement that reads
“For Deposit Only”. It is stamped on the back of each
check as soon as it is received.
3 Endorsements
Pg 281
Recording Deposits
• The check stubs in the check
book are a record of the Cash In
Bank account. The completed
stub reflects all checking account
transactions: payments, deposits,
and bank service charges
• Process of recording deposits:
Pg 281
1. Enter the date of the deposit on the check stub of
the next unused check on the deposit line
2. Enter the total amount of the deposit on the same
line in the dollars and cents column
3. Add the deposit amounts to the amount on the
Balance Brought Forward line and put that amount
on the Total line. This is the new checkbook balance.
Writing Checks
• Always write checks in ink
• Always fill out a check completely
• Complete the check stub BEFORE writing the
check
– Because the stub serves as a permanent record of
the check, it must be complete and accurate
– The top of the check stub is dedicated for
information about the check being written
– The bottom of the check stub is for keeping track
of current balance and deposits made to the
account
Parts of a Check
• Date – This is the date you write the check
– Post dating is writing a check and dating for a day in the future. Banks do
not have to honor the post date. Once a check is signed, it is valid and can
be processed.
• Payee – The Pay To The Order Of line – This is where the account holder
designates who has the rights to the amount on the check
• Number Amount – The amount of the check signified in numeric fashion
• Legal Line – The amount of the check written out in words. *If there is a
difference between the number amount and the legal line, the bank is
obligated to take the amount written on the legal line.
• Memo Line – This is an optional space for keeping track of notations about the
check
• Signature Line – Where the account holder signs their name authorizing the
bank to pay the amount on the check to the payee.
• Drawer – the person who signs the check
•
Drawee – the person who the check is written to
Pg 282
Check and Check Stub
Pg 282
Voiding A Check
• If an error is made while writing a check, the
check is marked “Void” in large letters across
the front (in ink). The check then cannot be
used but is still maintained for record keeping
purposes. Never throw away a voided check.
• When a check is voided, the stub is also
voided
Pg 282
Proving Cash
• Proving Cash
– The balance in the Cash in Bank account in the general
ledger is regularly compared with the balance in the
checkbook.
– This is part of internal control and will give an early
indication if something is wrong
– Accountants must take into consideration:
outstanding checks, outstanding deposits, and bank
fees
*Outstanding means not yet received
*Bank fees/service charges – Usually charged to the
account once a month based on the rules of the
particular account
Finding and Correcting Errors
• Possible errors
– Faulty addition and/or subtraction
– Failure to record a check or deposit
– Mistake in copying the balance forward amount to
the next check stub
• Correcting errors
– If the error is in the checkbook, make the
correction on the next unused check stub
• Make notations on both the original check stub with
the error as to where the correction is made and then
on the correction is made on the indicated check stub
The Bank Statement
• Bank Statement – an itemized record of all
transactions in a depositor’s account over a
given period-usually a month.
– Checking account balance at the beginning of the
period
– List of all deposits made during the period
– List of all checks paid by the bank during the
period
– List of any other deductions from the depositor’s
account
– Checking account balance at the end of the period
You get…
• Canceled Checks – The actual check you wrote
that has been processed by the bank and
stamped Canceled. It can act as proof of
purchase/payment
• Imaged Checks (Truncated) – copies of the
original check, usually printed smaller and
several to a page
Pg 285
Reconciliation Form
• Also known as a reconciling the bank statement.
• A worksheet (usually printed on the back of the bank
statement) that the account holder uses to make sure
their books and the banks records match.
• The reconciliation form only has those transactions on it
that have passed through the banks processing system.
The user needs to account for outstanding items
• The reconciliation will include information not previously
available to the account holder and must be
added/subtracted to the business’ books
– Service Fees
– Interest Earned
Pg 285
Pg 285
Pg 287
Journalizing Service Charges
• Fees are a part of doing business and must be
accounted for as an expense. If fees are nominal, most
businesses account for them in a Miscellaneous
Expense account
• Earning Interest – If a business has an account where
they earn interest, they will have an account set up to
account for what they earn.
Pg 286
Special Banking
Procedures
• Stop Payment on a
Check – revokes the
bank’s order to pay
the payee of the
check.
– Usually has a
substantial fee so
this should not be
done lightly
Pg 289
Special Banking Procedures
• Recording NSF Checks – Non Sufficient Funds
(dishonored or bounced check) – this is when a
check cannot be covered by the funds available in
the account
– If your business bounces a check, you will sustain a
large fee and risk a report to your credit company
and/or the bank closing your account
– If your business deposits a check that is returned for
non-sufficient funds then you must make note on the
next unused check stub and subtract the amount from
the current balance in the account
Electronic Funds Transfer System
• Known as EFT or EFTS
• These are electronic transfers of money from one
account to another without the use of a paper
document
–
–
–
–
–
–
Direct Payroll Deposit
Automated Bill Payments
Bankcards
Automated Teller Machines (ATMs)
Bank by Phone
Online Banking
• Businesses that use EFTs should have procedures in
place for keeping track of and recording these
activities
EFT Journal Transaction
Pg 290