Accounting 10
Module 3
Lesson 12
Accounting 10
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Lesson 12
Accounting 10
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Lesson 12
Lesson 12 - Banking and Cash Control
Topics:
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Business Banking and Cash Control
Bank Reconciliation
Remember These Important Points
Do You Understand?
Conclusion
Self Test
Answer for the Self Test
Assignment 12
After studying Lesson 12, the student should be able to
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prepare a bank deposit slip.
endorse cheques to transfer ownership.
prepare cheque stubs and write cheques.
define accounting terms related to bank accounts.
list and explain the reasons why the bank statement balance and the Cash account
in the General Ledger would not be equal.
prepare bank reconciliation statements.
prepare the General Journal entries resulting from a bank reconciliation statement.
Accounting 10
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Lesson 12
Business Banking & Cash Control
Read page 315 – 320 in your text
The area of accounting that is most troublesome for management is that of controlling
cash. Any business whose operations involve the processing of large numbers and/or
amounts of cash receipts must set up strict rules and procedures for the handling of such
receipts or face the prospect of serious losses from fraud and outright theft.
Cash procedures form part of a business's "internal control". Internal control means a
system of procedures that are put in place in order to remove any chance , on the part of
its employees, to try and steal the assets of the business. No system of internal control is
absolutely effective.
There is also the problem of external losses to contend with. If someone knows that a
business has a large amount of cash on hand they may be vulnerable to burglaries.
Study the examples of a Cash Proof and a Deposit Slip Page 318 -319 of text.
Writing Cheques – In most cases cheques that are used by businesses are pre-numbered.
This provides an easy way to identify each cheque. It is important for businesses to pay by
cheque. The reasons for this are given on page 367 of your text
Study how to properly record a cheque - page 367 of your text.
Endorsement of Cheques
There are 3 kinds of endorsements: they are Blank Endorsements, Special Endorsements
and Restrictive Endorsements.
Blank Endorsement means only the name of the endorser will appear. This type of
cheque can easily be cashed by anyone and because of this the endorser should not sign
his name until he is at the bank and wants to deposit the cheque or cash the cheque.
Special Endorsements gives the name to whom the cheque is to be paid plus the name of
the endorser .
Restrictive Endorsement gives the purpose for which the money is to be used and the
name of the endorser. This is the most common and the best endorsement to use for a
business. An example of this is when it is written (For deposit only to the account of and
then the name of the person.)
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Lesson 12
Voiding a Cheque if a cheque is spoiled, it is important to void both the cheque By
writing “void” on the cheque, you ensure that the cheque cannot be cashed. read page 368
of your text.
Certified Cheque are cheques that are used by a business when the business wants the
money to come out of the account immediately as soon as the cheque is presented to the
bank.
Read page 398 -408 of your text.
The Monthly Bank Statement
This statement is an accounting record of all withdrawals and deposits. This lets a
business check all the information found on the bank statement to the information
recorded in the businesses records.
Study the example of a Monthly Bank Statement on page 398 of your text.
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Reconciliations
The Need For a Bank Reconciliation
Very rarely does the cash account agree with the bank balance according to the statement.
This happens because certain transactions recorded by the business have not been
recorded by the bank or because items recorded by the bank have not been recorded by the
business.
Reconciling the bank statement is to bring the business cash account into agreement with
the bank statement.
The process of reconciling the bank statement provides you with an opportunity to check
your cash record against the record kept by an independent party--the bank.
For reconciliation to be effective, it is important that all cash received by the business be
deposited in the bank account. All payments by the business should be made by cheque so
that they will go through the bank account for payment.
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Lesson 12
Reconciling a Bank Statement
When you analyze and reconcile a bank statement, it is important to understand the
terms associated with this process. The following chart summarizes each of the additions
and subtractions to the bank statement balance and cheque stub balance of the business.
The items listed are described in detail after the chart.
Bank Statement Balance
Cash Account
- O/S Cheques
- Bank Service Charges
+ Bank Credit Memo
- Bank Debit Memo
+ O/S Deposits
- NSF Cheques
Some of the items which may appear in the company's records but not on the bank's
records are explained below.
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Outstanding Cheques (O/S Cheques): These are cheques written by the company
and subtracted from the cash account, but not as yet cashed (cancelled) by the bank.
When cheques are outstanding, the bank statement will show a higher balance
than the firm's cash account.
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Deposits in Transit or Outstanding Deposits (O/S Deposits): The business may
have deposited an amount which is shown in the business’s records but has yet to
appear on the bank statement. This generally happens if a deposit is made late on
the same day the bank statement is prepared. This late deposit is called and
outstanding deposit or deposit in transit, and it will cause the bank balance to be
lower than the business’s balance. The outstanding deposits are a result of a timing
difference.
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Bank Credit Memo: The bank will increase the depositor's bank account amount
using this source document (for example, interest on deposits).
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Errors in Calculation: Sometimes the accountant for a business firm may make an
error. For example, filling out a cheque for the wrong amount such as $362 instead
of $326.
Some of the items which may appear in the bank's records but not on the company's
records are described below.
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NSF Cheques: These are commonly known as bounced cheques. These are cheques
you have received, entered in the cash account, and deposited in the bank.
However, the customers who gave you the cheques did not have enough cash in
their accounts and their banks refused to honour the cheques. Such cheques are
returned due to Not Sufficient Funds (NSF).
Accounting 10
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Lesson 12
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Bank Service Charges: The bank routinely deducts a small amount from your
account for services they provide for you. Some banks charge on a per cheque basis
while others charge a set amount each month. You cannot record these charges in
your cash account until you receive your bank statement because you usually do not
know the exact amount of the charge. Bank service charges include any charges the
bank makes for its services. Some examples include safety deposit box rental, the
printing of personalized cheques, or the use of an automated teller.
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Bank Debit Memo: The bank uses this source document to decrease the depositor's
bank account amount. These are small amounts the bank deducts from your
account for such things as printing cheques, interest on loans, and overdraft
charges.
Steps in Preparing a Bank Reconciliation
Remember you are attempting to make your cash account balance equal the bank
statement balance. You do this by
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adjusting the bank statement balance for the items which the bank has not yet
recorded but you have them in your records.
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adjusting your cash account balance for the items which have not yet been recorded
but the bank has them in their records.
Adjusting the Bank Statement
Refer to the example of a Bank Reconciliation Statement given on page 402 of your text
Write in the usual statement heading--who, what, when.
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Write in the heading Balance as per bank statement and the amount shown on the
statement.
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Examine the bank statements and your records. Add on any deposits you have
made but which the bank has not yet recorded; these are deposits in transit or
outstanding deposits.
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Calculate the corrected bank balance.
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Lesson 12
Adjusting the Cash Account Balance
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Write in the heading Balance as per Cash account and the amount shown in the
cash account.
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Examine the bank statement and add on any credits the bank has given you, other
than regular deposits, which are not yet recorded in the records of the company; for
example, interest earned and credit memos.
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Subtract any debits the bank has taken from your account, other than cheques
written by you, which are not yet recorded in the records of the company; for
example, debit memos and interest paid.
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Calculate the corrected cash account balance.
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Check that the corrected bank balance is equal to the corrected cash account
balance and double rule the two corrected balances.
Adjusting the Cash Records After Reconciliation
The Cash account in the General Ledger must be updated by journalizing and posting the
discrepancies. Only those changes on the reconciliation which change the company's cash
balance are journalized. These items make the Cash account agree with the adjusted
bank balance.
Study the example of General Journal Entries and the Ledger Entry with regard to
Bank Reconciliation Statements page 407 of your text.
Accounting 10
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Lesson 12
Remember These Important Points
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A cheque is a written order given by a depositor directing her/his bank to
deduct a certain sum of money from her/his bank account, and to pay that
amount to the person or company designated on the cheque.
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Most businesses follow the practice of depositing all receipts in the bank as
they are received and making all payments by cheque.
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A business cheque is usually in a two-part form. The left-hand side of the
form is the cheque stub and the part to the right of the perforation is the
actual cheque.
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A certified cheque is used when the payee of a cheque wants to be sure that
the cheque will be paid promptly when presented.
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In preparing a bank reconciliation statement, you adjust the bank statement
balance for the items which the bank has not yet recorded but you have them
in your records. The cash account balance is adjusted for the items which
have not yet been recorded but the bank has them in their records.
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The Cash account in the general ledger must be updated by journalizing and
posting the discrepancies. Only those changes on the reconciliation which
change the company's cash balance are journalized.
Do You Understand?
Making a Deposit - placing cash in a bank account.
Depositor - the person or business in whose name cash is deposited.
Chequing Account - a bank account from which a business can order payments to others.
Savings Account - a bank account on which a bank pays interest to a depositor.
Deposit Slip - a bank form on which a depositor lists all cash and cheques being deposited.
Endorsement - a signature or stamp on a cheque's back transferring ownership.
Blank Endorsement - an endorsement consisting only of the endorser's signature on the
back of the cheque.
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Lesson 12
Special Endorsement - an endorsement stating to whom a cheque is to be paid.
Restrictive Endorsement - an endorsement restricting transfer of a cheque.
Drawer - a person or business issuing a cheque.
Payee - a person or business to whom a cheque is issued.
Drawee - a bank on which a cheque is drawn.
Voiding a Cheque - marking a cheque so that it can't be used.
Bank Balance - the up-to-date balance appearing on a depositor's bank records.
Bank Statement - a report of deposits, withdrawals, and bank balances sent to a depositor
by a bank. This is a copy of a current liability on the banker's books.
Cancelled Cheques - cheques paid by a bank and returned to a depositor.
Outstanding Cheques - cheques issued by a depositor but not yet "cashed" (cancelled) by
the bank.
Outstanding Deposits - deposits made but not yet credited by the bank on the books of the
banker.
Bank Service Charge - a charge made by a bank for maintaining a depositor's account.
Bank Debit Memo - a source document decreasing (debiting) the depositor's account on the
banker's books.
NSF Cheque - a cheque marked "Not Sufficient Funds."
Bank Credit Memo - a source document increasing (crediting) the depositor's account on
the banker's books.
Term Deposit Receipt - a source document issued by the bank, giving evidence of a shortterm investment.
Bank Reconciliation Statement - a statement detailing the items that cause the balance
on the bank statement to be different from the balance in the Cash account.
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Lesson 12
Conclusion
In this lesson, you have seen how a business reconciles its cash balance with the banks'
records. Effective control of a firm's cash is very important.
Self Test
Accounting 10
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P 10-5, page 409 of the text.
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MC 10-4, page 418 of the text.
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MC 10-5, page 418 of the text.
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Lesson 12
P 10-5a
Key Figure to Check: adjusted Cash account balance is $397.20
Accounting 10
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Lesson 12
P 10-5b
General Journal
Date
20__
Accounting 10
Page
Post
Ref.
Account Title
13
Debit
Credit
Lesson 12
Answers for the Self Test
P 10-5a
Paul W. Black, D.D.S.
Bank Reconciliation Statement
February 28, 20__
Balance as per bank statement, Feb. 28 ......... ......... .......... .......... .........
Add: deposit in transit, Feb. 28 . .......... .......... ......... .......... .......... .........
Subtotal ...... .......... ......... .......... .......... .......... ......... .......... .......... .........
$384.00
250.00
634.00
Deduct Outstanding Cheques:
No. 110 ........ ......... .......... .......... .......... ......... $ 25.40
No. 115 ........ ......... .......... .......... .......... .........
67.10
No. 123 ........ ......... .......... .......... .......... .........
125.80
No. 140 ........ ......... .......... .......... .......... .........
18.50
236.80
Adjusted bank statement balance ........ .......... ......... .......... .......... .........
$397.20
Balance as per Cash account, Feb. 28 .. .......... ......... .......... .......... .........
Deduct: bank service charge ...... .......... .......... ......... .......... .......... .........
$399.20
2.00
Adjusted Cash account balance . .......... .......... ......... .......... .......... .........
$397.20
Note:
Dollar signs are optional in the above statement because Bank Reconciliation Statements are not
normally included in a financial report.
P 10-5b
General Journal
DATE
20__
Feb. 28
ACCOUNT TITLE AND EXPLANATION
Bank Service Charge Expense
POST
REF.
Page 1
DEBIT
CREDIT
2.00
Cash
2.00
To record the monthly bank service charge
reported on the bank statement of Feb. 28.
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Lesson 12
MC 10-4a
If a depositor puts money in the bank, then the bank owes the customer more
money. How do you increase a liability? Obviously, with a credit entry. When a
depositor's account needs to be increased, the bank needs to make a credit entry to
show the increase in the amount it owes the depositor.
If the depositor withdraws money from her/his account, the bank does not owe her
or him as much money. To decrease a liability, you would make a debit entry.
Therefore, in order to show a decrease in the depositor's account balance (which
represents a deduction in the amount the bank owes the depositor), the bank needs
to make a debit entry.
MC 10-5a
The monthly bank statement records the deposits when the bank receives the
money and the cheques when they clear the bank; that is, when the payee cashes
the cheque. The business's Cash account records the deposits and cheques.
However, the Cash account records deposits when the duplicate deposit slip is
prepared and records the cheques when they are prepared. Since time lapses
between the preparation of these documents and when the bank receives them, the
business and the bank don't always record the same amounts during the same
month. Also, the bank is the preparer of some of the source documents that affect
the business's cash. The business cannot record these amounts until it receives the
source documents with the bank statement.
Moreover, bank clerks and accounting clerks are human and may make mistakes.
If the bank cashed a cheque written by another business on your account, then you
would lose cash. You will discover this discrepancy if you verify the bank's records
with the business's records. If the clerk is dishonest and cashes a cheque for
personal use, the owner will discover the theft when s/he reviews the cheques
returned with the bank statement.
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Lesson 12