chapter
6
College Accounting
11th Edition
Bank Accounts and
Cash Funds
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6–1
Learning Objectives
After you have completed this chapter, you
will be able to do the following:
6–2
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Internal Control
Internal control is the system of policies and procedures
that is designed to:
•
•
•
•
Protect assets against fraud and waste
Provide for accurate accounting data
Promote efficient operation
Encourage adherence to management policies
6–3
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Managing Cash Receipts
•
•
•
•
•
•
•
Maintain separation between cash handling and cash recording.
Designate someone other than the bookkeeper to open mail.
Make a record of cash received.
Endorse checks immediately upon receipt with the stamp, “For
Deposit Only.”
Deposit cash daily.
Journalize cash receipts as soon as possible, preferably by
someone different than the person who first received the cash.
Post cash receipts to the Accounts Receivable account as soon
as possible.
6–4
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Managing Cash Payments
• Make certain that all checks are pre-numbered.
• Make sure that all cash payments are made by check (with the
•
•
•
•
exception of petty cash).
Keep check supplies under lock.
Assign someone different than the signer of the checks to
prepare the checks.
Keep petty cash under lock with access limited to one person
other than the bookkeeper.
Appoint someone other than the person preparing checks to
prepare the bank reconciliation.
6–5
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Internal Control of Cash is critical activity in any business.
Divide the cash activities among several people to deter
mishandling.
Don’t allow the same person to receive the cash,
account for the cash and pay the bills!
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6–6
Practice Exercise 1
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3–7
Using a Checking Account
• When a person opens a bank account, that person fills
•
•
out a signature card for the bank’s files.
The bank provides printed deposit slips on which
customers record the amount of coins and currency
they are depositing and list each individual check
being deposited.
The ABA (American Bankers Association) number is
the small series of numbers located in the upper right
corner of a check.
3–8
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ABA number –
Roland’s Delivery
Services
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Substitute Checks and Remote Deposit
• The Check Clearing for the 21st Century Act (or Check 21 Act)
•
allows banks to create a two-sided digital version of the original
check, called a substitute check.
Included in the Check Clearing for the 21st Century Act, it now is
legal for anyone to use a computer scanner to capture images
of checks and deposit them electronically, a process known as
remote deposit.
6–10
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Automated Teller Machines
• Deposits, withdrawals, and transfers can be made at
all hours at bank with ATMs (automated teller
machines).
Each depositor uses a plastic card that contains a
coded number and has a personal identification
number or PIN.
•
Electronic Funds Transfers
• A transfer of funds initiated through an electronic terminal is an
•
•
Electronic Funds Transfer (EFT).
There is no paper document, such as a check or deposit slip.
The monthly bank statement will list the EFT deposits and
payments.
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Endorsements
The endorsement (1) transfers title to the money and (2)
authorizes the payment of the check.
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Writing Checks
Steps for Writing Checks
The party who writes the check is
called the drawer.
The party to whom payment is to be
made is the payee.
The information recorded on the check
stub is the basis for the journal
entry.
Checks should be written carefully so
that no one can successfully alter
them.
Canceled checks are checks that
have been paid or cleared by the
bank.
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Step 3:
Written
amount
Step 1:
Payee
Step 2:
Amount
in figures
Drawer
Bank routing
number
Bank routing
number
Number of
Check
Amount
of
check
6–14
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Bank Statements
The bank prepares the bank statement, which is created
from the bank’s viewpoint. The following legends are
found on bank statements:
• CM (credit memo): Increases in or credits to the account.
• DM (debit memo): Decreases in or debits to the account.
• OD (overdraft): The withdrawal of more than the cash
•
balance in the account.
EC (error correction): Correction of errors made by the
bank.
6–15
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6–16
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Bank Statements
• The canceled checks (checks that have been paid or
•
cleared by the bank) are listed on the bank statement.
They are called canceled checks because they are
canceled by a stamp on the back, indicating that they
have been paid.
6–17
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Recording Deposits or Withdrawals
Debit
Memos
Credit
Memos
6–18
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Practice Exercise 2
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Need for Reconciling Bank Balance and Ledger Balance
Since the bank statement balance and the ledger balance of
cash are not equal, a business prepares a bank
reconciliation.
The person performing the bank reconciliation will be making
sure—
• the dollar amount of each check matches the check entry in
•
•
the company’s ledger,
all of the charges, checks and electronic transfers belong to
the company, and
deposits are made in a timely manner
6–20
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Reasons for Differences Between the Bank Statement
Balance and the Customer’s Cash Balance
Deposits in transit – A deposit made after the bank statement was
issued.
Outstanding checks – Checks that have been written by the company
but not yet received for payment by the time the bank sends out its
statements.
Collections – Money collected by the bank for the customer.
Interest income Interest earned for keeping cash in the bank account.
NSF (not sufficient funds) check – A deposited check that the bank
cannot process because the check writer’s account does not contain
enough money.
Service charge – A bank charge for services rendered by the bank.
Errors – Mistakes made by the customer or the bank.
6–21
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Steps in Reconciling the Bank Statement
• Compare the amount of each canceled check on the bank
•
statement with the ledger entries in the company’s cash
account.
Any differences between the amount on the bank statement
and the amount on the company’s books should be noted.
6–22
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Steps in Reconciling the Bank Statement
• Compare the deposits in transit (deposits not recorded by
•
•
the bank at the time of the statement) listed on last month’s
bank reconciliation with the deposits shown on the bank
statement.
All of last month’s deposits in transit should be listed on this
month’s bank statement. If they are not, notify the bank
immediately.
Compare the remaining deposits listed on this month’s bank
statement with deposits written in the company’s accounting
records. Consider any deposits not shown on the bank
statement as deposits in transit.
6–23
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Steps in Reconciling the Bank Statement
• Review the list of outstanding checks left over from last
•
•
•
month’s bank reconciliation and note the checks that have
since been returned or cleared.
For each canceled check, compare the amount recorded on
the bank statement with the amount recorded in the
checkbook or general ledger cash account.
Use a check mark () to indicate that the check has been
paid and that the amount is correct.
Any payments that have not been marked off, including the
outstanding checks from last month’s bank reconciliation,
are the present outstanding checks.
6–24
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Steps in Reconciling the Bank Statement
• Trace the credit memos and debit memos to the journal. If
the memos have not been recorded, make separate entries
for them.
6–25
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W. Carson Company Bank Reconciliation
•
•
•
•
•
•
The bank statement indicates a balance of $6,446 as of March 31.
The Cash account as of March 31 is $4,650.
A deposit made on March 31 was not recorded on the bank statement, $2,174.
Outstanding checks: no. 920, $1,695; no. 975, $325; no. 976, $1,279.
Credit memo: Note collected by the bank from T. Landon, $700, not recorded in the
journal.
Debit memo: Collection charge and service charge not recorded in journal, $2.
Activities or
transactions
we knew
about but the
bank did not
know about
When the reconciliation process is complete, the 700.00
adjusted bank statement balance and adjusted
ledger balance MUST EQUAL.
29.00
Activities or
transactions
the bank knew
about but we
did not know
about
These require
journal entries
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6–26
Practice Exercise 3
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6–27
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6–28
Learning Objective
6–29
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Required Journal Entries
After the entries have been posted, the T account for
Cash looks like this:
The balance in the T account is now equal
to both the adjusted bank statement balance
and the adjusted ledger balance of Cash.
6–30
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Form of Bank Reconciliation
6–31
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6–32
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17,249.61
1,012.00
18,261.61
687.00
Bank statement
shows a final
balance of
$17,249.61
185.00
367.00
110.00
1,349.00
16,912.61
16,296.11
1,010.00
When the reconciliation process is complete,
the adjusted bank statement balance and
adjusted ledger balance MUST EQUAL.
9.00
Cash account
shows a balance
of $16,296.11
1,019.00
These all require
journal entries
19.50
283.00
100.00
402.50
16,912.61
Roland’s Delivery Services
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6–34
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6–35
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Practice Exercise 4
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6–36
Establishing the Petty Cash Fund
• To write a check for a small amount is not
economically practical. For many businesses the cost
of writing each check is more than $10.
• A business keeps a cash fund for petty (or small)
items. This cash fund is known as the Petty Cash
Fund.
• A business will set the maximum amount of payment
from the fund before a check is required.
6–37
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Establishing the Petty Cash Fund
Roland’s Delivery Service decides to establish a
Petty Cash Fund of $100, and put it under the control
of the assistant. A check is written for $100 to
establish the fund.
6–38
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Establishing the Petty Cash Fund
T accounts for the entry look like this:
Petty Cash Fund is an asset;
therefore, it is listed on the
balance sheet immediately
after Cash.
Once the fund is created, it is not
debited again unless the original
mount is not large enough to handle
the necessary transactions.
6–39
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Establishing the Petty Cash Fund
The check is written to the assistant, “Sheila R. Bayes,
Petty Cash Fund.” She converts it into convenient
denominations (quarters, dimes, $1 and $5 bills) and
keeps it in a locked drawer. She will not pay out of petty
cash anything larger than whatever amount is agreed
upon by management.
6–40
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Practice Exercise 5
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6–41
Learning Objective
6–42
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Payments from the Petty Cash Fund
A petty cash voucher must be used to account for every
payment from the fund.
6–43
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Petty Cash Payments Record
• Some businesses prefer to have a written record on
one sheet of paper, so they keep a petty cash
payments record.
• Petty cash vouchers and the accounts that are to be
charged are listed as well as the purpose of the
expenditure.
6–44
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6–45
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Reimbursement of the Petty Cash Fund
Petty Cash Fund
is not credited.
6–46
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Practice Exercise 6
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6–47
Establishing the Change Fund
Like the Petty Cash Fund
account, Change Fund is debited
only once: when it is established.
•
•
The Change Fund account is an
asset.
It is recorded in the balance sheet
immediately below Cash, unless
Petty Cash Fund is larger.
6–48
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Depositing Cash
At the end of each business day, Roland’s
Delivery Services’ accountant deposits the
cash taken in during September 1 ($1,575)
but holds back the amount of the Change
Fund ($150).
6–49
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Depositing Cash
On September 9, the cash count is $1,672. So, the accountant
deposits $1,522 ($1,672 – $150).
6–50
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Practice Exercise 7
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6–51
Learning Objective
6–52
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Cash Short and Over
• Because mistakes happen, accounting records must
be set up to cope with the situation.
• If after removing the Change Fund, the day’s receipts
are less than the register reading, then a cash
shortage exists.
• When the day’s receipts are greater than the register
reading, a cash overage exists.
6–53
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Cash Short and Over
On September 14, Roland’s Delivery Service has a cash count of
$1,663, while the cash register tape totals $1,515. There is $150
in the Change Fund.
6–54
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Cash Short and Over
On September 15, Roland’s Delivery Service has a cash count of
$1,732, while the cash register tape totals $1,578. There is $150
in the Change Fund, so the service has a $4 cash overage.
6–55
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Cash Short and Over
The following entry is recorded in Roland’s Delivery Services’
journal for September 14 and 15.
6–56
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Cash Short and Over
• At the end of the fiscal period, if Cash Short and
Over has a debit balance (or net shortage), the
accountant classifies it as an expense.
Miscellaneous Expense is debited and Cash Short
and Over is credited.
• If the account has a credit balance (or net overage),
the accountant classifies it as revenue. Cash Short
and Over is debited and Miscellaneous Income (an
income statement account) is credited.
6–57
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Cash Short and Over
The T account would look like this:
6–58
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Practice Exercise 8
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6–59
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