Banking Procedures
and Control of Cash
Chapter 6
6-1
Internal Control of Cash
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Internal Control Procedures
separation and rotation of duties
cash receipts deposited daily
setting up a petty cash fund
all other payments made by check
authorization required for activities
checks and other documents prenumbered
6-2
Learning Objective 1
Depositing, writing, and endorsing
checks for a checking account.
6-3
Learning Unit 6-1
Opening a checking account
 A signature card is required for validation
to protect against forgery and unauthorized
signing.
 Duplicate deposit tickets are used.
 ATM cards and personal identification
numbers are protected.
6-4
Learning Unit 6-1
Check endorsement
What is a check endorsement?
 It is the signing or stamping of one’s name
on the back left-hand side on the check.
 Checks must be signed by the person to
whom the check is made out.
6-5
Learning Unit 6-1
Types of Endorsements
Blank endorsement
Full endorsement
Restrictive endorsement
6-6
Learning Unit 6-1
The checkbook
 A check is a written order.
 The drawer is the one who writes the check.
 The drawee is the one who pays the money
to the payee (bank).
6-7
Learning Unit 6-1
The checkbook
 The payee is the one to whom the check is
payable.
 Write checks properly to ensure that
amounts and payee cannot be changed.
6-8
Learning Unit 6-1
The bank reconciliation
 This is a process that verifies the cash
balance in the business records to the
ending bank balance for the month.
 Deposits in transit are deposits not recorded
by the bank before the report (add to the
bank balance).
6-9
Learning Unit 6-1
The bank reconciliation
 Outstanding checks are issued checks that
have not yet cleared the bank (subtract from
the bank balance).
 Service charges are fees charged by a bank
(subtract from the bank balance).
6 - 10
Learning Unit 6-1
The bank reconciliation
 Nonsufficient funds (NSF) checks are those
which are received, deposited in the bank,
and returned because the drawer did not
have funds in their account (subtract from
bank balance).
 The check and a collection fee is charged
back to the drawer.
6 - 11
Learning Unit 6-1
Terminology
 Bank credits are when a bank credits the
account, which is an increase to the cash
balance in the business.
 What are some examples?
– bank errors
– funds collected by the bank on behalf of the
business
6 - 12
Learning Unit 6-1
Terminology
 Bank debits are a deduction from the cash
balance in the business.
 What are some examples?
– bank errors
– NSFs
– service charges
6 - 13
Learning Objective 2
Reconciling a bank statement.
6 - 14
The Bank Reconciliation Process
On August 2, Clara J. Accounting Practice
received the July’s bank statement.
 It indicated the following:
 The bank balance was $25,225.
 The bank had collected a note receivable
from one of Clara’s customers in the
amount of $1,000.

6 - 15
The Bank Reconciliation Process
The bank paid the electric bill of $300.
 There was a $200 check returned for NSF.
 Interest earned on the account was $15.
 Bank service charges were $6.

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6 - 16
The Bank Reconciliation Process
Clara’s books indicates a cash balance of
$26,647.
 A deposit of $3,250 was mailed to the bank
on June 30.
 Checks issued in June for $1,319 have not
yet been paid by the bank.

6 - 17
The Bank Reconciliation Process
Balance per bank, June 30
$25,225
Add deposit in transit
3,250
$28,475
1,319
$27,156
Less outstanding checks
Adjusted bank balance
6 - 18
The Bank Reconciliation Process
Balance per books, June 30
Add:
Note receivable
collected by the bank
Interest income
Less:
Payment of electric bill
NSF check
Service charge
Adjusted book balance
$26,647
1,000
15
$27,662
300
200
6
$27,156
6 - 19
The Bank Reconciliation Process
Balance per books
$27,156
Balance per bank
$27,156
Amounts are the same
6 - 20
Learning Objectives 3 and 4
Establishing and replenishing
a petty cash fund; setting up
an auxiliary petty cash record.
Establishing and replenishing
a change fund.
6 - 21
Learning Unit 6-2
Petty cash fund
 This is an account used for paying small
day-to-day expenses.
 The only time petty cash is entered in the
journal is to establish the fund (or to change
the level of cash in the fund).
 Expenses are debited and Cash credited to
replenish the fund.
6 - 22
Learning Unit 6-2
What is the entry to record the establishment
of a $150 petty cash fund?

Petty Cash
150
Cash in bank
150
To open the petty cash fund
6 - 23
Learning Unit 6-2
Forty dollars were taken out of the petty cash
fund for coffee and other miscellaneous
expenses. What is the journal entry to
record the replenishment of the fund?
 Miscellaneous expense 40
Cash in bank
40
To replenish the petty cash fund
6 - 24
Learning Objective 5
Handling transactions involving
cash short and over.
6 - 25
Cash Short and Over
How are small cash errors recorded?
 Beginning change fund
+ Cash register total
= Correct amount of cash
– Counted cash
= Shortage or overage of cash
6 - 26
End of Chapter 6
6 - 27