Unit 2
The Basic Accounting Cycle
Chapter 3
Business Transactions and the Accounting Equation
Chapter 4
Transactions That Affect Assets, Liabilities, and Owner’s Capital
Chapter 5
Transactions That Affect Revenue, Expenses, and Withdrawals
Chapter 6
Recording Transactions in a General Journal
Chapter 7
Posting Journal Entries to General Ledger Accounts
Chapter 8
The Six-Column Work Sheet
Chapter 9
Financial Statements for a Sole Proprietorship
Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
Chapter 11 Cash Control and Banking Activities
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Chapter 11
Cash Control and Banking Activities
What You’ll Learn
 Describe the internal controls used to protect cash.
 Describe the forms needed to open and use a
checking account.
 Record information on check stubs.
 Prepare a check.
 Prepare bank deposits.
 Reconcile a bank statement.
 Journalize and post entries relating to bank service
charges.
 Describe the uses of the electronic funds transfer
system.
 Define the terms introduced in this chapter.
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1
Chapter 11, Section 1
Banking Procedures
What Do You Think?
What happens if a business fails to take steps to protect
its assets and keep reliable records?
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SECTION 11.1
Banking Procedures
Main Idea
Internal controls are steps taken to protect assets and
keep reliable records.
You Will Learn
 how a business protects cash.
 how to use a checking account.
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Banking Procedures
SECTION 11.1
Key Terms










internal controls
external controls
checking account
check
depositor
signature card
deposit slip
endorsement
blank endorsement
special endorsement
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Banking Procedures
SECTION 11.1
Key Terms





restrictive endorsement
payee
drawer
drawee
voiding a check
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SECTION 11.1
Banking Procedures
Protecting Cash
In any business, cash is used in daily transactions; it is
important to track cash received and paid out.
Cash should be protected. There are two ways to
protect cash:
 internal controls (e.g. limiting the number of
people handling cash)
 external controls (e.g. verify accuracy of
signatures on checks)
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SECTION 11.1
Banking Procedures
The Checking Account
A checking account holds cash deposits made by the
depositor, whether a person or business, and allows
them to write a check against the balance.
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SECTION 11.1
Banking Procedures
Opening a Checking Account
A checking account helps a person or business
 protect cash, and
 provides a record of cash transactions.
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SECTION 11.1
Banking Procedures
The Signature Card
A signature card and a cash deposit are needed to
open a checking account. A signature card is kept on file
at the bank to verify that signatures on checks are valid.
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SECTION 11.1
Banking Procedures
The Checkbook
A checkbook is a group of printed checks packaged
together and numbered in sequential order.
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SECTION 11.1
Banking Procedures
The ABA Number
Each check is printed with a check number, the bank
account number, and an American Bankers Association
(ABA) number. The ABA number:
 identifies the bank.
 speeds the hand sorting of checks.
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SECTION 11.1
Banking Procedures
Making Deposits
Most businesses make daily deposits to protect the cash
it receives. A deposit slip containing a detailed record
of the deposits accompanies them. To complete a
deposit slip:
 Write the date on the Date line.
 Indicate the total currency and coins on the Cash
line.
 List checks separately by their ABA numbers.
 Add the amounts and enter the total on the Total
line.
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SECTION 11.1
Banking Procedures
Endorsing Checks
A business acquires the right to a check when it receives a
check. The depositor’s endorsement is needed to deposit
the check in the checking account. The endorsement
transfers check ownership to the bank.
There are three types of endorsements a business can use.
 A blank endorsement does not indicate the new
owner of the check.
 A special endorsement transfers ownership of the
check to a specific individual or business.
 a restrictive endorsement places limitations on how
a check may be handled after ownership is
transferred.
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13
SECTION 11.1
Banking Procedures
Recording Deposits
To record a deposit in the checkbook, follow these
steps:
 Enter the date of deposit in the Add deposits line
on the check stub for the next unused check.
 Enter the total amount of the deposit.
 Add the deposit amounts to the amount on the
Balance brought forward line and enter the total
on the Total line.
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14
SECTION 11.1
Banking Procedures
Writing Checks
Here are a few important rules to writing checks:
 Complete checks in ink.
 Complete the check stub before writing the check.
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SECTION 11.1
Banking Procedures
Completing the Check Stub
The stub serves as a permanent record of the check and
must be complete and accurate. The two parts to the
check stub include
 the upper part containing the amount of the
check, the date, the name of the payee, and the
purpose of the check, and
 the lower part containing a record of how the
transaction affects the checking account.
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SECTION 11.1
Banking Procedures
Completing the Check Stub
The check stub is completed in the order corresponding
to the numbers below.
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SECTION 11.1
Banking Procedures
Filling Out the Check
To write a check, follow these steps:
1. Write the date the check is being issued.
2. Enter the payee’s name on the Pay To The
Order Of line.
3. Enter the amount of the check in numbers.
4. On the next line, write the dollar amount of the
check in words.
5. The drawer signs the check. The drawee is the
bank on which the check is written.
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SECTION 11.1
Banking Procedures
Filling Out the Check
Let’s try
one!
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19
SECTION 11.1
Banking Procedures
Voiding a Check
Voiding a check is necessary if a mistake is made
while writing a check. Write Void in big letters across
the front in ink and prepare a new check.
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20
SECTION 11.1
Banking Procedures
Key Terms Review
 internal controls
Procedures within the business that are designed
to protect cash and other assets and to keep
reliable records.
 external controls
Measures and procedures provided outside the
business to protect cash and other assets.
 checking account
An account that allows a person or business to
deposit cash in a bank and then write checks and
make ATM withdrawals and purchases against
the account balance.
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SECTION 11.1
Banking Procedures
Key Terms Review
 check
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.
 depositor
A person or business that has cash on deposit in
a bank.
 signature card
A bank form containing the signature(s) of the
person(s) authorized to write checks on a
checking account.
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SECTION 11.1
Banking Procedures
Key Terms Review
 deposit slip
A bank form used to list the cash and checks to
be deposited.
 endorsement
An authorized signature written or stamped on the
back of a check that transfers ownership of the
check.
 blank endorsement
A check endorsement that includes only the
signature or stamp of the depositor. It does not
specify the new owner of the check.
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23
SECTION 11.1
Banking Procedures
Key Terms Review
 special endorsement
A check endorsement that a transfers ownership
of the check to a specific individual or business.
 restrictive endorsement
A check endorsement that transfers ownership to
a specific owner and limits how the check may be
handled (for example, For Deposit Only).
 payee
The person or business to whom a check is
written or a note is payable.
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SECTION 11.1
Banking Procedures
Key Terms Review
 drawer
The person who signs a check.
 drawee
The bank on which a check is written.
 voiding a check
Making a check unusable by writing the word
Void in ink across the front of the check.
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25
Chapter 11, Section 2
Reconciling the Bank Statement
What Do You Think?
Why is the bank reconciliation considered an
internal control?
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26
SECTION 11.2
Reconciling the Bank Statement
Main Idea
The bank reconciliation is an important internal control.
You Will Learn
 why businesses prove cash.
 how to read and reconcile a bank statement.
 about electronic funds transfer.
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27
Reconciling the Bank Statement
SECTION 11.2
Key Terms










bank statement
canceled checks
imaged checks
reconciling the bank statement
outstanding checks
outstanding deposits
bank service charge
stop payment order
NSF check
Check 21
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Reconciling the Bank Statement
SECTION 11.2
Key Terms




postdated check
electronic funds transfer system (EFTS)
bankcard
automated teller machine (ATM)
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SECTION 11.2
Reconciling the Bank Statement
Proving Cash
Comparing the Cash in Bank account balance with the
checkbook is called proving cash. If the two amounts do
not match, there is probably an error in the checkbook.
Common checkbook errors are:
 faulty addition or subtraction
 failure to record a deposit or a check
 a mistake in copying the balance forward amount
to the next check stub
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SECTION 11.2
Reconciling the Bank Statement
The Bank Statement
A bank statement contains an itemized record of all
transactions in a depositor’s account. A bank returns the
canceled checks, usually as imaged checks, with the
bank statement.
When these are received, the statement is compared to
the checkbook, called reconciling the bank statement
or bank reconciliation. A checkbook can be out of
balance due to:
 outstanding checks
 outstanding deposits
 bank charges
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SECTION 11.2
Reconciling the Bank Statement
Outstanding Checks and Deposits
Outstanding checks are checks that have been written,
but have not been presented to the bank for payment.
Outstanding deposits are deposits that have been
made and recorded but do not appear on the bank
statement.
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SECTION 11.2
Reconciling the Bank Statement
Bank Service Charges
A bank service charge is a fee for maintaining bank
records and processing bank statement items for the
depositor. This fee is subtracted from the depositor’s
account and must be subtracted from the checkbook
balance before reconciling.
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SECTION 11.2
Reconciling the Bank Statement
Interest Paid
Some checking accounts earn interest on account
funds. The interest amount must be recorded in the
checkbook, journalized, and posted.
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34
SECTION 11.2
Reconciling the Bank Statement
The Bank Reconciliation
Demo
11-3
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35
SECTION 11.2
Reconciling the Bank Statement
Journalizing Bank Service Charges
Bank service charges must be recorded in the
accounting records. An example of recording a bank
service charge follows:
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SECTION 11.2
Reconciling the Bank Statement
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37
SECTION 11.2
Reconciling the Bank Statement
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38
SECTION 11.2
Reconciling the Bank Statement
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39
SECTION 11.2
Reconciling the Bank Statement
Demo
11-4
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40
SECTION 11.2
Reconciling the Bank Statement
Special Banking Procedures
Three problems may occur when checks are written or
received and deposited:
 A business does not want the bank to pay an
issued check.
 A business receives and deposits a check from a
customer whose account does not have enough
money to cover the check.
 A customer presents a check that has a date in
the future.
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41
SECTION 11.2
Reconciling the Bank Statement
Stopping Payment on a Check
A stop payment order is issued when a drawer
instructs the drawee not to pay a check. To record a
stop payment order:
 Write Stopped Payment on the check stub for the
stopped check.
 Add the amount of the stopped check on the next
unused check stub.
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SECTION 11.2
Reconciling the Bank Statement
Recording NSF Checks
An NSF check is returned to the depositor because the
drawer’s account does not have enough funds to cover
the amount. NSF stands for Not Sufficient Funds. The
Check Clearing for the 21st Century, known as Check
21, allows the conversion of a paper check to an
electronic image that can be processed quickly. A bank
can pay a check on the same day it is written, instead of
several days later.
See p. 290,
then Demo
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SECTION 11.2
Reconciling the Bank Statement
Postdated Checks
A check that has a future date instead of the actual date
is called a postdated check. It should not be deposited
until the date that appears on the check.
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SECTION 11.2
Reconciling the Bank Statement
Electronic Funds Transfer System
The electronic funds transfer system (EFTS) handles
large volume of funds transfers and allows banks to
transfer funds among accounts quickly and accurately.
There are several ways EFTS impacts banking
activities:
 direct payroll deposit
 automated bill paying
 bankcards used at automated teller machines
(ATMs)
 bank-by-phone
 online banking
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SECTION 11.2
Reconciling the Bank Statement
Key Terms
 bank statement
An itemized record of all the transactions in a
depositor’s account over a given period, usually a
month.
 canceled checks
A check paid by the bank, deducted from the
depositor’s account, and returned with the bank
statement to the account holder.
 imaged checks
A copy of a canceled check; it is sent with the
bank statement in place of the original canceled
check.
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46
SECTION 11.2
Reconciling the Bank Statement
Key Terms
 reconciling the bank statement
The process of determining any differences
between a bank statement balance and a
checkbook balance.
 outstanding checks
A check that has been written but has not yet
been presented to the bank for payment.
 outstanding deposits
A deposit that has been made and recorded in
the checkbook but does not yet appear on the
bank statement.
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47
SECTION 11.2
Reconciling the Bank Statement
Key Terms
 bank service charge
A fee the bank charges for maintaining bank
records and processing bank statement items for
the depositor.
 stop payment order
A demand by the drawer, usually in writing, that
the bank not honor a specific check.
 NSF check
A check returned to the depositor by the bank
because the drawer’s checking account does not
have sufficient funds to cover the amount; also
called dishonored check.
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SECTION 11.2
Reconciling the Bank Statement
Key Terms
 Check 21
The Check Clearing for the 21st Century Act; it
allows the conversion of a paper check to an
electronic image that can be quickly processed
between banks.
 postdated check
A check that has a future date instead of the
actual date; it should not be deposited until the
date on the check.
 electronic funds transfer system (EFTS)
A system that allows banks to transfer funds
among accounts quickly and accurately without
the exchange of checks.
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49
SECTION 11.2
Reconciling the Bank Statement
Key Terms
 bankcard
A bank-issued card honored by many businesses
that can be used to withdraw cash and to make
payments for goods and services at many
businesses instead of writing checks; also called
a debit card, ATM card, or check card.
 automated teller machine (ATM)
Computer terminal where account holders can
conduct various banking activities.
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CHAPTER 11
Chapter 11 Review
Question 1
You have just received your bank statement for the
month. What are the steps in reconciling the bank
statement to the checkbook balance?
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CHAPTER 11
Chapter 11 Review
Answer 1
Step 1: Arrange canceled checks in numerical order;
compare them with the checks listed in the
checkbook stubs and place a check mark beside
the amount on the bank statement and check stub;
list the outstanding checks (those with no check
marks) and their amounts on the bank reconciliation
form.
Step 2: Enter the ending balance shown on the bank
statement in the proper box.
Step 3: Compare the deposits listed on the bank statement
to deposits in the checkbook. Enter the total of any
outstanding deposits on the bank reconciliation
form. Add this total to the bank statement balance
and enter the sum on the form.
(continued)
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CHAPTER 11
Chapter 11 Review
Answer 1
Step 4: Subtract the total of the outstanding checks
(Step 1) from the amount calculated in Step 3.
This is the adjusted bank balance.
Step 5: Compare the adjusted bank balance and the
checkbook balance. When they agree, the
bank statement has been reconciled.
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CHAPTER 11
Chapter 11 Review
Question 2
Do the following regarding the bank statement.
a) List at least two pieces of information that you
can learn from the monthly bank statement.
b) List at least two reasons why it is important to
reconcile the bank statement monthly.
(continued)
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CHAPTER 11
Chapter 11 Review
Answer 2
a) You can find out a number of important facts from the
bank statement:
1. Checks that have been cashed by the payee
(cleared).
2. Deposits that have been received by the bank.
3. Any service fees that the bank assessed during
the period.
4. The beginning and ending balances.
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CHAPTER 11
Chapter 11 Review
Answer 2
b) Reconciling the bank statement monthly allows you to
do the following:
1. Determine an accurate cash balance.
2. Maintain accurate accounting records.
3. Maintain good internal control over cash.
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Resources
Glencoe Accounting Online Learning Center
English Glossary
Spanish Glossary
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