Chapter 6
Bank Accounts
and Cash Funds
1
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
6–1
© 2011 Cengage Learning
Internal Control
Internal control is the system of policies
and procedures that is designed to:
1. Protect assets against fraud and waste.
2. Provide for accurate accounting data.
3. Promote efficient operation.
4. Encourage adherence to management
policies.
6–2
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.
6–3
Managing Cash Payments
 Make certain that all checks are prenumbered.
 Make sure that all cash payments are made by check
(with the exception of petty cash).
 Keep check supplies under lock.
 Assign someone different from 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.
6–4
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.
6–5
MICR and Substitute Checks
 The bank prints the amount of each
deposited check on the lower right side of the
check in a distinctive script called MICR,
which stands for magnetic ink character
recognition.
 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.
6–6
Automated Teller Machines
 Deposits withdrawals, and transfers can be
made at all hours at bank with ATMs
(automated teller machines).
 In addition to deposits and withdrawals, a
customer may transfer amounts from one
account to another (e.g., from savings to
checking) as well as check the balance of
their accounts.
6–7
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
 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.
6–10
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.
6–11
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.
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Recording Deposits or Withdrawals
6–13
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—
1) the dollar amount of each check has not been
altered,
2) all of the charges, checks and electronic
transfers belong to the company, and
3) deposits are made in a timely way.
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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.
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Steps in Reconciling the Bank Statement
Step 1. Canceled Checks
a. Compare the amount of each canceled check with the
bank statement and note any differences.
b. In the checkbook beside the check number, list the date
of the bank statement.
Step 2. Deposits
a. Compare the deposits in transit listed on last month’s
bank reconciliation with the deposits shown on the bank
statement.
b. Compare the remaining deposits listed on this month’s
bank statement with deposits written in the company’s
accounting records.
6–16
Step 3. Outstanding Checks
a. Arrange the canceled checks in order by check number.
b. Look over the list of outstanding checks left over from
last month’s bank reconciliation, and note the checks
that have not been returned or cleared.
c. For each canceled check, compare the amount
recorded in MICR numbers with the amount recorded in
the checkbook.
d. Review the endorsements on the backs of the checks to
verify that money has been sent to the correct payee.
Step 4. Bank Memoranda
Trace the credit memos and debit memos to the journal.
If the memos have not been recorded, make separate
entries for them.
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Required Journal Entries
6–18
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.
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Form of Bank Reconciliation
6–20
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.
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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.
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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 amount is not large enough to
handle the necessary transactions.
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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.
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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.
6–25
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.
6–26
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).
On September 9, the cash count is $1,672. So, the accountant
deposits $1,522 ($1,672 – $150).
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.
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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.
Step 1. Remove the $150 in the Change Fund.
Step 2 Deposit $1,513 in the bank ($1,663 – $150).
Step 3 Record the cash shortage of $2 as part of the
journal entry to record income.
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On September 15, Roland’s Delivery Service has a cash count
of $1,732, and the cash register tape totals $1,578. The
Change Fund has $150, so the service has a $4 cash overage.
 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.
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The T account would look like this:
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