CHAPTER 6 – CHAPTER 6 – CASH CONTROL CASH CONTROL

SYSTEMSSYSTEMS

OBJECTIVES: OBJECTIVES:

Define accounting terms related to using a checking account and petty cash fund.

Identify accounting concepts and practices related to using a checking account.

Prepare business papers related to using a checking account.

Journalize dishonored checks and electronic banking transactions.

Establish and replenish a petty cash fund.

CHAPTER 6-1CHAPTER 6-1

More money… more problems!

Businesses use cash MOST often in transactions

Must be EXTREMELY careful in recording these transactions

Ch 6-1: Checking AccountsCh 6-1: Checking Accounts

Check: A business form ordering a bank to pay cash from a bank account

Checking Account: A bank account from which payments can be ordered by a depositor.

Banks may pay interest on funds deposited.

To open account, the depositor(s) must: – Sign a signature card: Authorizes person(s) that

may sign checks for the business– Use bank forms to complete transactions

Check information: Check information:

DateNameCheck Number - Magnetic Ink CharactersABA number - identifies the bank

Depositing CashDepositing Cash

Deposit slip – form prepared each time cash and/or checks are placed in account

– No universal ‘deposit slip’

– Each bank’s is similar, but different

– Deposit slips are different to fit each bank’s recording machine

DEPOSITING CASHDEPOSITING CASH

•63-108 – Bank

•$10,000 – amount

•Aug 1 20-- – D10000.00 RDS – printed verification that total was deposited and accepted by RDS (bank employee)

Deposits must be recorded in checkbook.

Deposits have already been journalized in separate entries.– Cash receipts are journalized at time cash is received

(ie: cash / sales, cash / A/R)

–Later, cash receipts are deposited

No NEW journal entry is needed

DEPOSIT RECORDED ON A CHECK STUBDEPOSIT RECORDED ON A CHECK STUB

Lesson 6-1, page 120Lesson 6-1, page 120

Balance brought forward from previous transaction

Amount Deposited

EndorsementsEndorsements

Transfer ownership of a check Contains a signature or stamp on back of check Should be signed exactly as name is stated on front of

check Are confined to back of check at the top

– Federal regulations limit amount of space at top of check Endorsing a check guarantees payment If bank does not receive payment from person who signed

the FRONT of the check, each endorser is individually responsible for payment

Should be written in ink

Three Types of EndorsementsThree Types of Endorsements

1. Blank - signature only– Should only be used when person is at the bank

ready to cash/deposit– Why?

2. Special Endorsements (AKA Full endorsements) - restricts who can cash, deposit, or transfer check.– Pay to the order of __________

Types of EndorsementsTypes of Endorsements

Restrictive Endorsements - limit the use of the check. It can no longer be transferred.– Prevents unauthorized person from cashing if lost or

stolen Most companies use restrictive endorsements.

FYI- FDIC insures up to $100,000 per depositor– Federal Deposit Insurance Corporation

BLANK ENDORSEMENT, SPECIAL ENDORSEMENT, BLANK ENDORSEMENT, SPECIAL ENDORSEMENT, AND RESTRICTIVE ENDORSEMENTAND RESTRICTIVE ENDORSEMENT

Blank Endorsement

Restrictive Endorsement

Special Endorsement

Lesson 6-1, page 121Lesson 6-1, page 121

Writing a CheckWriting a Check

Check stub is filled out first.– Business’s record of each check written for cash

payment– For = Account debited

Word and figure amount should match Checks are printed with consecutive numbers.

– Helps YOU keep track of each check– No other significant purpose

Preparing checks

7.Write the date.

Preparing check stubs

COMPLETED CHECK STUB AND CHECKCOMPLETED CHECK STUB AND CHECK

1. Write the amount of the check.

5

34

2

98

10

11 12

1

7

6

6. Calculate the new account balance.

5. Write the amount of the check.

4. Record purpose of the check.

2. Write the date of the check.

3. Write to whom the check is to be paid.

12.Sign the check.

8.Write to whom the check is to be paid.

9.Write the amount in figures.10.Write the amount in words.11.Write the purpose of the check.

Lesson 6-1, page 122-123Lesson 6-1, page 122-123

Postdated CheckPostdated Check A check with a future date on it. Most banks will not accept a

postdated check. If banks don’t accept postdated

checks, what are they used for?

Voided CheckVoided Check A check that will not be cashed at the bank. Reasons - altered check (changes in name,

date, amount), check you made a mistake in writing

VOID is written on check stub and checkbook and check is kept for records

Must be accounted for in General journal.

RECORDING A VOIDED CHECKRECORDING A VOIDED CHECK

3. Write the check number.

1. Record the date.

4. Place a check mark in the Post. Ref. column.

2. Write the word VOID in the account title.

5. Place a dash in both the Debit and Credit columns.

5

4

Lesson 6-1, page 123Lesson 6-1, page 123

1 2 3

TO DO: TO DO:

Work Together, pg 124 On Your Own, pg 124

CHAPTER 6-2 – Bank ReconciliationCHAPTER 6-2 – Bank Reconciliation

Bank Statement: – a report of deposits, withdrawals, and bank

balances sent to a depositor by a bank

Bank StatementBank Statement

Prepared once a month by bank– Can be mailed or accessed online

When banks received check amount is deducted from account

Bank stamps check to indicate it has been canceled and returns canceled checks to depositor with bank statement

Information Shown:– Canceled checks - paid by the bank and returned to

depositor– Deposits– Charges– Interest paid

TimingTiming

At times, there will be discrepancies in balances because of timing.– Outstanding check: issued by depositor, but not yet

reported on bank statement• YOU wrote the check, but according to your bank

statement, it does not yet exist• It hasn’t yet been taken out of your account on the

statement– Outstanding deposit: made at bank, but not yet

shown on statement• YOU deposited cash/checks, but it has not

appeared on your statement yet

BANK STATEMENTBANK STATEMENT

Lesson 6-2, page 125Lesson 6-2, page 125

Verifying a Bank StatementVerifying a Bank Statement

Reconciliation: You must determine if the bank statement balance is correct. SHOULD BE COMPLETED IMMEDIATELY UPON RECEIVING BANK STATEMENT.

WHY?!? Differences exist because of:1. Outstanding checks- checks not cashed 2. Outstanding deposits- not recorded yet at bank3. Charges (service charge not recorded by depositor)

1. Fees – ie: ?4. Depositor’s errors (math or recording)5. Bank errors

1. Checks/deposits might be recorded in a wrong account

2. Data entry errors

Steps to Reconcile a Bank StatementSteps to Reconcile a Bank Statement

1. Arrange returned checks in numeric order.1. Canceled check place check mark on

check stub2. Determine outstanding checks (no check

mark).3. Determine outstanding deposits.4. Determine bank charges (SC).5. Determine if interest was paid (INT).6. Prepare reconciliation

6. Outstanding Deposits

5. Bank Balance Statement

BANK STATEMENT RECONCILIATIONBANK STATEMENT RECONCILIATION

Lesson 6-2, page 126Lesson 6-2, page 126

1

3

4

2

3. Service Charge

1. Date

4. Adjusted Check Stub Balance

2. Check Stub Balance

5

78

6

7. Subtotal

8. Outstanding Checks9

10. Compare Adjusted Balances

9. Adjusted Bank Balance

10

RECORDING A BANK SERVICE CHARGE ON A CHECK RECORDING A BANK SERVICE CHARGE ON A CHECK STUBSTUB

Lesson 6-2, page 127Lesson 6-2, page 127

1

3

2

3. Calculate and record the new subtotal.

1. Write Service Charge.

2. Write the amount of the service charge.

Entries to Journalize Service Charge and/or Interest Entries to Journalize Service Charge and/or Interest IncomeIncome

MUST journalize and post service charges to the cash account so that it is up to date

No check written– amount was automatically deducted by bank Source DOC: MEMORANDUM JOURNAL:

– Service Charges• Debit Miscellaneous Expense• Credit Cash

– Interest Paid• Debit Cash• Credit Interest Income

TO DO: TO DO:

Work Together, pg 129 On Your Own, pg 129 Application Prob 6-1, 6-2 – pg 140

CHAPTER 6-3CHAPTER 6-3

Dishonored Checks and Electronic Banking

Dishonored Check: Dishonored Check:

A check the bank refuses to pay because….– Check appears to be altered

• Altering/forging is illegal in ALL states– Signature does not match signature card– Amounts do not agree (words and figures)– It is postdated– The person who wrote the check ordered a ‘stop payment’

(after the check is written, you change your mind, usually a $30 fee)

– Insufficient funds by depositor• Illegal in most states• May affect credit rating• Stores post signs with consequences

Dishonored Check: Dishonored Check:

Can try to collect directly from person/business Fee is charged to payee AND depositor When you receive a check it is deposited and ADDED

to account

NOW: Subtract check AND bank charge from checkbook Journal entry must be made

– Debit - Accounts Receivable (of payee)

– Credit - Cash

– Source Doc: Memo

RECORDING A DISHONORED CHECK ON A CHECK RECORDING A DISHONORED CHECK ON A CHECK STUBSTUB

1

3

2

3. Calculate and record the new subtotal.

1. Write Dishonored Check $50.00.

2. Write the amount of the dishonored check.

Lesson 6-3, page 130Lesson 6-3, page 130

Original check: $35

Service Fee: $15

JOURNALIZING A DISHONORED CHECK – pg 131JOURNALIZING A DISHONORED CHECK – pg 131

November 29. Received notice from the bank of a dishonored check from Learn N Play, $35.00, plus $15.00 fee; total, $50.00. Memorandum No. 55.

1. Which accounts are affected?

Accounts Receivable—Learn N Play

Cash

4. How is each amount entered in the accounts?

Assets increase on the debit side.

Assets decrease on the credit side.

3. How is each classification changed?

Assets are increased.

Assets are decreased.

2. How is each account classified?

Accounts Receivable—Learn N Play is an asset account.

Cash is an asset account. Cash

Accounts Rec.—Learn N Play

DebitNormal Balance

DebitNormal Balance

50.00

50.00

Lesson 6-3, page 131Lesson 6-3, page 131

Journalizing an EFT Transfer – pg 132Journalizing an EFT Transfer – pg 132

EFT: computerized cash payments that uses electronic impulses to transfer funds– Arrangements must be made between

business, bank, and vendor (password)– same journal entry as when check is

written for payment, but source doc is a memo

**********************************************

Journalizing an EFT Transfer – pg 132Journalizing an EFT Transfer – pg 132

Transaction: Paid cash on account to Kelson Enterprises, $350.00, EFT, Memo No. 10

Date Debit: Accounts Payable – Kelson Enterprises

– Credit: Cash Source: M10

– no check was written for source doc Recorded on Check Stub as OTHER – to keep

checkbook balanced

Identified on bank stmt by EFT instead of Check No.

Journalizing a Debit Card Transaction – pg 133Journalizing a Debit Card Transaction – pg 133

Debit card: bank card that automatically deducts amount of purchase from account– Same effect as checks– Eliminates the need to carry a checkbook

Journal: – Debit: Supplies

• Credit: Cash– Source: Memo

Recorded on Check Stub as OTHER Identified on Bank Stmt as Purchase w/date, time,

location, and amount of transaction

TO DO: TO DO:

Work Together, pg 134 On your own, pg 134

Chapter 6-4Chapter 6-4

Petty Cash: Small amount of cash kept on hand for making

small payments. Asset with DR balance

Petty Cash Slips: Vouchers used to account for money paid from the fund.– Kept in lock box– Most companies set a limit for the max. amount

allowed to be paid with petty cash per transaction– Encore $20 max payments / $200 fund

New AccountNew Account

Petty Cash – Asset To Establish fund:

– Debit Petty Cash– Credit Cash

Petty Cash Debit

Normal Balance

+

Credit

-

ESTABLISHING A PETTY CASH FUND – pg 135ESTABLISHING A PETTY CASH FUND – pg 135

August 17. Paid cash to establish a petty cash fund, $200.00. Check No. 8.

1. Which accounts are affected?

Petty Cash

Cash

4. How is each amount entered in the accounts?

Assets increase on the debit side.

Assets decrease on the credit side.

3. How is each classification changed?

Assets are increased.

Assets are decreased.

2. How is each account classified?

Petty Cash is an asset account.

Cash is an asset account. Cash

Petty Cash

DebitNormal Balance

DebitNormal Balance

200.00

200.00

Lesson 6-4, page 135Lesson 6-4, page 135

Making Payments from Petty Cash FundMaking Payments from Petty Cash Fund

Vouchers are used to account for money paid from the fund Petty cash slips

slip number date of pymt to whom paid reason for pymt amount paid account to which amount is to be recorded (at

the end of month) Signature of person approving payment NO journal entries are needed for individual

payments– will be recorded later

Control feature: slip must be approved before cash is paid out

Petty Cash Paid OutPetty Cash Paid Out

As petty cash is paid out, the amount in the box decreases

It gets replenished at the end of the month or when significantly reduced

Replenish Petty Cash – pg 137Replenish Petty Cash – pg 137

Some businesses set a minimum amount for when to replenish (or end of each month)

Determine balance of Petty Cash Fund.– Cash remaining + slips total

Determine amount needed to bring it back to original balance.

Journalize the entry.– Debit EACH Account petty cash was spent on (expenses or assets)– Credit Cash

Balance should always be the same as the original amount of the fund (unless business decides to increase/decrease fund)

Example of Replenishment entry:Example of Replenishment entry:

DR CR Supplies 13.00 Miscellaneous Expense 20.00 Advertising Expense 25.00 Cash 58.00

To journalize: Date – of replenishmentDebit – each individual accountCredit – Cash account – total amountSource doc: Check issued to replenish petty cash

ALWAYS CREDIT CASH – NOT PETTY CASH.

*EXAMPLE - Journal entry – pg 137

TO DOTO DO

Work Together, pg 138 On your own, pg 138 Application Prob 6-3, 6-4

Chapter 6 Summary: Mastery 6-5 Challenge 6-6 Ch. 6 Study Guide Extra Problem 6-1