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7. Accounting for Cash. Cash. Includes: Currency, coins, and checking accounts Checks received from customers Money orders Bank cashier’s checks Because cash plays such a central role in operating a business, it must be carefully managed and controlled. Internal Control.

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Accounting for Cash


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    1. 7 • Accounting for Cash

    2. Cash • Includes: • Currency, coins, and checking accounts • Checks received from customers • Money orders • Bank cashier’s checks • Because cash plays such a central role in operating a business, it must be carefully managed and controlled.

    3. Internal Control • A set of procedures designed to ensure proper accounting for transactions • Good internal control for cash transactions: • All cash received should be deposited DAILY in a bank • All disbursements, except for payments from petty cash, should be made by CHECK

    4. 1 • Describe how to open and use a checking account.

    5. USA Patriot Act • Primary purpose of this act was to help detect and prevent terrorism. • As a result, banks must have a Customer Identification Program, or (CIP) that provides clear identification of every account holder of the bank.

    6. Opening a Checking Account • Each person authorized to sign checks must complete and sign a signature card. • This card is used to verify the depositor’s signature on any banking transactions.

    7. Signature Card Example

    8. Making Deposits • A deposit ticket is a form showing a detailed listing of items being deposited • Currency, coins, and checks are listed separately • Each check should be identified by its ABA (American Bankers Association) number • Found in upper right-hand corner of each check • Also shown in magnetic ink character recognition (MICR) code on the lower left side of the front of each check • The code is used to sort and route checks

    9. Endorsements • Each check being deposited must be endorsed by the depositor • Consist of stamping or writing the depositor’s name and sometimes other information on the back of the check

    10. Endorsements (cont.) • Blank endorsement • The depositor simply signs the back of the check • This makes the check payable to any bearer • Restrictive endorsement • The depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Daryl Beck only” for payment restriction

    11. Automated Teller Machines (ATM’s) • Each depositor has a plastic card and a personal identification number (PIN). • Most automated teller machines (ATMs) are on a system that allows noncustomers to use their ATMs. • It is important for the depositor to keep an accounting record of ATM withdrawals and deposits.

    12. Writing Checks • A check is a document ordering a bank to pay cash from a depositor’s account. • There are three parties to every check: • Drawer—the depositor who orders the bank to pay the cash • Drawee—the bank on which the check is drawn • Payee—the person being paid the cash • Business checks often have a check stub.

    13. Three Steps in Preparing a Check • Complete the check stub or register. • Enter the date, payee name, and amount on the check. • Sign the check. The check should not be signed until the check signer has verified that all aspects of the check are correct.

    14. Bank Statement • The statement shows: • The balance at the BEGINNING of the period • Deposits and other amounts ADDED during the period • Checks and other amounts SUBTRACTED during the period • The balance at the END of the period

    15. Bank Statement • Sent with bank statement • Canceled checks, “imaged” sheets of check faces, or a listing of checks • Any other forms representing items added to or subtracted from the account

    16. 2 • Prepare a bank reconciliation and related journal entries.

    17. Bank Reconciliation Example • Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23. We need to prepare a BANK RECONCILIATION.

    18. Maple Consulting Bank ReconciliationNovember 21, 20-- Heading includes: Name of Company Bank Reconciliation Date

    19. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 The bank reconciliation begins with the balance according to the bank statement.

    20. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Reconciling items are listed as additions or subtractions from the bank balance.

    21. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Once all reconciling items are listed, the adjusted bank balance is computed.

    22. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Now the reconciliation turns to adjusting the BOOK balance.

    23. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Additions and subtractions will be made to the book balance. Deduct:

    24. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: The adjusted book balance is computed. Deduct: Adjusted book balance

    25. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add: We say it is “reconciled” when the adjusted BANK and adjusted BOOK balances agree. Deduct: Adjusted bank balance Book balance, November 21 $2,393.23 Add: Deduct: Adjusted book balance

    26. Differences Between Bank and Book Balances • Deposits in transit • Deposits that have not reached the bank or been recorded by the bank before the statement is prepared • Outstanding checks • Checks that have not been presented to the bank for payment before the statement is prepared • Service charges • Bank charges for services such as check printing and processing

    27. Differences Between Bank and Book Balances (cont.) • Collections • Collections of promissory notes or charge accounts made by the bank on behalf of the depositor • Not sufficient funds (NSF) checks • Checks deposited but not paid because the drawer did not have sufficient funds • Errors • Errors made by the bank or by the depositor in recording cash transactions

    28. Bank Reconciliation • THREE STEPS: • STEP #1Identify deposits in transit and related errors. • STEP #2Identify outstanding checks and related errors. • STEP #3Identify additional reconciling items.

    29. STEP #1: Identify deposits in transit and related errors. • Compare the bank statement with: • Last month’s deposits in transit • They should all be on the bank statement • Deposits listed in the accounting records • If not found on the bank statement, the deposit is considered a deposit in transit • $ amounts for deposits in the accounting records • If they differ, the error needs to be corrected.

    30. STEP #1 Example • A deposit in the accounting records of $637.02, dated November 21, had not been received by the bank. DEPOSIT IN TRANSIT

    31. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 DEPOSITS IN TRANSIT are added to the bank balance. Deduct: Adjusted bank balance $2,393.23 Book balance, November 21 Add: Deduct: Adjusted book balance

    32. STEP #2: Identify outstanding checks and related errors. • Compare canceled checks with the bank statement and accounting records. • If they differ, the error needs to be corrected.

    33. STEP #2 Example • Check no. 214 was written for $18.98 but was entered on the check stub and on the books as $19.88. $0.90 ERROR

    34. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $0.90 is added back to the book balance. Deduct: Adjusted bank balance $2,393.23 Book balance, November 21 error on check no. 214 Add 0.90 Deduct: Adjusted book balance

    35. STEP #2: Identify outstanding checks and related errors. • Compare canceled checks with the bank statement and accounting records. • If they differ, the error needs to be corrected. • Check mark the stub or accounting records to indicate that the check has cleared. • Checks written but not cleared are OUSTANDING CHECKS. • These are subtracted from the bank balance on the reconciliation.

    36. STEP #2: Identify outstanding checks and related errors. • Compare canceled checks with the bank statement and accounting records. • If they differ, the error needs to be corrected. • Check mark the stub or accounting records to indicate that the check has cleared. • Checks written but not cleared are OUSTANDING CHECKS. • These are subtracted from the bank balance on the reconciliation.

    37. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,393.23 Book balance, November 21 Add 0.90 error on check no. 214 Outstanding checks are deducted from the bank balance. Deduct: Adjusted book balance

    38. STEP #3: Identify additional reconciling items. • Compare any additions and deductions on the bank statement that are not deposits or checks with the accounting records. • Items ADDED to the account by the bank are credit memos. • Items DEDUCTED from the account by the bank are debit memos.

    39. STEP #3 Example • Maple used an ATM machine to make a withdrawal from his account of $100.00 for personal use. However, he forgot to record this withdrawal on the books. Deduct $100.00 from the book balance.

    40. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 Adjusted book balance

    41. STEP #3 Example • The bank returned an NSF check of $200.00 written by one of Maple’s clients. Deduct $200.00 from the book balance.

    42. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add error on check no. 214 0.90 Deduct: Unrecorded ATM withdrawal $100.00 200.00 NSF check Adjusted book balance

    43. STEP #3 Example • The bank deducted $1.80 from Maple’s account for service charges. Deduct $1.80 from the book balance.

    44. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance Book balance, November 21 $2,393.23 Add 0.90 error on check no. 214 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

    45. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 The bank balance section of the reconciliation is totaled. Add 0.90 error on check no. 214 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 Adjusted book balance

    46. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 Deduct outstanding checks: Then the book balance section is totaled. No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 Add 0.90 error on check no. 214 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33

    47. Example • We now know that the actual amount of cash is $2,092.33, but the general ledger cash account still shows $2,393.23. JOURNAL ENTRIES ARE NEEDED!!!

    48. Bank Reconciliation Journal Entries • Only two kinds of items appearing on a bank reconciliation require journal entries: • Errors in the depositor’s books • Bank additions and deductions that do not already appear in the books • ALL items in the book balance section of the reconciliation require a journal entry.

    49. Maple Consulting Bank ReconciliationNovember 21, 20-- Bank statement balance, November 21 $1,748.09 Add deposit in transit 637.02 $2,385.11 These 4 items will require journal entries. Deduct outstanding checks: No. 219 $200.00 25.00 No. 224 No. 227 67.78 292.78 Adjusted bank balance $2,092.33 Book balance, November 21 $2,393.23 0.90 Add error on check no. 214 $2,394.13 Deduct: Unrecorded ATM withdrawal $100.00 NSF check 200.00 Bank service charge 1.80 301.80 Adjusted book balance $2,092.33