Unit 2 The Basic Accounting Cycle Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Business Transactions and the Accounting Equation Transactions That Affect Assets, Liabilities, and Owner s Capital Transactions That Affect Revenue, Expenses, and Withdrawals Recording Transactions in a General Journal Posting Journal Entries to General Ledger Accounts The Six-Column Work Sheet Financial Statements for a Sole Proprietorship Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship Chapter 11 Cash Control and Banking Activities 0
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. 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? 2
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. 3
SECTION 11.1 Banking Procedures Key Terms internal controls external controls checking account check depositor signature card deposit slip endorsement blank endorsement special endorsement 4
SECTION 11.1 Banking Procedures Key Terms restrictive endorsement payee drawer drawee voiding a check 5
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) 6
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. 7
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. 8
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. 9
SECTION 11.1 Banking Procedures The Checkbook A checkbook is a group of printed checks packaged together and numbered in sequential order. 10
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. 11
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. 12
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. 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. 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. 15
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. 16
SECTION 11.1 Banking Procedures Completing the Check Stub The check stub is completed in the order corresponding to the numbers below. 17
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. 18
SECTION 11.1 Banking Procedures Filling Out the Check 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. 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. 21
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. 22
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. 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. 24
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. 25
Chapter 11, Section 2 Reconciling the Bank Statement What Do You Think? Why is the bank reconciliation considered an internal control? 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. 27
SECTION 11.2 Reconciling the Bank Statement 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 28
SECTION 11.2 Reconciling the Bank Statement Key Terms postdated check electronic funds transfer system (EFTS) bankcard automated teller machine (ATM) 29
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 30
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 31
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. 32
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. 33
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. 34
SECTION 11.2 Reconciling the Bank Statement The Bank Reconciliation 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: 36
SECTION 11.2 Reconciling the Bank Statement 37
SECTION 11.2 Reconciling the Bank Statement 38
SECTION 11.2 Reconciling the Bank Statement 39
SECTION 11.2 Reconciling the Bank Statement 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. 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. 42
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 21 st 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. 43
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. 44
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 45
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. 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. 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. 48
SECTION 11.2 Reconciling the Bank Statement Key Terms Check 21 The Check Clearing for the 21 st 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. 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. 50
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? 51
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) 52
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. 53
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) 54
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. 55
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. 56
Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary 57