BANK ACCOUNTS AND CASH FUNDS

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Chapter 7

• BANK ACCOUNTS AND CASH FUNDS

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CASH MANAGEMENT

• A very important aspect of any system of
  financial accounting the accurate and efficient
  management of cash.
• For a business of any size, all cash received
  during a work day should be deposited at the end
  of the day, and all disbursements-with the
  exception of payments from Petty Cash -should be
  made by check.

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CASH MANAGEMENTcontinued

• Cash currency, coin, checks, money orders,
  traveler's checks, and bank drafts or bank
  cashier checks. Personal checks are accepted
  conditionally-we consider checks to be good until
  they are otherwise proven not to be good.

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Using A Checking Account

• When business owner founded a business, a
  checking account was opened in the name of the
  business
• When the business owner made the first deposit, a
  signature card is filled for the banks files
• Signature card gives the bank a copy of the
  official signatures of any persons authorized to
  sign checks.
• The bank can use it to verify the signatures on
  any checks of the business presented for payment.
  This card helps the bank detect forgeries.
  (Sample see next slide)

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DEPOSIT SLIPS

• The bank provides printed deposit slips or
  deposit tickets on which customers record the
  amount of coins and currency they are depositing
  and each individual check being deposited.
• A typical deposit slip is shown in next slide

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Deposit Slipscontinued

• Each check deposited should be listed according
  to its American Bankers Association (ABA) transit
  number.
• The ABA number is the small fraction located in
  the upper right corner of a check (See next slide)

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68 is City/State of the bank, and 420 identifies
specific bank on which the check is drawn
12 is Fed Reserve District (The Twelve) in which
the check is cleared and 10 is the routing number
used by the Federal Reserve Bank
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Bank Acct No. Typically 10 digits
ABA Routing No. Typically 9 digits
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Deposit Slipscontinued

• When the bank receives the deposited checks, it
  prints the amount of each check on the lower
  right side of the check in a script called MICR
  (magnetic ink character recognition)
• The routing number and the depositor's number
  used by the Federal Reserve Bank was printed on
  the lower left side of the blank check before it
  was sent to the account holder.
• MICR script is used so that the electronic
  equipment used to process the checks is able to
  rapidly read the script identifying the bank on
  which the check is drawn and the amount of the
  check

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MICR printed by the bank
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WRITING CHECKS

• People generally use a check to withdraw money
  from a bank account.
• A check represents an order by the drawer,
  directing the bank to pay a designated person or
  company.
• The party to whom payment is to be made is the
  payee.

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Endorsements

• The bank may not accept for deposit a check made
  out to a firm until someone from the firm has
  endorsed the check.
• The endorsement may be made by signature or by
  stamp. The endorsement should appear on the back
  of the left end of a check, as it does in next
  slide.

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Endorsement on the back of the check. It states
the name of the person and his/her bank who has
right of that check
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Endorsementscontinued

• The endorsement
• transfers title to the money and
• authorizes the payment of the check.
• In other words, if the check is not good,
• NSF (not sufficient funds), then the bank, in
• order to protect itself, will deduct the amount
• of the check from the depositor's account.

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Endorsementscontinued

• Restrictive Endorsement
• All checks made payable to Bryan Floral are
  endorsed by stamping on the back of the checks
  "Pay to the Order of Bessett National Bank, For
  Deposit Only, Bryan Floral"
• This is called a restrictive endorsement because
  it restricts or limits any further transfer of
  the check.
• This endorsement also forces the deposit of the
  check, because the endorsement is not valid for
  any other purpose.

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Restrictive Endorsement
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Endorsementscontinued

• Blank Endorsement When the party to whom a check
  is made payable (the payee) endorses the check by
  signing only her or his name on the back of the
  check, this is known as a blank endorsement (see
  next slide).
• J.D. Doe is the endorser (see next slide)
• With a blank endorsement, there are no
  restrictions attached.
• Once endorsed, the check becomes bearer paper and
  is negotiable by anyone who physically holds it.
• The number of times a check may be endorsed is
  unlimited.
• The Maker of the check is primarily liable
  (expected to pay first)
• If the payee/endorser gave the same check to
  specific person, the payee is now a Drawer.
• The endorser/Drawer is now secondary liable
  (expected to pay second)

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Endorsementscontinued

• Next Slide J.D Doe gave the check to N.R Smith,
  with qualified endorsement.
• Qualified Endorsement A third type of
  endorsement is a qualified endorsement (see next
  slide), which generally includes the phrase "Pay
  to the order of," followed by the name of the
  person to whom the check is being transferred,
  and then followed by the phrase "without
  recourse.
• Such an endorsement frees the endorser (J.D.Doe)
  from future secondary liability in case the
  Drawer of the check does not have sufficient
  funds to cover the check.

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WRITING CHECKScontinued

• The checks may be attached to check stubs. Each
  stub has spaces for recording the check number
  and amount, the date and payee, the purpose of
  the check, and the beginning and ending balances
  of cash. (See next slide)
• Note The information recorded on the check stub
  is the basis for the journal entry, so check
  stubs are vitally important.

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CHECK STUB-TO KEEP
THE CHECK TO BE GIVEN TO THE PAYEE
Detachable
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WRITING CHECKS

• Checks should be written carefully so it is hard
  to alter them.
• Write cents as a fraction of 100. For example,
  write 727.50 as "seven hundred twenty-seven
  50/100," or 89.00 as "eighty-nine and NO/IOO."
• From a legal standpoint, if there is a
  discrepancy between the amount in figures and the
  written amount, the written amount prevails.
• Computerized firms print their checks
  electronically, using a check writer,
• The drawer's signature on the face of the check
  should match that on the signature card on file
  at the drawer's bank.

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BANK STATEMENTS

• Once a month the bank sends each of its customers
  a bank statement.
• This statement provides the following information
  about customers' cash accounts
• The balance at the beginning of the month
• Additions in the form of deposits and credit
  memos
• Deductions in the form of checks and debit memos
• The final balance at the end of the month

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BANK STATEMENTS

• The following legend of symbols is listed on the
  bottom of the statement (from text book)
• CM (credit memo) Increases in or credits to the
  account, such as notes or accounts left with the
  bank for collection.
• DM (debit memo) Decreases in or debits to the
  account, such as NSF checks, ATM withdrawals, and
  service charges. Service charges are based on the
  number of items processed and the average account
  balance. Special charges may also be levied
  against the account for collections and other
  services performed, including check printing.

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BANK STATEMENTS..continued

• 3.PBP (pay by phone) Transactions made by
  telephone using the number keypad instead of
  writing checks.
• 4.OD (overdraft) The withdrawal of more than the
  cash balance in the account, resulting in a
  negative balance.
• 5.EC (error correction) Corrections of errors
  made by the bank, such as mistakes in
  transferring figures.

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BANK STATEMENTScontinued

• You might think that the two balances-the firm's
  and the bank's-should be equal, but this is
  unlikely.
• Some transactions may have been recorded in the
  firm's account before being entered in the bank's
  records
• Ordinarily' there is a delay of one or more days
  between the date on which a check is written and
  the date when it is presented to the bank for
  payment.
• Banks may not record deposits until the following
  business day. During this time lag, deposits made
  or checks written are recorded in the firm's
  checkbook, but they are not yet listed on the
  bank statement.

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BANK STATEMENTScontinued

• The bank mails statements to its depositors each
  month. 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 or perforation, indicating
  that they have been paid.

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Recording Deposits or Withdrawals FROM BANKS
point of view

• When the bank receives a cash deposit from a
  customer, the bank credits Deposits Payable,
  because it owes more to its customer.
• When the bank cashes a check (pays out) for a
  customer, the bank debits Deposits Payable,
  because it owes less to its customer.

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Recording Deposits or Withdrawals FROM CUSTOMERS
point of view

• The customer, on the other hand, uses the account
  titled Cash, or Cash in Bank, or simply the name
  of the bank.
• Deposits are recorded as debits, and withdrawals
  are recorded as credits in the account.
• On a bank reconciliation, the balance of the
  account is listed as the ledger balance of cash
  and to be reconcile with the bank statement.

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BANK RECONCILIATION

• Why? Because the bank statement balance and the
  ledger balance of cash are not equal,
• A firm prepares a bank reconciliation to uncover
  the reasons for the difference between the two
  balances and to correct any errors that may have
  been made by either the bank or the firm. This
  makes it possible to arrive at the same balance
  in each account, which is called the adjusted
  balance, or true balance, of the Cash account.
• There are a variety of reasons for differences
  between the bank statement balance and the
  customer's cash balance. Here are some of the
  more common ones

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BANK RECONCILIATIONS

• Deposit in transit A deposit made after the bank
  statement was issued. The deposit is recorded per
  book, but not per bank
• Outstanding checks Checks that have been
  written by the company but not yet received for
  payment by the time the bank sends out its
  statement.
• Collections When the bank acts as a collection
  point for its customers by accepting payments on
  their behalf, it adds the proceeds to the
  customer's bank account and sends a credit
  memorandum to notify the customer of the
  transaction or includes it on the next bank
  statement.
• Interest income. The depositor will not learn how
  much interest the bank has credited to the bank
  account until the bank statement is received.

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BANK RECONCILIATIONScontinued

• NSF (not sufficient funds) check (Dishonored
  check) When a bank customer deposits a check, it
  is recorded as cash on the customer's books.
  Occasionally, however, a check is not paid
  (bounces).
• Service charge for handling checks, for
  collecting money, for receiving payment of notes
  turned over to it by the customer for collection,
  for check printing, and for other such services.
  The bank immediately deducts the fee from the
  bank account
• Errors In spite of internal controls and systems
  designed to double check to prevent errors,
  sometimes either the customer or the bank makes a
  mistake. Often these errors do not become
  evident until the bank reconciliation is
  performed.

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Steps in Reconciling the Bank Statement
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Bank Recon.

• Bank Statement - Ending Balance
• Add Any addition in Cash per book but NOT in
  the bank.
• Minus Any deduction in Cash per book but NOT in
  the bank
• Adjusted Bank Statement Balance
• --------------------------------------------------
  -
• Cash per Book Ending Balance
• Add Any addition in Cash per bank but NOT
  recorded in the book
• Minus Any deduction in Cash per bank but NOT
  recorded in the book
• Adjusted Ledger Balance in Cash.
• --------------------------------------------------
  
• Adjusted Bank Statement Balance should equal to
  Adjusted Ledger Balance in Cash

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Tips for Bank Recon.

• Ask yourself if it has been recorded only by the
  bank or only by the depositor.
• If an item has been recorded by both the bank and
  the depositor, there is nothing to do.
• If an item has been recorded only by the bank,
  then record it in a similar manner in the Ledger
  Balance of Cash section.
• If an item has been recorded only by the
  depositor(the cash book), then record it in a
  similar manner in the Bank Statement Balance
  section.

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PETTY CASH FUND

• When it wouldnt be practical to write a check in
  some instances, it only makes sense to pay in
  cash, using the Petty Cash Fund.
• Petty means "small," so the firm sets a maximum
  amount that can be paid immediately out of petty
  cash. Payments that exceed this maximum must be
  processed by regular check through the journal.

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Petty Cash Fund

• The firm has to set the maximum amount of a
  payment from petty cash,
• next step is to estimate how much cash will be
  needed during a given period of time, such as a
  month. If the risk is great in keeping the cash
  in house, the amount kept in the fund should be
  small.

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Petty Cash Fund Journal Entries

• To establish Petty Cash Fund
• Dr. Petty Cash Fund (Asset account-similar to
  Cash)
• Cr. Cash (this is your checking account)
• Keeping track payments from the Petty Cash Fund
• Petty cash voucher must be used to account for
  every payment from the fund. P/C Voucher a
  receipt signed by the person who authorized the
  payment and by the person who received payment as
  well as the purpose of the petty cash payment.

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Keeping track payments from the Petty Cash Fund

• Or, the company may choose to keep Petty Cash
  Payments Records, with each expense is
  categorized.
• Reimbursement of Petty Cash Fund (when the fund
  is nearly exhausted)
• Dr. Expenses related to Petty Cash payments
• Cr. Cash (Checking)
• Keep in mind The Original Petty Cash Fund is
  untouched.

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The Change Fund

• The fund used by the company to give change to
  the customer
• Just like Petty Cash, the Change Fund is only
  debited once, when it is established.
• The Change Fund is also an Asset account, listed
  below Cash account.
• To established Change Fund Dr. Change Fund and
  Cr. Cash (Checking).
• At the end of the day Total Cash Count minus
  Change Fund New Cash Deposit. So Only this New
  Cash Deposit is recorded as Revenue. Dr. Cash Cr
  Revenue

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CASH SHORT AND

• If (Cash Count Change Fund) is NOT equal to
  Cash Register Tape, then
• Dr. Cash for (Cash Count-Change Fund). Still
  deposit all cash after shortage/over.
• Cr. Revenue for the Cash Register Tape
• Cr/Dr Cash Short and Over for the difference
  between the two.
• Cash Shortage Misc. Expense
• Cash Over Misc. revenue