Ch 7 Lecture Guide

1
ACCOUNTING-I

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Chapter 7
Lecture Guide
Accounting for a Sole Proprietorship Cash
Control Systems
2

• CASH CONTROL SYSTEMS

INTRODUCTION

• Cash Money
• Transactions involving cash occur more frequently
  than any other type.
• Cash Payments
• Checking account for large amounts
• Petty cash box for small amounts
• Cash Receipts
• Deposited in a bank
• Banking records provide objective evidence.
• Money kept in a bank is more secure than cash
  kept in the workplace.

3

• TERMS to LEARN

• checking account
• checkbook
• endorsement
• blank endorsement
• special endorsement
• restrictive endorsement
• postdated check
• bank statement
• bank statement reconciliation
• dishonored check
• electronic funds transfer (EFT)
• petty cash
• petty cash slip

4

• I. CHECKING ACCOUNTS

A. Authorizing Signatures
Signatures of all persons authorized to sign
checks for a business are provided for bank
reference on a signature card when a bank account
is opened.
B. Depositing Cash
1. A deposit slip is prepared for each bank
deposit each bank provides deposit slips in its
own format for customer use.
2. Checks are listed and identified by bank
number.
3. Banks issue receipts for all deposits.
See Illustration 7-1 (p 136)
5

• I. B. (cont)

4. When a deposit is made
The date and amount are recorded on the next
unused check stub in the business
checkbook. After the corresponding check is
written, the checkbook balance is subtotaled.
Subtotal previous balance
amount of the deposit
5. NO JOURNAL ENTRY is made for a deposit
because it is the same amount entered in the Cash
Debit column of the journal for cash received on
that date.
See Illustration 7-2 (p 136)
6

• I. (cont)

C. Endorsing Checks

• The name of the first owner of a check is written
  after Pay to the order of on the front of a
  check.
• The check owner must endorse the check in order
  to deposit it in the bank or transfer it to
  another business or individual.
• An endorsement consists of signatures and written
  instructions on the back of a check.
• The way a check is endorsed is critical because
  ownership can be transferred.
• Federal regulations limit the space in which an
  endorsement can be written.

7

• I. C. (cont)

• Endorsements must be signed (or rubber stamped)
  exactly as the owners name appears on the front
  of the check.
• If a check is made payable to a name other than
  the official signature (on the signature card),
  the endorser should write his/her name as it
  appears on the front of the check and provide
  his/her official signature beneath it.
• Each additional endorsement transfers ownership
  of the check to another business or individual.
• Each endorser is individually liable for payment
  of the check.

8

• I. C. (cont)

1. Blank endorsement
ONLY the name of the owner Should only be written
in person at a bank.
See Illustration 7-3 (p 137)
2. Special endorsement
Pay to the order of new owner followed by the
signature of the current owner. Transfers
ownership and is known as an endorsement in full
See Illustration 7-4 (p 137)
9

• I. C. (cont)

3. Restrictive endorsement
For deposit only to the account of ___ above
the signature of the check owner Limits use of
the check for any other purpose and, therefore,
prevents unauthorized persons from cashing the
check if it is lost or stolen. This is the type
of endorsement used by most businesses.
See Illustration 7-5 (p 138)
10

• I. (cont)

D. Writing Checks
Most businesses use preprinted checks with stubs
attached. Checks are numbered consecutively with
stubs numbered to match respective checks.
1. Preparing check stubs The check stub is
ALWAYS prepared before the check is
written! Check stubs provide records of cash
payments.
See Illustration 7-6 (p 138)
11

• I. D. 1. (cont)

Six steps in completing a check stub
See Illustration 7-6 (p 138)
a. Amount at the top after Check
No. b. Date c. To whom the check is
written d. the purpose For which the check was
written e. Amount below the subtotal f. enter
the new checking account balance as Balance
Carried Forward
Note Deposits and deductions made since the
previous check was written are listed on the stub
after Balance Brought Forward and are included
in the subtotal.
12

• I. D. (cont)

2. Preparing checks NEVER write a check until
the stub has been prepared!
See Illustration 7-6 (p 138)
a. write the Date in the space provided include
month, day, and year. Checks should NOT be
postdated! b. enter the Name of the person or
business to whom the check is being written on
the line after Pay to the order of. c. write
the Amount in Numbers in the space following the
. DO NOT leave blank space between the and
the first number.
13

• I. D. 2. (cont)

d. write the Amount in Words on the line before
the word Dollars and draw a line across any
unused space. If the dollar amount and the
amount written in words are not the same, the
bank may honor the check for the amount written
in words. e. write the purpose for which the
check was written on the line provided after the
word For. Memo may be used instead of
For no line may be provided at all. f. sign
the check -- ONLY AFTER all other information has
been entered.
14

• I. D. (cont)

3. Voiding checks
Banks usually DO NOT accept checks if information
has been altered (changed). Therefore, if an
error is made when writing a check, the check
should be voided. To void a check
a. write the word VOID in large letters across
the front of the check, and keep it for
reference. b. write VOID on the corresponding
check stub in both places where check amounts
would be entered.
15

• I. D. 3. (cont)

c. make a journal entry to account for a voided
check.
(1) enter check marks in the date, document
number, and posting reference columns. (2) write
Void in the account title column. (3) enter a
dash () in the Cash Credit amount column.
16
Answer Audit Your Understanding questions (p
140)
1. List the three types of endorsements.
Blank Special Restrictive
2. List the six steps for preparing a check
stub. Amount (at the top) Date
To Purpose (For) Amount (after
subtotal) Calculate and enter the Balance
Carried Forward
One more step Enter the Balance Carried
Forward as the Balance Brought Forward on the
next available check stub.
17

• II. BANK STATEMENT

• Banks maintain separate records for each account.
• Information is recorded daily for each account to
  add each deposit received and subtract each check
  processed.
• At the end of each month, banks send each
  depositor a statement for each account showing
  all deposits and charges which were made to the
  account.
• Banks usually charge depositors for processing
  and/or printing checks and for checks written for
  insufficient funds. Charges of these types are
  listed on bank statements.

18

• II. (cont)

• Each depositor should reconcile each account with
  the bank statement to ensure deposits and checks
  have been accurately recorded.
• Checks which have been paid as directed are
  listed on the statement and may be returned to
  the depositor with the bank statement.
• Checks which are not listed on the statement are
  called outstanding checks.
• Deposits which are not listed are called
  outstanding deposits.

Note Banks typically offer different types of
accounts to different types of depositors. Some
accounts may provide free check printing and/or
processing and free or varying service charges.
19

• II. (cont)

A. Verifying a Bank Statement
The bank statement should be reconciled with the
checkbook records when the statement is received
in order to verify accuracy of both sets of
records and permit correction of errors as soon
as possible.
See Illustration 7-7 (p 141)
20

• II. A. (cont)

Reasons for differences between a bank statement
and depositors records include
Bank Service Charges of which the depositor
becomes aware when the bank statement is
received Outstanding Deposits made by the
depositor but not yet recorded by the
bank Outstanding Checks issued by the depositor
but not yet processed by the bank Errors in
either the banks or the depositors records
21

• II. (cont)

B. Reconciling a Bank Statement with the
depositors checkbook

• Reconciling means verifying entries and
  calculations in the banks records (the bank
  statement) and the depositors records (the
  checkbook) such that the balances in both sets of
  records are the same.
• The form for reconciling a bank statement is
  provided on the back of the statement.

See Illustration 7-8 (p 142)
22

• II. B. (cont)

Steps to reconcile a bank statement 1. Calculat
e the adjusted check stub balance.
Use the appropriate area of the form to
a. write the date of the reconciliation. b. list
the balance brought forward as shown on the next
unused check stub. c. list bank charges shown on
the statement. d. enter the adjusted checkbook
balance in the space provided.
23

• II. B. (cont)

2. Calculate the adjusted bank balance.
Use the appropriate area of the form to a. write
the ending balance shown on the bank
statement. b. write the date and amount of each
outstanding deposit add outstanding deposits and
enter the total. c. add the bank statement
balance to the total of the outstanding deposits
and enter the total. d. list the number and
amount of each outstanding check calculate and
enter the total. e. calculate and enter the
adjusted bank balance.
24

• II. B. (cont)

3. Compare the adjusted check stub balance with
the adjusted bank balance.
If the balances are not the same, find and
correct all errors. When both balances are the
same, the bank statement has been reconciled and
should be filed along with cancelled checks which
may have been returned with the statement.
25

• II. (cont)

C. Recording a Bank Service Charge
Each bank charge (listed on a bank statement)
reduces the amount of money in the depositors
account.

• Therefore
• Each charge must be recorded (on the next unused
  check stub) in the depositors checkbook and
  deducted from the balance.
• A journal entry must be made to record each
  charge as a cash payment (Cash Credit).

26

• II. C. (cont)

Steps to to record a bank service
charge 1. Write Service charge on the next
unused check stub under the heading
Other. 2. Write the amount of the charge in
the corresponding area of the check
stub. 3. Calculate and record the subtotal.
Note Step 3 should be completed prior to
entering the amount of the corresponding check.
See Illustration 7-9 (p 144)
27

• II. (cont)

D. Journalizing a Bank Service Charge

• A journal entry must be made for each bank charge
  to record the appropriate deduction from the
  balance of the cash account.
• If the number and amounts of bank charges are
  significant, an account named Service (or Bank)
  Charges can be opened.
• If only small amounts are assessed, transactions
  are entered in the Miscellaneous Expenses
  account.
• The source document for a bank charge is a
  memorandum.

28

• II. D. (cont)

Steps in journalizing a bank service
charge 1. Enter the date shown on the bank
reconciliation. 2. Enter debit information
a. in the Account Title column, write
Miscellaneous Expense (or the appropriate
account title if a special account is used for
bank charges). b. write the amount of the charge
in the General Debit column.
See Illustration 7-10 (p 144)
29

• II. D. (cont)

3. Enter credit information Write the amount
of the charge in the Cash Credit
column. 4. Write the source document name and
number (M) in the Doc. No. column.
See Illustration 7-10 (p 144)
30

• II. (cont)

E. Dishonored Checks
Banks may dishonor (refuse to pay) checks for the
following reasons

• The check appears to have been altered or forged
  forgery is illegal.
• The signature of the person who signed the check
  does not match the one on the signature card
  the check
  may have been forged.
• The amount written in words does not agree with
  the amount written in figures if the bank does
  honor such a check, it will pay the check owner
  the amount written in words.

31

• II. E. (cont)

• The owner of the account stopped payment of the
  check. This procedure is used when

• a check is written in error, or
• when the item for which the check was written is
  not delivered or supplied as agreed.

32

• II. E. (cont)

• The depositor does not have enough money in the
  account (insufficient funds) to cover the amount
  of the check. This practice

• is illegal in most states,
• typically results in a charge being made to the
  depositors account, and
• can cause the depositor to have a poor credit
  rating resulting in difficulty obtaining credit
  in the future.

33

• II. E. (cont)

• Sometimes, money for a dishonored check can be
  collected from the individual or business which
  issued the check.
• Until the amount is recovered, the lost value as
  well as the fee charged by the bank for the
  dishonored check are classified as expenses and
  must be entered into the individuals or
  business records.
• Since the depositor initially journalized the
  check as cash received (Cash Debit), a journal
  entry must be made to deduct the amount of the
  check and any related fees as deductions in cash
  (Cash Credit).

34

• II. E. (cont)

1. Recording a dishonored check
The following information is entered on the next
unused check stub
a. Dishonored check in the area marked Other,
and b. the amount of the check plus any fee(s)
assessed in the amount column.
Note The new subtotal should be calculated and
entered prior to recording the amount of the
corresponding check.
See Illustration 7-11 (p 146)
35

• II. E. (cont)

2. Journalizing a dishonored check
A memorandum is written as the source document
for a dishonored check. The memo shows
the date the individual or business was
notified of the dishonored check, the amount
of the check, and the amount of any fee(s)
assessed.
Because the check was initially recorded as
money received (Cash Debit), a journal entry must
be made to reverse the effect of that transaction.
36

• II. E. 2. (cont)

Steps in journalizing a dishonored
check a. enter the date shown on the
memo. b. enter debit information
(1) in the Account Title column, write
Miscellaneous Expense (2) write the total of
the check plus the fee charged in the General
Debit column.
c. enter credit information write the total
of the check plus the fee in the Cash Credit
column. d. write the source document name and
number (M) in the Doc. No. column.
See Illustration 7-12 (p 148)
37
Answer Audit Your Understanding questions (p
147)
1. List the three steps in reconciling a bank
statement. Calculate the adjusted check stub
balance Calculate the adjusted bank
balance Compare adjusted balances
2. Draw T accounts to analyze a dishonored check
written for 25 with a fee of 5.
38

• III. ELECTRONIC FUNDS TRANSFER

• Payments can be made using computerized banking
  systems.
• Special arrangements must be made with the
  account owners bank.
• Payments can be made automatically at specified
  times or by authorizing such a payment with a
  phone call.
• If a phone call is made, a special password must
  be identified.
• Since checks are not written to make payments of
  this type, memorandums are used as source
  documents. The memo includes the date,
  description, and amount of the transaction.

39

• III. (cont)

• A payment made in this manner is recorded on the
  next unused check stub in the area marked Other
  in order to maintain an accurate record of the
  balance in the checking account.
• Each EFT payment is journalized at the time the
  payment is made using the same procedure
  described for journalizing bank service fees.
  (See II-D)

40

• IV. PETTY CASH

• Some businesses keep cash on hand for use in
  making small payments for services or supplies
  delivered to the business when writing a check is
  not time or cost efficient.
• Each business determines amounts which are too
  small for checks to be written.
• A Petty Cash (Asset) account must be opened.
• A Petty Cash fund is established and maintained
  to account for transactions of this type.

41

• IV. (cont)

A. Establishing a Petty Cash Fund
1. A check is written for the amount the business
wishes to use as Petty Cash.
2. The journal entry to record the check contains
the following elements
a. date the check was written b. account title
Petty Cash c. source document Check
d. amounts General Debit Cash Credit
See Illustration 7-14 (p 150)
3. The check is cashed at the bank, and the money
is placed in a special location (usually a locked
drawer or box).
42

• Opening Petty Cash Review

1. Determine amount
2. Write a check to establish fund (source
document check)
3. Journalize Acct Title Gen Dr
Cash Cr Petty Cash

4. Cash the check and place the money in the
petty cash box/drawer.
43

• IV. (cont)

B. Making Payments from a Petty Cash Fund
1. For each payment made from the petty cash
fund, a form called a petty cash slip is
completed.
2. A petty cash slip contains the following
elements
a. petty cash slip number (consecutive), b. date
the payment was made, c. name of the individual
or business to whom the payment was
made, d. reason for the payment, e. amount paid,
and f. signature of the person who paid.
See Illustration 7-15 (p 151)
44

• IV. (cont)

C. Replenishing a Petty Cash Fund
1. When the amount of cash on hand falls below a
determined level and/or at the end of each month,
the amount of cash paid out must be replaced
(replenished).
2. The following steps are used to replenish a
petty cash fund
a. prove petty cash cash on hand plus the total
of completed petty cash slips must equal the
balance of the petty cash account b. prepare a
petty cash report which lists amounts to be added
to specific ledger accounts and the petty cash
total
See Illustration 7-16 (p 152)
45

• IV. B. 2. (cont)

c. write a check to replenish petty cash (like
the check written to establish the petty cash
fund) d. journalize the entry using information
from the petty cash report
(1) date the check was written (2) title of each
account affected on separate lines (3) source
document (check ) on the first line of the
transaction entry (4) amounts General Debit
for each account (2) Cash Credit for check amount
See Illustration 7-17 (p 153)
46

• Replenishing Petty Cash Review

1. Determine amount paid from box/drawer
2. Write a check for the amount spent (source
document check)
3. Journalize Acct Title Gen Dr
Cash Cr List each /each Total
4. Cash the check and return the amount spent to
the petty cash box/drawer to bring it back to the
original amount.
47
Answer Audit Your Understanding questions (p
153)
Draw T accounts to analyze the following 1. An
EFT transaction to pay 100 on account to Kelson
Enterprises
2. Establishment of a 50 petty cash fund
48
Answer Audit Your Understanding questions (p
153)
Draw T accounts (cont)
3. Replenish petty cash with 20 paid for
miscellaneous expenses and 10 in repairs
49
CREDITS
Based on Century 21 Accounting Ross, Hanson,
et al Southwestern Publishing Company, 1995
Restart Presentation
Esc to End