Accounting: Chapter 7
What kinds of items on a bank reconciliation require a journal entry?
Everything with the exception of deposits in transit and outstanding checks (we don't worry about the bank).
Reconciling the Bank Statement: Deposits
If a business receives cash on April 30th, it would be recorded that day on their books. The money would be sent to the bank, although it would not clear until the following day, May 1st. The depositor's book balance would be more than the bank's book balance.
Reconciling the Bank Statement: Cash Payments
If a business writes a check on April 30th, it would be recorded that day on their books. Let's say the check was shipped that day, and would arrive on May 3rd. If the payee deposited the check properly, it would not clear until May 4th. The depositor's book balance would be less than the bank's book balance.
Why are bank statements beneficial for reconciling?
It explains the difference between the book and bank balances.
NOTE:
Print problems 4, 5, & 6 for references.
Non Sufficient Funds Checks (NSF)
Situation in which the drawer's account does not have enough money to cover the amount of the check.
Ex: A check was written for $18.98 but was entered on the check stub and on the books as $19.88.
The $.90 is added to the book balance because $.90 too much had been deducted from the book balance.
NOTE:
The amount for the petty cash fund will NEVER change.
How is a petty cash fund journalized (established)?
The amount is debited for petty cash and credited for cash.
Ex: A bank service charge.
The amount is deducted from the book balance.
Ex: A company received a check from a customer. The bank returned a NSF check.
The amount is deducted from the book balance.
Ex: The company made an ATM withdrawal. They forgot to record it.
The amount is deducted from the book balance.
Ex: 3 checks are outstanding.
The amount of these outstanding checks in subtracted from the bank statement balance.
Check Stub
The bottom portion of a check that provides all relevant information about the check.
Collections
The collection of promissory notes.
Drawer
The depositor who orders the bank to pay the cash.
Drawee
The financial institution.
Payee
The person to whom the check is payable.
Replenishing the Petty Cash Fund
The petty cash fund should be replenished whenever it runs low and at the end of the accounting period.
Internal Control
The procedures and strategies used to protect the firm's assets from theft, damage, and misuse.
Bank Reconciliation
The process of matching the book and bank balances.
American Bankers Association Number
The small fraction printed in the upper right-hand corner of each check. Each financial institution will have one of these.
What forms of identification are needed from the CIP?
The specific documents vary depending on the bank's program and services provided to the customer.
Ex: A deposit has not been received by the bank.
This amount is added to the bank statement balance.
Endorse
To give approval.
Why are lines added after the payee's name and other things?
To prevent unauthorized changes to the check.
Electronic Funds Transfer (EFT)
Transfer of money from one bank to another via electronics.
How is a petty cash fund replenished?
Whatever petty cash was used for, will be debited. Then, the total amount of those "expenses" will be credited to cash.
Cash Over
When the amount on hand amount is more than the recorded amount.
Cash Short
When the amount on hand is less than the recorded amount.
What does a petty cash voucher include?
- The name of the payee - The purpose of the payment - The amount to be charged for the payment - The date of the transaction
What are the steps in preparing a bank reconciliation?
1. Add deposits in transit 2. Subtract outstanding checks 3. Fix additional reconciling items
How many parties are there to every check?
3
How many common errors are there for the difference between the book and bank balances?
6
Change Fund
A cash fund used by a business to make change for customers who pay cash for goods or services
Outstanding Checks
A check that has been written but has not yet cleared.
Automated Teller Machine (ATM)
A computer terminal that allows a withdrawal or a deposit of cash from an account.
Check
A document ordering a bank to pay cash from a depositor's account.
Personal Identification Number (PIN)
A four digit number used as an electronic signature.
Petty Cash Payment Record
A multi-column record that supplements the regular accounting records. It is not a journal.
Remitter
A person who sends a payment.
What is needed to access an ATM?
A plastic card and a personal identification number.
Petty Cash Voucher
A receipt from money used from the petty cash fund.
Deposit Tickets
A receipt that banks give you for depositing funds into your account. Note: Currency, coins, and checks are listed separately.
Signature Card
A record of an account holder's signature used to verify identity.
Bank Statements
A record that is provided by the bank of all transactions that have occurred in a customer's account the past month (big receipt). Ex: The balance at the beginning of the period, deposits, checks, and the balance at the end of the period.
Customer Identification Program (CIP)
A set of procedures that provides clear identification of every account holder.
Petty Cash Fund
A small amount of cash that is kept for minor purchases.
Night Depository
A system provided by banks that allows depositors to put currency in a locked bag, which is placed in a chute for processing the following morning.
Blank Endorsement
A type of endorsement in which there is a signature of the endorser, which enables any holder to assert a claim for payment.
Restrictive Endorsement
A type of endorsement that places a limitation on the use of a check. Ex: "Pay to the order of" or "Pay to Zachary Porter."
What exactly is done on a bank reconciliation?
Additions and subtractions to the bank and book balances.
Service Charges
Banks charges for services. Ex: Checking printing, processing, etc.
Deposits in Transit
Deposits that have not yet been recorded by the bank before the statement is prepared.
Errors
Errors made by the bank or the depositor in recording cash transactions.
How should cash over be journalized?
It should be credited because it is an revenue.
How should cash shortage be journalized?
It should be debited because it is an expense.