Accounting 101: Chapter 9

Cash Proof

At the end of the day, the store manager prints transaction totals from the cash register. The store manager and the cash register clerk should both count the cash in that clerk's cash drawer. The store manager should prepare a cash proof. The cash proof verifies that the amount in the cash register, less the change fund, equals the amount shown on the cash register transaction totals.

Bank service charges

Bank service charges are fees charged by banks to cover the costs of maintaining accounts and providing services, such as the use of the night deposit box and the collection of promissory notes. The debit memorandum shows the type and amount of each service charge.

Debit Cards

Debit cards (also called check cards) look like credit cards or ATM (automated teller machine) cards but operate like cash or a personal check. In this context, debit means "subtract," so when you use your debit card, you are subtracting your money from your bank account. Funds on deposit with a bank represent a liability to the bank. By debiting accounts when depositors use their debit cards, the bank reduces the depositors' account balances, which reduces the bank's liabilities to depositors. Debit cards are accepted almost everywhere including grocery stores, retail stores, gasoline stations, and restaurants. Debit cards are popular because they offer an alternative to carrying checks or cash. Transactions that are completed with the debit card will appear on your bank statement.

Endorsing Checks

Each check needs an endorsement to be deposited. The endorsement is a written authorization that transfers ownership of a check. After the payee transfers ownership to the bank by an endorsement, the bank has a legal right to collect payment from the drawer, the person or business that issued the check. If the check cannot be collected, the payee guarantees payment to all subsequent holders. Several forms of endorsement are shown in Figure 9.5. Endorsements are placed on the back of the check, on the left, near the perforated edge where the check was separated from the stub.

Blank Endorsement

A blank endorsement is the signature of the payee that transfers ownership of the check without specifying to whom or for what purpose. Checks with a blank endorsement can be further endorsed by anyone who has the check, even if the check is lost or stolen.

Check, the Drawer, The Drawee, the Payee, and negotiable

A check is a written order signed by an authorized person, the drawer, instructing a bank, the drawee, to pay a specific sum of money to a designated person or business, the payee. The checks in Figure 9.4 are negotiable, which means that ownership of the checks can be transferred to another person or business.

A credit memorandum

A credit memorandum explains any addition, other than a deposit, to the checking account. For example, when a note receivable is due, the bank may collect the note from the maker and place the proceeds in the checking account. The amount collected appears on the bank statement, and the credit memorandum showing the details of the transaction is enclosed with the bank statement.

A debit memorandum

A debit memorandum explains any deduction, other than a check, to the checking account. Service charges and dishonored checks appear as debit memorandums.

Dishonored Check

A dishonored check is one that is returned to the depositor unpaid. Normally, checks are dishonored because there are insufficient funds in the drawer's account to cover the check. The bank usually stamps the letters NSF for Not Sufficient Funds on the check. The business records a journal entry to debit Accounts Receivable and credit Cash for the amount of the dishonored check.

Full Endorsement

A full endorsement is a signature transferring a check to a specific person, business, or bank. Only the person, business, or bank named in the full endorsement can transfer it to someone else.

A petty cash voucher

A petty cash voucher is used to record the payments made from the petty cash fund. The petty cash voucher shows the voucherPage 285 number, amount, purpose of the expenditure, and account to debit. The person receiving the funds signs the voucher, and the person who controls the petty cash fund initials the voucher. Figure 9.2 shows a petty cash voucher for $16.25 for office supplies.

A Postdated Check

A postdated check is dated some time in the future. If the business receives a postdated check, it should not deposit it before the date on the check. Postdated checks are written by drawers who do not have sufficient funds to cover the check. The drawer expects to have adequate funds in the bank by the date on the check. Issuing or accepting postdated checks is not a proper business practice.

A promissory note

A promissory note is a written promise to pay a specified amount of money on a certain date. Most notes require that interest is paid at a specified rate. Businesses use promissory notes to extend credit for some sales transactions. Sometimes promissory notes are used to replace an accounts receivable balance when the account is overdue. For example, on July 31 Maxx-Out Sporting Goods accepted a six-month promissory note from Stacee Fairley, who owed $800 on account (see Figure 9.1). Fairley had asked for more time to pay his balance. Maxx-Out Sporting Goods agreed to grant more time if Fairley signed a promissory note with 9 percent annual interest. The note provides more legal protection than an account receivable. The interest is compensation for the delay in receiving payment.

The Check Stub

Before writing the check, complete the check stub. In Figure 9.4, the check stub for Check 111 shows: Balance brought forward: $12,025.50 Check amount: $1,500.00 Balance: $10,525.50 Date: January 3, 2019 Payee: Carter Real Estate Group Purpose: January rent Once the stub has been completed, fill in the check. Carefully enter the date, the payee, and the amount in figures and words. Draw a line to fill any empty space after the payee's namePage 290 and after the amount in words. To be valid, checks need an authorized signature. For Maxx-Out Sporting Goods only Max Ferraro, the owner, is authorized to sign checks.

Many businesses now manage a significant portion of their cash activities using online banking. Online banking offers many features to make businesses more efficient. These features include:

Businesses can initiate electronic funds transfers (EFTs) to vendors from a computer instead of writing checks. Payments to government agencies for taxes can be submitted online, using the government agency website, to avoid late payment penalties. Businesses can receive EFTs from customers, rather than receiving checks in the mail. This is especially important in transacting cash receipts from foreign customers. Routine payments, such as those for utilities expenses and loan payments, can be automatically deducted from the company's bank account. Many banks offer security alerts for such instances as changes in mailing addresses and ATM and automatic payment withdrawals that exceed specified limits. Such alerts are often sent to the responsible company official via e-mail or phone text messages. When an alert is received, the company should view account activity online to ensure cash transactions are legitimate. There are usually no source documents for the transactions listed above. The accountant should check bank activity online frequently to ensure all EFTs and other transactions initiated electronically are recorded in the accounting records. For example, the online account activity of Western Imports and Exports for July 29, 30, and 31, 2019, is shown in Figure 9.10. The company's accountant was out of town during that period. In addition to the internal controls over banking activities discussed earlier, companies using online banking should allow only authorized check signers access to the company's online account. Additionally, log-in information, such as user identification and passwords, should be changed frequently.

Deposit Slip

Businesses prepare a deposit slip to record each deposit of cash or checks to a bank account. Usually the bank provides deposit slips preprinted with the account name and number. Figure 9.6 shows the deposit slip for the January 8 deposit for Maxx-Out Sporting Goods.

The following are essential cash receipt controls:

Have only designated employees receive and handle cash whether it consists of checks and money orders, or currency and coins. These employees should be carefully chosen for reliability and accuracy and should be carefully trained. In some businesses employees who handle cash are bonded. Bonding is the process by which employees are investigated byPage 287 an insurance company. Employees who pass the background check can be bonded; that is, the employer can purchase insurance on the employees. If the bonded employees steal or mishandle cash, the business is insured against the loss. Keep cash receipts in a cash register, a locked cash drawer, or a safe while they are on the premises. Make a record of all cash receipts as the funds come into the business. For currency and coins, this record is the audit tape in a cash register or duplicate copies of numbered sales slips. The use of a cash register provides an especially effective means of control because the machine automatically produces a tape showing the amounts entered. This tape is locked inside the cash register until it is removed by a supervisor. Before a bank deposit is made, check the funds to be deposited against the record made when the cash was received. The employee who checks the deposit is someone other than the one who receives or records the cash. Deposit cash receipts in the bank promptly—every day or several times a day. Deposit the funds intact—do not make payments directly from the cash receipts. The person who makes the bank deposit is someone other than the one who receives and records the funds. Enter cash receipts transactions in the accounting records promptly. The person who records cash receipts is not the one who receives or deposits the funds. Have the monthly bank statement sent to and reconciled by someone other than the employees who handle, record, and deposit the funds. One of the advantages of efficient procedures for handling and recording cash receipts is that the funds reach the bank sooner. Cash receipts are not kept on the premises for more than a short time, which means that the funds are safer and are readily available for paying bills owed by the firm.

Petty Cash Fund

In a well-managed business, most bills are paid by check. However, there are times when small expenditures are made with currency and coins. Most businesses use a petty cash fund to pay for small expenditures. Suppose that in the next two hours the office manager needs a $4 folder for a customer. It is not practical to obtain an approval and write a check for $4 in the time available. Instead, the office manager takes $4 from the petty cash fund to purchase the folder. Only one person controls the petty cash fund. That person should keep receipts for all expenditures. The establishment of the petty cash fund should be recorded as follows: debit petty cash, credit cash

Cash Transactions

In accounting, the term cash is used for currency, coins, checks, money orders, and funds on deposit in a bank. Most cash transactions involve checks.

Adjusting Financial Records

Items in the second section of the bank reconciliation statement include additions and deductions made by the bank that do not appear in the accounting records. Businesses prepare journal entries to record these items in the books. For Maxx-Out Sporting Goods, three entries must be made. The first entry is for the NSF check from David Newhouse, a credit customer. The second entry is for the bank service charge. The third entry is to record the loan received from the bank on January 31.

Well-run businesses put the following internal controls in place:

Limit access to the checkbook to designated employees. When the checkbook is not in use, keep it in a locked drawer or cabinet. Use prenumbered check forms. Periodically, verify and account for all checks. Examine checks before signing them. Match each check to an approved invoice or other payment authorization. Separate duties: The person who writes the check should not sign or mail the check. The person who performs the bank reconciliation should not handle or deposit cash receipts or write, record, sign, or mail checks. File all deposit receipts, canceled checks, voided checks, and bank statements for future reference. These documents provide a strong audit trail for the checking account. Require employees working with cash receipts or cash payments to take mandatory annual vacations.

Cash Received on Account- Statement of Account

Maxx-Out Sporting Goods makes sales on account and bills customers once a month. It sends a statement of account that shows the transactions during the month and the balance owed. Customers are asked to pay within 30 days of receiving the statement. Checks from credit customers are journalized and posted, and then the checks are deposited in the bank.

petty cash analysis sheet, Supplies, Freight In, and Miscellaneous Expense.

Most businesses use a petty cash analysis sheet to record transactions involving petty cash. The Receipts column shows cash put in the fund, and the Payments column shows the cash paid out. There are special columns for accounts that are used frequently, such as Supplies, Freight In, and Miscellaneous Expense. There is an Other Accounts Debit column for entries that do not fit in a special column. Figure 9.3 shows the petty cash analysis sheet for Maxx-Out Sporting Goods for February.

Canceled Checks

Often the bank encloses canceled checks with the bank statement. Canceled checks are checks paid by the bank during the month. Canceled checks are proof of payment. They are filed after the bank reconciliation is complete. Usually there is a difference between the ending balance shown on the bank statement and the balance shown in the checkbook. A bank reconciliation determines why the difference exists and brings the records into agreement.

4 REasons why book balance may not agree with balance on bank statement

Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank statement: Outstanding checks are checks that are recorded in the general journal but have not been paid by the bank. Deposit in transit is a deposit that is recorded in the general journal but that reaches the bank too late to be shown on the monthly bank statement. Service charges and other deductions are not recorded in the business records. Deposits, such as the collection of promissory notes, are not recorded in the business records.

Second Section

Second Section important! Adjusted Book Balance Make journal entries to record additions and deductions that appear on the bank statement but that have not been recorded in the general ledger. Enter the balance in books from the Cash account, $16,060.70. Record any deposits made by the bank that have not been recorded in the accounting records. A deposit of $1,000 was made on January 31 that was not recorded in the company's accounting records. This deposit was a loan from First Texas National Bank. Record deductions made by the bank. There are two items: the NSF check for $525, the bank service charge for $25. Record any errors in the accounting records that were discovered during the reconciliation process. Maxx-Out Sporting Goods did not have any errors in January. The adjusted book balance is $16,510.70. Notice that the adjusted bank balance and the adjusted book balance agree.

The following are essential cash payment controls:

The following are essential cash payment controls: Make all payments by check except for payments from special-purpose cash funds such as a petty cash fund or a travel and entertainment fund. Issue checks only with an approved bill, invoice, or other document that describes the reason for the payment. Have only designated personnel, who are experienced and reliable, approve bills and invoices. Have checks prepared and recorded in the checkbook or check register by someone other than the person who approves the payments. Have still another person sign and mail the checks to creditors. Consider requiring that two people sign all checks greater than a predesignated amount. Use prenumbered check forms. Periodically, the numbers of the checks that were issued and the numbers of the blank check forms remaining should be verified to make sure that all check numbers are accounted for. During the bank reconciliation process, compare the canceled checks to the checkbook or check register. The person who does the bank reconciliation should be someone other than the person who prepares or records the checks. Enter promptly in the accounting records all cash payment transactions. The person who records cash payments should not be the one who approves payments or the one who writes the checks. Small businesses usually cannot achieve the division of responsibility recommended for cash receipts and cash payments. However, no matter what size the firm, efforts should be made to set up effective control procedures for cash.

The following internal control procedures apply to petty cash:

The following internal control procedures apply to petty cash: Use the petty cash fund only for small payments that cannot conveniently be made by check. Limit the amount set aside for petty cash to the approximate amount needed to cover one month's payments from the fund. Write petty cash fund checks to the person in charge of the fund, not to the order of "Cash." Assign one person to control the petty cash fund. This person has sole control of the money and is the only one authorized to make payments from the fund. Keep petty cash in a safe, a locked cash box, or a locked drawer. Obtain a petty cash voucher for each payment. The voucher should be signed by the person who receives the money and should show the payment details. This provides an audit trail for the fund.

Restrictive Endorsement

The safest endorsement is the restrictive endorsement. A restrictive endorsement is a signature that transfers the check to a specific party for a specific purpose, usually for deposit to a bank account. Most businesses restrictively endorse the checks they receive using a rubber stamp.

Use the following steps to prepare the bank reconciliation statement:

Use the following steps to prepare the bank reconciliation statement: First Section Enter the balance on the bank statement, $24,508.50. Compare the deposits in the checkbook with the deposits on the bank statement. Maxx-Out Sporting Goods had one deposit in transit. On January 31 receipts of $5,940.00 were placed in the bank's night deposit box. The bank recorded the deposit on February 1. The deposit will appear on the February bank statement. List the outstanding checks: Put the canceled checks in numeric order. Compare the canceled checks to the check stubs, verifying the check numbers and amounts. Examine the endorsements to make sure that they agree with the names of the payees. List the checks that have not cleared the bank. Maxx-Out Sporting Goods has seven outstanding checks totaling $15,537.80. While reviewing the canceled checks for Maxx-Out Sporting Goods, Max Ferraro found a $1,600 check issued by The Dress Barn. The $1,600 was deducted from Maxx-Out Sporting Goods' account; it should have been deducted from the account for The DressPage 295 Barn. This is a bank error. Max Ferraro contacted the bank about the error. The correction will appear on the next bank statement. The bank error amount is added to the bank statement balance on the bank reconciliation statement. The adjusted bank balance is $16,510.70.

Over or Short

When cash receipts are more than the sales per the cash register tape, cash is over. When cash receipts are less than the sales per the cash register tape, cash is short. Record short or over amounts in the Cash Short or Over account. If the account has a credit balance, there is an overage, which is treated as revenue. If the account has a debit balance, there is a shortage, which is treated as an expense.

THE BANK RECONCILIATION PROCESS: AN ILLUSTRATION

When the bank statement is received, it is reconciled with the financial records of the business. On February 5 Maxx-Out Sporting Goods received the bank statement shown in Figure 9.7. The ending cash balance according to the bank is $24,508.50. On January 31 the Cash account, called the book balance of cash, is $16,060.70. The same amount appears on the check stub at the end of January. Sometimes the difference between the bank balance and the book balance is due to errors. The bank might make an arithmetic error, give credit to the wrong depositor, or charge a check against the wrong account. Some banks require that errors in the bank statement be reported within a short period of time. The errors made by businesses include not recording a check or deposit, or recording a check or deposit for the wrong amount.