Ch. 5 Cash Control Systems

5-1 Checking Accounts How Businesses Use Cash Most businesses make major cash payments by check Cash Transactions occur more frequently than other types of transactions, more chances occur to make recording errors affecting cash

5-1 Depositing Cash Check- business form ordering a bank to pay cash from a bank account Checking account- bank account from which payments can be ordered by a depositor Signature card is used for persons authorized to sign checks Deposit slip is used to place cash or checks in a bank account. Receipt is given when a deposit is made for verification

Deposit Recorded on a Check Stub Deposit is recorded on the check stub Checkbook subtotal is calculated Cash receipts are journalized at the time cash is received No journal entry is needed for deposits because the cash receipts have already been journalized

Endorsements Ownership of a check can be transferred. One person transfers ownership to another person by signing the back of the check. Endorsement- signature or stamp on the back of a check transferring ownership An endorsement should be signed exactly as the person’s name appears on the front of the check. Blank endorsement- an endorsement consisting only of the endorser’s signature Special endorsement- an endorsement indicating a new owner of a check Pay to the Order of Restrictive endorsement- endorsement restricting further transfer of a check’s ownership FOR DEPOSIT ONLY IN THE ACCOUNT OF Prevents unauthorized persons from cashing the check if it is lost or stolen

Completed Check Stub and Check A check stub is a business’s record of each check written for a cash payment transaction Objective Evidence- To avoid forgetting to prepare a check stub, the check stub is prepared before the check is written Postdated check- a check with a future date

Recording a Voided Check If any kind of error is made in preparing a check, a new check should be prepared. The word VOID, is written in large letters across both the check and its stub. To assure that all check numbers are listed in the journal, record voided check in the general journal.

5-2 Bank Reconciliation A report of deposits, withdrawals, and bank balances sent to deposit by a bank—bank statement Bank records and depositor’s records may be different: A service charge may not have been recorded. Outstanding deposits may be recorded in the recorder’s records and not on a bank statement. Outstanding checks may be recorded in the recorder’s records and not on a bank statement. A depositor may have made math or recording errors.

Bank Statement Reconciliation A bank statement is reconciled by verifying that information on a bank statement and a checkbook are in agreement. Reconciling immediately is an important aspect of cash control. The bank statement is used to determine the canceled checks. Outstanding checks are those checks issued by a depositor but not yet reported on a bank statement.. Outstanding deposits are those deposits made at a bank but not yet shown on a bank stmt.

5-3 Dishonored Checks and Electronic Banking Dishonored check- a check that a bank refuses to pay (bounced check) The bank dishonors the check when the account has insufficient funds to pay the check Other reasons: The check appears to be altered. The signature of the person who signed the check does not match the one on the signature card. The check is postdated. The person who wrote the check has stopped payment on the check The amounts written in figures and in words does not agree

5-3 Issuing a check on an account with insufficient funds is illegal. Altering or forging a check Sometimes money for a dishonored check can be collected directly from the person or business that wrote the check. If not recovered, the amount of the check becomes an expense to the business. Most banks will charge a fee for handling dishonored checks that have been previously accepted for deposit. The business deducts the amount of the check plus fee.

To journalize a dishonored check Original Debit A/R Credit Sales To journalize a dishonored check Debit A/R (check amount + fee) Credit Cash Journalize an electronic funds transfer Electronic funds transfer- a computerized cash payments system that transfers funds without the use of checks, currency, or other paper documents Debit- Accounts Payable Credit- Cash

5-3 Journalizing a Debit Card Transaction Debit card- a bank card that automatically deducts the amount of a purchase from the checking account of the cardholder Treat debit card transaction as a cash transaction Major difference between a debit and a credit card is when using a debit card, the amount of the purchase is automatically deducted from the checking account. A debit card eliminates the need to write a check. When using a debit card, it is important to write down all purchases to avoid errors in the checking account. A Cash payment made with a debit card is recorded on the check stub as Other Source Document: Memorandum Concept: Objective Evidence

5-4 Petty Cash Petty cash- an amount of cash kept on hand and used for making small payments A business may maintain a separate cash fund cash fund for making small cash payments when writing a check is not time or cost effective. A business may set a maximum such as $20. The petty cash account is an asset with a normal debit balance. The balance of the petty cash account increases on the debit side and decreases on the credit side. Source Document is a check.

Making Payments from Petty Cash fund with a Petty Cash Slip Petty cash slip- a form showing proof of a petty cash payment Every time that a small payment is made from the petty cash fund, a petty cash slip is completed. Includes the information: 1. petty cash slip number, 2. date of petty cash payment, 3. to whom paid, 4. reason for the payment 5. amount paid, 6. account in which amount is to be recorded and 7. signature of person approving the petty cash payment

Replenishing Petty Cash As petty cash is paid out, the amount in the petty cash box decreases and will have to be replenished. The person has to prove the petty cash fund- add the amount remaining + total of petty cash slips =petty cash fund Debit the expense accounts- Misc Exp Credit cash Source Document- check You only debit the petty cash fund when it is established.