© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Please note: this presentation includes slide transitions and animations. To utilize the presentation features, launch the slide show and click to advance the slides and where appropriate, the animations will appear.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. College Accounting 11 th Edition Bank Accounts and Cash Funds chapter 6 6–2

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives After you have completed this chapter, you will be able to do the following: 6–3

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–4

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Internal control is the system of policies and procedures that is designed to: Protect assets against fraud and waste Provide for accurate accounting data Promote efficient operation Encourage adherence to management policies Internal Control 6–5

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maintain separation between cash handling and cash recording. Designate someone other than the bookkeeper to open mail. Make a record of cash received. Endorse checks immediately upon receipt with the stamp, “For Deposit Only.” Deposit cash daily. Journalize cash receipts as soon as possible, preferably by someone different than the person who first received the cash. Post cash receipts to the Accounts Receivable account as soon as possible. Managing Cash Receipts 6–6

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Make certain that all checks are pre-numbered. Make sure that all cash payments are made by check (with the exception of petty cash). Keep check supplies under lock. Assign someone different than the signer of the checks to prepare the checks. Keep petty cash under lock with access limited to one person other than the bookkeeper. Appoint someone other than the person preparing checks to prepare the bank reconciliation. Managing Cash Payments 6–7

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Internal Control of Cash is critical activity in any business. Divide the cash activities among several people to deter mishandling. Don’t allow the same person to receive the cash, account for the cash and pay the bills! 6–8

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 1 3–9

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–10

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. When a person opens a bank account, that person fills out a signature card for the bank’s files. The bank provides printed deposit slips on which customers record the amount of coins and currency they are depositing and list each individual check being deposited. The ABA (American Bankers Association) number is the small series of numbers located in the upper right corner of a check. Using a Checking Account 3–11

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–12

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. ABA number – Roland’s Delivery Services 6–13

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Check Clearing for the 21 st Century Act (or Check 21 Act) allows banks to create a two-sided digital version of the original check, called a substitute check. Included in the Check Clearing for the 21 st Century Act, it now is legal for anyone to use a computer scanner to capture images of checks and deposit them electronically, a process known as remote deposit. Substitute Checks and Remote Deposit 6–14

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Deposits, withdrawals, and transfers can be made at all hours at bank with ATMs (automated teller machines). Each depositor uses a plastic card that contains a coded number and has a personal identification number or PIN. Automated Teller Machines 6–15

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A transfer of funds initiated through an electronic terminal is an Electronic Funds Transfer ( EFT). There is no paper document, such as a check or deposit slip. The monthly bank statement will list the EFT deposits and payments. Electronic Funds Transfers 6–16

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The endorsement (1) transfers title to the money and (2) authorizes the payment of the check. Endorsements 6–17

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–18

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The party who writes the check is called the drawer. The party to whom payment is to be made is the payee. The information recorded on the check stub is the basis for the journal entry. Checks should be written carefully so that no one can successfully alter them. Canceled checks are checks that have been paid or cleared by the bank. Writing Checks 6–19

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Steps for Writing Checks 6–20

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–21 Step 3: Written amount Step 1: Payee Step 2: Amount in figures Drawer

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–22 Number of Check Roland’s Delivery Services account number Bank routing number Amount of check

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The bank prepares the bank statement, which is created from the bank’s viewpoint. The following legends are found on bank statements: CM (credit memo): Increases in or credits to the account. DM (debit memo): Decreases in or debits to the account. OD (overdraft): The withdrawal of more than the cash balance in the account. EC (error correction): Correction of errors made by the bank. Bank Statements 6–23

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–24

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–25

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 on the back, indicating that they have been paid. Bank Statements 6–26

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Recording Deposits or Withdrawals Debit Memos Credit Memos 6–27

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 2

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–29

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Since the bank statement balance and the ledger balance of cash are not equal, a business prepares a bank reconciliation. The person performing the bank reconciliation will be making sure— the dollar amount of each check matches the check entry in the company’s ledger, all of the charges, checks and electronic transfers belong to the company, and deposits are made in a timely manner Need for Reconciling Bank Balance and Ledger Balance 6–30

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Deposits in transit – A deposit made after the bank statement was issued. Outstanding checks – Checks that have been written by the company but not yet received for payment by the time the bank sends out its statements. Collections – Money collected by the bank for the customer. Interest income Interest earned for keeping cash in the bank account. NSF (not sufficient funds) check – A deposited check that the bank cannot process because the check writer’s account does not contain enough money. Service charge – A bank charge for services rendered by the bank. Errors – Mistakes made by the customer or the bank. Reasons for Differences Between the Bank Statement Balance and the Customer’s Cash Balance 6–31

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Compare the amount of each canceled check on the bank statement with the ledger entries in the company’s cash account. Any differences between the amount on the bank statement and the amount on the company’s books should be noted. Steps in Reconciling the Bank Statement 6–32

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Compare the deposits in transit (deposits not recorded by the bank at the time of the statement) listed on last month’s bank reconciliation with the deposits shown on the bank statement. All of last month’s deposits in transit should be listed on this month’s bank statement. If they are not, notify the bank immediately. Compare the remaining deposits listed on this month’s bank statement with deposits written in the company’s accounting records. Consider any deposits not shown on the bank statement as deposits in transit. Steps in Reconciling the Bank Statement 6–33

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Review the list of outstanding checks left over from last month’s bank reconciliation and note the checks that have since been returned or cleared. For each canceled check, compare the amount recorded on the bank statement with the amount recorded in the checkbook or general ledger cash account. Use a check mark ( ) to indicate that the check has been paid and that the amount is correct. Any payments that have not been marked off, including the outstanding checks from last month’s bank reconciliation, are the present outstanding checks. Steps in Reconciling the Bank Statement 6–34

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Trace the credit memos and debit memos to the journal. If the memos have not been recorded, make separate entries for them. Steps in Reconciling the Bank Statement 6–35

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The bank statement indicates a balance of $6,446 as of March 31. The Cash account as of March 31 is $4,650. A deposit made on March 31 was not recorded on the bank statement, $2,174. Outstanding checks: no. 920, $1,695; no. 975, $325; no. 976, $1,279. Credit memo: Note collected by the bank from T. Landon, $700, not recorded in the journal. Debit memo: Collection charge and service charge not recorded in journal, $2. W. Carson Company Bank Reconciliation 6–36

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–37 Activities or transactions we knew about but the bank did not know about When the reconciliation process is complete, the adjusted bank statement balance and adjusted ledger balance MUST EQUAL. Activities or transactions the bank knew about but we did not know about These require journal entries

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 3 6–38

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–39

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–40

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Required Journal Entries 6–41

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After the entries have been posted, the T account for Cash looks like this: Required Journal Entries 6–42 The balance in the T account is now equal to both the adjusted bank statement balance and the adjusted ledger balance of Cash.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Form of Bank Reconciliation 6–43

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–44

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17, , Bank statement shows a final balance of $17, Cash account shows a balance of $16, , , , , , , , When the reconciliation process is complete, the adjusted bank statement balance and adjusted ledger balance MUST EQUAL. These all require journal entries Roland’s Delivery Services 6–45

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–46

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–47

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 4 6–48

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–49

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. To write a check for a small amount is not economically practical. For many businesses the cost of writing each check is more than $10. A business keeps a cash fund for petty (or small) items. This cash fund is known as the Petty Cash Fund. A business will set the maximum amount of payment from the fund before a check is required. Establishing the Petty Cash Fund 6–50

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Roland’s Delivery Service decides to establish a Petty Cash Fund of $100, and put it under the control of the assistant. A check is written for $100 to establish the fund. Establishing the Petty Cash Fund 6–51

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. T accounts for the entry look like this: Establishing the Petty Cash Fund Petty Cash Fund is an asset; therefore, it is listed on the balance sheet immediately after Cash. 6–52 Once the fund is created, it is not debited again unless the original mount is not large enough to handle the necessary transactions.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The check is written to the assistant, “Sheila R. Bayes, Petty Cash Fund.” She converts it into convenient denominations (quarters, dimes, $1 and $5 bills) and keeps it in a locked drawer. She will not pay out of petty cash anything larger than whatever amount is agreed upon by management. Establishing the Petty Cash Fund 6–53

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 5 6–54

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–55

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A petty cash voucher must be used to account for every payment from the fund. Payments from the Petty Cash Fund 6–56

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Some businesses prefer to have a written record on one sheet of paper, so they keep a petty cash payments record. Petty cash vouchers and the accounts that are to be charged are listed as well as the purpose of the expenditure. Petty Cash Payments Record 6–57

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6–58

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reimbursement of the Petty Cash Fund 6–59 Petty Cash Fund is not credited.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 6 6–60

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–61

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Like the Petty Cash Fund account, Change Fund is debited only once: when it is established. The Change Fund account is an asset. It is recorded in the balance sheet immediately below Cash, unless Petty Cash Fund is larger. Establishing the Change Fund 6–62

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. At the end of each business day, Roland’s Delivery Services’ accountant deposits the cash taken in during September 1 ($1,575) but holds back the amount of the Change Fund ($150). Depositing Cash 6–63

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. On September 9, the cash count is $1,672. So, the accountant deposits $1,522 ($1,672 – $150). Depositing Cash 6–64

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 7 6–65

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective 6–66

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Because mistakes happen, accounting records must be set up to cope with the situation. If after removing the Change Fund, the day’s receipts are less than the register reading, then a cash shortage exists. When the day’s receipts are greater than the register reading, a cash overage exists. Cash Short and Over 6–67

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. On September 14, Roland’s Delivery Service has a cash count of $1,663, while the cash register tape totals $1,515. There is $150 in the Change Fund. Cash Short and Over 6–68

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. On September 15, Roland’s Delivery Service has a cash count of $1,732, while the cash register tape totals $1,578. There is $150 in the Change Fund, so the service has a $4 cash overage. Cash Short and Over 6–69

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The following entry is recorded in Roland’s Delivery Services’ journal for September 14 and 15. Cash Short and Over 6–70

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. At the end of the fiscal period, if Cash Short and Over has a debit balance (or net shortage), the accountant classifies it as an expense. Miscellaneous Expense is debited and Cash Short and Over is credited. If the account has a credit balance (or net overage), the accountant classifies it as revenue. Cash Short and Over is debited and Miscellaneous Income (an income statement account) is credited. Cash Short and Over 6–71

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The T account would look like this: Cash Short and Over 6–72

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Practice Exercise 8 6–73

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

College Accounting 11 th Edition Bank Accounts and Cash Funds chapter 6 3–75