College Accountinghorowitk/documents/Chapter07_003.pdfBank Reconciliation November 21, 20--Bank statement balance, November 21 We say it is “reconciled” when the adjusted BANK

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College

Accounting

Heintz & Parry20th Edition

Chapter 7

Accounting

for Cash

• Includes:

– Currency, coins, and checking accounts

– Checks received from customers

– Money orders

– Bank cashier’s checks

• Because cash plays such a central role in

operating a business, it must be carefully

managed and controlled.

• A set of procedures designed to ensure proper

accounting for transactions

• Good internal control for cash transactions:

– All cash received should be deposited DAILY

in a bank

– All disbursements, except for payments from

petty cash, should be made by CHECK

Describe how to open and

use a checking account.

1

• Each person authorized to sign checks must

complete and sign a signature card.

– This card is used to verify the depositor’s

signature on any banking transactions.

• A deposit ticket is a form showing a detailed listing of items being deposited

– Currency, coins, and checks are listed separately

– Each check should be identified by its ABA (American Bankers Association) number

• Found in upper right-hand corner of each check

• Also shown in magnetic ink character recognition (MICR) code on the lower left side of the front of each check

• The code is used to sort and route checks

• Each check being deposited must be endorsed by the depositor

• Consist of stamping or writing the depositor’s name and sometimes other information on the back of the check

• Blank endorsement

– The depositor simply signs the back of the check

• This makes the check payable to any bearer

• Restrictive endorsement

– The depositor adds words such as ―For deposit,‖ ―Pay to any bank,‖ or ―Pay to Daryl Beck only‖ for payment restriction

• Each depositor has a plastic card and a

personal identification number (PIN).

• Most automated teller machines (ATMs) are on

a system that allows noncustomers to use their

ATMs.

• It is important for the depositor to keep an

accounting record of ATM withdrawals and

deposits.

• A check is a document ordering a bank to pay cash from a depositor’s account.

• There are three parties to every check:

– Drawer—the depositor who orders the bank to pay the cash

– Drawee—the bank on which the check is drawn

– Payee—the person being paid the cash

• Business checks often have a check stub.

• Complete the check stub or register.

• Enter the date, payee name, and amount on the

check.

• Sign the check.

The check should not be signeduntil the check signer has verified

that all aspects of the checkare correct.

• The statement shows:

– The balance at the BEGINNING of the period

– Deposits and other amounts ADDED during

the period

– Checks and other amounts SUBTRACTED

during the period

– The balance at the END of the period

• Sent with bank statement

– Canceled checks, ―imaged‖ sheets of check

faces, or a listing of checks

– Any other forms representing items added to

or subtracted from the account

Prepare a bank

reconciliation and related

journal entries.

2

Bank statement shows a balance of $1,748.09. But the general ledger account has a balance of $2,393.23.

We need to prepare a BANK

RECONCILIATION.


Maple Consulting

Bank Reconciliation

November 21, 20--

Heading includes:Name of CompanyBank Reconciliation

Date


Maple Consulting

Bank Reconciliation

November 21, 20--

Bank statement balance, November 21

The bank reconciliation begins with the

balance according to thebank statement.

$1,748.09


Maple Consulting

Bank Reconciliation

November 21, 20--

Bank statement balance, November 21 $1,748.09Add:

Deduct:

Reconciling items are listedas additions or subtractions

from the bank balance.


Maple Consulting

Bank Reconciliation

November 21, 20--


Once all reconciling itemsare listed, the

adjusted bank balance is computed.

$1,748.09Add:

Deduct:

Adjusted bank balance


Maple Consulting

Bank Reconciliation

November 21, 20--


Now the reconciliation turns to adjusting the BOOK balance.

$1,748.09Add:

Deduct:


Book balance, November 21 $2,393.23


Maple Consulting

Bank Reconciliation

November 21, 20--

Bank statement balance, November 21 $1,748.09Add:

Deduct:


Book balance, November 21

Add:

Deduct:

$2,393.23

Additions and subtractions will be made to the

book balance.


Maple Consulting

Bank Reconciliation

November 21, 20--


The adjusted book balance is computed.

$1,748.09Add:

Deduct:


Book balance, November 21Add:

Deduct:

$2,393.23

Adjusted book balance


Maple Consulting

Bank Reconciliation

November 21, 20--


We say it is “reconciled” when the adjusted BANK and adjusted BOOK

balances agree.

$1,748.09Add:

Deduct:


Book balance, November 21Add:

Deduct:

$2,393.23


• Deposits in transit

– Deposits that have not reached the bank or

been recorded by the bank before the

statement is prepared

• Outstanding checks

– Checks that have not been presented to the

bank for payment before the statement is

prepared

• Service charges

– Bank charges for services such as check

printing and processing

• Collections

– Collections of promissory notes or charge

accounts made by the bank on behalf of the

depositor

• Not sufficient funds (NSF) checks

– Checks deposited but not paid because the

drawer did not have sufficient funds

• Errors

– Errors made by the bank or by the depositor

in recording cash transactions

THREE STEPS:

• Compare the bank statement with:

– Last month’s deposits in transit

• They should all be on the bank statement

– Deposits listed in the accounting records

• If not found on the bank statement, the

deposit is considered a deposit in transit

– $ amounts for deposits in the accounting

records

• If they differ, the error needs to be

corrected.

A deposit in the accounting records of $637.02, dated November 21, had

not been received by the bank.

DEPOSITIN

TRANSIT


Maple Consulting

Bank Reconciliation

November 21, 20--


DEPOSITS IN TRANSIT areadded to the bank balance.

$1,748.09Add

Deduct:



Add:

Deduct:

$2,393.23


deposit in transit 637.02

• Compare canceled checks with the bank

statement and accounting records.

– If they differ, the error needs to be corrected.

Check no. 214 was written for $18.98 but was entered on the check stub and

on the books as $19.88.

$0.90 ERROR


637.02

Maple Consulting

Bank Reconciliation

November 21, 20--


$0.90 is added back tothe book balance.

$1,748.09Add

Deduct:



Add

Deduct:

$2,393.23


deposit in transit

error on check no. 214 0.90

• Compare canceled checks with the bank statement and accounting records.

– If they differ, the error needs to be corrected.

• Check mark the stub or accounting records to indicate that the check has cleared.

• Checks written but not cleared are OUSTANDING CHECKS.

– These are subtracted from the bank balance on the reconciliation.

Check numbers 219, 224, and 227 do not appear on the bank statement.

OUTSTANDINGCHECKS


0.90

Maple Consulting

Bank Reconciliation

November 21, 20--


Outstanding checksare deducted fromthe bank balance.

$1,748.09Add

Deduct



Add

Deduct:

$2,393.23



error on check no. 214

outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78

• Compare any additions and deductions on the

bank statement that are not deposits or checks

with the accounting records.

– Items ADDED to the account by the bank are

credit memos.

– Items DEDUCTED from the account by the

bank are debit memos.

Maple used an ATM machine to make a withdrawal from his account of $100.00 for personal use. However, he forgot to record

this withdrawal on the books.

Deduct $100.00from the

book balance.


Maple Consulting

Bank Reconciliation

November 21, 20--

Bank statement balance, November 21 $1,748.09Add

Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78

Unrecorded ATM withdrawal $100.00

The bank returned an NSF check of $200.00 written by one of Maple’s

clients.


book balance.


Maple Consulting

Bank Reconciliation

November 21, 20--


Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78


NSF check 200.00

The bank deducted $1.80 from Maple’s account for service charges.


book balance.


Maple Consulting

Bank Reconciliation

November 21, 20--


Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78


NSF check 200.00

Bank service charge 1.80


Maple Consulting

Bank Reconciliation

November 21, 20--


Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78


NSF check 200.00


The bank balance section of the reconciliation is totaled.

$2,385.11

$2,092.33


Maple Consulting

Bank Reconciliation

November 21, 20--


Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78


NSF check 200.00


Then the book balancesection is totaled.

$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

We now know that the actual amount of cash is $2,092.33, but the general ledger

cash account still shows $2,393.23.

JOURNAL ENTRIESARE NEEDED!!!

• Only two kinds of items appearing on a bank

reconciliation require journal entries:

– Errors in the depositor’s books

– Bank additions and deductions that do not

already appear in the books

• ALL items in the book balance section of the

reconciliation require a journal entry.


Maple Consulting

Bank Reconciliation

November 21, 20--


Deduct



Add

Deduct:

$2,393.23




outstanding checks:

No. 219No. 224

No. 227

$200.0025.00

67.78 292.78


NSF check 200.00


$2,385.11

$2,092.33

$2,394.13

301.80$2,092.33

These 4 items will require journal entries.


DATE DESCRIPTION PR DEBIT CREDIT

Cash1

2

3

4

5

6

7

8

9

10

11

When check no. 214 was written, the cash account was credited for $0.90 more

than the check amount of $18.98.This entry puts $0.90 back

in the Cash account.

0 9020--Nov. 21



Cash1

2

3

4

5

6

7

8

9

10

11

Accounts Payable

0 90

0 90

Error in recording check

20--Nov. 21

Accounts Payable was originallydebited for $19.88. This was $0.90 morethan the actual telephone bill of $18.98.

This entry removes the extra $0.90.



Cash1

2

3

4

5

6

7

8

9

10

11

Since the ATM withdrawal wasfor “personal expenses,” the

drawing account should be debited.

Accounts Payable

0 90

0 90


J. M., Drawing 100 00

Nov.20--

21

21



Cash1

2

3

4

5

6

7

8

9

10

11

The $100 withdrawal was never recorded.This entry will remove the $100.00

from the cash account.

Accounts Payable

0 90

0 90



Nov.20--

21

21

Cash 100 00



Cash1

2

3

4

5

6

7

8

9

10

11

Accounts Payable

0 90

0 90



Nov.20--

21

21

Cash 100 00

Unrecorded ATM withdrawal



Accounts Receivable10

11

12

13

14

15

16

17

18

19

20

Cash

200 00

200 00

Unrecorded NSF check

21

The amount of the bounced checkis placed into Accounts Receivable

and Cash is reduced.



Accounts Receivable10

11

12

13

14

15

16

17

18

19

20

Cash

200 00

200 00

Unrecorded NSF check

Miscellaneous Expense 1 80

21

21

Cash 1 80

Bank service charge

Service charges are usually small;often they are put into Misc. Expense.

Establish and use a

petty cash fund.

3

• A fund set up to pay for small items with cash

– Checks for very small amounts are

cumbersome

• To establish the fund:

– A check is written to the petty cash custodian

for the amount to be set aside in the fund

– The custodian cashes the check and places

the money in a petty cash box

• The custodian should be the only person

authorized to make payments from the fund.

Maple wants to establish a $200 petty cash fund to be used to make small

purchases.

CASH

200 $200 is withdrawn (by check)

from the cash account.

Maple wants to establish a $200 petty cash fund to be used to make small

purchases.

CASH

200 200

PETTY CASH

Petty Cash is an ASSET account.



Petty Cash1

2

3

4

5

6

7

8

9

10

11

200 0020--Dec. 1

Cash 200 00

Establish petty cash fund

• A receipt prepared for every payment from the

petty cash fund.

• Voucher shows the:

– Name of the payee

– Purpose of the payment

– Account to be charged for the payment (e.g.,

Postage Expense)

– Signatures of the custodian and payee

• A special multi-column record that supplements

the regular accounting records

• Provides a record of each petty cash payment

– Broken down by account

• e.g.: Travel/Entertainment Expense,

Postage Expense, etc.

– Used to prepare the replenishment journal

entry

• The petty cash fund should be replenished whenever the fund runs low and at the end of each accounting period.

• Once the fund is established by debiting Petty Cash and crediting Cash, no further entries are made to Petty Cash.

• To replenish the fund, debits are made to appropriate expense accounts and Cash is credited.

– Only if the amount of the fund itself is being changed would there be a debit or credit to Petty Cash.

• At the end of the month, the petty cash fund

contains eight vouchers and only $21.20 in

cash. The fund needs to be replenished.

• To replenish the fund:

– A check is written for $178.80, which is the

total of the eight vouchers

– A journal entry is made to recognize:

• The expenses shown on the vouchers

• The outflow of cash via the check

.



1

2

3

4

5

6

7

8

9

10

11

40 8020--Dec. 31

39 50

Automobile Expense

Postage Expense

Travel & Entertain. Exp. 30 25

Cash 178 80

Cash should be credited for the amount neededto restore the fund to its established amount.

($200.00 fund – $21.20 in box = $178.80 needed)

Miscellaneous Expense

James Maple, Drawing 30 00

38 25



1

2

3

4

5

6

7

8

9

10

11

40 8020--Dec. 31

39 50

Automobile Expense

Postage Expense


Cash 178 80

The journal entry balances!!!Vouchers (amounts debited)equal the amount needed to replenish the fund (credit).


30 00

38 25

James Maple, Drawing



1

2

3

4

5

6

7

8

9

10

11

40 8020--Dec. 31

39 50

Automobile Expense

Postage Expense


Cash 178 80


30 00

38 25

James Maple, Drawing

Replenishment of petty

cash fund

Establish a change fund

and use the cash short

and over account.

4

• A supply of currency and coins kept in the cash

register or cash drawer

– Allows businesses to make change when

customers pay in cash

• At the end of the day, cash received during the

day is deposited

– But the change fund is held back for use on

the following day

Sporty’s Cleaners is opening for business on June

1. Sporty needs to establish a $200 change

fund.

CASH

200

Just like the petty cashfund, a change fund

starts by withdrawing from the cash account.

Sporty’s Cleaners is opening for business on June

1. Sporty needs to establish a $200 change

fund.

CASH

200 200

CHANGE FUND

Change Fund isan ASSET.



Change Fund1

2

3

4

5

6

7

8

9

10

11

200 0020--June 1

Cash 200 00

Establish change fund

At the close of its first day of business, Sporty’s

had $1,450.00 in the cash register.

CASH IN DRAWER $1,450.00Less:CHANGE FUND – 200.00

$1,250.00CASH FROM SALES

The CASH from sales shouldagree with the sales recordedon the cash REGISTER TAPE.


had $1,450.00 in the cash register.

CASH IN DRAWER $1,450.00Less: CHANGE FUND – 200.00


Sales from the cash register tapeare also $1,250.00!!!



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Only the $1,250.00 is debited to Cash and deposited.

The change fund is not deposited.



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Sales 1,250 00

Cash received from sales

What would have happened if the cash register tape didn’t agree with

the cash from sales?

At the close of its first day of business, Sporty’s had $1,450.00 in the cash

register.



What if the cash register tapehad shown sales of $1,252.00?

CASH IN DRAWER $1,450.00

Less: CHANGE FUND – 200.00


$1,252.00CASH REGISTER TAPE

$ 2.00SHORTAGE

Overages and shortages are recorded in an account called “CASH SHORT AND OVER.”



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Cash is debited for the amount deposited.



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Cash Short and Over is debited for shortages

and credited for overages.

Cash Short and Over 2 00



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Sales is credited for the amount on the cash register tape

even though this was not the amount collected.


Sales 1,252 00

At the close of its first day of business, Sporty’s had $1,450.00 in the cash

register.



What if the cash register tapehad shown sales of $1,247.00?


had $1,450.00 in the cash register…

But the cash register tape showed $1,247.00

CASH IN DRAWER $1,450.00

Less: CHANGE FUND – 200.00


$1,247.00CASH REGISTER TAPE

$ 3.00OVERAGE



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1


Cash Short and Over is debited for shortages

and credited for overages.



Cash1

2

3

4

5

6

7

8

9

10

11

1,250 0020--June 1

Sales is credited for the amount on the cash register tape

even though this was not the amount collected.


Sales 1,247 00

Documents

College Accountinghorowitk/documents/Chapter07_003.pdfBank Reconciliation November 21, 20--Bank statement balance, November 21 We say it is “reconciled” when the adjusted BANK