Banking Procedures and Control of Cash Chapter 6



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Banking Procedures and Control of Cash

  • Chapter 6


Internal Control of Cash

  • Internal Control Procedures

  • separation and rotation of duties

  • cash receipts deposited daily

  • setting up a petty cash fund

  • all other payments made by check

  • authorization required for activities

  • checks and other documents prenumbered



Learning Objective 1

  • Depositing, writing, and endorsing

  • checks for a checking account.



Learning Unit 6-1

  • Opening a checking account

  • A signature card is required for validation to protect against forgery and unauthorized signing.

  • Duplicate deposit tickets are used.

  • ATM cards and personal identification numbers are protected.



Learning Unit 6-1

  • Check endorsement

  • What is a check endorsement?

  • It is the signing or stamping of one’s name on the back left-hand side on the check.

  • Checks must be signed by the person to whom the check is made out.



Learning Unit 6-1



Learning Unit 6-1

  • The checkbook

  • A check is a written order.

  • The drawer is the one who writes the check.

  • The drawee is the one who pays the money to the payee (bank).



Learning Unit 6-1

  • The checkbook

  • The payee is the one to whom the check is payable.

  • Write checks properly to ensure that amounts and payee cannot be changed.



Learning Unit 6-1

  • The bank reconciliation

  • This is a process that verifies the cash balance in the business records to the ending bank balance for the month.

  • Deposits in transit are deposits not recorded by the bank before the report (add to the bank balance).



Learning Unit 6-1

  • The bank reconciliation

  • Outstanding checks are issued checks that have not yet cleared the bank (subtract from the bank balance).

  • Service charges are fees charged by a bank (subtract from the bank balance).



Learning Unit 6-1

  • The bank reconciliation

  • Nonsufficient funds (NSF) checks are those which are received, deposited in the bank, and returned because the drawer did not have funds in their account (subtract from bank balance).

  • The check and a collection fee is charged back to the drawer.



Learning Unit 6-1

  • Terminology

  • Bank credits are when a bank credits the account, which is an increase to the cash balance in the business.

  • What are some examples?

  • bank errors

  • funds collected by the bank on behalf of the business



Learning Unit 6-1

  • Terminology

  • Bank debits are a deduction from the cash balance in the business.

  • What are some examples?

  • bank errors

  • NSFs

  • service charges



Learning Objective 2

  • Reconciling a bank statement.



The Bank Reconciliation Process

  • On August 2, Clara J. Accounting Practice received the July’s bank statement.

  • It indicated the following:

  • The bank balance was $25,225.

  • The bank had collected a note receivable from one of Clara’s customers in the amount of $1,000.



The Bank Reconciliation Process

  • The bank paid the electric bill of $300.

  • There was a $200 check returned for NSF.

  • Interest earned on the account was $15.

  • Bank service charges were $6.



The Bank Reconciliation Process

  • Clara’s books indicates a cash balance of $26,647.

  • A deposit of $3,250 was mailed to the bank on June 30.

  • Checks issued in June for $1,319 have not yet been paid by the bank.



The Bank Reconciliation Process



The Bank Reconciliation Process



The Bank Reconciliation Process

  • Balance per books Balance per bank

  • $27,156 $27,156



Learning Objectives 3 and 4

  • Establishing and replenishing

  • a petty cash fund; setting up

  • an auxiliary petty cash record.

  • Establishing and replenishing

  • a change fund.



Learning Unit 6-2

  • Petty cash fund

  • This is an account used for paying small day-to-day expenses.

  • The only time petty cash is entered in the journal is to establish the fund (or to change the level of cash in the fund).

  • Expenses are debited and Cash credited to replenish the fund.



Learning Unit 6-2

  • What is the entry to record the establishment of a $150 petty cash fund?

  • Petty Cash 150 Cash in bank 150 To open the petty cash fund



Learning Unit 6-2

  • Forty dollars were taken out of the petty cash fund for coffee and other miscellaneous expenses. What is the journal entry to record the replenishment of the fund?

  • Miscellaneous expense 40 Cash in bank 40 To replenish the petty cash fund



Learning Objective 5



Cash Short and Over

  • How are small cash errors recorded?

  • Beginning change fund

  • Cash register total

  • Correct amount of cash

  • Counted cash

  • Shortage or overage of cash



End of Chapter 6





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