Patchogue-Medford High School
Accounting I – Chapter 11 Notes
Chapter 11 – Cash Controls and Banking Activities Page 250
Objective: Students will be able to demonstrate their knowledge of internal and external controls when using cash. They will show how these protect cash, and are used in preparing checks and deposits. They will be able to prepare a bank reconciliation using the info from the bank statement and G/L, prove cash balances, and journalize adjustments to the cash account. They will post them to the G/L to finalize the balances for the period.
Cash needs to be protected to avoid loss or waste. When using cash the best way is to utilize a checking account in a FDIC bank.
Internal controls protect cash from loss, waste, theft, forgery, fraud, and embezzlement. These controls are designed to protect both cash and other assets in order to produce reliable records.
There are seven controls:
- Limit the number of people handling the cash
- Separation of duties
- The bonding (insuring) of employees
- The use of cash registers and safes
- Deposit cash daily
- Use checks, or ELT, for all cash payments
- Reconcile the bank statement to the books cash balance
External Controls are procedures used outside of the business to protect the businesses cash and other assets. Banking controls on your checking account are examples.
Checking account: (pg 282)
- Checks – A written order from a depositor telling the bank to pay a stated amount of cash to the named person on the check.
- Checkbook – Pre-Printed checks (decreases), deposit slips (increases), and stubs used to record these with explanations about the cash account activity.
- Depositor – A person that has cash on deposit in the bank that would increase the balance.
- Signature Cards (pg 282) – This document contains the signatures of all of the people authorized to write (sign) checks against the account.
Deposit slip – List deposits coming into the account. The checks are listed individually and must be endorsed by the depositor (account owner). There are three types of endorsements
- Blank – Signed by the payee; once signed anyone can cash it. Not safe.
- Special – Transfers ownership to the named person on the back.
- Restrictive – Limits how a check can be handled. Safest method.
6. All deposits and bank charges are recorded onto the stub.
7. Always complete the check stub before you write a check
If you make a mistake in writing the check you would VOID it and the stub. All checks must be accounted for used or not.
Writing a check (page 285)
- Always write the check in ink (do not use red) so it can’t be changed.
- If an error is made, put a line thru it and initial it.
- Make sure you put a date on it.
- Use the memo field whenever possible
- Payee – Person to who the check is written to
- Drawer – Person who owns the account and signs the check
- Drawee – The bank that the check is written on.
- Complete the stub before writing the check
Check the routing of a check (the steps a check goes thru to be paid) page 294.
Do problem 11-1, Preparing a Deposit slip and check, pg 286, WB 216.
The next step is reconciling the bank account to the books.
-Proving Cash – the cash balance in the bank account shown on the bank statement must agree, after doing the reconciliation, to the balance shown in the G/L and checkbook. All three must agree.
The Bank Reconciliation is prepared monthly. It has a heading; Who, What, & When (pg 288)
The Bank Statement:
- It is an itemized record of all of the transactions recorded against or for the account by the bank
- The balance at the beginning of the period
- Lists all deposits (credits) individually
- Lists all checks paid (debits),(cancelled) in numeric order
Lists all other deductions and additions made by the bank
- Monthly service charge
- Interest (both earned and paid)
- Special Charges (S/C) – NSF, Printing, stop payment
- Auto payments
The balance at the end of the period
**IMPORTANT** Banking Debits mean a reduction to cash; Banking credits mean an increase to cash. These terms are directly opposite in meaning to accounting Debits and Credits.
There are seven steps to completing a Bank Reconciliation (page 290). You would ask yourself the question about the transaction: Who knows about this transaction? Then put it in the appropriate place on the bank reconciliation form:
- Arrange cancelled checks in numeric order. Compare them to the checks written from the checkbook. The checks that have not been cleared (reported by the bank) are considered “Outstanding” (O/S). You would make a numeric list with dates and get a total. This would be a reduction to the bank balance.
- Enter the ending bank balance from the bank statement
- Compare deposits from the statement to the deposits recorded in the G/L and the checkbook. The deposits that are not shown on the bank statement are considered “Deposits in Transit” (DIT). You would list these individually by date. This would be an addition to the bank balance.
- Record any adjustments shown on the bank statement. S/C, Interest Exp., Printing fees, banking fees, stop payments, and some book errors would all be reductions to cash on the book side. Collections, Interest inc., and some book errors would be an increase to the book side.
- Do the math to get an adjusted balance for both the bank and book.
- Compare the two amounts, they must equal to be complete, double line each amount.
- Now record the adjustments by J/E into the G/L and by putting them into the checkbook stub.
Review: (291 + 293)
O/S = outstanding checks, reduction to bank side
DIT = deposit in transit, increase to bank side
S/C = bank service charge, reduction to book side, credit to cash
NSF = non-sufficient funds (bounced check), reduction to books, check & fees are set up as a debit to receivables with a credit to cash for the total amount.
EFTS = electronic funds transfer system
ATM = automated teller machine
Do Problem 11-2, Parts of a bank statement, page 295, WB 216
Terms Page 297
Questions Page 298
Prob. 11-3 Deposits TB pg 300 WB pg 217
Prob. 11-4 Using a checkbook TB pg 300 WB pg 218 PC 227
Prob. 11-5 Bank Rec, J/E & Posting TB pg 301 WB pg 219 PC 230 Q235
Prob. 11-6 Bank Rec, J/E & Posting TB pg 301 WB pg 221
Prob. 11-7 Bank Rec, J/E & Posting TB pg 302 WB pg 223 PC 232 Q238
Prob. 11-8 Bank Rec TB pg 302 WB pg 225 PC 233