LESSON 5-1 How are checking accounts utilized in a sole ...€¦ · CENTURY 21 ACCOUNTING © 2009 South -Western, Cengage Learning LESSON 5-1 How are checking accounts utilized in

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 5-1

How are checking accounts utilized in a sole proprietorship?


How do businesses use cash?

Most major payments are made by check Checks are prenumbered as a safety measure Small cash payments for items such as postage and some

supplies may be made from a cash fund kept at the place of business.

Risk of error due to the frequency of cash transactions – errors recording cash transaction, may be lost

Checking account – business form ordering a bank to pay cash from a bank account Signature card for person/persons authorized to sign check

is kept on file at bank

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LESSON 5-1


Depositing Cash

Bank customer prepares a deposit slip each time cash or checks are placed in a bank account Vary from bank to bank but contain same basic information

Checks are listed according to bank routing numberson each check

Bank customer receives a receipt Usually a copy of deposit slip with printed verification

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LESSON 5-1


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LESSON 5-1

DEPOSITING CASH page 119


DEPOSIT RECORDED ON A CHECK STUB

After deposit is recorded on check stub, subtotal is calculated

Cash receipts are journalizedat the time cash is received, but they are deposited later No journal entry needed

because it has already been recorded

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LESSON 5-1

page 119


Endorsements

Endorsement – signature or stamp on the back of a checktransferring ownership (must be within space indicated) Should be signed exactly as the person’s name appears on the front

of the check (Pay to the order of) Ownership might be transferred multiple times

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LESSON 5-1


Blank Endorsements

signature of endorser only Whomever is in possession of the check is the subsequent owner Should be used only when the person is at the bank ready to cash or

deposit a check

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LESSON 5-1

Blank Endorsement


Special Endorsements

Also called endorsement in full – indicates a new owner Includes “Pay to the order of (name of new owner)” Only the new owner can cash/deposit/transfer check

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LESSON 5-1

Special Endorsement


Restrictive Endorsements

Restricts further transfer of the check Prevents unauthorized persons from cashing the check if it is lost or

stolen

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LESSON 5-1

Restrictive Endorsement


Completed Check Stub and Check

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 on it

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LESSON 5-1


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LESSON 5-1

5. Write the amount of the check.

2. Write the date of the check.3. Write to whom the check is to

be paid.

4. Record the purpose of the check.

1. Write the amount of the check.

6. Calculate the new checking account balance.

COMPLETED CHECK STUB page 121

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LESSON 5-1

COMPLETED CHECK

7. Write the date.

page 121

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1098

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10. Write the amount in words.8. Write to whom the check is to

be paid.9. Write the amount in figures.

11. Write the purpose of the check.12. Sign the check.


Voided checks

Banks usually refuse to accept altered checks If an error is made, a new check should be written All checks should be retained (not thrown away) to help

account for all checks and make sure none have been lost or stolen

Void the check that contains an error by writing “VOID” across the check and stub Voided check is journalized to avoid questions about whether

or not all checks have been journalized

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LESSON 5-1

1. Record the date in the Date column.2. Write the word VOID in the Account Title column3. Write the check number in the Doc. No. column.4. Place a check mark in the Post. Ref. column.5. Place a dash in both the Debit and Credit columns.

RECORDING A VOIDED CHECK page 122

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LESSON 5-1

TERMS REVIEW

code of conduct checking account endorsement blank endorsement special endorsement restrictive endorsement postdated check

page 123


LESSON 5-2

What is a bank reconciliation?

Why is it an important accounting procedure?


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LESSON 5-2

BANK STATEMENT page 124


Bank Statement

Bank statement - report of deposits, withdrawals, and bank balances sent to a depositer by a bank

Why might a bank’s records and a customer’s records differ?1. Service charge may not have been recorded in customer’s records2. Outstanding deposits may be recorded in the customer’s records

but not the bank’s3. Outstanding checks may be recorded in the customer’s records but

not on a bank statement4. A customer may have made math or recording errors

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LESSON 5-2


Bank statement reconciliation Bank statement is reconciled by verifying that information on

a bank statement agrees with the checkbook Reconciling immediately is an important part of cash control

Reconciling the bank statement For each check listed on the bank statement, place a check mark on

the corresponding check stub outstanding check = check stub with no check mark (these have been

issued by the customer but not yet reported on bank statement) For each deposit on the bank statement, place a check mark on the

corresponding check stub Outstanding deposits = deposits made at the bank but not yet on the bank

statement Service charge – deduct service charge from the check stub

Journalize entry – memorandum is source doc. because no check is written

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LESSON 5-2


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LESSON 5-2

5. Bank Statement Balance

BANK STATEMENT RECONCILIATION

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9. Adjusted Bank Balance

page 125

2. Check Stub Balance

10. Compare Adjusted Balances

1. Date

3. Service Charge4. Adjusted Check

Stub Balance

6. Outstanding Deposits

7. Subtotal8. Outstanding

Checks 10


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LESSON 5-2

1. Write Service Charge $8.00on the check stub under the heading “Other.”

RECORDING A BANK SERVICE CHARGE ON A CHECK STUB page 126

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2. Write the amount of the service charge in the amount column.

3. Calculate and record the new subtotal on the Subtotal line.


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LESSON 5-2

1. Write the date.

JOURNALIZING A BANK SERVICE CHARGE page 127

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August 31. Received bank statement showing August bank service charge, $8.00. Memorandum No. 3.

2. Write the title of the account debited. Record the debit amount. 3. Write the title of the account credited. Record the credit amount.4. Write the source document number in the Doc. No. column.

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LESSON 5-2

TERM REVIEW

bank statement

page 128


LESSON 5-3

How do you record dishonored checks and an Electronic Funds Transfer?


DISHONORED CHECKS

Dishonored check – check that the bank refuses to pay Why are checks dishonored?

1. Person who wrote the check has insufficient funds to pay (illegal)2. Check appears to be altered (also illegal!)3. Signature of person who signed check doesn’t match signature card4. Amounts written in figures do not match amounts written in words5. Check is postdated6. Person who wrote check has stopped payment on the check

Dishonored checks can affect credit score of person who wrote the check

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page 129


What happens when a check is dishonored?

Sometimes the money can be collected directly from the person or business that wrote the check

Often the money cannot be collected and becomes an expense to the business Additionally, banks usually charge a fee for handling dishonored

checks that also become an expense of the business

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LESSON 5-3

RECORDING A DISHONORED CHECK ON A CHECK STUB

1. Write Dishonored check $105.00 on the line under the heading “Other.”

page 129

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2. Write the total of the dishonored check in the amount column.

3. Calculate and record the new subtotal on the Subtotal line.


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LESSON 5-3

JOURNALIZING A DISHONORED CHECK page 130

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November 29. Received notice from the bank of a dishonored check from Campus Internet Café, $70.00, plus $35.00 fee; total, $105.00. Memorandum No. 55.

2. Write the title of the account debited. Write the debit amount.3. Write the title of the account credited. Write the amount credited.4. Write the source document number in the Doc. No. column.

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1. Write the date.


Electronic Funds Transfer

Computerized cash payments system that transfersfunds without the use of checks, currency, or other paper documents

Many businesses use EFT to pay vendors (via phone or internet) Person in charge of EFT should be given a password to

safeguard cash

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LESSON 5-3


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LESSON 5-3

JOURNALIZING AN ELECTRONIC FUNDS TRANSFER page 131

September 2. Paid cash on account to Kelson Enterprises, $350.00, using EFT. Memorandum No. 10.

2. Write the title of the account debited. Record the amount debited.3. Write the title of the account credited. Record the amount credited.4. Write the source document number in the Doc. No. column.

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1. Write the date.


Debit Card

Bank card that automatically deducts the amount of a purchase from the checking account of the cardholder Eliminates the need to write a check How is this different than a credit card?

Businesses must record these transactions promptly and update the check stub Recorded on the check stub as “other” Debit card transactions are verified as part of the bank reconciliation

process

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LESSON 5-3


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LESSON 5-3

JOURNALIZING A DEBIT CARD TRANSACTION page 132

September 5. Purchased supplies, $24.00, using debit card. Memorandum No. 12.

2. Write the title of the account debited. Record the amount debited.3. Write the title of the account credited. Record the amount credited. 4. Write the source document number in the Doc. No. column.

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1. Write the date.


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LESSON 5-3

TERMS REVIEW

dishonored check electronic funds transfer debit card

page 133


LESSON 5-4

How/why do businesses use a petty cash fund?


Petty Cash

An amount of cash kept on hand and used for making smallpayments Businesses use petty cash when it is not cost/time effective to write a

check What is considered a “small” payment varies among businesses Asset account

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LESSON 5-4


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LESSON 5-4

1. Write the date.

ESTABLISHING A PETTY CASH FUND page 134

August 19. Paid cash to establish a petty cash fund, $100.00. Check No. 8.

2. Write the title of the account debited. Record the amount debited.3. Write the title of the account credited. Record the amount credited.4. Write the source document number in the Doc. No. column.

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Petty cash slip – form showing the purpose and amounttaken from the petty cash fund (proof of payment) Number, date of payment, payee, reason, amount, account,

signature Slips are kept in the petty cash box until the fund is replenished (no

entries for individual petty cash payments)

MAKING PAYMENTS FROM A PETTY CASH FUND WITH A PETTY CASH SLIP

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LESSON 5-4

page 135


Replenishing Petty Cash

Petty cash is replenished when the funds are low or at the end of the fiscal period (usually monthly)

Before petty cash is replenished, a proof of the fund is completed by comparing the total of the slips to the amount remaining in the fund

Record entry to replenish fund Debit expense accounts (slips) and credit cash (write check to

replenish) DO NOT DO ANYTHING TO THE PETTY CASH ACCOUNT

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LESSON 5-4


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LESSON 5-4

1. Write the date.

REPLENISHING PETTY CASH page 136

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August 31. Paid cash to replenish the petty cash fund, $30.00: miscellaneous expense, $20.00; advertising, $10.00. Check No. 12.

4. Write the source document number in the Doc. No. column.3. Write the title of the account credited. Record the credit amount.

2. Write the title of the first account debited. Write the debit amount. Write the title of the second account. Record the debit amount.

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LESSON 5-4

TERMS REVIEW

petty cash petty cash slip

page 138

Documents

LESSON 5-1 How are checking accounts utilized in a sole ...€¦ · CENTURY 21 ACCOUNTING © 2009 South -Western, Cengage Learning LESSON 5-1 How are checking accounts utilized in