Chapter

Objectives
Objectives
1. Describe The definition and characteristics of
After
After studying
studying this
this
cash
chapter,
chapter, you
you should
should
2. Describe the nature of cash and the
be
be able
able
importance of internal to:
to: over cash.
control
3. Describe the nature of a bank account and its
use in controlling cash.
4. Prepare a bank reconciliation and journalize any
necessary entries.
The definition and characteristics of cash
 Control Over Cash
Many companies need several cash accounts to
account for different cash categories and funds.
Most companies have multiple bank accounts.
The title for each bank account should be:
Cash in Bank—(Name of Bank)
Preventive controls protect cash from theft and
misuse of cash.
Detective controls are designed to detect theft
or misuse of cash and are also preventive in
nature.
A
Asummary
summary received
received from
from
the
the bank
bank of
of all
all account
account
transaction
transaction isis called
called aa
statement
statement ofof account.
account.
A
Abank
bank reconciliation
reconciliation isis aa listing
listing
of
of the
the items
items and
and amounts
amounts thatthat
cause
cause thethe cash
cash balance
balance reported
reported
in
in the
the bank
bank statement
statement to to differ
differ
from
from the
the balance
balance of
of the
the cash
cash
account
account in
in the
the ledger.
ledger.
The factors that cause differences the between cash balance
according to company and cash balance according to bank
Reasons
Reasons for
for Differences
Differences Between
Between Depositor’s
Depositor’s
Records
Records andand the
the Bank
Bank Statement
Statement


Outstanding
Outstanding checks
checks

Deposits
Deposits in
in transit
transit

Service
Service charges
charges

Collections
Collections

Not-sufficient-funds
Not-sufficient-funds (NSF)
(NSF)
checks
checks

Errors
Errors
 Steps
Steps in
in aa Bank
Bank Reconciliation
Reconciliation
1. Compare each deposit listed on the bank statement
Add
Add deposits
deposits not
not recorded
recorded by
by the
the bank
bank to
to the
the
with unrecorded deposits appearing on the preceding
balance
balance
period’s according
accordingand
reconciliation to
to the
withbank
the bank statement.
statement.
deposit receipts.
2.Deduct
Compare paid checks
checks with outstanding
outstanding that havechecks
been paid
Deduct checks outstanding that have been
appearing on the preceding period’s reconciliation and
paid
by
by the
the bank
bank from
from
with recorded checks.
the
the balance
balance according
according to
to the
the
bank
bank statement.
statement. to entries in the
3. Add
Compare bank credit memorandums
Add credit
credit memorandums
memorandums that that have
have not
not been
been
journal.
recorded
recorded to
to the
the balance
balance according
according to
to the
the
depositor’s
depositor’s records.
records.
 Steps
Steps in
in aa Bank
Bank Reconciliation
Reconciliation
4.Deduct
Compare bankmemorandums
debit memorandums to entries
Deduct debit memorandums that have not
debit that have not been
been
recording cash payments.
recorded from the balance according to the
5. List any errors discovered during the precedingthe
recorded from the balance according to steps.
depositor’s
depositor’s records.
records.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99

Power
Power Network
Network prepares
prepares to
to reconcile
reconcile the
the
monthly
monthly bank
bank statement
statement as
as ofof July
July 31,
31, 2006
2006
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not
recorded by bank
816.20 $4,175.9
8

A
Adeposit
deposit of
of $816.20
$816.20 did
did not
not
appear
appear on
on the
the bank
bank statement.
statement.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank
$4,175.9 408.00 $2,957.9
8 9

The
The bank
bank collected
collected aa note
note in
in the
the
amount
amount ofof $400
$400 and
and the
the related
related
interest
interest of
of $8
$8 for
for Power
Power Networking
Networking
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
checks:
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99

A
Three
Three deposit
deposit of
Achecks
checks that
of $637.02
that were did
did not
not appear
were written
$637.02 written during
during the
appear the
period did on
not the
appear bank statement.
on the
on the bank
period did not appear on the bank
bank statement:
statement. statement:
#812,
#812, $1,061;
$1,061; #878,
#878, $435.39,
$435.39, #883,
#883, $48.60.
$48.60.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check returned
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39
No. 883 48.60 1,544.99

The
The bank
bank returned
returned an
an NSF
NSF check
check from
from oneone of
of the
the
firm’s
firm’s customers,
customers,Thomas
Thomas Ivey,
Ivey, in
in the
the amount
amount of of
$300.
$300. This
This was
was aa payment
payment onon account.
account.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges 18.00

The
The bank
bank service
service charges
charges totaled
totaled $18.00.
$18.00.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges18.00
Error recording
Check No. 879 9.00
327.00
Check
Check No.
No. 879
879 for
for $732.26
$732.26 to
toTaylor
Taylor Co.
Co. on
on account,
account,
erroneously
erroneously recorded
recorded in
in journal
journal as
as $723.26.
$723.26.
 BANK

Bank’s Depositor’s
books records
Beginning balance $3,359.78 Beginning balance $2,549.99
Add deposit not Add note and interest
recorded by bank 816.20 collected by bank 408.00
$4,175.9 $2,957.9
Deduct outstanding 8 9
Deduct check return
checks: because of insufficient
No. 812 $1,061.00 funds $300.00
No. 878 435.39 Bank service
No. 883 48.60 1,544.99 charges18.00
Error recording
Check No. 879 9.00 327
Adjusted balance $2,630.99 Adjusted balance $2,630.99
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Journal
Journal entries
entries must
must be be prepared
prepared
for
for those
those items
items that
that affected
affected the
the
depositor’s
depositor’s side
side of
of the
the
reconciliation.
reconciliation.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries
Entries Related
Related to
to aa Bank
Bank Reconciliation
Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.
 Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement $3,359.78
Add: Deposit not recorded by bank 816.20
$4,175.98
Deduct: Outstanding checks
No. 812 $1,061.00
No. 878 435.39
No. 883 48.60 1,544.99
Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99

Add: Note and interest collected by bank 408.00
$2,957.99
Deduct: NSF check (Thomas Ivey) returned $300.00
Bank service charges 18.00
Error in recording Check No. 879 9.00 327.00
Adjusted balance $2,630.99
Entries
Entries Related
Related to
to aa Bank
Bank Reconciliation
Reconciliation
July 31 Cash 408 00
Notes Receivable 400 00
Interest Receivable 8 00
Note collected by bank.

30 Accounts Receivable—Thomas Ivey 300 00

Miscellaneous Administrative Exp. 18 00
Accounts Payable—Taylor Co. 9 00
Cash 327 00
NSF check, bank service
charges, and error in
recording Check no. 879.
Chapter 7

The
The End
End