Unit 2 The Basic Accounting Cycle

Chapter 3 Business Transactions and the Accounting Equation

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 6 Recording Transactions in a General Journal

Chapter 7 Posting Journal Entries to General Ledger Accounts Chapter 8 The Six-Column Work Sheet

Chapter 9 Financial Statements for a Sole Proprietorship

What You’ll Learn

Describe the internal controls used to protect cash.

Describe the forms needed to open and use a checking account.

Record information on check stubs.

Prepare a check.

Prepare bank deposits.

Reconcile a bank statement.

Journalize and post entries relating to bank service charges.

What Do You Think?

Main Idea

Internal controls are steps taken to protect assets and keep reliable records.

You Will Learn

how a business protects cash.

Protecting Cash

In any business, cash is used in daily transactions; it is important to track cash received and paid out.

Cash should be protected. There are two ways to protect cash:

internal controls (e.g. limiting the number of people handling cash)

The Checking Account

A checking account holds cash deposits made by the

Opening a Checking Account

A checking account helps a person or business
protect cash, and

The Signature Card

A signature card and a cash deposit are needed to

The Checkbook

Each check is printed with a check number, the bank account number, and an American Bankers Association

(ABA) number. The ABA number:

identifies the bank.

Making Deposits

Most businesses make daily deposits to protect the cash it receives. A deposit slip containing a detailed record of the deposits accompanies them. To complete a

deposit slip:

Write the date on the Date line.

Indicate the total currency and coins on the Cash line.

Endorsing Checks

A business acquires the right to a check when it receives a check. The depositor’s endorsement is needed to deposit the check in the checking account. The endorsement

transfers check ownership to the bank.

There are three types of endorsements a business can use.

A blank endorsement does not indicate the new owner of the check.

A special endorsement transfers ownership of the check to a specific individual or business.

a restrictive endorsement places limitations on how a check may be handled after ownership is

Recording Deposits

To record a deposit in the checkbook, follow these steps:

Enter the date of deposit in the Add deposits line on the check stub for the next unused check.

Enter the total amount of the deposit.

Writing Checks

Here are a few important rules to writing checks:
Complete checks in ink.

Completing the Check Stub

The stub serves as a permanent record of the check and must be complete and accurate. The two parts to the check stub include

the upper part containing the amount of the

check, the date, the name of the payee, and the purpose of the check, and

Completing the Check Stub

Filling Out the Check

To write a check, follow these steps:

1. Write the date the check is being issued.

2. Enter the payee’s name on the Pay To The Order Of line.

3. Enter the amount of the check in numbers.

4. On the next line, write the dollar amount of the check in words.

Voiding a Check

Key Terms Review

Procedures within the business that are designed to protect cash and other assets and to keep

reliable records.

external controls

Measures and procedures provided outside the business to protect cash and other assets.

checking account

Key Terms Review

A written order from a depositor telling the bank to pay a stated amount of cash to the person or

business named on the check.

depositor

A person or business that has cash on deposit in a bank.

signature card

Key Terms Review

A bank form used to list the cash and checks to be deposited.

endorsement

An authorized signature written or stamped on the back of a check that transfers ownership of the check.

blank endorsement

Key Terms Review

A check endorsement that a transfers ownership of the check to a specific individual or business.

restrictive endorsement

A check endorsement that transfers ownership to a specific owner and limits how the check may be handled (for example, For Deposit Only).

payee

Key Terms Review

The person who signs a check.

drawee

The bank on which a check is written.

voiding a check

Making a check unusable by writing the word

What Do You Think?

Main Idea

The bank reconciliation is an important internal control.

You Will Learn

why businesses prove cash.

how to read and reconcile a bank statement.

Key Terms

bank statement

canceled checks

imaged checks

reconciling the bank statement

outstanding checks

outstanding deposits

bank service charge

Key Terms

postdated check

electronic funds transfer system (EFTS)

bankcard

Proving Cash

Comparing the Cash in Bank account balance with the

checkbook is called proving cash. If the two amounts do not match, there is probably an error in the checkbook. Common checkbook errors are:

faulty addition or subtraction

failure to record a deposit or a check

The Bank Statement

A bank statement contains an itemized record of all

transactions in a depositor’s account. A bank returns the

canceled checks, usually as imaged checks, with the bank statement.

When these are received, the statement is compared to the checkbook, called reconciling the bank statement

or bank reconciliation. A checkbook can be out of balance due to:

outstanding checks

outstanding deposits

Outstanding Checks and Deposits

Outstanding checks are checks that have been written, but have not been presented to the bank for payment.

Bank Service Charges

Interest Paid

Journalizing Bank Service Charges

Bank service charges must be recorded in the

Special Banking Procedures

Three problems may occur when checks are written or received and deposited:

A business does not want the bank to pay an issued check.

A business receives and deposits a check from a customer whose account does not have enough money to cover the check.

Stopping Payment on a Check

A stop payment order is issued when a drawer

instructs the drawee not to pay a check. To record a stop payment order:

Write Stopped Payment on the check stub for the stopped check.

Recording NSF Checks

An NSF check is returned to the depositor because the drawer’s account does not have enough funds to cover the amount. NSF stands for Not Sufficient Funds. The

Check Clearing for the 21st _{Century, known as Check}

21, allows the conversion of a paper check to an

Postdated Checks

Electronic Funds Transfer System

The electronic funds transfer system (EFTS) handles large volume of funds transfers and allows banks to

transfer funds among accounts quickly and accurately. There are several ways EFTS impacts banking

activities:

direct payroll deposit

automated bill paying

bankcards used at automated teller machines (ATMs)

bank-by-phone

Key Terms

bank statement

An itemized record of all the transactions in a

depositor’s account over a given period, usually a month.

canceled checks

A check paid by the bank, deducted from the depositor’s account, and returned with the bank statement to the account holder.

Key Terms

reconciling the bank statement

The process of determining any differences between a bank statement balance and a checkbook balance.

outstanding checks

A check that has been written but has not yet been presented to the bank for payment.

outstanding deposits

Key Terms

bank service charge

A fee the bank charges for maintaining bank

records and processing bank statement items for the depositor.

stop payment order

A demand by the drawer, usually in writing, that the bank not honor a specific check.

NSF check

Key Terms

The Check Clearing for the 21st _{Century Act; it}

allows the conversion of a paper check to an electronic image that can be quickly processed between banks.

postdated check

A check that has a future date instead of the actual date; it should not be deposited until the date on the check.

electronic funds transfer system (EFTS)

Key Terms

A bank-issued card honored by many businesses that can be used to withdraw cash and to make payments for goods and services at many

businesses instead of writing checks; also called a debit card, ATM card, or check card.

automated teller machine (ATM)

Step 1: Arrange canceled checks in numerical order;

compare them with the checks listed in the

checkbook stubs and place a check mark beside the amount on the bank statement and check stub; list the outstanding checks (those with no check

marks) and their amounts on the bank reconciliation form.

Step 2: Enter the ending balance shown on the bank

statement in the proper box.

Step 3: Compare the deposits listed on the bank statement

Step 4: Subtract the total of the outstanding checks

(Step 1) from the amount calculated in Step 3. This is the adjusted bank balance.

Step 5: Compare the adjusted bank balance and the

Do the following regarding the bank statement.

a) List at least two pieces of information that you can learn from the monthly bank statement. b) List at least two reasons why it is important to

a) You can find out a number of important facts from the bank statement:

1. Checks that have been cashed by the payee (cleared).

2. Deposits that have been received by the bank. 3. Any service fees that the bank assessed during

the period.

b) Reconciling the bank statement monthly allows you to do the following:

Glencoe Accounting Online Learning Center English Glossary