CHAPTER 4 – Banking Instructor: Dr.Gehan Shanmuganathan.

CHAPTER 4 – Banking

Instructor:

Dr.Gehan Shanmuganathan

Business Math, Ninth EditionCheryl Cleaves, Margie Hobbs & Jeffrey Nobel

Learning Outcomes

Make account transactions.

Record account transactions.

Make account transactions

Various checking account forms or records provide written documentation of the funds that flow into and out of the account.

– A transaction is a banking activity that changes the amount of money in a bank account.

– Funds going into the account are deposits and are recorded as a credit to the account.

– A deposit ticket is needed to support the transaction.

Checking Account Transactions

4-1-1Section 4-1

Make an account depositChecking Account TransactionsSection 4-1

HOW TO:

STEP 2Enter the amount of currency and/or coins being deposited.

STEP 3List the amount of each check to be deposited including an identifying name or company. MORE

Record the date.STEP 1

HOW TO:

STEP 5If the deposit for a personal account and you need some money in cash, enter that amount on the line “less cash received” and sign on the appropriate line.

STEP 6Subtract the amount of cash received from the total for the net deposit.

Add the currency, coins and checks.STEP 4

If there is a mistake in the deposit: The bank will issue a bank memo.

– An increase in the balance (or in your favor) is called a credit memo.

– A decrease in the balance (or in the bank’s favor) is called a debit memo.

HOW TO:

Examples…

Suppose Janice’s bank initially cleared a check for $174.00 which Janice actually wrote for $147.00.

Would she receive a credit memo or a debitmemo once the bank detected its error?

A credit memo.

Checking Account TransactionsSection 4-1

Businesses that permit customers to use credit cards to charge merchandise ordinarily receive payment through electronic deposit from the credit card or check processing company.

– Sometimes called point-of-sale transactions.

Visa®, MasterCard® and Discover® are examples of major credit card companies that electronically transmit funds to business accounts.

– Electronic funds transfers (EFTs).

Another type of electronic deposit is direct deposit for payroll.

– Employees can access their paycheck funds directly from their accounts.

A withdrawal is a transaction which reduces the amount of funds in the account.

– These transactions are called debits.

One bank record for withdrawals is a check or bank draft.

– Another type of debit is through the use of a debit card to pay for goods and services.

Withdrawing funds from an ATM will also result in a debit to the account.

Key Terms Payee

– The one to whom the money on a check is paid.

– The bank or institution that pays the amount of the check to the payee.

– The one authorizing the payment of the check.

Automatic Drafts

– Regular withdrawals that the owner of an account authorizes to be made electronically.

Key Terms…Checking Account TransactionsSection 4-1

Key Terms Signature card:

– Signature of those authorized to sign the checks for a given account.

Personal identification number (PIN)

– A private code that is used to authorize a transaction on a debit card or ATM card.

Identify the elements of a check

HOW TO: Make a withdrawal with a check

STEP 2Enter the name of the payee.

STEP 3Enter the amount of the check in numerals.

Enter the date of the check.STEP 1

HOW TO: Make a withdrawal with a check

STEP 5Explain the purpose of the check.

STEP 6Sign the check.

Write the amount of the check in words. Cents can be written as a fraction of a dollar or decimal notation.

STEP 4

Identify the elements of a check Check stub

– A form attached to the check for recording account transactions that show the account balance.

Account register

– A separate form for recording all checking account transactions. It also shows the account balance.

Record account transactions

For checks and other debits…

– Enter the date, amount of the check/debit, theperson or company receiving the check/debit,and the purpose of the check/debit

– Subtract the amount of the check or debit fromthe previous balance to obtain the new balance.

– For handwritten checks with stubs, carry thenew balance forward to the next stub.

Individuals and businesses with banking accounts must record all transactions made to the account.

Make an entry for every account transaction.

For deposits and other credits…

– Enter the date, the amount of the deposit or credit, and a brief explanation of the deposit or credit.

– Add the amount of the deposit or credit to the previous balance to obtain the new balance.

Record account transactions4-1-2Checking Account TransactionsSection 4-1

On an electronic money management system…

– Enter the appropriate details for producing a check.

– Record other debits and all deposits and credits.• The account register is maintained by the system automatically.

– For business accounts or personal accounts used for tracking expenses, record the type of expense or budget account number

Record account transactions4-1-2Checking Account TransactionsSection 4-1

Banks will require payees who are not account holders to present identification before cashing a check from their bank.

Account holders will be required to sign the check and also record their account numberon the back of the check.

EndorsementsChecking Account TransactionsSection 4-1

Endorsement

– A signature, stamp or electronic imprint on the backof a check that authorizes payment in cash or directs payment to a third party or account.

Simple endorsement

– The payee signs or stamps the back of the check to deposit the amount in an account or to cash the check.

Restricted endorsement

– A type of endorsement that reassigns the check to a different payee, or directs the check to be depositedin a specified account.

In a restricted endorsement, the original payee writes “pay to the order of,” lists the name of the new payee, and signs the check.

Another type uses the phrase “for deposit only,” and listing the account number—without actually signing or endorsing the check.

Restricted EndorsementsChecking Account TransactionsSection 4-1

HOW TO:

These measures are intended to providegreater security when handling checks.

Learning Outcome

Reconcile a bank statementwith an account register.

Financial institutions provide account statements to their checking account customers.

– To enable them to reconcile any differences between that statement and the customer’s own account

– Any transactions that had not been posted at that time are considered “outstanding” and are takeninto account during this process.

Bank Statements

4-2-1Section 4-2

Reconcile a bank statementwith an account register

Key Terms…

Bank reconciliation

– The process of making the account register agreewith the bank statement.

Bank statement

– An account record provided by the bank periodically designed to match your records to the bank’s records.

Service charge

– A fee the bank charges for maintaining the checking account or for other banking services.

Bank StatementsSection 4-2

Key Terms…

Returned check

– A deposited check that was returned because the maker’s account did not have sufficient funds.

Returned check fee

– Bank charges to the depositor for returned checks.

Key Terms…

Non-sufficient fund fee

– A fee charged to the account holder when a checkis written for which there are not sufficient funds.

When a check is returned NSF, there are sometimes two penalties – one the bank charges, and another by the payee who

was unable to collect the money.

Key Terms…

Outstanding checks

– Checks that have been written, but have not yet been posted to the maker’s account.

Outstanding deposits

– Deposits that have been made, but have not yet been posted to the maker’s account.

When reconciling your account, besure to note any bank fees (for returned

checks, service charges, etc.) onyour account register.

HOW TO: Reconcile a bank statement

STEP 2Enter into the register the transactions appearing on the bank statement, but not checked off.

Check off all matching transactions appearing on both the bank statement and the account register.

STEP 1

Check off these transactions as they are enteredand update the register balance accordingly.This is the adjusted register balance.

STEP 3

Make a list of checks anddebits in the register thathave not been checked off.

Add these amounts to findthe total outstanding debits.

STEP 4

Use Figure 4-25as a guide.

Make a list of all deposits &credits in the register thathave not been checked off.

Add these amounts to findthe total outstanding credits.

STEP 5

Use Figure 4-25as a guide.

Calculate the adjusted statement balance by adding the statement balance and total outstanding deposits & credits, and then subtracting total outstanding checks and other debits.

STEP 6

Statement balance+ Total outstanding credits- Total outstanding debits

Adjusted statement balance MORE

STEP 8If the adjusted statement balance does not equal the register balance, find the cause of the difference and correct the register, or notify the bank accordingly.

Compare the adjusted statement balance with the adjusted register balance. The amounts should be equal.

STEP 7

Write statement reconciled on the next blank line inthe account register and record the statement date.

EXERCISE SET A

PRACTICE TEST

CHAPTER 4 – Banking Instructor: Dr.Gehan Shanmuganathan.

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