Objectives - hall's blog€¦ · Bank Reconciliation Items Impacting the Adjusting Book Balance...
Transcript of Objectives - hall's blog€¦ · Bank Reconciliation Items Impacting the Adjusting Book Balance...
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Objectives
• To explain cash control procedures.
• To identify the steps to perform bank
reconciliations.
• To describe how bank activities are
journalized.
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Cash
• Is money in the form of coins or bills
• May also be cash equivalents in a business
cash account
There is approximately $1.1 trillion worth of cash currently in circulation.
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Cash Equivalents
• Are assets which can be turned into cash in
a short period of time−examples:
• treasury bills− short-term method for the U.S. government to
borrow money
• money market accounts− an account similar to a checking account, but
pays more interest and restricts money
withdrawals
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Cash Controls
• Monitor the process of receiving and
distributing cash−involve best practices for collecting,
transporting and storing cash
Best practices: procedures which are accepted as most effective
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Benefits of Cash Controls
• Include the following:−prevent theft and fraud
−ensure the businesses have money to pay bills
−increase accuracy of business financial
records
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Common Cash Control Procedures
• Include:−bank account access
−dual control
−security of check stock
−timely account reconciliations
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Bank Account Access
• Is a cash control which limits who can
access company funds−large companies can have accounts in several
location to make cash faster/easier to access
−banks keep records which show when cash
was deposited or withdrawn
−banks usually send monthly statements to
companies which summarize bank
transactions
Deposit: practice of placing money into a bank account
Withdrawal: practice of taking money out of a bank account
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Dual Control
• Is a cash control process which requires
two people to complete a transaction
• Helps prevent employee “borrowing”
• Prevents false accusations because two
people are present
• Helps the business prevent theft and helps
the employee make ethical decisions
Employee Borrowing: practice of removing cash and replacing it at a later
date
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Dual Control Process Example
• One employee physically counts cash and
other valuables and records the amount
• A second employee compares this
information with previous documents which
show the expected cash/valuables amounts
• The findings are compared; if they do not
match, the employees determine the issue
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Dual Control Process Example
• The two employees
sign a document
indicating they both
agree on the final
amount
• What occurs if there is
a loss depends on company procedures
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Security of Check Stock
• Is a cash control process in which:−check stock is stored in a secure environment
which is only accessible by a few employees
such as a locked cabinet or safe
−checks are signed by two people• large businesses may use signature plates or
stamps for checks to place an authorized
signature on a check− signature plates should be only accessible to
authorized users
Check stock: paper which is used by a company to print checks
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Reconciliation of Bank Statements
• Is a cash control process which requires
verification that bank statement amounts
match company cash amounts
• Is usually completed by a person who does
not sign checks or maintain accounting
records
• Can be automatically setup within a
company’s system to be done daily or
monthly
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Bank Reconciliation Process
• Includes four steps:−adjusting the balance per bank
−adjusting the balance per books
−comparing the adjusted balances
−preparing and posting journal entries
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Adjusting Balances
• Are used to include transactions which were
not included on the financial statement or
were improperly recorded by the business−bank and company
account balances are
commonly different
because many
transactions take
different amounts of
time to be completed
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Bank Reconciliation Items Impacting the Adjusting Bank
Balance
• Include:−deposits in transit
• cash received and
recorded by the company
but not yet recorded by
the bank
−outstanding checks• checks recorded in the company’s cash
account but not yet recorded (“cleared”) by the
bank
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Bank Reconciliation Items Impacting the Adjusting Bank
Balance• Include:
−bank errors• errors which are caused by
the bank such as recording
incorrect amounts or omitting
deposits/withdrawals
• could increase or decrease
the bank statement balance
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Bank Reconciliation Items Impacting the Adjusting Book
Balance
• Include:−bank service charges
• fees charged by the bank for performing
common account activities (accepting deposits,
mailing the bank statement, etc.)− decreases the company’s cash account
−non-sufficient funds (NSF) check• checks not deposited by the bank because the
account of the check writer did not have
enough funds
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Bank Reconciliation Items Impacting the Adjusting Book
Balance
• Include:−check printing charges
• when a company allows its bank to reorder its
checks
−interest earned• the money a bank
gives the company
based on their bank
account balance
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Comparing the Adjusted Balances
• Should occur after the bank and book
balances are adjusted−the balances should be equal
−if the balances are not equal, the process
should be repeated
−the balance is equal to the amount of cash
present at the time the bank reconciliation was
made
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Journal Entries
• Must be prepared when adjustments are
made to the balance per books−adjustments which increase the cash balance
• debit cash and credit another relevant account
−adjustments which decrease the cash balance• credit to cash and a debit to another relevant
account
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Effect of Bank Reconciliation Items
• Balance per bank statement−added to balance
• deposits in transit, bank errors which
understate bank statement balance
−subtracted from balance• outstanding checks,
bank errors which
overstate bank
statement balance
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Effect of Bank Reconciliation Items
• Balance per book
statement−added to balance
• interest income
−subtracted from
balance• bank service charges,
NSF checks, bank printing fees
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Bank Reconciliation Example
The Alan Company needs to reconcile their bank
statement. Their bank statement for December 29th
says they have $25,000 in their account. However,
they know they had $24,200 in their account on the
day, so the bank made an error. Also, they just
deposited $1,000 in their account on December 30,
so it would not show on the statement anyway.
Along with the new deposit, the company wrote a
check for $800 to pay for supplies, which would
decrease their balance.
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Bank Reconciliation Example
Alan Company also noticed some bank information
was not added to their company accounting
records. Their cash account balance was $24,000.
They received $1,500 in interest from keeping their
money in the checking account. They also noticed
the bank did not deposit a customer’s $200 check
because the customer did not have the funds.
Additionally, the bank charged the company $160
for service fees and $140 for automatically printing
company checks.
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Alan Company Bank Reconciliation Example
Balance per Bank, Dec 31 25,000
Add: Deposit in Transit 1,000
Total 26,000
Less: Outstanding Checks 800
Bank error that overstated
balance
200
Adjusted Bank Balance:
Dec 31
25,000
Balance per Books, Dec 31 24,000
Add: Interest Income from
bank
1,500
25,500
Less:
NSF Check 200
Bank Service Charges 160
Bank printing Charges 140
500
Adjusted Book Balance 25,000
Alan Company
Bank Reconciliation
December 31, 2015• Example of post made
for Alan Company Bank
Reconciliation
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Bank Service Charges Example
• On March 7, Brenda’s Burgers received a
bank statement with a bank service charge
of $3. March 7 Debit Credit
Miscellaneous Expense 3
Cash 3
Miscellaneous Expense
Debit
3
Credit
Cash
Debit Credit
3
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Petty Cash
• Is cash on hand to use for small expenses
which do not require checks or credit cards−examples:
• paying for stamps, reimbursing employee for
buying a small item, buying lunch for a client,
etc.
• Is typically controlled by one person within a
business (petty cash custodian)
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Petty Cash Controls
• Involve the effective management of small
expenses
• Include:−keeping a petty cash log to record sums of
money entering and leaving the fund
−requiring a receipt for every transaction
−reconciling the petty cash fund by counting the
amount in the box and verifying the total listed
in the log matches the sum on hand
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Petty Cash Controls
• Include:−integrating petty cash system with the overall
company’s bookkeeping system
−locking the box or storage area when the petty
cash is kept
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How to Replenish Petty Cash Methods
• Include:−keeping the petty cash
amount at the original
balance• as cash is used, it
must be replenished
• each time the fund is replenished, it should be
to the original amount
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How to Replenish Petty Cash Methods
• Include:−using a petty cash custodian to manage the
account• custodian should make the replenishment
request and include receipts for expenses
• check is written to the custodian in the amount
of the expenses
• cash is placed in the petty cash box
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Journal Entries for Petty Cash
• When debits, are debited based on the
items purchased−examples:
• supplies are recorded in the supplies expense
account
• fuel expenses are recorded in the fuel expense
account
−the amount credited is the total amount
removed from the account
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Establishing Petty Cash Journal Entry & Posting
ExampleOn March 1, Supreme Cuts Barber Shop set up a
petty cash account which holds $300. Below is how
the transaction would be posted in the journal:
March 1 Debit Credit
Petty Cash 300
Cash 300
Petty Cash Fund
Debit
300
Credit
Cash
Debit Credit
300
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Replenishing Petty Cash Journal Entry & Posting
Example• By the end of the week, Supreme Cuts spent $50 for
a new razor and $25 in fuel expenses; the following
is the posted record of these transactions and the
replenishment of the petty cash fund
March 7 Debit Credit
Supplies 50
Fuel Expense 25
Cash 75
Supplies
Debit
50
Credit
Fuel Expense
Debit
25
Credit
Cash
Debit Credit
75
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Electronic Funds Transfer (EFT)
• Is the process of money being exchanged
between businesses and
customers/employees electronically
• Is a cash control which minimizes the
amount of people with access to money
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Electronic Funds Transfer (EFT) Examples
• Include:−direct deposit of employee wages into their
checking accounts
−paying bills online
−using online services such as PayPal®
−withdrawing money from an ATM
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Benefits of Electronic Funds Transfer (EFT)
• Include:−convenience
−provides documentation of transactions
−less costly• cheaper than issuing paper paychecks
−faster cash flow• money from customers can be received
immediately
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Acknowledgements
• Bank Reconciliation. (n.d.). Retrieved from
http://accountingexplained.com/financial/cash-and-equiv/bank-
reconciliation
• Kieso, D., & Weygandt, J. (2010). Intermediate accounting
(13th ed.). Hoboken, NJ: Wiley.
• Marley, S., & Pedersen, J. (2005). Accounting for business: An
introduction. Frenchs Forest: Pearson Education.
• Nieva, R. (2012). 6 fascinating facts about cash. Retrieved from
http://fortune.com/2012/07/12/6-fascinating-facts-about-cash/
• Swanson, L. Accounting for Petty Cash and Cash Short and
Over [PowerPoint slides]. Retrieved from
http://ww2.nscc.edu/swanson_l/Acct%201104%20Web/Present
ations/Petty%20Cashrev.pdf
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Acknowledgements
• Which items on a bank reconciliation will require a journal
entry? (n.d.). Retrieved from
http://www.accountingcoach.com/blog/bank-reconciliation-
journal-entry
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Acknowledgements
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