Accounting Chap 7` Flashcards
___ includes currency, coins, checks, money orders, and cashier’s checks
Cash
Because ___ plays such a central role in operating a business, a system of ___ is necessary
cash
internal control
A set of procedures designed to ensure proper accounting for transactions
Including transactions:
All cash received should be deposited DAILY in a bank
All disbursements, except for payments from petty cash, should be made by CHECK
INTERNAL CONTROL
When opening a checking account, A ___ must be completed and signed by an authorized person and the depositor’s social security number or employer identification
number (EIN) is shown on the card to identify the depositor.
signature card
This card is used to verify the depositor’s signature on any banking transactions
signature card
A ___ is a form showing a detailed listing of items being deposited
Currency, coins, and checks are listed
separately
deposit ticket
Checks are identified by their
ABA (American Bankers Association) Numbers
Each check being deposited must be endorsed by the depositor
Consist of stamping or writing the depositor’s name and sometimes other information on the back of the check
ENDORSEMENTS
The depositor simply signs the back of the check.
This makes the check payable to any bearer.
Blank endorsement
The depositor adds words such as “For deposit,” “Pay to any bank,” or “Pay to Daryl Beck only” to restrict the payment of the check.
Restrictive endorsement
Automated teller machines (ATMs) allow depositors to make deposits or withdrawals at all times.
a) Each depositor has a plastic card.
b) Each depositor has a personal identification number (PIN).
c) It is important for the depositor to keep an accounting record of ATM transactions.
A ___ is a document ordering a bank to pay cash from a depositor’s account
check
Three parties to each check
drawer
drawee
payee
The ___ is the depositor who orders the bank to pay the cash.
drawer
The ___ is the bank on which the check is drawn
drawee
The ___ is the person being paid the cash
payee
Recording methods
a) Check stubs
b) Check register
c) Financial computer software package
Steps in preparing a check
a) Complete the check stub or register.
b) Enter the date, payee name, and the amount of the check.
d) Sign the check.
The check stub or register should be completed ___ and that the signature is done ___ since it is the actual authorization to the bank to pay the money.
first
last
Bank Statement
- Gives the balance at the beginning of the period.
- Lists deposits and other amounts added during the period.
- Lists checks and other amounts subtracted during the period.
- Gives the balance at the end of the period.
- Provides the depositor with cancelled checks or the equivalent and any other forms representing items added to or subtracted from the account.
With ___ & ___, there can be timing differences between the depositor’s books and the bank’s books
deposits
cash payments
Reasons for Differences Between Bank and Book Balances
- Deposits in transit
- Outstanding checks
- Service charges
- Collections
- Not sufficient fund (NSF) checks
- Errors
Deposits that have not reached the bank
or been recorded by the bank before the
statement is prepared
Deposits in transit
Checks that have not been presented to
the bank for payment before the statement is prepared
Outstanding checks
Bank charges for services such as check printing and processing
Service charges
Collections of promissory notes or
charge accounts made by the bank on
behalf of the depositor
Collections
Checks deposited but not paid because
the drawer did not have sufficient funds
Not sufficient fund (NSF) checks
Errors made by the bank or by the
depositor in recording cash transactions
Errors
Steps in Preparing the Bank Reconciliation
- Identify deposits in transit and any related errors.
- Identify outstanding checks and any related errors.
- Identify additional reconciling items
Identify deposits in transit and any related errors.
a) Compare deposits listed on the bank statement with deposits in transit on last month’s bank reconciliation.
(1) All of last month’s deposits in transit should appear on the current month’s bank statement.
b) Compare the remaining deposits on the bank statement with deposits listed in the accounting records.
(1) Any deposits listed in the accounting records but not on the bank statement are deposits in transit on the current bank reconciliation.
c) Compare the individual deposit amounts on the bank statement and in the accounting records.
(1) If they differ, the error needs to be corrected.
Identify outstanding checks and any related errors.
a) Compare canceled checks with the bank statement and the accounting records.
(1) If the amounts differ, the error needs to be corrected.
c) As each canceled check is compared with the accounting records, place a check mark on the check stub or other accounting record to indicate that the check has cleared.
c) Any checks written that have not been checked off represent outstanding checks on the bank reconciliation.
(1) This includes outstanding checks from last month’s
bank reconciliation that have not yet cleared.
A depositor’s account is a ___ to the bank. Thus, a credit memo ___ this liability; a debit memo ___ the liability.
liability
increases
reduces
Illustration of a Bank Reconciliation
- Deposits in transit are ___ to the bank statement balance.
- Outstanding checks are ___ from the bank statement balance.
added
subtracted
Illustration of a Bank Reconciliation
- Error in recording a check
a) ___ to the book balance if too much is deducted.
b) ___ from the book balance if not enough is deducted. - Unrecorded ATM withdrawals are ___ from the book balance.
Add
Subtract
deducted
Illustration of a Bank Reconciliation
- NSF check amounts are ___ from the book balance.
- Bank service charges are ___ from the book balance.
deducted
deducted
BANK RECONCILIATION JOURNAL ENTRIES
Only two kinds of items appearing on a bank reconciliation require journal entries:
- Errors in the depositor’s books
2. Bank additions and deductions that do not already appear in the books
ALL items in the ___ section of the reconciliation require a journal entry
book balance
Journal Entries
- Errors in the depositor’s books require journal entries.
- Bank additions and deductions that do not already appear in the books require journal entries.
- Cash is debited or credited as appropriate.
- The account for which cash was spent or received is debited or credited as appropriate.
Uses a computer rather than paper checks to complete bank transactions.
Electronic Funds Transfer (EFT)
A fund set up to pay for small items with cash
Checks for very small amounts are cumbersome
PETTY CASH FUND
Establishing a Petty Cash Fund
- A check is written to the petty cash custodian for the amount to be set aside in the fund.
- The custodian cashes the check and places the money in a petty cash box
Petty Cash is an asset that is listed immediately ___ Cash on the balance sheet.
below
- The ___ should be the only person authorized to make payments from the petty cash fund.
custodian
A receipt prepared for every payment from the petty cash fund
Petty cash vouchers
Petty Cash Voucher shows the:
Name of the payee
Purpose of the payment
Account to be charged for the payment (e.g., Postage Expense)
Signatures of the custodian and payee
Making Payments from a Petty Cash Fund
- Petty cash vouchers should be prepared for each payment from the
fund. - Vouchers should be signed by the custodian and by the person receiving the cash.
- Vouchers should be numbered consecutively so that all vouchers can be accounted for.
A special multi-column record that supplements the regular accounting records
Provides a record of each petty cash payment
Broken down by account
– e.g.: Travel/Entertainment Expense,
Postage Expense, etc.
Used to prepare the replenishment
journal entry
PETTY CASH PAYMENTS RECORD
The petty cash fund should be replenished whenever the fund runs
___ and at the ___ of each accounting period
low
end
Once the petty cash fund is established by ___ Petty Cash and ___
Cash, no further entries are made to Petty Cash
debiting
crediting
To replenish the fund, ___ are made to appropriate expense accounts and Cash is ___
Only if the amount of the fund itself is
being changed would there be a debit or
credit to Petty Cash
debits
credited
Replenishing the Petty Cash Fund
- Should be replenished when the fund runs low.
- Should be replenished at the end of each accounting period.
- The information in the petty cash payments record is used to replenish the petty cash fund.
a) Once the petty cash is established, an entry is made to Petty Cash only if the amount of the fund is being changed.
b) In the journal entry to replenish the fund, the debits are to appropriate expense and drawing accounts and the credit is to Cash.
A supply of currency and coins kept in the cash register or cash drawer
Allows businesses to make change when
customers pay in cash
CHANGE FUND
Establish a Change Fund
- Once established, no further entries are made to the change fund unless the amount of the change fund itself is being changed.
- The change fund is an asset that is listed immediately below cash on the balance sheet.
Used to accumulate cash shortages and overages throughout the accounting period.
Cash Short and Over
- The Cash Short & Over account is ___ when cash is short and ___ when cash is
over. - At the end of the period, a debit balance in the Cash Short & Over account (a net
shortage) is treated as an ___. - At the end of the period, a credit balance in the Cash Short & Over account (a net
overage) is treated as revenue.
debited
credited
expense
Is the set of procedures, processes, and records established to initiate, process, record, and report the business’s transactions.
Accounts for the related assets and liabilities.
Information and Communication System
