Chapter 6: Banking Activities as Controls

Basic Bank Services: Banks provide essential services that help businesses manage and control cash. These services include maintaining bank accounts, providing detailed deposit records, processing checks, and offering electronic funds transfers (EFTs). Let's break down these services: 1. Bank Account: A business opens a bank account to deposit and withdraw money securely. Authorized individuals must sign a signature card, which the bank uses to verify signatures for checks and other transactions. 2. Deposit: A deposit ticket lists the items deposited, including currency, coins, and checks. The bank provides a receipt to confirm the deposit. 3. Check: A check is a document instructing the bank to pay a specified amount to a designated payee. There are three parties involved: o Maker: The person or company writing the check. o Payee: The person or company receiving the payment. o Bank: The financial institution holding the funds. Remittance advice is an optional part of a check used to explain the purpose of the payment. 4. Electronic Funds Transfer (EFT): This is the electronic transfer of money between parties. EFT is commonly used for payroll, rent, utilities, and more, as it is convenient and cost-effective. Bank Statements: Banks provide bank statements, typically monthly, which detail the following: 1. 2. 3. 4. Beginning balance. Withdrawals and other deductions (e.g., checks, fees, ATM withdrawals). Deposits and other additions (e.g., cash deposits, EFTs, interest earned). Ending balance. Statements also list canceled checks (checks that the bank has paid and deducted from the account). Other usual deductions include bank service fees, NSF (nonsufficient funds) checks, and adjustments for previous errors. Deposits may also include interest earned or note collections made by the bank on behalf of the depositor. Bank Reconciliation: Bank reconciliation is a process used to ensure that the company’s book balance of cash matches the bank statement balance. Differences arise due to timing and errors, and the reconciliation process adjusts both records to ensure accuracy. Bank Balance Adjustments: 1. Deposits in transit: These are deposits made by the company but not yet recorded by the bank (e.g., deposits made after the bank closes). 2. Outstanding checks: Checks that the company has written but which have not yet been processed by the bank. 3. Bank errors: Any mistakes made by the bank that need adjustment. Book Balance Adjustments: 1. Interest earned and unrecorded receipts: Interest or receipts (such as note collections) added to the account but not yet recorded by the company. 2. Bank fees and NSF checks: Fees for check printing, service charges, or returned (NSF) checks that need to be subtracted from the book balance. 3. Book errors: Mistakes in the company’s accounting records. Steps to Prepare a Bank Reconciliation: 1. Enter the bank statement balance. 2. Add deposits in transit and any bank errors that understate the bank balance. 3. Subtract outstanding checks and any bank errors that overstate the balance. 4. Compute the adjusted bank balance. 5. Enter the book balance from the company's records. 6. Add unrecorded cash receipts, interest earned, and any book errors that understate the balance. 7. Subtract bank fees, NSF checks, and errors overstating the balance. 8. Compute the adjusted book balance. 9. Ensure the adjusted bank and book balances are equal. Example of a Bank Reconciliation: Information: • • • • • Bank statement balance: $1,900 Book balance: $1,610 Deposit in transit: $800 Outstanding checks: $200, $400, $100 Note receivable collected by the bank: $470 • • • NSF check: $150 Bank fee for check printing: $20 Book error: Check written for $340 but recorded as $430. Bank Reconciliation: Step 1: Adjust Bank Balance: • • • • Bank balance: $1,900 Add deposit in transit: +$800 Subtract outstanding checks: -$200, -$400, -$100 Adjusted bank balance: $2,000 Step 2: Adjust Book Balance: • • • • • • • Book balance: $1,610 Add note receivable collected by the bank: +$470 Add interest earned (if applicable, not in this case). Subtract NSF check: -$150 Subtract bank fee: -$20 Correct book error (check recorded for $430, should be $340): +$90 Adjusted book balance: $2,000 Both adjusted balances now match at $2,000, completing the reconciliation. Journal Entries to Record Reconciliation Adjustments: 1. Collection of Note Receivable: plaintext Debit: Cash $470 Credit: Notes Receivable $470 2. NSF Check: plaintext Debit: Accounts Receivable Credit: Cash $150 $150 3. Bank Fee: plaintext Debit: Bank Fees Expense $20 Credit: Cash $20 4. Correction of Book Error: plaintext Debit: Cash $90 Credit: Office Supplies $90 After these entries, the company's books will be updated to reflect the reconciled cash balance.