Alex James
Cash (Part C)
by
Charles Lamson
Bank Accounts: Their Nature and Use as a Control Over Cash
Most of you are already familiar with bank accounts. You have a checking account at a local bank, credit union, savings and loan association, or other financial institution. In this section, we discuss the nature of a bank account used by a business. The features of such accounts will be similar to your own bank account. We then discuss the use of bank accounts as an additional control over cash. Business Bank Accounts A business often maintains several bank accounts. The forms used with each bank account are a signature card, deposit ticket, check, and record of checks drawn. When you open a checking account you sign a signature card. This card is used by the bank to verify the signature on checks that are submitted for payment. Also, when you open an account, the bank assigns an identifying number to the account. The details of a deposit are listed by the depositor on a printed deposit ticket supplied by the bank. These forms are often prepared in duplicate. The bank teller stamps or initials a copy of the deposit ticket and gives it to the depositor as a receipt. Other types of receipts may also be used to give the depositor written proof of the late date and the total amount of the deposit.  A check is a written document signed by the depositor, ordering the bank to pay a sum of money to an individual or entity. There are three parties to a check---the drawer, the drawee, and the payee. The drawer is the one who signs the check, ordering payment by the bank. The drawee is the bank on which the check is drawn. The payee is the party to whom payment is to be made. The name and address of the depositor are usually printed on each check. In addition, checks are prenumbered, so that they can easily be kept track off by both the issuer and the bank. Banks encode their identification number and the depositor's account number in magnetic ink on each check. These numbers make it possible for the bank to sort and post checks automatically. When a check is presented for payment, the amount for which it is drawn is inserted, next to the account, in magnetic ink. A record of each check should be prepared at the time a check is written. A small booklet called a transactions register is often used by both businesses and individuals for this purpose. The purpose of a check may be written in space provided on the check or on an attachment to the check. Normally, checks issued to a creditor on account are sent with a form that identifies the specific invoice that is being paid. The purpose of this remittance advice is to make sure that proper credit is recorded in the accounts of the creditor. In this way, mistakes are less likely to occur. A check and remittance advice is shown in Exhibit 3. EXHIBIT 3 Check and Remittance Advice   Before depositing the check, the payee removes the remittance advice. The payee may then use the remittance advice as written proof of the details of the cash receipt. Bank Statement Banks usually maintain a record of all checking account transactions. A summary of all transactions, called a statement of account, is mailed to the depositor usually each month. Like any account with a customer or a creditor, the bank statement shows the beginning balance, additions, deductions, and the balance at the end of the period. A typical bank statement is shown in Exhibit 4. EXHIBIT 4 Bank Statement  The depositor's check received by the bank during the period may accompany the bank statement, arranged in the order of payment. The paychecks are stamped "Paid," together with the date of payment. Other entries that the bank has made in the depositor's account may be described in debit or credit memorandums enclosed with the statement. You should note that a depositor's checking account balance in the bank's records is a liability with a credit balance. Debit memorandums issued by the bank on a depositor's account therefore decrease the depositor's balance. Likewise, credit memorandums increase the depositor's balance. A bank issues a debit memorandum to charge (decrease) a depositor's account for service charges or for deposited checks returned because of insufficient funds. Likewise, a bank issues a credit memorandum when it increases the depositor's account for collecting a note receivable for the depositor, making a loan to the depositor, receiving a wire deposit, or adding interest to the depositor's account.  Bank Accounts as a Control Over Cash A bank account is one of the primary tools a business uses to control cash. For example, businesses often require that all cash receipts be initially deposited in a bank account. Likewise, businesses usually use checks to make all cash payments, except for very small amounts. When such a system is used, there is a double record of cash transactions---one by the business and the other by the bank. A business can use a bank statement to compare the cash transactions recorded in its accounting records to those recorded by the bank. The cash balance shown by a bank statement is usually different from the cash balance shown in the accounting records of the business, as shown in Exhibit 5.  This difference may be the result of a delay by either party in recording transactions. For example, there is a time lag of 1 day or more between the date a check is written and the date that it is presented to the bank for payment. If the depositor mails deposits to the bank or uses the night depository, a time lag between the date of the deposit and the date that it is recorded by the bank is also probable. The bank may also debit or credit the depositor's account for transactions about which the depositor will not be informed until later. The difference may be the result of errors made by either the business or the bank in recording transactions. For example, The business may incorrectly post to Cash a check written for $4,500 as $450. Likewise, a bank may incorrectly record the amount of a check.  *WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 289-292* end |
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