Chapter 6
Banking Procedures and Control of Cash
Chapter Overview
This chapter focuses on cash and the internal control of cash. The chapter begins with an explanation of
setting up and using a checking account. All cash received should be deposited in the entity’s bank account
at the end of each day; and, except for petty cash disbursements, all cash payments should be made using the
business’s checking account. At the end of each month, the cash balance shown in the general ledger should
be reconciled with the cash balance reported by the bank. On the date of the bank statement, the bank is
unaware of deposits in transit and outstanding checks while the business may not be aware of bank charges
Learning Objectives
After studying Chapter 6, your students should gain proficiency in the following:
2. Explain Bank Reconciliation.
Chapter 6 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
9 NSF Checks 2 5 Easy
10 Bank Reconciliation Entries 2 5 Easy
11 EFT 2 5 Easy
12 Online Banking 2 5 Easy
13 Check Truncation 2 5 Easy
14 Petty Cash 3 5 Easy
Concept Checks
1 Bank Reconciliation 2 10 Easy
2 Bank Reconciliation Entries 2 5 Easy
Exercises (Set A)
6A-1 Bank Reconciliation Entries 2 15 Medium
6A-2 Petty Cash Entries 3 15 Medium
Exercises (Set B)
6B-1 Bank Reconciliation Entries 2 15 Medium
6B-2 Petty Cash Entries 3 15 Medium
Problems (Set A)
6A-1 Bank Reconciliation and Entries 2 20 Medium
6A-2 Bank Reconciliation and Entries 2 20 Medium
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Problems (Set B)
6B-1 Bank Reconciliation and Entries 2 20 Medium
Financial Report Problem
Reading Amazon’s Annual Report 2 15 Medium
Keeping It Real
Learning Unit 6-1: Banking Procedures and Checking Accounts
Summary: Internal control systems help safeguard the business assets, especially cash. Cash is the asset
Key Concepts: Internal control system, signature card, deposit slip, endorsement, check, drawer, drawee,
payee, cancelled check
Lecture Outline:
1. Strong internal control procedures are necessary for a business to protect its assets. While cash is
the easiest asset to be stolen, lost, or mishandled. All of the business’s assets need to be protected
through internal control procedures. These procedures help the business:
c. Provide tools for management to operate the business more efficiently and effectively.
2. Internal control procedures include:
a. Separating the duties of employees.
b. Depositing cash receipts in the bank the same day the cash arrives.
c. Issuing checks for all cash payments except for those using the petty cash account.
Opening a checking account:
2. Deposit slip – bank form used to deposit funds:
a. When completing the form, the depositor lists all checks, coins, and other currency
3. Automated Teller Machines (ATM): machines that accept cards as a form of identifying a
specific bank account and are used to deposit, withdraw, or transfer funds.
4. Check endorsements: the signing or stamping of an authorized name on the back of the check.
Endorsing a check transfers the right for the stated amount of cash to someone else – usually the
bank. There are 3 types of endorsements:
a. A blank endorsement does not specify who can deposit the check, and the bank will pay
the last person who signs the check.
5. Debit Cards: allow funds to be taken directly from the checking account to pay for purchases
anywhere VISA or MasterCard is accepted.
6. Checks are written orders signed by a drawer (the person who writes the check) to pay a specific
sum of money to the payee.
7. Bank Statement: Monthly statements sent to the owner of the checking account that reflect all
8. Cancelled Checks: checks that have been cashed or paid by the bank.
Teaching Tips/Strategy: Discussion Questions #2 – #5 are excellent to introduce the banking terms and key
terminology included on this unit.
Use the “Ten-Minute Quiz” questions #1 and #2 to reinforce Learning Objective 6-1 concepts.
Learning Unit 6-2: The Bank Reconciliation Process
Summary: Bank reconciliation is the process of reconciling the bank balance on the bank statement versus
the company’s checkbook balance. Bank reconciliations involve several steps, including determining the
deposits in transit and the outstanding checks. The cash balance in the business’s records and the cash
Key Concepts: Bank reconciliation, bank statement, deposits in transit, outstanding checks, NSF
(nonsufficient funds), debit memorandum, credit memorandum, electronic funds transfer (EFT), ATM
(automatic teller machine), phishing, check truncation (safekeeping)
Lecture Outline:
Bank reconciliation items:
1. Deposits in transit are determined by analyzing the bank statement to determine if last month’s
deposits in transit were cleared by the bank and which of this month’s deposits were not cleared
by the bank. Deposits in Transit are:
2. Outstanding checks are:
3. Service charges are charges from the bank in exchange for the bank performing specific tasks.
4. Nonsufficient funds (NSF) are checks returned because the account did not have enough money
in the account to pay for the check.
5. Other information provided by the bank statement:
Bank statement reconciliation steps:
2. Prepare a list of outstanding checks.
4. Compute the cash balance per your books.
6. Total the deposits in transit.
8. Compute the balance per the reconciliation.
Banking Trends:
1. Electronic funds transfers (EFT): cash transfers without the use of paper checks.
3. Online banking advantages:
a. Convenience – never close.
b. Availability – available anywhere.
4. The disadvantages to online banking are :
a. Start-up time – may take time as individuals and businesses need to register for the
online program.
5. Common banking scams:
a. Phishing: customers receive fake emails pretending to be from the bank and attempt to
obtain information about the business or the account.
b. Skimming: theft of credit card information. Skimming at ATMs can be damaging
because of the number of accounts and the amount of money that can be accessed. Tips
to help avoid being a skimming victim:
i. Keep your PIN safe and do not give it to anyone
ii. Watch out for strangers who try to “help” at an ATM.
iii. Trust yourself. It the ATM does not look right, do not use it.
6. Check Truncation – banks do not return cancelled checks to the depositor but instead use a
Teaching Tips/Strategy: Relate the lecture topic with students’ experience with their personal checking
accounts. Ask students what the benefits of reconciling are and having an updated balance of the cash
account. Discuss challenges while preparing the banking reconciliation such as errors, NSF checks, and
Use the “Ten-Minute Quiz” question #3, #4 and #5 (bank reconciliation) and #6 and #7 (banking
scams) to reinforce the Learning Objective 6-2 concepts.
Learning Unit 6-3: The Establishment of Petty Cash and Change
Funds
Summary: Sometimes a business needs to make a purchase, and it is not practical or feasible to have a
check written. A petty cash fund is a source of cash that allows a business to make these purchases without
writing a check.
A change fund is a fund made up of various denominations that is used to make change for customers. This
fund is placed in the cash register drawer and used to make change for customers who pay cash.
Key Concepts: Petty cash fund, petty cash voucher, auxiliary petty cash record, change fund, cash short and
over.
Lecture Outline:
Petty Cash Fund
1. Setting up the petty cash fund:
a. Custodian is the person responsible for administering the funds,
2. Making payments from the petty cash fund (petty cash reimbursement):
a. The custodian needs a completed petty cash voucher form when paying petty cash for a
specific purpose.
b. The petty cash voucher requires certain information:
i. voucher number (to ensure all vouchers are accounted for)
ii. date
iii. person or organization to whom the payment was made
iv. reason for the payment
c. The petty cash vouchers are put into the petty cash box, and the total of cash and amount
listed on the vouchers should equal the amount of cash approved for the fund.
3. An auxiliary petty cash record records the voucher information and aids the understanding of petty
cash expenditures by keeping track of the amounts spent and why they were spent.
4. Petty cash reimbursement:
a. When the amount of cash in the petty cash fund is reduced to a point where it needs to be
replenished, a check is written.
they have been processed.
5. Increase/Decrease petty cash fund: After establishing the account, the account petty cash is not
Change Fund
1. The change fund:
a. is placed in the cash register drawer
b. used to make change for customers who pay cash.
c. The journal entry is: debit (Dr.) Change Fund and (Cr.) credit Cash.
d. The formula is:
Beg. change fund
+ Cash register total
Cash Short and Over
1. Cash Short and Over:
a. is debited when there is a shortage of cash
b. cash over occurs when sales amount is smaller than the cash received.
c. cash over or credit ending balance is considered other income
Teaching Tips/Strategy: Discuss a petty cash system and explain how it works. Ask students what their
experience has been with petty cash and how internal controls are implemented on the petty cash system.
Review the “petty cash and change fund” with the “Success Coach” LU 6-3 to reinforce the basic unit
concepts.
Use the “Ten-Minute Quiz” question #8 and #9 to reinforce the petty cash concepts.
A “change fund group activity” might be beneficial to have a hands-on approach to the concept. Items
Use the “Ten–Minute Quiz” question #10 to reinforce the change fund concepts.
Teaching Tips/Strategy: Each chapter contains a “Try It!” at the end of each Learning Unit. The “Try its!”
Name Date Section
CHAPTER 6
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Which endorsement indicates the name of the company or the person to whom the check is to be paid?
a. blank endorsement
b. full endorsement
c. restrictive endorsement
d. special endorsement
2. A check is a written order to pay a specific amount to the
a. drawer
b. drawee
c. payee
d. supplier
3. Which of the following should not be included in the bank reconciliation?
a. outstanding checks at year end
b. deposits in transit
c. nonsufficient funds
d. petty cash receipts
4. When preparing a bank reconciliation, which of the following will not result in a journal entry for the
business?
a. Deposit in transit
b. Bank service charge previously recognized by the business
c. Error made by the bank in recording the amount of a check deposited
d. Error made by the business in recording the amount of a check deposited
5. When preparing a bank reconciliation, bank service charges are
a. added to the balance per bank statement
b. deducted from the balance per bank statement
c. deducted from the balance per book
d. added to the balance per book
6. Which of the following is not an advantage of online banking?
a. efficiency
b. learning curve
c. transaction speed
d. availability
7. Emails that pretend to be from the bank and attempt to obtain information is a type of fraud called
a. spam
b. email fraud
c. phishing
d. truncation
8. Journal entries using the petty cash fund account
a. occur when the vouchers are totaled
b. occur when the fund is established and the balance changed
c. occur each month
d. never occur
9. When the petty cash fund is replenished,
a. the expenses as described in the vouchers are debited
b. cash per checking account is credited
c. both a and b
d. neither a nor b
10. When the cash drawer is short at the end of the day,
a. Cash Short and Over is debited and sales is credited
b. Cash Short and Over is debited and cash is credited
c. Sales is debited and Cash Short and Over is credited
d. Cash is debited and Cash Short and Over is credited
Answer Key to Chapter 6 Quiz
1. b