Principles of Financial Accounting: Internal Control and Cash - Control Features of a, Checking Account

What It Is

A checking account is a type of bank account used by businesses to manage their cash. Control features of a checking account are essential to ensure the accuracy and reliability of financial records. If a company has $10,000 in its checking account, it's crucial to maintain control over these funds to prevent unauthorized transactions and ensure compliance with accounting standards.

Key Concepts & Formulas

• Bank Reconciliation: A process to verify the accuracy of a company's checking account balance by comparing it with the bank statement. Example: A company's checking account balance is $5,000, but the bank statement shows a balance of $4,500. The bank reconciliation will identify the difference and ensure the accuracy of the company's records.
• Cash Balance: The amount of cash available in a company's checking account. Example: A company has a cash balance of $10,000 in its checking account.
• Deposits: Cash received into a company's checking account. Example: A company receives a $5,000 deposit from a customer.
• Withdrawals: Cash paid out of a company's checking account. Example: A company pays $2,000 in rent from its checking account.
• NSF (Non-Sufficient Funds) Check: A check written by a company that has insufficient funds in its checking account. Example: A company writes a $1,000 check, but its checking account balance is only $500.
• Bank Fees: Charges imposed by the bank for services such as overdrafts, NSF checks, or maintenance fees. Example: A company is charged a $20 overdraft fee by its bank.
• Interest Earned: Interest earned on a company's checking account balance. Example: A company earns $50 in interest on its $10,000 checking account balance.
• Interest Paid: Interest paid on a company's loan or overdraft. Example: A company pays $100 in interest on its $5,000 overdraft.

Journal Entry Examples

1. Deposits: Dr. Cash $5,000 Cr. Accounts Receivable $5,000 Explanation: The company receives a $5,000 deposit from a customer, increasing cash and decreasing accounts receivable.

2. Withdrawals: Dr. Rent Expense $2,000 Cr. Cash $2,000 Explanation: The company pays $2,000 in rent from its checking account, increasing rent expense and decreasing cash.

3. NSF Check: Dr. NSF Penalty $20 Cr. Cash $20 Explanation: The company is charged a $20 NSF penalty by its bank, increasing NSF penalty and decreasing cash.

Common Mistakes

1. Mistake: Confusing debits and credits for expense accounts. Correction: Remember that debits increase assets and expenses, while credits increase liabilities and equity. Use the mnemonic "ADE" (Assets, Drawings, Expenses) to help you remember.
2. Mistake: Failing to record bank fees as a debit to cash. Correction: Bank fees are a type of expense, so they should be recorded as a debit to cash.
3. Mistake: Ignoring interest earned on a company's checking account balance. Correction: Interest earned should be recorded as a credit to interest revenue.

Exam Tips

1. Tip: Be careful when reversing normal balances. Remember that reversing normal balances can lead to incorrect journal entries.
2. Tip: Use the bank reconciliation process to verify the accuracy of a company's checking account balance.
3. Tip: Be aware of NSF checks and bank fees, as they can have a significant impact on a company's financial records.

Quick Practice

1. What is the adjusting entry for accrued salaries of $5,000? Answer: Dr. Salaries Expense $5,000, Cr. Salaries Payable $5,000 Explanation: The company has accrued salaries of $5,000, which should be recorded as an expense and a liability.

2. A company receives a $10,000 deposit from a customer. What is the journal entry? Answer: Dr. Cash $10,000, Cr. Accounts Receivable $10,000 Explanation: The company receives a $10,000 deposit from a customer, increasing cash and decreasing accounts receivable.

3. A company pays $1,000 in rent from its checking account. What is the journal entry? Answer: Dr. Rent Expense $1,000, Cr. Cash $1,000 Explanation: The company pays $1,000 in rent from its checking account, increasing rent expense and decreasing cash.

Last-Minute Cram Sheet

1. Dividends are NOT an expense – they go directly to retained earnings.
2. Cash balance is the amount of cash available in a company's checking account.
3. Bank fees are a type of expense and should be recorded as a debit to cash.
4. Interest earned should be recorded as a credit to interest revenue.
5. NSF checks can have a significant impact on a company's financial records.
6. Bank reconciliation is a process to verify the accuracy of a company's checking account balance.
7. Cash is a current asset and should be recorded as a debit.
8. Accounts receivable is a current asset and should be recorded as a credit.
9. Rent expense is a type of operating expense and should be recorded as a debit.
10. Salaries payable is a type of current liability and should be recorded as a credit.