Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 319BANK ACCOUNTS
Most of you are familiar with bank accounts. You probably have a checking account
at a local bank, credit union, savings and loan association, or other financial institu-
tion. In this section, we discuss the use of bank accounts by businesses. We then dis-
cuss the use of bank accounts as an additional control over cash.Use of Bank Accounts
A business often maintains several bank accounts. For example, a business with sev-
eral branches or retail outlets such as SearsorThe Gap Inc.will often maintain a bank
account for each location. In addition, businesses usually maintain a separate bank
account for payroll and other special purposes.
A major reason that businesses use bank accounts is for control purposes. Use of
bank accounts reduces the amount of cash on hand at any one time. For example, many
merchandise businesses deposit cash receipts twice daily to reduce the amount of cash
on hand that is susceptible to theft. Likewise, using a payroll account allows for pay-
ing employees by check or electronic funds transfer rather than by distributing a large
amount of cash each payroll period.
In addition to reducing the amount of cash on hand, bank accounts provide an
independent recording of cash transactions that can be used as a verification of the
business’s recording of transactions. That is, the use of bank accounts provides a dou-
ble recording of cash transactions. The company’s cash account corresponds to the
bank’s liability (deposit) account for the company. As we will discuss and illustrate in
the next section, this double recording of cash transactions allows for a reconciliation
of the cash account on the company’s records with the cash balance recorded by the
bank.
Finally, the use of bank accounts facilitates the transfer of funds. For example, elec-
tronic funds transfer systems require bank accounts for the transfer of funds between
companies. Within a company, cash can be transferred between bank accounts through
the use of wire transfers. In addition, online banking allows companies to transfer funds
and pay bills electronically as well as monitor their cash balances on a real-time basis.Bank Statement
Banks usually maintain a record of all checking account transactions. A summary of
all transactions, called a bank statement, is mailed to the depositor or made available
online, 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 5.
The depositor’s checks or copies of the checks received by the bank during the pe-
riod may accompany the bank statement, arranged in order of payment. If paid checks
are returned, they are stamped “Paid,” together with the date of payment. Many banks
no longer return checks or check copies with bank statements. Instead, the check pay-
ment information is available online. Other entries that the bank has made in the de-
positor’s account are described as debit or credit memorandums on the statement.
The depositor’s checking account balance in the bank recordsis a liability; thus, in
the bank’s records, the depositor’s account has a credit balance. Since the bank state-
ment is prepared from the bank’s point of view, a credit memorandum entry on the
bank statement indicates an increase (a credit) in the depositor’s account. Likewise, aDescribe the nature of a
bank account and its use
in controlling cash.