Chapter 7 Sarbanes-Oxley, Internal Control, and Cash 321A bank makes credit entries (issues credit memoranda) for deposits made by
electronic funds transfer, for collections of note receivable for the depositor, for pro-
ceeds for a loan to the depositor, for interest earned on the depositor’s account, and
to correct bank errors. A bank makes debit entries (issues debit memoranda) for pay-
ments made by electronic funds transfer, for service charges, for customers’ checks
returned for not sufficient funds, and to correct bank errors.
Customers’ checks returned for not sufficient funds, called NSF checks, are checks
that were initially deposited, but were not paid when they were presented to the cus-
tomer’s bank for payment. Since the bank initially credited the check to the depositor’s
account when it was deposited, the bank debits (issues a debit memorandum) when
the check is returned without payment. We discuss the accounting for NSF checks later
in this chapter.
The reason for a credit or debit memorandum entry is indicated on the bank state-
ment. For example, Exhibit 5 identifies the following types of credit and debit memo-
randum entries:EC — Error correction to correct bank error.
NSF — Not sufficient funds check.
SC — Service charge.
ACH — Automated Clearing House entry for electronic funds transfer.
MS — Miscellaneous item such as collection of a note receivable on behalf of the
depositor or receipt of loan proceeds by the depositor from the bank.In the preceding list, we have included the notation “ACH” for electronic funds
transfers. ACH is a network for clearing of electronic funds transfers among individuals,
companies, and banks.^7 Because electronic funds transfers may be either deposits or
payments, ACH entries may indicate either a debit or credit entry to the depositor’s
account. Likewise, entries to correct bank errors and miscellaneous items may indicate
a debit or credit entry to the depositor’s account.Bank Accounts as a Control Over Cash
As we mentioned earlier, a bank account is one of the primary tools a company uses
to control cash. For example, companies often require that all cash receipts be initially
deposited in a bank account. Likewise, companies usually use checks or bank account
transfers 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 company and
the other by the bank.
A company 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 company, as shown in Exhibit 6.
This difference may be the result of a delay by either party in recording transac-
tions. For example, there is a time lag of one day or more between the date a check is
written and the date that it is presented to the bank for payment. If the company 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 company’s account for transactions about which the company
will not be informed until later.
The difference may be the result of errors made by either the company or the bank
in recording transactions. For example, the company may incorrectly post to Cash a check
written for $4,500 as $450. Likewise, a bank may incorrectly record the amount of a check.Q.On the bank’s records,
are customer service
charges recorded as a
debit or a credit to the de-
positor’s account?
A.Debit.
7 For further information on ACH, see http://www.nacha.org /About/what_is_ach_.htm.