Bank Accounting - Types of Bank Accounts, Cash Receipts & Disbursements, Disclosures Required for Cash Accounting

• Part 11.1 - Summary of Qualitative Characteristics of GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
• Part 11.2 - How and When to Recognize Revenues & Expenses in Accrual Accounting
• Part 11.3 - Functions in the Purchasing Process and how to Segregate Purchasing Duties
• Part 11.4 - Three Steps to Determining and Applying Materiality
• Part 11.5 - Assertions of Management about Economic Events in the Business
• Part 11.6 - Bank Accounting - Types of Bank Accounts, Cash Receipts & Disbursements, Disclosures Required for Cash Accounting
• Part 11.7 - Objectives of Internal Controls set by Management
• Part 11.8 - How to Test Internal Controls of an Organization
• Part 11.9 - Positive Accounting Theory (PAT)
• Part 11.11 - Accounting Information - Complex Commodity & Information Asymmetry

Bank account involves accounting for cash transactions including organization-wide cash receipts, cash disbursements, payroll disbursements, vendor payments, rent payments, employee salary payments, etc. Cash refers to:

o Currency on hand
o Cash on deposit in bank accounts (including certificates of deposit, time deposits and savings accounts)
o May also include “cash equivalents”, which are short-term, highly liquid investments that are readily convertible into cash or are so close to maturity that there is little risk of change in their value (e.x. T-bills, commercial paper, money market funds, may also include demand loans)

Why is Cash Critical to Accounting?

o Virtually all accounting transactions that flow through the organization pass through the cash account

Sources of Cash (Cash Receipts)

• Cash receipts from the sale of goods/services
• Sale of property, plant and equipment
• Proceeds from issuing long-term debt or capital stock

Uses of Cash (Cash Disbursements)

• Purchasing inventory and supplies
• Payment of payroll expenses
• Purchase of property, plant and equipment
• Payment on long-term debt and repurchase of stock

Types of Bank Accounts

i) General cash accounts – principal cash account used by the organization for cash receipts from the revenue process and cash disbursements from the payroll and purchasing processes

ii) Imprest cash accounts – contains a stipulated amount of money and the account is used for limited purposes (for example disbursing payroll and dividend cheques).

o When used for payroll, the total amount of the net payroll is drawn from the general account and then the individual cheques are drawn from the imprest cash account. The payroll account serves as a clearing account and maintains adequate control over cash).

iii) Branch accounts – used by companies with branches in multiple locations. Each branch is able to pay local expenses and maintain a banking relationship in the local community. May be in the form of an imprest account with designated amounts transferred based on cash reports submitted to headquarters.

Disclosures required for Cash Accounting

• Accounting policy for defining cash and cash equivalents

• Restrictions on cash (funds allocated for a specific purpose by the board of directors)

• Contractual obligations to maintain compensating balances (debt covenant restrictions)

• Cash balances restricted by foreign exchange controls

• Letters of credit

• Restriction on the use of specific funds of cash for NPOs