A checking account simplifies the reconciliation of the general account by avoiding a large number of relatively small outstanding checks. It also simplifies recordkeeping because a separate cash disbursements journal can be maintained for each account.
When it is necessary for a company to write a large number of checks for a specific purpose, it may be appropriate to establish a special account to simplify control and monthly reconciliation.
Such accounts are commonly used for payroll, dividends, and interest on bonds.
When the total amount to be paid out is calculated, a transfer is made from the general to the special checking account.
For example, if the payroll department at Sample Company calculates the net salaries and wages for the next payday as $47,542, a journal entry would be made to record the transfer of this amount to the Cash–Payroll Account.
In turn, payroll checks are written and the following entry is recorded:
Consequently, the book balance in the Cash–Payroll Account (as well as other special checking accounts) is virtually always zero. The bank balance equals the sum of the outstanding checks.