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.

Cash--Payroll Account Journal Entry
In turn, payroll checks are written and the following entry is recorded:

Payroll Payable Journal Entry
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.

Frequently Asked Questions

What is a checking account?

A checking account is an asset account used for transactions involving checks, debit cards, and similar methods of drawing upon deposited funds. All withdrawals are reflected as debits in the account holder's balance sheet.

How do they work?

Such accounts are commonly used for payroll, dividends, and interest on bonds. If money is deposited into the account and there are no pending transactions in that account, then there will be funds available to withdraw. A bank teller might also transfer funds between bank accounts with proper identification.

What is an example of a checking account transaction?

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.

Who is responsible for the checking account?

A checking account must be reconciled to determine an accurate bank balance. The company is responsible for maintaining records of transactions and verifying that it has the correct amount of funds available in its accounts.

What are the advantages of a checking account?

Checking accounts are beneficial to individuals and business entities. A personal checking account allows you access to your funds without penalty or delay, which is especially useful for paying bills on time or when an unforeseen expense occurs. A business checking account simplifies the reconciliation of a general account by avoiding a large number of relatively small outstanding checks.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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