A special checking account simplifies the reconciliation of the general account by avoiding a large number of relatively small outstanding checks. It also simplifies recordkeeping in that 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 particular 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. If the payroll department of the Sample Company computes 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.
Then, Payroll checks are written and this 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.
A special checking account simplifies the reconciliation of the general account by avoiding a large number of relatively small outstanding checks. It also simplifies recordkeeping in that a separate cash disbursements journal can be maintained for each account.