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🧾financial accounting i review

Electronic Funds Transfer (EFT)

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Electronic Funds Transfer (EFT) is a method of transferring money from one bank account to another electronically, without the use of paper checks or cash. It is a fast, secure, and convenient way to make payments and manage financial transactions.

5 Must Know Facts For Your Next Test

  1. EFT transactions are recorded in a bank's records and the recipient's account, providing a clear audit trail of the payment.
  2. EFT can be used for a variety of transactions, including bill payments, payroll, and fund transfers between personal or business accounts.
  3. EFT transactions are generally faster and more secure than traditional paper-based payment methods, reducing the risk of lost or stolen checks.
  4. EFT can help improve cash flow management by allowing for the timely and accurate transfer of funds between accounts.
  5. Businesses often use EFT to streamline their accounts payable and receivable processes, reducing administrative costs and improving efficiency.

Review Questions

  • Explain how electronic funds transfer (EFT) relates to the purpose of a bank reconciliation.
    • EFT transactions are an important consideration in the bank reconciliation process. The bank reconciliation is used to compare the company's records of its bank account activity, including EFT transactions, with the bank's records. This helps identify any discrepancies or errors, such as missing or incorrect EFT transactions, which can then be resolved. Accurately reconciling EFT transactions is crucial for maintaining the integrity of the company's financial records and ensuring the accuracy of the bank balance.
  • Describe how electronic funds transfer (EFT) impacts the preparation of a bank reconciliation and its associated journal entries.
    • EFT transactions must be properly recorded and accounted for in the preparation of a bank reconciliation. The company's records of EFT transactions, such as deposits and withdrawals, need to be compared to the bank's records to ensure they match. Any differences, such as outstanding EFT transactions, must be identified and adjusted through journal entries. These journal entries may involve recording the EFT transaction in the company's books, making corrections, or reconciling timing differences between when the transaction was recorded by the company and when it was processed by the bank.
  • Evaluate the importance of accurately tracking and reconciling electronic funds transfer (EFT) transactions in the context of preparing a bank reconciliation.
    • Accurately tracking and reconciling EFT transactions is critical to the preparation of an effective bank reconciliation. EFT transactions can have a significant impact on a company's cash flow and financial reporting, and any discrepancies or errors in these transactions can lead to inaccurate bank balances and financial statements. By carefully reconciling EFT transactions, the company can ensure that its records are up-to-date, transactions are properly accounted for, and any issues are identified and resolved in a timely manner. This, in turn, helps maintain the integrity of the company's financial records and supports effective cash management and decision-making.