Ch.6 Internal Control and Accounting for Cash 1 Internal control and its objectives Understand cash and internal control procedures related to cash Accounting for petty cash Combined Journal Prepare a bank reconciliation
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Ch.6 Internal Control and Accounting for Cash
1
Internal control and its objectives
Understand cash and internal control procedures
related to cash
Accounting for petty cash
Combined Journal
Prepare a bank reconciliation
The Sarbanes-Oxley Act of 2002
• Congress responded by passing the
Sarbanes-Oxley Act of 2002
• Among other provisions, companies are
required to maintain strong and effective
internal controls over recording business
transactions and preparing financial
statements
2
Internal Control
• The methods and procedures a business uses
to internally protect its assets
• A good system of internal control is designed
to
Safeguard assets
Ensure the accuracy and reliability of
accounting records
Promote operational efficiency
Ensure compliance with laws and
regulations
3
Objectives of Internal Control
4
Cash
• Includes currency, coins, checks made
payable to the business, money orders,
and amounts on deposit in banks and
other financial institutions
• Generally considered the most precious
of all assets
• Almost everyone wants it
• Easily taken if not protected
5
Steps in Controlling and Protecting Cash
• Establish ResponsibilityOnly properly designated
personnel are authorized to
handle cash receipts.
• Separation of DutiesThe individual who accounts for
cash is different from the persons
who receive and deposit cash.6
Steps in Controlling and Protecting Cash
• Physical ProtectionCash on hand should be in a
secure location and cash should
be deposited daily.
• DocumentationCash register tapes, summaries
of checks received, etc. should
be kept to show the amount of
cash received.7
Steps in Controlling and Protecting Cash
• Independent VerificationCashiers check cash registers,
supervisors count cash receipts
daily, and company treasurer
compares cash receipts with
bank deposits.
• Keep Only a Small Amount of Cash on Hand
Only a small amount of cash
should be maintained on hand
to make small expenditures.8
The Petty Cash Account
• To control cash, most businesses use bank
checking accounts when making cash
expenditures
• It is not practical to write checks for very
small amounts
• Most businesses maintain a petty cash
fund which is a small amount of money
kept in the office for making small
expenditures9
Establishing a Petty Cash Fund
1. Estimate the amount of cash needed in the
fund.
2. A check for this amount is written payable to
Petty Cash.
3. The check is then cashed, and the money is
placed in a box, a drawer, or a safe to be used
for the fund.
10
Establishing a Petty Cash Fund
4. The check is recorded in the journal by
Debiting the Petty Cash account (an asset)
Crediting the Cash account
11
+ asset
- asset
Making Payments from the Petty Cash Fund
• Petty cashier (usually) is the only person who
makes payments from the fund.
• Petty cash voucher
Prepared for each payment
Shows the details of the payment
Serves as proof of payment
12
Petty Cash Voucher
13
Maintaining the Petty Cash Payments Record
• Some firms prefer to record all petty cash
payments on a single sheet called the petty
cash payments record.
• A petty cash payments record is not a journal.
• It is an auxiliary record used as a basis for
making a journal entry.
• An auxiliary record is a nonessential business
record that is helpful in maintaining records
that are essential.14
Petty Cash Payments Record
15
Replenishing the Petty Cash Fund
• Normally replenished at month-end or when it
nears depletion or reaches a minimum amount
• When replenished, the Petty Cash account is
NOT debited
• The accounts debited are determined by
analyzing the petty cash vouchers
• The Cash account is credited
16
Example
Replenishing the Petty Cash Fund
Here is a list of expenses and amounts taken from
the petty cash payments record.
Prepare the journal entry to replenish the petty cash
fund.17
Expense Amount
Office Supplies Expense $15.00
Miscellaneous Expense 8.00
Postage Expense 10.84
Cathy Nash, Drawing 10.00
Advertising Expense 25.00
Total $68.84
Example
Replenishing the Petty Cash Fund
18
+ expense
+ expense+ expense
+ drawing+ expense
- asset
Please keep in your mind!
• The Petty Cash account is debited onlywhen the fund is being established or
when the amount in the fund is
increased.
• The Petty Cash account is credited onlywhen the amount of the fund is
decreased or eliminated completely.
19
The Change Fund Account
• Businesses that have many cash transactions
usually establish a change fund.
An amount of money that is placed in the
cash register drawer
Used to make change for customers who
pay in cash
• The establishment of a change fund is
recorded by
Debiting the Change Fund account
Crediting the Cash account20
Example
Establishing the Change Fund
Assume a business decides to establish a change fund
on March 23 for $125.
The following journal entry would be made.
21
+ asset
- asset
The Cash Short and Over Account
• A cash shortage results when the
amount of cash in the cash register is
less than the amount of cash sales rung
up on the register.
• A cash overage results when the amount
of cash in the cash register is more than
the cash sales rung up on the register.
22
The Cash Short and Over Account
• Used to bring the cash on hand into
agreement with the cash sales
• Used to handle both shortages and
overages
• Does NOT have a normal balance
o If it has a debit balance, considered an
expense
o If it has a credit balance, considered
revenue23
Example
Assume cash in the cash register amounts to $598 and
sales based on the cash register tapes amounts to $600.
The following entry would be prepared.
24
no normal balance
+ asset
+ revenue
Example
Assume cash in the cash register amounts to $774 and
sales based on the cash register tapes amounts to $769.
The following entry would be prepared.
25
no normal balance
+ asset
+ revenue
Combined Journal
• A multicolumn journal used by small businesses to
help save journalizing and posting time
• AKA combination journal
• Has two special columns for recording debits and
credits to Cash, and various other special columns
for recording transactions that occur often
• Has two general columns for recording
transactions that occur less often
26
Combined Journal
27
Designing a Combined Journal
• Designed to fit the individual needs of the business
using it
• Special columns should be set up for those accounts
that are most often affected by business transactions
Cash Debit Column
Cash Credit Column
Accounts Payable Debit Column
Accounts Payable Credit Column
Fees Earned Credit Column
Salaries Expense Debit Column
General Debit and Credit Columns
• When the month’s transactions have been
journalized, each column of the combined journal
should be totaled28
Recording Business Transactions in a Combined Journal
Two transactions to record on Jun. 1:
29
1. Issued Check No. 120 for June rent, $600
2. Received cash for services performed, $400
On the next slide, we’ll see these transactions along with all
of Diana’s transactions for the month of June recorded in a
combined journal:
30
Recording Business Transactions in a Combined Journal
Proving the Combined Journal
31
Total and prove the equality of the debits and credits.
Diana adds her total debit columns and her total credit
columns as shown below:
Column Totals
Column Titles Debit Credit
Cash $ 4,696 $ 6,375
General 16,775 11,200
Accounts Payable 1,650 2,350
Fees Earned 0 4,496
Salaries Expense 1,300 0
Totals $ 24,421 $ 24,421
Posting the General Columns• The procedure for posting amounts in the General Debit and
Credit columns is similar to posting from a two-column
journal.
• The steps to complete the posting process:
1. Enter the date of the entry in the Date column of the
appropriate account.
2. Enter the amount of the entry in the Debit column of the
appropriate account.
3. Calculate the new balance of the account by adding the
current posting to the previous balance.
4. Enter the reference “CJ” and the page number of the
combined journal in the P.R. column of the appropriate
account.
5. Enter the number of the account in the P.R. column of
the combined journal.32
Posting the General Columns• Let’s look at Diana’s first transaction in her combined
journal to record rent paid of $600 for the current month.
• The steps to complete the posting process for the first
transaction are:
6. Enter the date of the entry (Jun. 1) in the Date column
of the Rent Expense account.
7. Enter the amount of the entry ($600) in the Debit
column of the Rent Expense account.
8. Calculate the new balance of the Rent Expense
account by adding the current posting to the previous
balance: $600 + $3,000 = $3,600.
9. Enter the reference “CJ” and the page number of the
combined journal (6) in the P.R. column of the Rent
Expense account.
10. Enter the number of the Rent Expense account (516) in
the P.R. column of the combined journal.33
34
Posting an Entry from the General column of a Combined Journal
4 3
Posting the Totals of the Special Columns
• Special columns are used only for
recording debits or credits to specific
accounts.
• Only the TOTALS of the special columns
are posted, not the individual numbers in
the columns.
• The number of each account to which a
posting is made is written in parentheses
directly below the special column total.35
Posting the Special Columns of a Combined Journal
36
Bank Checking Accounts
• Bank Checking Accountan amount of cash on deposit with a bank that
the bank must pay at the written order of the
depositor
• American Bankers Association (ABA) Transit Number
a number printed on checks and deposit slips
that identifies the bank and the area in which
the bank is located as well as other
information
37
The Signature Card
• Lists personal information and contains the
signature of the person or persons who are
authorized to write checks on the account
• Kept on file by the bank as an aid in identifying
possible forgeries38
Deposit Slip
• Prepared when coin, currency, or checks
are deposited in a bank account
• Indicates
Name of the depositor
Account number
Summarizes the amount deposited
39
Deposit Slip
40
ABA transit
number
Endorsement
• A signature or stamp on the back of the
check
• Transfers ownership of the check to the
bank (or to another person or to an
individual)
• Authorizes payment of the check
41
Common Forms of Endorsement
• Blank Endorsement
• Full Endorsement
• Restrictive Endorsement
42
Writing Checks
• A check is a written order directing a bank to
pay a specified sum of money to a designated
person or business.
• The person or business who writes a check is
called the drawer.
• The bank on which the check is written is
called the drawee.
• The person or business to whom a check is
made payable is called the payee.
43
The Bank Statement
• Shows what the bank
did with the customer’s
money
• Shows the account’s
Beginning Balance
Ending Balance
Cash Receipts
Payments
Charges
44
Reconciling the Bank Statement
• The balance shown on the bank statement
and the balance in the checkbook
normally do not agree at the end of the
month
• Bank reconciliation — the process of
making the bank statement agree with the
checkbook balance
45
Reconciling the Bank Statement
Common reasons why the bank statement
balance may not agree with the checkbook
balance include:
• Outstanding checks
• Deposits in transit
• Service charges and other bank fees
• Errors, either the depositor’s or the bank’s
• Bank collections
• NSF checks
46
Steps in Reconciling the Bank Statement
Add the amount of deposits in transit to the bank
statement balance
Subtract the amount of outstanding checks from
the bank statement balance
Add to the checkbook balance the amount of any
interest earned on the account or any collection
made by the bank for the depositor
Subtract any charges appearing on the bank
statement from the checkbook balance
47
Example
A Completed Bank Reconciliation Statement
48
Example
Updating Cash Records
All checkbook adjustments require a journal entry.
Assume the bank deducted $12 for its service charge on the depositor’s checking account.
The following journal entry would be required:
49
+ expense- asset
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