Internal Control and Cash Internal Control and Cash C H A P T E R 8 9-1 Practice: Ex 8-6 Ex 8-10 Prob 8-4A.

Internal Internal Control and Control and

CashCash

C H A P T E R 8

9-1

Practice:

Ex 8-6

Ex 8-10

Prob 8-4A

Learning ObjectivesLearning Objectives1. Define, explain the purpose, and identify

the principles of internal control. (LO1)

2. Define cash and explain how it is reported. (LO2)

3. Apply internal control to cash. (LO3)

4. Explain and record petty cash fund transactions. (LO4)

9-2

Learning ObjectivesLearning Objectives5. Explain and identify banking activities

and the control features they provide. (LO5)

6. Prepare a bank reconciliation and journalize any resulting adjustment(s). (LO6)

7. Calculate the acid-test ratio and explain its use as an indicator of a company’s liquidity. (Appendix 9A) (LO7)

9-3

All policies and procedures used to:• Protect assets• Ensure reliable accounting• Promote efficient operations• Encourage adherence to company

policies

9-4 LO 1

Internal Control SystemInternal Control System

Principles of Internal ControlPrinciples of Internal Control

1. Ensure transactions and activities are authorized.

2. Maintain adequate records.

3. Insure assets.

4. Separate recordkeeping and custody of assets.

5. Establish a separation of duties

9-5 LO 1

Principles of Internal ControlPrinciples of Internal Control

6. Apply technological controls.

7. Perform internal and external audits.

9-6

Internal controls will vary based on the nature and size of the organization.

LO 1

Limitations of Internal ControlLimitations of Internal ControlHuman Error

• Negligence• Fatigue

Human Fraud

Intent to defeat internal controls for personal gain.

Costs vs. Benefits

The costs of internal control must not exceed their benefits.

9-7 LO 1

• Misjudgment• Confusion

CashCash• Important asset for every company.• Control of cash and access to it is

critical. Cash includes:

• Currency, Coins and Cheques• Deposits in bank accounts• Other items acceptable for deposit

9-8 LO 2

Internal Control for CashInternal Control for CashGuidelines:

1. Handling of cash v. recordkeeping of cash.

2. Deposit cash receipts daily.

3. Make cash disbursements (payments) by cheque.

9-9 LO 3

Control of Cash Control of Cash DisbursementsDisbursements

• All expenditures should be made by cheque (or EFT).

• Authorization (cheque signing) and recordkeeping duties separated

• Apply a voucher system.

9-10 LO 3

Petty CashPetty Cash

Good internal control procedures require cash disbursements be made by cheque.

The exception: Small payments required in most

companies for items such as postage, courier fees, repairs, and supplies.

9-11 LO 4

Cashier’s Office Petty Cashier

GENERAL JOURNAL Page 4Date Description PR Debit Credit

May 1 Petty Cash 150

Cash 150

To establish a petty cash fund

Prepares cheque to

establish petty cash fund.

Starting a Petty Cash FundStarting a Petty Cash Fund

9-12 LO 4

The petty cashier makes payments from this fund for small disbursements.

… and ensures a petty cash receipt is signed by the person receiving the money to easily identify the expenses paid from petty cash.

9-13 LO 4

Operating a Petty Cash FundOperating a Petty Cash Fund

GENERAL JOURNAL Page 4Date Description PR Debit Credit

May 15 Postage Expense 46

Courier Expense 80

Cash 126

A cheque is issued and the fund is replenished when the amount of cash becomes low.

9-14 LO 4

Topping Up the FundTopping Up the Fund

A cash over and short account may be needed.

QS 8-5 & 8-6

Banking Activities as ControlsBanking Activities as Controls

Basic Bank Services• Bank account• Bank deposits and cheques• Electronic funds transfer• Credit/Debit card transactions

9-15 LO 5

Credit Card TransactionsCredit Card Transactions

• The risk of bad debts is transferred to the credit card company.

• The company collects cash from the sale quickly.

• The credit card companies charge a fee to the vendor.

9-16 LO 5

Debit Card TransactionsDebit Card Transactions• The bank transfers funds from the

customer’s account to the vendor’s bank account.

• The bank charges a fee to the vendor.

9-17 LO 5

TechCom has $100 of credit card sales with a 4% fee and cash is received immediately (assume cost of sales is $40).

GENERAL JOURNAL Page 8Description PR Debit Credit

Aug. 15 Cash 96.00

Credit Card Expense 4.00

Sales 100.00

To record credit card expense less 4% fee

15 Cost of Goods Sold 40.00 Merchandise Inventory 40.00

To record cost of sales

2011

Date

9-18 LO 5

Illustration: Illustration: Credit Card TransactionCredit Card Transaction

Bank ReconciliationsBank Reconciliations Bank reconciliations are:• Prepared periodically to explain the

difference between cash reported on the bank statement and the cash balance on company’s books.

• An important element of internal control.

9-19 LO 6

The bank statement provides information

about everything that has gone

through the bank account for a given

period of time.

CM – Credit MemoDM – Debit MemoEC – Error CorrectionIN – Interest EarnedNSF – Non-sufficient FundsOD – OverdraftSC – Service Charge

31-Oct-11494 504 2

Previous Balance

Current Balance

1,609.58 2,050.00

DateNumber Amount Amount

Oct 1 1,609.58

3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58

15 127 50.00 100.00 1,999.58 16 23.00 DM 150.00 2,126.58

17 122 70.00 485.00 2,541.58 18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF

10.00 DM 2,296.58

26 121 120.00 2,176.58

29 128 135.00 2,041.58

31 IN 8.42 2,050.00

Daily Balance

Hamilton, ON L8P 2J8

VideoBuster Company

723.00 1,163.42

Deposits and Credits

Cheques and Debits

Account Number

Total Cheques and Debits

Total Deposits and Credits

National BankHamilton, ON L8P 2X5

Bank Statement

Statement Date901 Main Street

9-20 LO 6

Cheque # Amount119 55.00$

120 200.00 121 120.00

122 70.00 123 25.00 124 150.00 125 15.00

126 200.00

127 50.00

128 135.00

1,020.00$

(101)

Cash Disbursements Journal

Date Explanation PR Debit Credit Balance30-Sep Balance 1,609.58 31-Oct CR6 815.00 2,424.58

31-Oct CD4 1,020.00 1,404.58

General Ledger Cash Account

Cash Account # 101

The general ledger, cash receipts, and

cash disbursements journals provide

information about everything that has gone through our

accounting records for a given period of

time.

DateDeposit Amount

Oct 3 $ 240.00

9 180.00

15 100.00 16 150.00 31 145.00

$ 815.00

(101)

Cash Receipts Journal

9-21 LO 6

*

Bank Reconciliation - ExampleBank Reconciliation - Example

31-Oct-11494 504 2

Previous Balance

Current Balance

1,609.58 2,050.00

DateNumber Amount Amount

Oct 1 1,609.58

3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58

15 127 50.00 100.00 1,999.58

16 23.00 DM 150.00 2,126.58

17 122 70.00 485.00 2,541.58

18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF

10.00 DM 2,296.58

26 121 120.00 2,176.58 29 128 135.00 2,041.58

31 IN 8.42 2,050.00

Bank Statement

Statement Date

Daily Balance

Hamilton, ON L8P 2J8

VideoBuster Company

723.00 1,163.42

Deposits and Credits

Cheques and Debits

National BankHamilton, ON L8P 2X5

Account Number

Total Cheques and Debits

Total Deposits and Credits

901 Main Street

Date Explanation PR Debit Credit Balance30-Sep Balance 1,609.58 31-Oct CR6 815.00 2,424.58 31-Oct CD4 1,020.00 1,404.58

Cash Account # 101

General Ledger Cash Account

9-22 LO 6

Why are the balances different?

Some items are reflected on the bank statement but not in the accounting records and vice versa.

Reconciling ItemsReconciling Items

Bank Statement• Outstanding

cheques.• Deposits in transit.• Bank errors.

General Ledger• Non-sufficient funds

cheque (NSF).• Bank service charges.• Interest earned on

bank account.• Collections made by

the bank.• Book errors.

9-23 LO 6

Bank Reconciliation for VideoBuster

9-24

Let’s prepare the bank reconciliation for VideoBuster Company at the end of October 31, 2011.

LO 6

31-Oct-11494 504 2

Previous Balance

Current Balance

1,609.58 2,050.00

DateNumber Amount Amount

Oct 1 1,609.58

3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58

15 127 50.00 100.00 1,999.58

16 23.00 DM 150.00 2,126.58

17 122 70.00 CM 485.00 2,541.58

18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF

10.00 DM 2,296.58

26 121 120.00 2,176.58 29 128 135.00 2,041.58

31 IN 8.42 2,050.00

Daily Balance

1,163.42

Total Deposits and Credits

901 Main Street

Deposits and Credits

Cheques and Debits

National BankHamilton, ON L8P 2X5

Account Number

Total Cheques and Debits

Bank Statement

Statement DateHamilton, ON L8P 2J8

VideoBuster Company

723.00

DateDeposit Amount

Oct 3 $ 240.00

9 180.00

15 100.00 16 150.00 31 145.00

$ 815.00

(101)

Cash Receipts Journal

Cheque # Amount119 55.00$ 120 200.00

121 120.00

122 70.00

123 25.00 124 150.00 125 15.00 126 200.00

127 50.00 128 135.00

1,020.00$

(101)

Cash Disbursements Journal

9-25 LO 6

VideoBuster Bank Reconciliation

Bank Balance 2,050.00$ Book Balance 1,404.58$

Add: Add:

sub total Interest earned

sub total

Less:Outstanding cheques Less:

Adjusted bank balance Adjusted book balance 1,845.00$

VIDEOBUSTER COMPANY

Bank ReconciliationOctober 31, 2011

Recording Adjusting Entries Recording Adjusting Entries from the Bank Reconciliationfrom the Bank Reconciliation

GENERAL JOURNAL Page 8Description PR Debit Credit

Oct. 31 Cash 485.00 Collection expense 15.00

Notes Receivable 500.00

To record collection by bank

Oct. 31

Date2011

9-27LO 6

GENERAL JOURNAL Page 8Description PR Debit Credit

Oct. 31 Accounts Receivable - Heflin 30.00

Cash 30.00

To record NSF cheque plus s/c

Oct. 31 23.00 Cash 23.00

2011

Date

9-28 LO 6

Recording Adjusting Entries Recording Adjusting Entries from the Bank Reconciliationfrom the Bank Reconciliation

Recording Adjusting Entries from Recording Adjusting Entries from Bank ReconciliationBank Reconciliation

After posting the reconciling entries the cash account looks like this . . .

GENERAL LEDGER

Account: Cash Acct. No. 101 Balance

Date Item PR Debit Credit DR (CR)

2011

Oct. 31 Balance 1,404.58

31 Adjusting entry G8 485.00 1,889.58

31 Adjusting entry G8 8.42 1,898.00 31 Adjusting entry G8 30.00 1,868.00 31 Adjusting entry G8 23.00 1,845.00

9-29 LO 6

Let’s practiceLet’s practice

Exercise 8-10 Problem 8-8A

9-30