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Internal Control and
Accounting for Cash
Chapter Six
Copyright 2011 by The McGraw-Hi ll Companies, I nc. All ri ghts reserved.McGraw-Hill/Irwin
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6-1
Key Features of Internal Control
1. Separation of Duties
2. Quality of Employees
3. Bonded Employees
4. Required Absences
5. Procedures Manual
6. Authority and Responsibility
7. Prenumbered Documents8. Physical Control
9. Performance Evaluations
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Accounting for Cash
ControllingCash
Cash receiptsshouldbe recorded
immediately uponreceipt and deposited
intact daily.
Cash paymentsshouldbe made by
prenumbered check.
Up to date signaturecardshould be
maintained.
A deposit ticketshould be used for
all deposits.
A monthly bankreconciliation shouldbe prepared by an
independent party.
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Reconciling the Bank Statement
Unadjusted bank balance
Add + Deposits in transit
Deduct - Outstanding checksEquals = True cash balance
Adjustment to the Bank Balance
The bank reconciliation reports on the differencesbetween the balance on the bank statement and the
balance in the general ledger cash account. Thereconciliation results in the true cash balancethat
will appear on the balance sheet.
Unadjusted book balance
Add + Accounts receivable collectionsAdd + Interest earned
Deduct - Bank service charges
Deduct - Non-sufficient funds (NSF) check
Equals = True cash balance
Adjustments to the Book Balance
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Reconciling the Bank Statement
If an error is found on the bank statement, anadjustment for it is made to the unadjustedbank balance to determine the true cash
balance. An error made on our books requiresan adjusting journal entry to correct.
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Bank Reconciliation
Green Shades Resorts, Inc. is preparing the bankreconciliation for the month of September.
1. The Sept 30thbalance on the bank statement is$3,516.45, and the Cash general ledger balance on thisdate is $3,361.22 .
2. There was a deposit in transit in the amount of $724.11.
3. The bank erroneously deducted a $25 check drawn on
the books of Green Valley Resorts from our account.4. At September 30ththree checks are outstanding. Check
639 dated 9/18 for $13.75; Check 646 dated 9/20 for$29.00; and Check 672 dated 9/27 for $192.50 .
More Information
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Bank Reconciliation
5. During the month of September the bank collected anaccount receivable for us in the amount of $940.00 .
6. A check actually written for $36.45 for supplies waserroneously recorded in our records by the bookkeeperas $63.45.
7. The bank assessed a service charge of $8.40 forSeptember.
8. We deposited a NSF check in the amount of $289.51 .
Lets prepare the bank reconciliation
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Bank Reconciliation
Unadjusted Bank Balance, September 30 3,516.45$
Add: Deposits in transit 724.11
Bank error: Check drawn on GVRI charged to GSRI 25.00
Less: Outstanding checks
Check No. 639 - September 18 13.75
Check No. 646 - September 20 29.00
Check No. 672 - September 27 192.50 (235.25)
True Cash balance, September 30 4,030.31$
Unadjusted Book Balance, September 30 3,361.22$Add: Receivable collected by bank 940.00
Error: Check 633 recorded as 63.45 not 36.45 27.00
Less: Bank service charge (8.40)
NSF Check (289.51)
True Cash balance, September 30 4,030.31$
Green Shades Resorts, Inc.
Bank Reconciliation Statement
September 30, 2011
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Adjusting the Books
Every reconciling item that appears on the unadjustedbook balance section requires a journal entry to adjust
the general ledger cash balance to the true cash balance.
Account Title Debit Credit
Cash 967.00
Accounts Receivable 940.00
Supplies Expense 27.00
Bank service charge expense 8.40
Accounts receivable 289.51
Cash 297.91
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Cash Short and Over
When using a cash register, employeessometimes make mistakes in collecting cash or
making change for customers. If the cash registerdoes not reconcile by a small amount at the endof the day, we use an account called cash short
and over to force a balance.
Assume a cash
register was to havea balance of $500,but contained only$499 at the end of
the day.
Account Title Debit Credit
Cash 499.00
Cash short and over 1.00
Sales 500.00
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Using Petty Cash Funds
A petty cash fund is used to make smallexpenditures that cannot wait for the formal check-writing process. The fund is operated on an imprest
basis. This means that when the fund gets low oncash it is replenished. The petty cashier is alwaysresponsible for the cash in the fund. This is an
excellent internal control.
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Using Petty Cash Funds
Record expenses paid from the petty cash fund.
Account Title Debit Credit
Misc. Expense 216.00
Cash 216.00
Treasurer preparesa $216.00 checkpayable to thepetty cashier.
Petty cashier takesthe check to the bank
and gets $216.00cash for the fund.
The fund is now returned to its $300 balance.
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The Financial Analyst
How can afinancial
analyst knowthat a
companyreally did
follow GAAP? Certified Public Accountants
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Materiality and Financial Audits
Auditors do not guarantee that financialstatements are absolutely correctonly
that they are materiallycorrect.
Material ItemAn error, or other
reporting problem, that
would influence thedecision of an average
prudent investor.
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Types of Audit Opinions
Unqualified Adverse
Qualified Disclaimer