topic 9- cash and internal controls

Chapter

9

Cash and Internal Controls 100 Shares

Cash???? $1 par value

Learning Learning Objectives Objectives

\ue000 Define cash and cas Define internal control and identify its purpose equivalents and explain and principles how to report them \ue000 Describe the impact \ue000 of Explain internal cont technology on internal over cash receipts control \ue000 Describe internal con over cash \ue000 Discuss the limitations of internal control disbursements \ue000 Prepare a bank reconciliation \ue000

Purpose Purpose of of Internal Internal Control Control Policies Policies and and procedures procedures managers managers use use to to ..... . Protect assets. \ue001 \ue001 Protect assets. Ensure reliable \ue002 \ue002 Ensure reliable accounting. accounting. Promote efficient \ue003 \ue003 Promote efficient operations. operations. UrgeUrge adherence to \ue004 \ue004 adherence to company company policies. policies.

Principles Principles of of Internal Internal Control Control Establish responsibilities. responsibilities. Establish Maintainadequate adequate records. Maintain records.

Insure assets key employees. Insure assets and andbond bond key employees. Separate recordkeeping recordkeeping from from custody Separate custody of of assets. assets. Divide responsibility responsibility for Divide for related related transactions. transactions.

Apply technological controls. Applytechnological technologicalcontrols. controls. Apply Perform regularand andindependent independent Performregular regular and Perform reviews. reviews.

Technology Technology and and Internal Internal Control Control Reduced Processing Errors

Limited Evidence of Processing

More Extensive Testing of Records

Crucial Separation of Duties

Limitations Limitations of of Internal Internal Control Control Human Error

Negligence Fatigue Misjudgment Confusion

Human Fraud

Intent to defeat internal controls for personal gain

Limitations Limitations of of Internal Internal Control Control The costs of internal controls must not exceed their benefits.

Benefits

Costs

Control Control of of Cash Cash

An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separated from recordkeeping of cash.

Cash receipts are promptly deposited in a bank.

Cash disbursements are made by check.

Cash, Cash, Cash Cash Equivalents, Equivalents, and and Liquidity Liquidity Cash Currency, coins and amounts on deposit in bank accounts, checking checking accounts, accounts, and and some some savings savings accounts. accounts.

Cash Equivalents Short-term, highly liquid investments that are:

Readily convertible to a known cash amo Close to maturity date and not sensitive interest rate changes

Cash, Cash, Cash Cash Equivalents, Equivalents, and and Liquidity Liquidity Liquidity How easily an asset can be converted into another asset or be used in paying for services or obligations.

Inventory

Cash

Control Control of of Cash Cash Receipts Receipts

Over-the-Counter Cash Cash Receipts By Mail Receipts Two people open the mai Cash register with locked-in record of transactions. Compare cash register record with cash reported.

• Money to cashier’s office. • List to accounting accounting dept. • Copy of list filed.

Control Control of of Cash Cash Disbursements Disbursements

All expenditures made by check. The on exception exception is is for for small small payments payments from from petty petty cash. cash. Separate authorization, check signing an recordkeeping recordkeeping duties. duties. Use a voucher system.

Voucher Voucher System System of of Control Control A voucher system establishes procedures for: Verifying, Verifying, approving approving and and recording recording obligations obligations for for eventual eventual cash cash disbursement. disbursement. Issuing Issuing checks checks for for payment payment of of verified, verified, approved approved and and recorded recorded obligations. obligations.

Voucher Voucher System System of of Control Control Cashier Accounting Receiving Supplier (Vendor) Purchasing Requesting

Check Invoice Approval Receiving Report Invoice Purchase Order Purchase Requisition

Voucher

Supplier (Vendor) Cashier Accounting, Requesting & Purchasing Accounting Supplier, Requesting, Receiving & Accounting Purchasing and Accounting

Petty Petty Cash Cash System System of of Control Control

Small payments required in most companies f items items such such as as postage, postage, courier courier fees, fees, minor minor repairs repairs and and low-cost low-cost supplies. supplies.

Operating Operating aa Petty Petty Cash Cash Fund Fund Petty Cashier

Company Cashier

Petty Cashier

Operating Operating aa Petty Petty Cash Cash Fund Fund Petty Cashier

Company Cashier

Petty Cashier

May 1

Accountant

Petty cash Cash

400

400

Operating Operating aa Petty Petty Cash Cash Fund Fund Petty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash.

Petty Cashier

Receipts

37¢ Stamps $45

Courier $80

Operating Operating aa Petty Petty Cash Cash Fund Fund Receipts

$125 Company Cashier

To reimburse petty cash fund

May 31

Use a Cash

Over and Short

account if needed.

Accountant

Petty Cashier Postage expense 45 Delivery expense 80 Cash

125

Petty Petty Cash Cash Example Example

Tension Co. maintains a petty cash fund of $400. The following summary information was taken fro petty cash vouchers for July: Travel Expenses $79.30 Customer Business Lunches 93.42 Express Mail Postage 55.00 Miscellaneous Office Supplies 32.48

Let’s look at replenishing the fund if the balance o July 31 was $137.80.

Petty Petty Cash Cash Example Example What What amount amount of of cash cash will will be be required required to to replenish the petty cash fund? a. $260.20 b. $262.20 c. $139.80 d. $137.80

Petty Petty Cash Cash Example Example What What amount amount of of cash cash will will be be required required to to replenish the petty cash fund? a. $260.20 b. $262.20 c. $139.80 d. $137.80 Let’s prepare the journal entry to replenish the petty cash fund.

Petty Petty Cash Cash Example Example Here is the journal entry to replenish the petty cash fund. July 31 Travel Expense

79.30

Entertainment Expense

93.42

Postage Expense

55.00

Office Supplies Expense 32.48 Cash Over and Short Cash

2.00 262.20

Banking Banking Activities Activities as as Controls Controls Bank Accounts

Checks

Signature Cards

Electronic Funds Transfer

Deposit Tickets

Bank Statements

Bank Bank Reconciliation Reconciliation

A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books. Bank Statement

FirstNationalBank Nashville, TN 37459

May 31, 2002

Clothes Mart Nashville, TN Acct No 278609

Previous Balance 1488.79 5/1

Total Checks 1,367.09

Total Deposits 2,604.22

107

55.00

5/4

108

279.50

5/7

109

44.75

5/9

110

21.81

5/12

111

37.55

5/18

112

175.98

5/21

113

288.31

5/27

114

12.54

115

451.65

5/2

Current Balance 2,725.92 1,251.88

5/15

825.04

5/30 5/31

*

527.30

Why are the balances different?

Reconciling Reconciling Items Items Bank Bank Statement Statement Balance Balance Deduct: Deduct: Outstanding Outstanding checks. checks. Add: Add: Deposits Deposits in in transit. transit. Add : Bank Add or Deduct Deduct: Bank errors. errors.

Book Book Balance Balance Deduct: Deduct: Nonsufficient Nonsufficient funds funds check check (NSF). (NSF). Deduct: Deduct: Bank Bank service service charge. charge.

Add: Add: Interest Interest earned earned on on checking checking account. account. Add: Add: Collections Collections made made by by the the bank. bank. Add : Add or orDeduct Deduct: Book Book errors. errors.

Bank Bank Reconciliation Reconciliation Two Two sections: sections:

Reconcile Reconcile bank bank statement statement balance balance to to the the adjusted adjusted bank bank balance. balance.

Reconcile Reconcile book book balance balance to to the the adjusted adjusted boo boo balance. balance.

The The adjusted adjusted balances balances should should be be equal. equal.

Bank Bank Reconciliation Reconciliation Example Example

Let’s Let’s prepare prepare aa July July 31 31 bank bank reconciliation reconciliation statement statement for for the the Simmons Simmons Company. Company.

The July 31 bank statement indicated a balance balance of of $9,610. $9,610. The cash general ledger account on tha date date shows shows aa balance balance of of $7,430. $7,430.

Additional information necessary for the reconciliation reconciliation is is shown shown on on the the next next screen. screen.

Bank Bank Reconciliation Reconciliation Example Example Outstanding checks totaled $2,417.

A $500 check mailed to the bank for deposit had no reached the bank at the statement date.

The bank returned a customer’s NSF check for $225 received as payment on account receivable.

The bank statement showed $30 interest earned duri

Check No. 781 for supplies expense cleared the bank $268 but was erroneously recorded in our books as $240

A $486 deposit by Acme Company was erroneously credite to our account by the bank.

SIMMONS COMPANY BANK RECONCILIATION AS AT 31 July 2006

Bank Balance, 31 July Deposit in Transit Bank Error Outstanding Checks Adjusted Balance, 31 July

$ 9,610

Book Balance, 31 July Interest Recording Error NSF Check

$ 7,430

500 $ (486) (2,417) $ 7,207

$

30 (28) (225)





Recording Recording Adjusting Adjusting Entries Entries from from aa Bank Bank Reconciliation Reconciliation Only amounts shown on the book portion of the reconciliation require an adjusting entry. July 31

Cah s

July 31

Suppliesexpense Accountsreceivable Cash

Ine t rest revenue

30

28 225

30

253

Recording Recording Adjusting Adjusting Entries Entries from from Bank Bank Reconciliation Reconciliation After posting the reconciling entries the cash account looks like this . . .

Adjusted Adjusted balance balance on on July July 31. 31.

End of Topic 9