1 after studying this chapter, you should be able to: 8 – internal control & cash objective 2...
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After studying this chapter, you should be able to:
8 – Internal Control & Cash8 – Internal Control & Cash
Objective 2 - Describe the objectives of internal control.
Objective 3 - Describe and illustrate the application of internal controls to cash.
Objective 4 - Describe and illustrate the application of internal controls to cash.
Objective 5 - Describe and illustrate the use of a bank reconciliation in controlling cash.
Objective 6 - Describe the accounting for special-purpose cash funds.
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1) assets are safeguarded and used for business purposes,
2) business information is accurate, and
3) employees comply with laws and regulations.
To provide reasonable assurance that:
8-2Objectives of Internal Control
Objective 2Objective 2Objective 2Objective 2
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Example of control procedures for an all-night convenience store:
Locate the cash register near the door, so that it is fully visible from outside the store; have two employees work late hours; employ a security guard.
Deposit cash in the bank daily, before 5 p.m.
8-2
Keep only small amounts of cash on hand after 5 p.m. by depositing excess cash in a store safe that can’t be opened by employees on duty.
Install cameras and alarm systems.
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8-2Indicators of Internal Control Problems
Warning Signs With Regard to People
1. Abrupt change in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other employees.
5. Excessive use of alcohol or drugs.
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8-2Indicators of Internal Control Problems
Warning Signs from the Accounting System
1. Missing documents or gaps in transaction numbers.
2. An unusual increase in customer refunds.
3. Differences between daily cash receipts and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
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One of the most important controls to protect cash received in over-the-
counter sales is a cash register.
8-3Control of Cash Receipts
Objective 3Objective 3Objective 3Objective 3 Describe and illustrate the application of internal controls to cash.
A predetermined amount of money that is given to each cash register clerk in a cash
drawer is called a change fund.
Change Fund
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Mar 19 Cash 3 142 00
Cash Short and Over 8 00
To record cash sales and
actual cash on hand.
Sales 3 150 00
Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the change fund, only $3,142.00 was on hand.
8-3Cash Short and Over
Note that the shortage (an expense) was debited to Cash Short and Over. If there were a surplus (i.e. a revenue), the there would be a credit to Cash Short and Over.
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Cash may be received from customers through electronic funds transfers. Customers may authorize automatic
electronic transfers from their checking accounts to pay monthly bills.
8-3Electronic Funds Transfers – ensure some kind of control over cash
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Describe the nature of a bank account and its use in controlling cash.
Objective 4Objective 4Objective 4Objective 4
8-4
A major reason that businesses use bank accounts is for control purposes.
Use of Bank Accounts
Bank accounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of
transactions.
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A summary received from the bank of all checking
account transaction is called a bank statement.
8-4Bank Statement
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8-4Bank Statement
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8-4
Bank Statement
(Concluded)
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Typical credit or debit memorandum entries found on the bank statement:
EC — Error correction to correct bank error.
NSF — Not sufficient funds check.SC — Service charge.ACH — Automated Clearing House entry
for electronic funds transfer.MS — Miscellaneous items.
8-4
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8-4-Example Exercise 8-2
The following items may appear on a bank statement:(1) NSF check(2) EFT Deposit(3) Service Charge(4) Bank correction of an error from recording a $400
check drawn by the depositor as $40.
Indicate whether the item would appear as a debit or credit memorandum on the bank statement and whether the item would increase or decrease the balance of depositor’s account.
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Follow My Example 8-2
8-4
For Practice: PE 8-2A, PE 8-2B
Appears on the Bank Statement
as a Debit or Credit
Memorandum
Increases or Decreases the Balance of the
Depositor’s Bank AccountItem No.
(1) Debit Memorandum Decreases
(2) Credit Memorandum Increases
(3) Debit Memorandum Decreases
(4) Debit Memorandum Decreases
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8-4
Power Networking should determine the reason for difference in these two amounts.
Power Networking’s Records and Bank Statement
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Describe and illustrate the use of a bank reconciliation in controlling cash.
Objective 5Objective 5Objective 5Objective 5 8-5
A bank reconciliation is an analysis of the items and amounts that cause the
cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance.
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8-5
Bank’s recordsBeginning balance $3,359.78 Beginning balance $2,549.99
Power Network prepares to reconcile the monthly bank statement as of
July 31. The bank statement shows an ending cash balance of $3,359.78. The company’s Cash account has a
July 31 balance of $2,549.99.
Company’s records
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
A deposit of $816.20 did not appear on the bank statement.
Company’s recordsBank’s records
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
The bank collected a note in the amount of $400 and the related interest of $8 for Power
Networking
Add note and interest collected by bank
408.00$2,957.9
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Company’s recordsBank’s records
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00$2,957.9
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Three checks that were written during the period did not appear on the bank statement: No. 812,
$1,061; No. 878, $435.39, No. 883, $48.60.
Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60
1,544.99
Company’s recordsBank’s records
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00$2,957.9
9Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60
1,544.99
The bank returned a check for $300 from Power Networking’s customer (Thomas Ivey) because of
insufficient funds (NSF).
Company’s recordsBank’s records
Deduct check NSF $300.00
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00$2,957.9
9Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60
1,544.99
Bank service charges 18.00
The bank service charges totaled $18.00.
Company’s recordsBank’s records
Deduct check NSF $300.00
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8-5
Beginning balance $3,359.78
Company’s recordsBeginning balance $2,549.99
Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00$2,957.9
9Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60
1,544.99
Bank service charges 18.00Error recording Check No. 879 9.00
327.00
Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.
Bank’s records
Deduct check NSF $300.00
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8-5
Beginning balance $3,359.78 Beginning balance $2,549.99Add deposit not recorded by bank 816.20
$4,175.98
Add note and interest collected by bank
408.00$2,957.9
9Deduct outstanding checks:
No. 812 $1,061.00No. 878 435.39No. 883 48.60
1,544.99
Deduct check NSF $300.00
Bank service charges 18.00
Adjusted balance $2,630.99 Adjusted balance $2,630.99
Company’s recordsBank’s records
Error recording Check No. 879 9.00
327.00
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8-5
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8-5
Beginning balance $2,549.99
Add note and interest collected by bank 408.00
$2,957.99Deduct check
NSF $300.00Bank service charges 18.00
327.00
Error recording Check No. 879 9.00
Company’s records
Journal entries must be prepared for those items that affected the company’s (depositor’s) side of the reconciliation.
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8-5
July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Income8 00
Entry to Record Plus Items
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8-5
July 31 Cash 408 00
Note collected by bank.
Notes Receivable 400 00
Interest Income8 00
31 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Expense 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00
NSF check, bank service charges, and error in recording Check no. 879.
Entry to Record Minus Items
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8-5Example
The following data was gathered to use in reconciling the bank account of Photo Op.
Balance per bank $14,500Balance per company records 13,875Bank service charges 75Deposit in transit 3,750NSF check 800Outstanding checks 5,250
a. What is the adjusted balance on the bank reconciliation?
b. Journalize any necessary entries for Photo OP based upon the bank reconciliation.
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Describe the accounting for special-purpose cash funds.
Objective 6Objective 6Objective 6Objective 6
8-6
It is usually not practical for a business to write checks to pay
small amounts. Thus, it is desirable to control such
payments by using a special cash fund, called a petty cash fund.
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On August 1, issued Check No. 511 for $500 to established a petty cash fund.
Post. Ref.
JOURNAL
Date Description Debit Credit
Page 9
Aug. 1 Petty Cash 500 002008
Cash 500 00Established petty cash fund issuing Check 511.
8-6
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At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies,
$380, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $30.
Aug. 31 Office Supplies 402 00
Replenished petty cash fund.
Cash 467 00
Store Supplies 35 00
Miscellaneous Administrative Exp. 30 00
8-6
Replenishing the petty cash fund physically restores it to its original amount of $500. Note that no entry to Petty Cash is
required when the fund is replenished.
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8-6
Example Exercise 8-4
Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of $500.
b) The amount of cash in the petty cash fund is currently $120. Issued a check to replenish the fund based on the following summary of petty cash receipts: office supplies, $300 and miscellaneous administrative expense, $75. Record any missing or additional funds in the cash short and over account.
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Example
8-6
a) Petty Cash 500Cash500
b) Office Supplies 300Miscellaneous Admin. Expense 75Cash Short and Over 5
Cash380