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...
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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
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