cash coin and currency checking, savings, and money market accounts undeposited, cashier, and...
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CashCoin and currency
Checking, savings, and money market accounts
Undeposited, cashier, and certified checks
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Cash Equivalents
Commercial paper U.S. Treasury bills Certain money market funds
Readily convertible to cash Original maturity to investor of
three months or less
Examples:
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Cash Management Necessary to ensure company has
neither too little nor too much cash on hand
Tools• Cash flows statement• Bank reconciliations• Petty cash funds
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Cash balance, beginning of period
= Cash balance, end of period
Bank Statements
+Deposits+Customer notes
and interest collected by bank
+Interest earned
Canceled checks
NSF checks Service charges
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Bank Reconciliation – Step 1
Deposits in transit: Late period deposits not yet reflected on bank statement
•Trace deposits listed on the bank statement to the books. •Identify the deposits in transit. •Add to the bank balance.
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Bank Reconciliation – Step 2
Outstanding checks: Checks written but not yet presented to bank
•Trace checks cleared by the bank to the books. •Identify outstanding checks.• Subtract from the bank balance.
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Bank Reconciliation – Step 3
Credit memoranda: Interest earned, customer notes collected, etc.
List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
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•List all other subtractions (debit memoranda) shown on the bank statement. •Subtract from the book balance.
Bank Reconciliation – Step 4
Debit memoranda: NSF checks, service charges, etc.
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Example of ReconciliationCash Account Adjustments: Debit Memoranda
Balance per books, June 30
$2,895.82Add: Customer note collected $500.00
Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45
Deduct: NSF check $245.72 Collection fee on note 16.50 Service charge for lockbox 20.00 (282.22)
Adjusted balance, June 30 $3,233.05© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Bank Reconciliation – Step 5
Identify errors made by the bank or the company in recording the transactions during the period.
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Bank Reconciliation – Step 6Use the information collected in steps 1 through 5 to prepare the bank reconciliation.
Bank Reconciliation
Balance per bank $$$
Adjusted balance $$$
Balance per books $$$
Adjusted balance $$$
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Example of Reconciliation
Balance per statement, June 30 $3,308.59Adjusted balance, June 30 $3,233.05
Bank Statement Adjustments
Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05
Cash Account Adjustments
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Bank Reconciliation Adjusting Entries
Bank Reconciliation
Balance per bank $$$
Adjusted balance $$$
Balance per books $$$
Adjusted balance $$$
Book adjustments are the basis for adjusting
entries
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Bank Reconciliation Adjusting Entries
Accounts Receivable 245.72Collection Fee Expense 16.50Rent Expense—Lockbox 20.00Cash 337.23
Notes Receivable 500.00 Interest Revenue 65.45 Supplies 54.00
To record bank reconciliation adjustments.
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Petty Cash
A check is writtenJournalize
establishment offund
Disbursementwith proper
documentation
Fund replenished
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Prepare the journal entry to record the petty cash fund replenishment
Petty Cash Transactions for Mickey’s Marathon Sports
Original fund balance $200.00Petty cash expenditures:
U.S. Post Office 55.00Overnight delivery service 69.50Office supply express 45.30
Coin and currency per count 26.50
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Accounting for Petty Cash
*$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 – $196.30 = $3.70 short
Journal Entry to Replenish Fund:
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Internal Control System
Consists of the policies and procedures necessary to ensure:• The safeguarding of an entity’s assets• The reliability of its accounting records• The accomplishment of its overall
objectives
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Sarbanes-Oxley Act of 2002 (SOX)
Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals
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Internal Control
Control Environment
AccountingSystem
InternalControl
Procedures
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The Control EnvironmentManagement’s competence and
operating stylePersonnel policies and practices Influence of board of directors
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The Accounting System
Can be manual, fully computerized, or a combination of both
Use of journals is an integral part of any system
Methods and records used to report transactions and maintain financial
information
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Internal Control Procedures
Segregationof Duties
SafeguardingAssets and
Records
ProperAuthorizations
IndependentVerification
The Design and Use of Business
Documents
IndependentReview and
Appraisal
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Proper AuthorizationsAuthority and responsibility go hand in
hand
Segregation of DutiesSeparate physical custody from the accounting for assets
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Independent Verification
One individual or department acts as a check on the work of another
Safeguarding Assets and RecordsProtect assets and accounting records from loss,
theft, unauthorized use, etc.
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Independent Review and Appraisal
Provide for periodic review and appraisal of the accounting system and the people operating it
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The Design and Use of Business Documents
Capture all relevant information about a transaction and assist in proper recording and classification.
Are properly controlled
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Limitations on Internal ControlNo system is entirely foolproof
• Employees in collusion can override the best controls
• Cost vs. benefit tradeoff
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Computerized Business Documents and Internal
Control
LO5
Cash receipts should be deposited intact in the bank on a daily basis
All cash disbursements should be made by check
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Control over Cash ReceiptsCash received over the counter (e.g., cash
sales)Cash received in the mail (e.g., credit sales)
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Controls over Cash Received over the Counter
Cash registers Locked-in cash register tape Prenumbered customer receipts Investigate recurring discrepancies
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Controls over Cash Received in the Mail
Two employees open mailPrelist preparedMonthly customer statements
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Document Flow for Merchandise
CheckPrepared
PurchaseRequisition
Receiving Report
Purchase Order
Invoice Approval
Purchase Invoice
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End of Chapter 6