INTERNAL CONTROL INTERNAL CONTROL AND CASH AND CASH

Quiz on Thursday Nov 13 Quiz on Thursday Nov 13

CHAPTERCHAPTER

77

Main-in Receipt Many customers still send their checks through the

mail. All main in receipts should be opened by two mail

clerks. As soon as they open it, they should stamp, “For

Deposit only” A list of the checks which are received each day,

should be prepared and be copied.

CONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH Receipt

Main-in Receipt One copy of the list should be sent to the cashier’s

department, who will take them to the bank for daily deposit.

Second copy should be sent to the accounting department for journal entries.

At the end of the month, an accounting manager would compare the ledger records with the bank statement. (Segregation of Duty and Performance Review)

CONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH Receipt

Electronic Receipt Some companies would send their money through

EFT (electronic funds transfer or online banking) What would be the source document for EFT? Bank statement (shows all changes in the bank

account for one month) Electronic Funds Transfer result in better internal

control since no cash or checks are handled by company employees.

CONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH ReceiptCONTROL OVER CASH Receipt

Payments are usually made by cheque rather than by cash, except for petty cash transactions.

Only specified individuals should be authorized to sign cheques. (Some companies require two signatures)

Different departments or individuals should be assigned the duties of approving an item for payment and paying it.

CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS

Prenumbered cheques should be used and each cheque should be supported by an approved invoice or other source document. Blank cheques should be stored

in a safe.1. Access (to blank check) should be

restricted to authorized personnel.2. A cheque writer machine should be

used to imprint the amount on the cheque in indelible ink.

CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS

Purchase Order (=Expense form)Many large companies use purchase orders to improve their internal control over cash disbursements. A purchase order is an authorization form prepared by for each expense. It is usually prepared by the purchasing department. When the goods are received, the receiving report should be matched with purchase order and purchase invoice.

CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS

Electronic PaymentsMany companies use electronic funds transfer system to make payments to suppliers and employees. (instead of issuing checks)Examples are salaries, pre-authorized payments such as loan payment and interest paymentsThe only source document for EFT is bank statement.

CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS

Each cheque should be compared with the approved invoice before it is issued. (done by supervisor or manager of the department)

Following payment, the approved invoice should be stamped PAID.

Paid

CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS

A petty cash fund is used to pay relatively small amounts. (For example, buying stamps, paying for taxi, paying for employees’ lunch, paying for UPS etc) These are too small amounts to use checks or EFT Operation of the fund, often called an imprest

system, (=“imprest” means an advance of a specific amount of money for a designated purpose) involves

1. establishing the fund,2. making payments from the fund, and3. replenishing the fund.

PETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUND

Accounting entries are required when1. the fund is established,

a. appoint an employee to be responsible for the PCF (Authorization)

b. determine the size of the fundc. A check is issued to the responsible person’s

name and he or she will go to bank to get cash.

d. Petty cash is kept in safe place.2. Making payments from the fund3. Replenishing the Fund

PETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUND

ESTABLISHING THE FUNDESTABLISHING THE FUNDESTABLISHING THE FUNDESTABLISHING THE FUND

When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount.

When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount.

100 100

Accounting entries are not required when2. Making payments from the fund

a. The branch manager has the authority to make payments from the fund in accordance with management policies. (what they can use it for etc…)b. Each payment from the fund should be documented on a pre-numbered petty cash receipts and it must be signed by both the branch manager and the person who used the money. c. No accounting entry is made to record a payment at the time it is made from petty cash. d. The receipts are kept in the petty cash box until the cash needs to be replenished.

PETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUND

Accounting entries are required when3. Replenishing the Fund

a. When the money in the petty cash fund reaches a minimum level, the fund is replenished.

b. The request for reimbursement is made by the branch manager.

c. He or she prepares a summary (schedule) of the payments that have been made and send the schedule.

d. The controller (or accountant) examines and verifies the receipts and other documentation that these were proper usage of the fund.

e. Then the controller would stamp “paid” to these supporting documents.

PETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUND

Replenishing the FundNote: We do not change the “petty cash” account. We will decrease the “cash” account. The accountant will replenish what has been used. The accountant will exchange the receipts with check. It does not change the balance of petty cash fund. Sometimes there is a cash shortage or overage.

PETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUNDPETTY CASH FUND

REPLENISHING THE FUNDREPLENISHING THE FUNDREPLENISHING THE FUNDREPLENISHING THE FUND

On March 15 the petty cash custodian requests a cheque for $87. The fund contains $13 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5.

On March 15 the petty cash custodian requests a cheque for $87. The fund contains $13 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5.

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Mar. 15 Postage ExpenseFreight OutMiscellaneous Expense Cash

To replenish petty cash fund.

44 38 5 87

REPLENISHING THE FUNDREPLENISHING THE FUNDREPLENISHING THE FUNDREPLENISHING THE FUND

On March 15 the petty cash custodian requests a cheque for $88. The fund contains $12 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5.

On March 15 the petty cash custodian requests a cheque for $88. The fund contains $12 cash and petty cash receipts for postage, $44, freight out, $38, and miscellaneous expenses, $5.

GENERAL JOURNALDate Account Titles and Explanation Debit Credit

Mar. 15 Postage ExpenseFreight OutMiscellaneous ExpenseCash Over and Short Cash To replenish petty cash fund/

44 38 5 1

88

Classwork / HomeworkClasswork / HomeworkClasswork / HomeworkClasswork / Homework

P380 E7.4, E7.5 and E7.6 P384 P7.4 P385 P7.5