Internal Control
and Cash
CHAPTER
8
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Define, explain the purpose, and identify
the principles of internal control. (LO1)
Define cash and explain how it is reported.
(LO2)
Apply internal control to cash. (LO3)
Explain and record petty cash fund
transactions. (LO4)
1.
2.
3.
4.
2
© 2013 McGraw-Hill Ryerson Limited.
Learning Objectives
Explain and identify banking activities and
the control features they provide. (LO5)
Prepare a bank reconciliation and
journalize any resulting adjustment(s).
(LO6)
Calculate the acid-test ratio and explain its
use as an indicator of a company’s
liquidity. (Appendix 8A) (LO7)
5.
6.
7.
3
© 2013 McGraw-Hill Ryerson Limited.
Internal Control System
All policies and procedures used to :
• Protect assets
• Ensure reliable accounting
• Promote efficient operations
• Encourage adherence to company
policies
4
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Principles of Internal Control
Ensure transactions and activities are
authorized.
Maintain adequate records.
Insure assets and bond key employees.
Separate recordkeeping and custody of
assets.
Establish a separation of duties.
1.
2.
3.
4.
5.
5
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Principles of Internal Control
Apply technological controls.
Perform internal and external audits.
6.
7.
Internal controls will vary based on the
nature and size of the organization.
6
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Limitations of Internal Control
Human Error
• Negligence
• Fatigue
• Misjudgment
• Confusion
Human Fraud
Intent to defeat internal controls for personal gain.
Costs vs. Benefits
The costs of internal control must not exceed their
benefits.
7
© 2013 McGraw-Hill Ryerson Limited.
LO 1
Cash
•
•
Is an important asset for every company.
Control of cash on hand and access to it is
critical.
Cash includes:
•
•
•
•
8
Currency
Coins
Deposits in bank accounts
Other items acceptable for deposit
© 2013 McGraw-Hill Ryerson Limited.
LO 2
Liquidity
•
•
•
Refers to how easily an asset can be
converted into another asset or used in
paying for services or obligations.
Cash and similar assets are called liquid
assets.
Companies must own some liquid assets
to pay their obligations.
9
© 2013 McGraw-Hill Ryerson Limited.
LO 2
Internal Control for Cash
Guidelines:
1. Separate handling of cash from
recordkeeping of cash.
2. Deposit cash receipts daily.
3. Make cash disbursements by
cheque.
10
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Control of Cash Receipts
Internal control over cash receipts ensures
that all cash received is properly recorded
and deposited. These controls include:
• The use of cash registers for over-thecounter cash sales.
• The separation of recordkeeping and
custody of cash.
11
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Control of Cash Disbursements
All expenditures should be made by
cheque. The only exception is for small
payments from petty cash.
Separate authorization, cheque signing,
and recordkeeping duties.
Apply a voucher system.
•
•
•
12
© 2013 McGraw-Hill Ryerson Limited.
LO 3
Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
13
© 2013 McGraw-Hill Ryerson Limited.
Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
14
© 2013 McGraw-Hill Ryerson Limited.
Petty Cash System of Internal
Control
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.
15
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Operating a Petty Cash Fund
Cashier’s
Office
Prepares
cheque to
establish petty
cash fund.
GENERAL JOURNAL
Date
Description
May 1 Petty Cash
Petty Cashier
Page 4
PR Debit Credit
150
Cash
150
To establish a petty cash fund
16
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Operating a Petty Cash Fund
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.
17
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Operating a Petty Cash Fund
A cheque is issued and the fund is
replenished when the amount of cash on
hand becomes low.
GENERAL JOURNAL
Date
Description
PR Debit Credit
May 15 Postage Expense
Courier Expense
Cash
18
Page 4
46
80
A cash over and
short account is
used if needed.
126
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Operating a Petty Cash Fund
Cash required to
Cash
Fund
size
=
replenish petty
remaining
cash
Cash
Total of petty - Cash required to
=
over/(short) cash receipts replenish petty
cash
19
© 2013 McGraw-Hill Ryerson Limited.
LO 4
Banking Activities as Controls
Basic Bank Services
• Bank account
• Bank deposits and cheques
• Electronic funds transfer
• Bank credit card transactions
• Debit card transactions
20
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Credit Card Transactions
•
•
•
•
Many companies allow customers to use
bank credit cards for their purchases.
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.
21
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Illustration-Credit Card
Transaction
TechCom has $100 of credit card sales with
a 4% fee and cash is received immediately
(assume cost of sales is $40).
GENERAL JOURNAL
Date
Description
Page 8
PR
Aug. 15 Cash
Credit Card Expense
Sales
Debit
Credit
96.00
4.00
100.00
To record credit card expense less 4% fee
15 Cost of Goods Sold
Merchandise Inventory
40.00
40.00
To record cost of sales
22
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Debit Card Transactions
•
•
•
•
Many companies allow customers to use
debit cards for their purchases.
The bank transfers funds from the
customer’s account to the vendor’s bank
account.
The bank charges a fee to the vendor.
The entries are identical to a bank credit
card sale.
23
© 2013 McGraw-Hill Ryerson Limited.
LO 5
Bank 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.
24
© 2013 McGraw-Hill Ryerson Limited.
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
25
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
The bank statement
provides information
about everything
that has gone
through the bank
account for a given
period of time.
CM – Credit Memo
DM – Debit Memo
EC – Error Correction
IN – Interest Earned
NSF – Non-sufficient Funds
OD – Overdraft
SC – Service Charge
LO 6
Cash Disbursements Journal
Cheque #
119
120
121
122
123
124
125
126
127
128
$
$
26
Amount
55.00
200.00
120.00
70.00
25.00
150.00
15.00
200.00
50.00
135.00
1,020.00
(101)
© 2013 McGraw-Hill Ryerson Limited.
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.
LO 6
Bank Reconciliation - Example
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Date
Cheques and
Debits
Number Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
27
119
123
127
122
120
125
121
128
Bank Statement
*
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Deposits and
Credits
Amount
Daily
Balance
55.00
25.00
50.00
23.00 DM
70.00
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
Why are the balances
different?
Some items are reflected
on the bank statement
but not in the accounting
records and vice versa.
General Ledger Cash Account
Cash
Account # 101
Date Explanation PR Debit
Credit
Balance
30-Sep Balance
1,609.58
31-Oct
CR6 815.00
2,424.58
31-Oct
CD4
1,020.00 1,404.58
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Reconciling Items
Bank Statement
•
•
•
Outstanding
cheques.
Deposits in transit.
Bank errors.
General Ledger
•
•
•
•
•
28
Non-sufficient funds
cheque (NSF).
Bank service charges.
Interest earned on
bank account.
Collections made by
the bank.
Book errors.
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Let’s prepare the bank
reconciliation for VideoBuster
Company at the end of October 31,
2014.
29
© 2013 McGraw-Hill Ryerson Limited.
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Date
Cheques and
Debits
Number Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
30
119
123
127
122
120
125
121
128
Bank Statement
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
These items
15
100.00
Statement Date appear
31-Oct-14 on both the
16
150.00
Account Number 494 504 2
31
145.00
Cash Receipts
$
815.00
Total Deposits
Current
Journal and the
(101)
and Credits
Balance
bank
1,163.42
2,050.00 statement;
therefore, none of
Deposits and
Daily
these
items is a Cash Disbursements Journal
Credits
Balance
Amount
Amount
reconciling
item. Cheque #
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
119
120
121
122
123
124
125
126
127
128
$
$
55.00
200.00
120.00
70.00
25.00
150.00
15.00
200.00
50.00
135.00
1,020.00
(101)
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Total Cheques
and Debits
723.00
Date
Cheques and
Debits
Number Amount
26
29
31
31
119
123
127
122
120
125
121
128
These items
appear on both
Cash
Total Deposits the
Current
and Credits
Balance
Disbursements
1,163.42
2,050.00
Journal AND the
Deposits and
bank statement;
Daily
Credits
Balancenone of
therefore,
Amount
these1,609.58
items is a
240.00
1,794.58
reconciling
180.00
1,949.58 item.
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Oct 1
3
9
15
16
17
18
19
20
Bank Statement
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
100.00
150.00
485.00
8.42
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
$
100.00
150.00
145.00
815.00
(101)
Cash Disbursements Journal
Cheque #
Amount
119
$
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)
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Date
Cheques and
Debits
Number Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
32
119
123
127
122
120
125
121
128
Bank Statement
These items appear
in the Cash
Statement Dateonly
31-Oct-14
Account Number
494 504 2 Journal OR
Receipts
the Cash
Total Deposits
Current
and Credits
Balance
Disbursements
1,163.42
2,050.00
Journal OR the bank
Deposits and
Daily
statement;
Credits
Balance
Amount therefore, each of
1,609.58
these
items is a
240.00
1,794.58
180.00reconciling
1,949.58
item.
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
100.00
150.00
485.00
8.42
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
$
100.00
150.00
145.00
815.00
(101)
Cash Disbursements Journal
Cheque #
Amount
119
$
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)
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
33
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
The items that show
up only on the bank
statement are
reconciling items on
the book side of the
bank reconciliation.
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
34
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2014
Book Balance
Add:
1,609.58
Collection of $500 note
1,794.58
less $15 collection fee
1,949.58
Interest earned
485.00
8.42
NSF cheque plus s/c
Cheque printing charge
30.00
23.00
1,999.58
2,126.58
2,541.58Less:
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
1,404.58
493.42
1,898.00
53.00
1,845.00
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Statement Date 31-Oct-14
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
35
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2014
Book Balance
Add:
1,609.58
Collection of $500 note
1,794.58
less $15 collection fee
1,949.58
Interest earned
485.00
8.42
NSF cheque plus s/c
Cheque printing charge
30.00
23.00
1,999.58
2,126.58
2,541.58Less:
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2013 McGraw-Hill Ryerson Limited.
1,404.58
493.42
1,898.00
53.00
1,845.00
LO 6
The items that show up
only on the Cash
Receipts or Cash
Disbursements Journal
are reconciling items on
the bank side of the
bank reconciliation.
36
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
$
100.00
150.00
145.00
815.00
(101)
Cash Disbursements Journal
Cheque #
Amount
119
$
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)
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2014
Bank Balance
Add:
Deposit in transit
Less: Outstanding cheques
No. 124
No. 126
37
$
100.00
150.00
145.00
815.00
(101)
$ 2,050.00
145.00
2,195.00
$ 150.00
200.00
350.00
$ 1,845.00
Cash Disbursements Journal
Cheque #
Amount
119
$
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)
© 2013 McGraw-Hill Ryerson Limited.
LO 6
The Final Product
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2014
Bank Balance
Add:
Deposit in transit
$ 2,050.00
145.00
2,195.00
Less: Outstanding cheques
$ 150.00
No. 124
350.00
200.00
No. 126
$ 1,845.00
Adjusted bank balance
38
Book Balance
Add: Collection of $500 note
less $15 collection fee
Interest earned
$ 1,404.58
$ 485.00
8.42
493.42
1,898.00
Less:
Cheque printing charge
NSF cheque plus fee
Adjusted book balance
© 2013 McGraw-Hill Ryerson Limited.
23.00
30.00
53.00
$ 1,845.00
LO 6
Recording Adjusting Entries
from the Bank Reconciliation
GENERAL JOURNAL
Date
Description
2014
Oct. 31 Cash
Collection expense
Notes Receivable
Page 8
PR
Debit
Credit
485.00
15.00
500.00
To record collection by bank
Oct. 31 Cash
Interest earned
8.42
8.42
To record collection by bank
39
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Recording Adjusting Entries
from the Bank Reconciliation
GENERAL JOURNAL
Date
Description
2014
Oct. 31 Accounts Receivable - Heflin
Cash
Page 8
PR
Debit
Credit
30.00
30.00
To record NSF cheque plus s/c
Oct. 31 Office supplies expense
Cash
23.00
23.00
To record cheque printing charge
40
© 2013 McGraw-Hill Ryerson Limited.
LO 6
Recording Adjusting Entries from
Bank Reconciliation
After posting the reconciling entries the cash
account looks like this . . .
GENERAL LEDGER
Account:
Cash
Date
Acct. No.
Item
PR
Debit
Credit
101
Balance
DR (CR)
2014
Oct.
31
31
31
31
31
Balance
Adjusting entry
Adjusting entry
Adjusting entry
Adjusting entry
G8
G8
G8
G8
485.00
8.42
30.00
23.00
1,404.58
1,889.58
1,898.00
1,868.00
1,845.00
Adjusted balance on October 31
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© 2013 McGraw-Hill Ryerson Limited.
LO 6
Review
Discuss the purpose of a bank reconciliation.
A bank reconciliation is a procedure designed to
explain the differences between the balance in a
firm's bank account and the balance on the
period's bank statement. The reconciliation
procedure examines the differences based on the
information available to each party and adjusts for
the differences. It also serves as a format for the
discovery and correction of recording errors.
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© 2013 McGraw-Hill Ryerson Limited.
Review
Identify the principles of internal control.
Principles of internal control include the following:
• establishing responsibilities
• maintaining adequate records
• insuring assets and bonding key employees
• separating recordkeeping from custody of assets
• dividing responsibilities for related transactions
• applying technological controls
• performing regular independent reviews
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© 2013 McGraw-Hill Ryerson Limited.
Using the Information-Appendix 8A
Acid-Test Ratio
• A measure of a company’s liquidity.
• Similar to current ratio but excludes less
liquid assets.
• Ratio will vary from industry to industry.
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© 2013 McGraw-Hill Ryerson Limited.
LO 7
Using the Information-Appendix 8A
Acid-Test Ratio =
Quick assets*
Current liabilities
* cash, short-term investments, and receivables
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© 2013 McGraw-Hill Ryerson Limited.
LO 7
End of Chapter
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© 2013 McGraw-Hill Ryerson Limited.