Cash
Coin and currency
Checking, savings, and
money market accounts
Undeposited, cashier,
and certified checks
LO1
Cash Equivalents
 Readily convertible to cash
 Original maturity to investor of
three months or less
Examples:
 Commercial paper
 U.S. Treasury bills
 Certain money market funds
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
LO2
Bank Statements
Cash balance, beginning of period
+Deposits
+Customer notes
and interest
collected by bank
+Interest earned
Canceled checks
NSF checks
Service charges
= Cash balance, end of period
Bank Reconciliation – Step 1
•Trace deposits listed on the bank statement to
the books.
•Identify the deposits in transit.
•Add to the bank balance.
Deposits in transit: Late period deposits not yet
reflected on bank statement
Bank Reconciliation – Step 2
•Trace checks cleared by the bank to the books.
•Identify outstanding checks.
• Subtract from the bank balance.
Outstanding checks: Checks written but not
yet presented to bank
Bank Reconciliation – Step 3
List all other additions (credit memoranda)
shown on the bank statement. Add to the book
balance.
Credit memoranda: Interest earned, customer
notes collected, etc.
Bank Reconciliation – Step 4
•List all other subtractions (debit memoranda)
shown on the bank statement.
•Subtract from the book balance.
Debit memoranda:
NSF checks, service charges, etc.
Example of Reconciliation
Cash Account Adjustments: Debit Memoranda
Balance per books, June 30
$2,895.82
Add:
Customer note collected
Interest on customer note
Interest earned during June
Error in recording check 498
Deduct: NSF check
Collection fee on note
Service charge for lockbox
Adjusted balance, June 30
$3,233.05
$500.00
50.00
15.45
54.00
619.45
$245.72
16.50
20.00
(282.22)
Bank Reconciliation – Step 5
Identify errors made by the bank or the
company in recording the transactions
during the period.
Bank Reconciliation – Step 6
Use the information collected in steps 1 through 5 to prepare the
bank reconciliation.
Bank Reconciliation
Balance per bank
$$$
Adjusted balance
$$$
Balance per books
$$$
Adjusted balance
$$$
Example of Reconciliation
Bank Statement Adjustments
Balance per statement, June 30 $3,308.59
Adjusted balance, June 30
$3,233.05
Cash Account Adjustments
Balance per books, June 30
Adjusted balance, June 30
$2,895.82
$3,233.05
Bank Reconciliation Adjusting
Entries
Bank Reconciliation
Balance per bank
$$$
Adjusted balance
$$$
Balance per books
$$$
Adjusted balance
$$$
Book
adjustments
are the basis
for adjusting
entries
Bank Reconciliation
Adjusting Entries
Accounts Receivable
245.72
Collection Fee Expense
16.50
Rent Expense—Lockbox
20.00
Cash
337.23
Notes Receivable
Interest Revenue
Supplies
To record bank reconciliation adjustments.
500.00
65.45
54.00
Petty Cash
A check is written
Journalize
establishment of
fund
Disbursement
with proper
documentation
Fund replenished
Petty Cash Transactions for
Mickey’s Marathon Sports
Original fund balance
Petty cash expenditures:
U.S. Post Office
Overnight delivery service
Office supply express
Coin and currency per count
$200.00
55.00
69.50
45.30
26.50
Prepare the journal entry to record the petty cash fund
replenishment
Accounting for Petty Cash
Journal Entry to Replenish Fund:
*$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) =
$200.00 – $196.30 = $3.70 short
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
LO3
Sarbanes-Oxley Act
of 2002 (SOX)
Act of Congress intended to bring reform
to corporate accountability and stewardship
in response to corporate scandals
Internal Control
Control
Environment
Accounting
System
Internal
Control
Procedures
The Control Environment
 Management’s competence and
operating style
 Personnel policies and practices
 Influence of board of directors
The Accounting System
Methods and records used to report
transactions and maintain financial
information
 Can be manual, fully computerized, or a
combination of both
 Use of journals is an integral part of any
system
Internal Control Procedures
Independent
Review and
Appraisal
The Design and
Use of Business
Documents
Proper
Authorizations
Independent
Verification
Safeguarding
Assets and
Records
Segregation
of Duties
LO4
Proper Authorizations
 Authority and responsibility go hand in
hand
Segregation of Duties
Separate physical custody from the accounting
for assets
Independent Verification
 One individual or department acts as a
check on the work of another
Safeguarding Assets and Records
Protect assets and accounting records from loss,
theft, unauthorized use, etc.
Independent Review and
Appraisal
 Provide for periodic review and appraisal of
the accounting system and the people
operating it
The Design and Use of
Business Documents
 Capture all relevant information
about a transaction and assist in
proper recording and classification.
 Are properly controlled
Limitations on Internal Control
 No system is entirely foolproof
• Employees in collusion can override
the best controls
• Cost vs. benefit tradeoff
Computerized Business
Documents and Internal
Control
 Cash receipts should be deposited intact in
the bank on a daily basis
 All cash disbursements should be made by
check
LO5
Control over Cash Receipts
 Cash received over the counter (e.g.,
cash sales)
 Cash received in the mail (e.g., credit
sales)
Controls over Cash Received
over the Counter
 Cash registers
 Locked-in cash register tape
 Prenumbered customer receipts
 Investigate recurring discrepancies
Controls over Cash Received
in the Mail
 Two employees open mail
 Prelist prepared
 Monthly customer statements
Document Flow for Merchandise
Purchase
Requisition
Receiving
Report
Purchase
Order
Invoice
Approval
Purchase
Invoice
Check
Prepared
End of Chapter 6