Internal Control and
Managing Cash – Chapter 4
Set up an effective system of
internal control.
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Internal Control
Organizational plan and all related
measures that an entity adopts
 Safeguard
assets
 Encourage adherence to company
policies
 Promote operational efficiency
 Ensure accurate and reliable
accounting records
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Components of an
Effective System
Competent, reliable, and ethical
personnel
Assignment of responsibilities
Proper authorization
Separation of duties
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Audit
Examination of company’s
financial statements accounting
systems, and internal controls,
by an outside party
 Internal auditor - employee of
the business
 External auditor - independent
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Limitations of Internal Control
Collusion - two or more
employees working together to
defraud the firm
A system of internal control that
is too complex can hurt
efficiency and control
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The Bank Reconciliation – an
internal control device
Items that cause differences between
bank balance and book balance
1. Items recorded by the company
but not yet recorded by the bank:
•
•
Deposits in transit
Outstanding checks
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The Bank Reconciliation
Items that cause differences between
bank balance and book balance
2. Items on a bank statement and not
recorded by the business:
•
•
•
•
•
•
Bank collections
Electronic funds transfers
Service charge
Interest revenue earned on account
NSF checks
Errors
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Bank Reconciliation Illustrated
Business Research, Inc., shows a balance
on its bank statement of $5,931.51 on
January 31. The company Cash account
has a balance of $3,294.21.
1. The January 30 deposit of $1,591.63
does not appear on the bank statement.
2. The bank erroneously charged to the
account a $100 check (No. 656) written
by Business Research Associates.
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The Bank Reconciliation
Illustrated
3. Five company checks, totaling
$1,350.14, issued late in January and
recorded in the journal have not been
paid by the bank.
4. The bank received $904.03 by EFT on
behalf of Business Research, Inc.
5. The bank collected on behalf of the
company a note receivable, $2,114
(including interest revenue of $214).
6. The bank statement shows interest
revenue of $28.01.
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The Bank Reconciliation
Illustrated
7. Check number 333 for $150 paid to
Brown Company on account was
recorded as a cash payment of $510.
8. The bank service charge for the month
was $14.25.
9. The bank statement shows an NSF check
for $52.
10.Business Research pays insurance
expense by EFT and has not recorded
this $361 payment.
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The Bank Reconciliation
Illustrated
Balance per bank, January 31
Add deposit in transit
Check erroneously charged
Less outstanding checks
Adjusted bank balance
$5,931.51
1,591.63
100.00
$7,623.14
(1,350.14)
$6,273.00
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Bank Reconciliation
Illustrated
Balance per books, January 31
Add: ETF receipt of rent revenue
Collection of note receivable
Interest revenue earned
Correction of book error
$3,294.21
904.03
2,114.00
28.01
360.00
$6,700.25
Less: Service charge
$ 14.25
NSF check
52.00
Payment of insurance expense 361.00 ( 427.25)
Adjusted book balance
$6,273.00
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Cash receipts and cash
payments internal controls
Petty Cash - A small amount of
cash kept on hand to pay for
minor expenses.
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Using a Budget to Manage
Cash
A financial plan that helps
coordinate business activities
Cash budget - helps an entity
manage cash by planning
receipt and payment of cash
during a future period
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Using a Budget to Manage
Cash
Cash balance, beginning
+ Budgeted cash receipts
- Budgeted cash payments
Expected cash balance, ending
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Reporting Cash on
the Balance Sheet
 Companies usually combine all
cash amount into single total called
“Cash and Cash Equivalents” on
the balance sheet.
 Cash equivalents include liquid
assets
 Time
deposits
 Certificates of deposit
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Ethics and Accounting
Company code of ethical and
responsible behavior by
employees
AICPA Code of Professional
Conduct
Standards of Ethical Conduct
for Management Accountants
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