ACG 2021
Financial Accounting
Internal Control and
Cash
Learning Objectives
• Understand Internal Control
• Use a bank reconciliation as a control
device
• Account for Petty Cash
• Use a budget to manage cash
Internal Control
Internal control is an organizational plan
and related measures that an entity
adopts to reach various Goals:
– Safeguard assets
– Encourage adherence to company policies
– Promote operational efficiency
– Ensure accurate and reliable
accounting records
Failures of Internal Control
•
•
•
•
Enron
WorldCom
Others
Led to Congress Passing SarbanesOxley Act
– Address Public Concerns over failed
• Audits of Public Companies
• Internal Controls at Public Companies
Bank Accounts as
Controls
• All cash should be deposited into a bank
account daily.
• To draw money from the account, a check is
written
• Three parties to a check:
– maker – signs the check
– payee – to whom the check is written
– bank – on which the check is drawn
• Remittance advice is an optional attachment
that gives the reason for the payment.
Cash Control Definitions
• Monthly bank statements are sent to the
account holder and should be reconciled.
– to check (a financial account) against another for
accuracy (Webster Online Dictionary)
• Electronic fund transfer (EFT) is the electronic
transfer of cash. No check is written.
– Payments on behalf of account holder.
– Deposits made from customers to account holder.
• Bank statements include both physical checks
and EFT payments as well as other
transactions on the account.
Bank Reconciliation
• Comparison of:
– Two independently maintained records of a business’s cash
• The company’s Cash account (T-Account, the book balance)
• The bank statement
• Differences between the two records generally arise
because of timing differences.
– Deposits were made but after the bank statement was
printed and mailed.
– Checks were written but have not cleared the bank when the
bank statement was printed mailed.
• Reconciliations ensure that the two records agree.
Bank Reconciliation
Items for reconciliation:
• Items RECORDED by the company but
not yet recorded by the bank:
– Deposits in transit
– Outstanding checks
Bank Reconciliation
Items for reconciliation:
• Items recorded by the bank BUT NOT YET recorded
by the company.
– Bank collections
• deposits received directly by the bank from customers
– Electronic funds transfers
• Both payments and deposits
– Service charges and the cost of printed checks
– Interest revenue earned on checking account
– Nonsufficient funds (NSF) checks
• These are checks deposited from a business’ customers that
don’t have sufficient funds
– So they ‘bounce’
• Errors by the company or the bank
Bank Reconciliation
• The adjusted bank balance must equal
the adjusted books balance
– Book Balance = Ending Cash Account
• This is how we ensure Control over
Cash
Reconciling Items
Bank Balance
• Add deposits in transit
• Subtract outstanding
checks
• Add or subtract
corrections of bank
errors, as appropriate
Book Balance
• Add bank collection
items, interest revenue,
and EFT receipts
• Subtract service
charges, NSF checks,
and EFT payments
• Add or subtract
corrections of book
errors, as appropriate.
Bank Reconciliation
• Journal entries are only made for:
– Adjustments to Book Balance
• Bank collection items, interest revenue, and
EFT receipts
• Service charges, NSF checks, and EFT
payments
• Errors made by the company
– (bank errors do not require journal entries on the
company’s books).
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.
2.
3.
4.
5.
6.
The January 30 deposit of $1,591.63 does not appear on the bank
statement.
The bank erroneously charged to the account a $100 check (No. 656)
written by Business Research Associates.
Five company checks, totaling $1,350.14, issued late in January and
recorded in the journal have not been paid by the bank.
The bank received $904.03 by EFT on behalf of Business Research, Inc.
The bank collected on behalf of the company a note receivable, $2,114
(including interest revenue of $214).
The bank statement shows interest revenue of $28.01.
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.
Bank Reconciliation
Business Research, Inc.
Bank Reconciliation
January 31, 20X6
Bank
Balance, January 31
Add:
1. Deposit of January 30
in transit
2. Correction of bank
error – Research
Associates check 656
erroneously charged
against company
account
Books
$5,931.51
1,591.63
100.00
7,623.14
Less: Outstanding Checks
No. 337
$286.00
No. 338
319.47
No. 339
83.00
No. 340
203.14
No. 341
458.53
(1,350.14)
Adjusted bank balance
$6,273.00
Balance, January 31
$3,294.21
Add:
4. EFT receipt of rent
revenue
904.03
5. Bank Collection of note
receivable including interest
revenue of $214
2,114.00
6. Interest revenue earned
on bank balance
28.01
7. Correction of book error –
overstated amount of
check no. 333
360.00
6,700.25
Less:
8. Service charge $14.25
9. NSF check
52.00
10. EFT payment of
insurance
expense
361.00
(427.25)
Adjusted book balance
$6,273.00
Journal Entries from
Reconciliation
(4)
Cash
Rent Revenue
Receipt of monthly rent
904.03
904.03
(5)
Cash
2,114.00
Notes Receivable
1,900.00
Interest Revenue
214.00
Note receivable collected by the bank
(6)
Cash
Interest Revenue
Interest earned on bank balance
28.01
28.01
(7)
Journal Entries from
Reconciliation
Cash
360.00
Accounts Payable
Correction of check no. 333
(8)
(9)
(10)
Miscellaneous Expense
Cash
Bank Service Charge
Accounts Receivable
Cash
NSF customer check returned by bank
Insurance Expense
Cash
Payment of monthly insurance
360.00
14.25
14.25
52.00
52.00
361.00
361.00
ACG 2021
Financial Accounting
Petty Cash
Cash Budgets, and
Cash on the Balance
Sheet
Petty Cash
• Petty cash fund is to pay for minor expenses.
• Fund is opened with a particular amount of cash.
• A custodian issues cash when needed and places all petty cash
tickets and receipts in the box with the remaining cash.
• The sum of the remaining cash and petty cash tickets should equal
the amount established for the fund.
• Petty cash is an example of an imprest fund.
• Beginning Cash + Added Cash – Receipts = Ending Cash
Petty Cash
Receipts
Beg Bal
Added Cash
End Bal
Petty Cash Journal Entries
Petty Cash
500.00
Cash
To establish Petty Cash Fund
Postage Expense
70.00
Office Supplies Expense 180.00
Miscellaneous Expense 125.00
Cash
To Reimburse the petty cash fund
500.00
375.00
Cash Budgets
• Budget – a financial plan
• Cash budget
– plans cash receipts and cash payments
Beginning cash
Plus: Expected Receipts
Less: Expected Payments
Equals: Expected Ending cash
• Allows mangers to know in advance whether
they will likely need to borrow money.
Reporting Cash on the
Balance Sheet
• Cash and Cash Equivalents
– liquid assets such as time deposits and certificates
of deposit
• Restricted cash must be disclosed separately.
– Collateral
– Other non-Operating uses
• Compensating balances are not included as
cash.
– Minimum cash balance required for loan
End of Chapter 4