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Chapter 7
INTERNAL CONTROL
AND CASH
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CHAPTER 7
INTERNAL CONTROL AND CASH
After studying this chapter, you should be
able to:







Identify the principles of internal control.
Explain the applications of internal control to
cash receipts.
Explain the applications of internal control to
cash disbursements.
Prepare a bank reconciliation.
Explain the reporting of cash.
Discuss the basic principles of cash
management.
Identify the primary elements of a cash
budget.
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PRINCIPLES OF INTERNAL
CONTROL
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Internal control
Safeguards an organization’s
assets from


Employee theft, robbery,
unauthorized use
Enhances the accuracy and
reliability of accounting records


Risk of errors and irregularities
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PRINCIPLES OF INTERNAL
CONTROL
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PRINCIPLES OF INTERNAL CONTROL
 Establishment of
responsibility:
 most effective when
only one person is
responsible for a
given task

Segregation of
duties:

the work of one
employee should
provide a reliable
basis for
evaluating the
work of
another employee
PRINCIPLES OF INTERNAL CONTROL
Documentation procedures:
documents provide evidence that
transactions and events have
occurred
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Physical, Mechanical, and
Electronic Controls
Independent Internal Verification
Independent Internal Verification
Rotating employee’s
duties and requiring
employees to take
vacations
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Limitations of Internal
Controls




Cost/Benefit - cost of establishing
procedure should not exceed expected
benefit
Human element - fatigue, carelessness,
indifference
Collusion - two or more individuals who
work together to get around controls
Size of business
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Review
a.
b.
c.
d.
Segregation of duties means?
Rotating employee duties and
requiring vacations.
Reviewing, comparing and reconciling
information from two sources.
The responsibility for related activities
should be assigned to different
individuals.
Physical separation of employees from
each other.
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Cash consists of...






coins
currency
checks
money orders
money on hand
deposits in bank
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Petty Cash Fund
is a cash fund used to pay relatively small amounts
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USE OF A BANK
 The use of a bank
 minimizes the amount of currency that
must be kept on hand
 contributes significantly to good internal
control over cash.

A “double” record of cash is
maintained, one by the
company, one by the bank.
These two accounts must
be reconciled.
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Bank Statement
a copy of the
bank’s records
sent to the
customer for
periodic review.
Bank
Statement
shows
•check &
other debits
•deposits &
other credits
•daily cash
balance
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RECONCILING THE BANK
ACCOUNT
Reconciliation

is necessary as the balance per bank
and balance per books are seldom in
agreement due to time lags and errors
A bank reconciliation
 should be prepared by an employee
who has no other responsibilities
pertaining to cash
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RECONCILING THE
BANK ACCOUNT
 Steps in preparing a bank reconciliation:




Determine deposits in transit
Determine outstanding checks
Note any errors discovered
Trace bank memoranda to the records
Each reconciling item used in determining the
“Adjusted cash balance per books” should be
recorded by the depositor with an adjusting
entry

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BANK RECONCILIATION
Terms




Deposits in transit - deposits recorded by the
depositor that have not been recorded by the
bank.
Outstanding checks - checks issued and recorded
by the company that have not been paid by the
bank.
NSF check - a check that is not paid by the bank
because of insufficient funds in the customer’s
bank account.
Adjusted balance - same as true cash balance,
correct cash balance
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BANK RECONCILIATION
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
(To record collection of notes
receivable by bank)
Debit
Credit
1035
15
1000
50
Collection of Note Receivable This entry involves four
accounts. Interest of $50 has not been accrued and the
collection fee is charged to Miscellaneous Expense.
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Cash
Accounts Payable — Andrea
Company
(To correct error in recording
check No. 443)
Debit
Credit
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Book Error An examination of the cash disbursements
journal shows that check No. 443 was a payment on
account to Andrea Company, a supplier. The check, with
a correct amount of $1,226.00, was recorded at $1,262.00.
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Accounts Receivable — J. R. Baron
Cash
(To record NSF check)
Debit
Credit
425.60
425.60
NSF Check An NSF check becomes an
accounts receivable to the depositor.
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Miscellaneous Expense
Cash
(To record charge for printing
company checks)
Debit
Credit
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Bank Service Charges Check printing charges (DM) and other
bank service charges (SC) are debited to Miscellaneous
Expense because they are usually nominal in amount.
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Basic Principles of Cash
Management
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