Chapter 8 - Mrs. Doering's Website

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Accounting
Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm
Prepared by:
Carole Bowman, Sheridan College
Edited by:
Carolyn Doering, HHSS
CHAPTER
8
INTERNAL CONTROL
AND CASH
INTERNAL CONTROL
Internal control consists of the
policies and procedures adopted
within a business in order to:
1. Optimize resources
2. Prevent and detect errors and
irregularities
3. Safeguard its assets
4. Maintain the accuracy and reliability of
its accounting records
ILLUSTRATION 8-1
PRINCIPLES OF INTERNAL CONTROL
Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification
PRINCIPLES OF INTERNAL CONTROL


Authorization of transactions and activities:
Authorization by the proper individual is
important. Control is 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
should provide evidence that transactions
and events have occured.
Safeguards to control access to, and use of,
assets and records: Physical, mechanical,
and electronic controls relate primarily to
the safeguarding of assets and enhancing
accuracy and reliability of the accounting
records.
PRINCIPLES OF INTERNAL CONTROL
Independent verification:
• External verification indicates whether
the company’s financial statements
fairly present its financial position and
results of operations in accordance with
GAAP and IFRS
• Internal verification involves review,
comparison, and reconciliation of
information from two sources.
ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties
Accounting Employee A
Maintains cash balances
per books
Assistant Cashier B
Maintains custody of
cash on hand
Independent Internal Verification
Assistant Controller C
Makes monthly comparisons: reports any irreconcilable differences to Controller
LIMITATIONS OF INTERNAL
CONTROL
 Cost/benefit
 Collusion
 Size
of business
 Human element
CASH


Cash includes coins, currency, cheques,
money orders, and money on hand or on
deposit at a bank or similar depository.
Internal control over cash is imperative in
order to safeguard cash and assure
the accuracy of the
accounting records for cash.
CONTROL OVER CASH RECEIPTS


Only designated personnel should be
authorized to handle or have access to cash
receipts.
Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash
CONTROL OVER CASH RECEIPTS
Documents should include:
1. remittance advices
2. cash register tapes
3. deposit slips
Cash should be stored in safes and bank
vaults.
Access to storage areas should be limited to
authorized personnel.
Cash registers should be used in executing
over-the-counter receipts.

CONTROL OVER CASH RECEIPTS



Daily cash counts and daily comparisons of
total receipts should be made.
All personnel who handle cash receipts
should be bonded and required to take
vacations.
An important tool in control of over-thecounter receipts is cash registers that are
visible to customers.
CONTROL OVER CASH DISBURSEMENTS



Payments are made by cheque rather
than by cash, except for petty cash
transactions.
Only specified individuals should
be authorized to sign cheques.
Different departments or individuals
should be assigned the duties of approving
an item for payment and paying it.
CONTROL OVER CASH DISBURSEMENTS
Prenumbered cheques should be used and
each cheque should be supported by an
approved invoice or other
document.
 Blank cheques should be stored
in a safe.
1. Access should be restricted to
authorized personnel.
2. A cheque writer machine should be
used to imprint the amount on the
cheque in indelible ink.

CONTROL OVER CASH DISBURSEMENTS


Each cheque should be compared with the
approved invoice before it is issued.
Following payment, the approved invoice
should be stamped PAID.
PETTY CASH FUND
 A petty
cash fund is used to pay relatively small
amounts.
 Operation of the fund, often called an imprest
system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
 Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.
ESTABLISHING THE FUND
GENERAL JOURNAL
Date
Mar. 1
Account Titles and Explanation
Petty Cash
Cash
To establish a petty cash fund.
Debit
Credit
100
When the fund is established, a cheque
payable to the petty cash custodian is issued
for the stipulated amount.
100
REPLENISHING THE FUND
GENERAL JOURNAL
Date
Mar. 15
Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.
Debit
Credit
44
38
5
87
On March 15 the petty cash custodian requests a
cheque for $87. The fund contains $13 cash and
petty cash receipts for postage, $44, freight out,
$38, and miscellaneous expenses, $5.
REPLENISHING THE FUND
(Cash Short or Over)
GENERAL JOURNAL
Date
Mar. 15
Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund.
Debit
44
38
5
1
Credit
88
On March 15 the petty cash custodian requests a
cheque for $88. The fund contains $12 cash and
petty cash receipts for postage, $44, freight out,
$38, miscellaneous expenses, $5, and Cash Short
$1.
USE OF A BANK
The use of a bank minimizes the amount of
currency that must be kept on hand and
contributes significantly to good internal
control over cash.
 A company can safeguard
its cash by using a bank as
a depository and clearing
house for cheques received
and cheques written.

BANK STATEMENTS
A bank statement
shows:
1. cheques paid and
other debits charged
against the account
2. deposits and other
credits made to the
account
3. account balance
after each day’s
transactions
ACCOUNT
STATEMENT
W. A. LEE COMPANY
500 QUEEN STREET
Statement Date/Credit
Line Closing Date
FREDERICTON, NB, E3B 5C2
April 30, 2003
457923
ACCOUNT NUMBER
Balance
Deposits and Credits
Last Statement
No.
Total Amount
13,256.90
20
34,805.10
Balance
Cheques and Debits
Total Amount
This Statement
32,154.55
15,907.45
26
DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date No. Amount
Date
Amount Date Amount
4-2
435
644.95
4-5
436 3,260.00
4-4
437 1,185.79
4-3
438
776.65
4-8
439 1,781.70
4-7
440 1,487.90
4-8
441 2,420.00
4-11
442 1,585.60
4-12
443 1,226.00
=================
4-29
NSF
425.60
4-29
459 1,080.30
4-30
DM
30.00
4-30
461
620.15
4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60
Symbols:
4-2
16,888.80
4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45
CM
Credit Memo
EC
Error Correction
NSF
Not Sufficient Funds
DM
Debit Memo
INT
Interest Earned
SC
Service Charge
Reconcile Your
Account Promptly
RECONCILING THE BANK ACCOUNT


Reconciliation is necessary because 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.
Reasons to Reconcile

Deposits in transit
 Deposits
recorded by depositor that have not
been recorded by bank

Outstanding cheques
 Cheques
written (issued) and recorded by
company that have not been presented
to/paid by bank

Adjusted balance
 Reconciled
or correct cash balance
Reasons to Reconcile con’t.

Debit memoranda

Charges against depositor’s account (e.g.
service charges, RC (returned)/NSF
(insufficient funds) cheques)
 Credit

for your bank account!
Credit memoranda

Amounts that increase depositor’s
account (e.g., interest earned)
 Debit
for your bank account!
Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding cheques
+deposits in transit
+/- bank errors
= correct cash amount
$ Per Books
-NSF cheques
-cheque printing or
other service charges
+notes collected by
bank
+/- book errors
= correct cash amount
Illustration 8-11
Reconciling Journal Entries

Books


Each reconciling item in
determining the adjusted
balance per books MUST be
journalized and posted
Bank

Do NOT journalize any
entries on bank side
REPORTING CASH
Cash reported on the Balance Sheet
includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
 Cash is listed first in the balance sheet
because it is the most liquid asset.

CASH EQUIVALENTS


Cash equivalents are highly liquid
investments, with maturities of three
months or less when purchased, that can
be converted into a specific amount of
cash.
Examples include money market funds,
short-term notes, and treasury bills.
USING THE INFORMATION IN THE
FINANCIAL STATEMENTS
Most important asset
 Pervasive impact
 Vulnerable to theft or
misuse
 Balancing act needed
to ensure sufficient,
but not excess,
quantity

USING THE INFORMATION IN THE
FINANCIAL STATEMENTS


Cash Flow Statement : shows where cash
came from and what is was used for.
Management report: states management’s
responsibility for internal controls.
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