CHAPTER
7
INTERNAL CONTROL
AND CASH
Quiz on Thursday Nov 13
CONTROL OVER CASH Receipt
Main-in Receipt
 Many customers still send their checks
through the mail.
 All main in receipts should be opened by two
mail clerks.
 As soon as they open it, they should stamp,
“For Deposit only”
 A list of the checks which are received each
day, should be prepared and be copied.
CONTROL OVER CASH Receipt
Main-in Receipt
 One copy of the list should be sent to the
cashier’s department, who will take them to
the bank for daily deposit.
 Second copy should be sent to the
accounting department for journal entries.
 At the end of the month, an accounting
manager would compare the ledger records
with the bank statement. (Segregation of
Duty and Performance Review)
CONTROL OVER CASH Receipt
Electronic Receipt
 Some companies would send their money
through EFT (electronic funds transfer or
online banking)
 What would be the source document for
EFT?
 Bank statement (shows all changes in the
bank account for one month)
 Electronic Funds Transfer result in better
internal control since no cash or checks are
handled by company employees.
CONTROL OVER CASH DISBURSEMENTS
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Payments are usually made by cheque rather
than by cash, except for petty cash
transactions.
Only specified individuals should
be authorized to sign cheques. (Some
companies require two signatures)
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 source
document.
 Blank cheques should be stored
in a safe.
1. Access (to blank check) should be
restricted to authorized personnel.
2. A cheque writer machine should be
used to imprint the amount on the
cheque in indelible ink.
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CONTROL OVER CASH DISBURSEMENTS
Purchase Order (=Expense form)
Many large companies use purchase orders to
improve their internal control over cash
disbursements.
A purchase order is an authorization form
prepared by for each expense.
It is usually prepared by the purchasing
department.
When the goods are received, the receiving
report should be matched with purchase order
and purchase invoice.
CONTROL OVER CASH DISBURSEMENTS
Electronic Payments
Many companies use electronic funds
transfer system to make payments to suppliers
and employees. (instead of issuing checks)
Examples are salaries, pre-authorized
payments such as loan payment and interest
payments
The only source document for EFT is bank
statement.
CONTROL OVER CASH DISBURSEMENTS
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Each cheque should be compared with the
approved invoice before it is issued. (done
by supervisor or manager of the department)
Following payment, the approved invoice
should be stamped PAID.
PETTY CASH FUND
A petty cash fund is used to pay relatively
small
amounts.
(For example, buying stamps, paying for taxi,
paying for employees’ lunch, paying for UPS
etc)  These are too small amounts to use
checks or EFT
 Operation of the fund, often called an imprest
system, (=“imprest” means an advance of
a specific amount of money for a designated
purpose) involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
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PETTY CASH FUND
Accounting
entries are required when
1. the fund is established,
a. appoint an employee to be responsible for the
PCF (Authorization)
b. determine the size of the fund
c. A check is issued to the responsible person’s
name and he or she will go to bank to get
cash.
d. Petty cash is kept in safe place.
2. Making payments from the fund
3. Replenishing the Fund
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
PETTY CASH FUND
Accounting
entries are not required when
2. Making payments from the fund
a. The branch manager has the authority to make
payments from the fund in accordance with
management policies. (what they can use it for
etc…)
b. Each payment from the fund should be
documented on a pre-numbered petty cash
receipts and it must be signed by both the branch
manager and the person who used the money.
c. No accounting entry is made to record a
payment at the time it is made from petty cash.
d. The receipts are kept in the petty cash box
until the cash needs to be replenished.
PETTY CASH FUND
Accounting
entries are required when
3. Replenishing the Fund
a. When the money in the petty cash fund reaches
a minimum level, the fund is replenished.
b. The request for reimbursement is made by the
branch manager.
c. He or she prepares a summary (schedule) of
the payments that have been made and send
the schedule.
d. The controller (or accountant) examines and
verifies the receipts and other documentation
that these were proper usage of the fund.
e. Then the controller would stamp “paid” to
these supporting documents.
PETTY CASH FUND
Replenishing the Fund
Note: We do not change the “petty cash” account.
We will decrease the “cash” account.
The accountant will replenish what has been used.
The accountant will exchange the receipts with check.
It does not change the balance of petty cash fund.
Sometimes there is a cash shortage or overage.
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
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, and miscellaneous expenses, $5.
Classwork / Homework
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P380 E7.4, E7.5 and E7.6
P384 P7.4
P385 P7.5