8 – Internal Control & Cash
After studying this chapter, you should be able to:
Objective 2 - Describe the objectives of internal control.
Objective 3 - Describe and illustrate the application of
internal controls to cash.
Objective 4 - Describe and illustrate the application of
internal controls to cash.
Objective 5 - Describe and illustrate the use of a bank
reconciliation in controlling cash.
Objective 6 - Describe the accounting for specialpurpose cash funds.
1
Objective 2
Objectives of Internal Control
8-2
To provide reasonable assurance that:
1) assets are safeguarded and used for
business purposes,
2) business information is accurate, and
3) employees comply with laws and
regulations.
2
8-2
Example of control procedures for an allnight convenience store:
 Locate the cash register near the door, so that
it is fully visible from outside the store; have
two employees work late hours; employ a
security guard.
 Deposit cash in the bank daily, before 5 p.m.
 Keep only small amounts of cash on hand
after 5 p.m. by depositing excess cash in a
store safe that can’t be opened by
employees on duty.
 Install cameras and alarm systems.
3
Indicators of Internal
Control Problems
8-2
Warning Signs With Regard to People
1.
2.
3.
4.
Abrupt change in lifestyle.
Close social relationships with suppliers.
Refusing to take a vacation.
Frequent borrowing from other
employees.
5. Excessive use of alcohol or drugs.
4
Indicators of Internal
Control Problems
1.
2.
3.
4.
5.
8-2
Warning Signs from the
Accounting System
Missing documents or gaps in transaction
numbers.
An unusual increase in customer refunds.
Differences between daily cash receipts
and bank deposits.
Sudden increase in slow payments.
Backlog in recording transactions.
5
Objective 3
Describe and illustrate the application
of internal controls to cash.
8-3
Control of Cash Receipts
One of the most important controls
to protect cash received in over-thecounter sales is a cash register.
Change Fund
A predetermined amount of money that is
given to each cash register clerk in a cash
drawer is called a change fund.
6
8-3
Cash Short and Over
Cash sales for March 19 totaled $3,150.00 per
the cash register tape. After removing the
change fund, only $3,142.00 was on hand.
Mar 19 Cash
Cash Short and Over
Sales
To record cash sales and
actual cash on hand.
3 142 00
8 00
Note that the shortage (an expense) was
debited to Cash Short and Over. If there were
a surplus (i.e. a revenue), the there would be a
credit to Cash Short and Over.
3 150 00
7
Electronic Funds Transfers – ensure some kind of
control over cash
8-3
Cash may be received from customers
through electronic funds transfers.
Customers may authorize automatic
electronic transfers from their checking
accounts to pay monthly bills.
8
Objective 4
Describe the nature of a bank account
and its use in controlling cash.
8-4
Use of Bank Accounts
A major reason that businesses use
bank accounts is for control purposes.
Bank accounts provide an independent recording of
cash transactions that can be used as a verification
of the business’s recording of transactions.
9
Bank Statement
8-4
A summary received from
the bank of all checking
account transaction is called
a bank statement.
10
Bank Statement
8-4
11
Bank Statement
8-4
(Concluded)
12
8-4
Typical credit or debit memorandum
entries found on the bank statement:
— Error correction to correct bank
error.
NSF — Not sufficient funds check.
SC
— Service charge.
ACH — Automated Clearing House entry
for electronic funds transfer.
MS — Miscellaneous items.
EC
13
8-4
Example Exercise 8-2
The following items may appear on a bank statement:
(1) NSF check
(2) EFT Deposit
(3) Service Charge
(4) Bank correction of an error from recording a $400
check drawn by the depositor as $40.
Indicate whether the item would appear as a debit or credit
memorandum on the bank statement and whether the item
would increase or decrease the balance of depositor’s
account.
14
8-4
Follow My Example 8-2
Item No.
(1)
(2)
(3)
(4)
Appears on the
Bank Statement
as a Debit or
Credit
Memorandum
Debit Memorandum
Credit Memorandum
Debit Memorandum
Increases or
Decreases the
Balance of the
Depositor’s
Bank Account
Decreases
Increases
Decreases
Debit Memorandum
Decreases
For Practice: PE 8-2A, PE 8-2B
15
Power Networking’s Records
and Bank Statement
8-4
Power Networking
should determine the
reason for difference in
these two amounts.
16
8-5
Objective 5
Describe and illustrate the use of a bank
reconciliation in controlling cash.
A bank reconciliation is an analysis of
the items and amounts that cause the
cash balance reported in the bank
statement to differ from the balance of
the cash account in the ledger in order
to determine the adjusted cash balance.
17
8-5
Bank’s records
Beginning balance
Company’s records
$3,359.78 Beginning balance
$2,549.99
Power Network prepares to reconcile
the monthly bank statement as of
July 31. The bank statement shows
an ending cash balance of $3,359.78.
The company’s Cash account has a
July 31 balance of $2,549.99.
18
8-5
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$3,359.78 Beginning balance
$2,549.99
816.20
$4,175.98
A deposit of $816.20 did not
appear on the bank statement.
19
8-5
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
The bank collected a note in the amount of $400
and the related interest of $8 for Power Networking
20
8-5
Bank’s records
Beginning balance
Add deposit not
recorded by bank
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Three checks that were written during the period
did not appear on the bank statement: No. 812,
$1,061; No. 878, $435.39, No. 883, $48.60.
21
8-5
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Beginning balance
Add deposit not
recorded by bank
The bank returned a check for $300 from Power
Networking’s customer (Thomas Ivey) because of
insufficient funds (NSF).
22
8-5
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Beginning balance
Add deposit not
recorded by bank
The bank service charges totaled $18.00.
23
8-5
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Check No. 879 9.00 327.00
Beginning balance
Add deposit not
recorded by bank
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
24
8-5
Bank’s records
Company’s records
$2,549.99
$3,359.78 Beginning balance
Add note and interest
816.20
collected by bank
408.00
$4,175.98
$2,957.99
Deduct outstanding
Deduct check
checks:
NSF
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Check No. 879 9.00 327.00
Adjusted balance
$2,630.99 Adjusted balance
$2,630.99
Beginning balance
Add deposit not
recorded by bank
25
8-5
26
Journal entries must be prepared for
those items that affected the company’s
(depositor’s) side of the reconciliation.
8-5
Company’s records
Beginning balance
Add note and interest
collected by bank
$2,549.99
408.00
$2,957.99
Deduct check
NSF
$300.00
Bank service
charges
18.00
Error recording
Check No. 879
9.00
327.00
27
8-5
Entry to Record Plus Items
July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.
408 00
400 00
8 00
28
8-5
Entry to Record Minus Items
July 31 Cash
Notes Receivable
Interest Income
Note collected by bank.
31 Accounts Receivable—Thomas Ivey
Miscellaneous Expense
Accounts Payable—Taylor Co.
Cash
NSF check, bank service
charges, and error in
recording Check no. 879.
408 00
400 00
8 00
300 00
18 00
9 00
327 00
29
Example
8-5
The following data was gathered to use in
reconciling the bank account of Photo Op.
Balance per bank
$14,500
Balance per company records 13,875
Bank service charges
75
Deposit in transit
3,750
NSF check
800
Outstanding checks
5,250
a. What is the adjusted balance on the bank reconciliation?
b. Journalize any necessary entries for Photo OP based
upon the bank reconciliation.
30
Objective 6
Describe the accounting for
special-purpose cash funds.
8-6
It is usually not practical for a
business to write checks to pay
small amounts. Thus, it is
desirable to control such
payments by using a special cash
fund, called a petty cash fund.
31
8-6
On August 1, issued Check No. 511 for $500
to established a petty cash fund.
Page 9
JOURNAL
Date
2008
Description
Aug. 1 Petty Cash
Cash
Established petty cash
fund issuing Check 511.
Post.
Ref.
Debit
Credit
500 00
500 00
32
8-6
At the end of August, the petty cash receipts indicated
expenditures for the following items: office supplies,
$380, postage (office supplies), $22; store supplies, $35,
and miscellaneous administrative items, $30.
Aug. 31 Office Supplies
402 00
Store Supplies
35 00
Miscellaneous Administrative Exp.
Cash
Replenished petty cash fund.
30 00
467 00
Replenishing the petty cash fund physically restores it to its
original amount of $500. Note that no entry to Petty Cash is
required when the fund is replenished.
33
8-6
Example Exercise 8-4
Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of $500.
b) The amount of cash in the petty cash fund is
currently $120. Issued a check to replenish the fund
based on the following summary of petty cash
receipts: office supplies, $300 and miscellaneous
administrative expense, $75. Record any missing or
additional funds in the cash short and over account.
34
8-6
Example
a) Petty Cash
Cash
500
b) Office Supplies
Miscellaneous Admin. Expense
Cash Short and Over
Cash
300
75
5
500
380
35