Practice:
Ex 8-6
Ex 8-10
Prob 8-4A
Internal Control
and Cash
CHAPTER 8
9-1
Learning Objectives
1.
2.
3.
4.
9-2
Define, explain the purpose, and identify
the principles of internal control. (LO1)
Define cash and explain how it is
reported. (LO2)
Apply internal control to cash. (LO3)
Explain and record petty cash fund
transactions. (LO4)
Learning Objectives
5.
6.
7.
9-3
Explain and identify banking activities
and the control features they provide.
(LO5)
Prepare a bank reconciliation and
journalize any resulting adjustment(s).
(LO6)
Calculate the acid-test ratio and explain
its use as an indicator of a company’s
liquidity. (Appendix 9A) (LO7)
Internal Control System
All policies and procedures used to:
• Protect assets
• Ensure reliable accounting
• Promote efficient operations
• Encourage adherence to
company policies
9-4
LO 1
Principles of Internal Control
1.
2.
3.
4.
5.
9-5
Ensure transactions and activities
are authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and
custody of assets.
Establish a separation of duties
LO 1
Principles of Internal Control
6.
7.
Apply technological controls.
Perform internal and external audits.
Internal controls will vary based on the
nature and size of the organization.
9-6
LO 1
Limitations of Internal Control
Human Error
• Negligence
• Fatigue
•
•
Misjudgment
Confusion
Human Fraud
Intent to defeat internal controls for personal gain.
Costs vs. Benefits
The costs of internal control must not exceed their
benefits.
9-7
LO 1
Cash
•
•
Important asset for every
company.
Control of cash and access to it is
critical.
Cash includes:
•
•
•
9-8
Currency, Coins and Cheques
Deposits in bank accounts
Other items acceptable for deposit
LO 2
Internal Control for Cash
Guidelines:
1. Handling of cash v. recordkeeping of
cash.
2. Deposit cash receipts daily.
3. Make cash disbursements
(payments) by cheque.
9-9
LO 3
Control of Cash
Disbursements
•
•
•
9-10
All expenditures should be made
by cheque (or EFT).
Authorization (cheque signing)
and recordkeeping duties
separated
Apply a voucher system.
LO 3
Petty Cash
Good internal control procedures
require cash disbursements be made
by cheque.
The exception:
Small payments required in most
companies for items such as postage,
courier fees, repairs, and supplies.
9-11
LO 4
Starting a Petty Cash Fund
Prepares
cheque to
establish petty
cash fund.
Cashier’s
Office
GENERAL JOURNAL
Date
Petty Cashier
Page 4
Description PR Debit Credit
May 1 Petty Cash
150
Cash
150
To establish a petty cash fund
9-12
LO 4
Operating a Petty Cash Fund
The petty cashier makes payments from this
fund for small disbursements.
… and ensures a petty cash receipt is
signed by the person receiving the money to
easily identify the expenses paid from petty
cash.
9-13
LO 4
Topping Up the Fund
A cheque is issued and the fund is
replenished when the amount of cash
becomes low.
QS 8-5 & 8-6
GENERAL JOURNAL
Page 4
A cash over and
Date
Description PR Debit Credit
short account
May 15 Postage Expense
46
may be needed.
Courier Expense
Cash
9-14
80
126
LO 4
Banking Activities as Controls
 Basic
•
•
•
•
9-15
Bank Services
Bank account
Bank deposits and cheques
Electronic funds transfer
Credit/Debit card transactions
LO 5
Credit Card Transactions
•
•
•
9-16
The risk of bad debts is transferred to the
credit card company.
The company collects cash from the sale
quickly.
The credit card companies charge a fee
to the vendor.
LO 5
Debit Card Transactions
•
•
9-17
The bank transfers funds from the
customer’s account to the vendor’s bank
account.
The bank charges a fee to the vendor.
LO 5
Illustration:
Credit Card Transaction
TechCom has $100 of credit card sales with
a 4% fee and cash is received immediately
(assume cost of sales is $40).
GENERAL JOURNAL
Date
Description
2011
Aug. 15 Cash
Credit Card Expense
Sales
Page 8
PR
Debit
Credit
96.00
4.00
100.00
To record credit card expense less 4% fee
15 Cost of Goods Sold
Merchandise Inventory
40.00
40.00
To record cost of sales
9-18
LO 5
Bank Reconciliations
Bank reconciliations are:
• Prepared periodically to explain the
difference between cash reported on
the bank statement and the cash
balance on company’s books.
• An important element of internal
control.
9-19
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Statement Date 31-Oct-11
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
9-20
Bank Statement
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
The bank statement
provides information
about everything
that has gone
through the bank
account for a given
period of time.
CM – Credit Memo
DM – Debit Memo
EC – Error Correction
IN – Interest Earned
NSF – Non-sufficient Funds
OD – Overdraft
SC – Service Charge
LO 6
Cash Disbursements Journal
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
$
100.00
150.00
145.00
815.00
(101)
Cheque #
119
120
121
122
123
124
125
126
127
128
$
$
Amount
55.00
200.00
120.00
70.00
25.00
150.00
15.00
200.00
50.00
135.00
1,020.00
(101)
The general ledger,
cash receipts, and
cash disbursements
journals provide
information about
everything that has
gone through our
accounting records
for a given period of
time.
General Ledger Cash Account
Cash
Account # 101
Date Explanation PR Debit
Credit
Balance
30-Sep Balance
1,609.58
31-Oct
CR6 815.00
2,424.58
31-Oct
CD4
1,020.00 1,404.58
9-21
LO 6
Bank Reconciliation - Example
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Total Cheques
and Debits
723.00
Date
Cheques and
Debits
Number Amount
26
29
31
9-22
Statement Date 31-Oct-11
Account Number 494 504 2
Previous
Balance
1,609.58
Oct 1
3
9
15
16
17
18
19
20
119
123
127
122
120
125
121
128
Bank Statement
*
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Deposits and
Credits
Amount
Daily
Balance
55.00
25.00
50.00
23.00 DM
70.00
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
Why are the balances
different?
Some items are reflected
on the bank statement
but not in the accounting
records and vice versa.
General Ledger Cash Account
Cash
Account # 101
Date Explanation PR Debit
Credit
Balance
30-Sep Balance
1,609.58
31-Oct
CR6 815.00
2,424.58
31-Oct
CD4
1,020.00 1,404.58
LO 6
Reconciling Items

Bank Statement
•
•
•
Outstanding
cheques.
Deposits in transit.
Bank errors.

General Ledger
•
•
•
•
•
9-23
Non-sufficient funds
cheque (NSF).
Bank service charges.
Interest earned on
bank account.
Collections made by
the bank.
Book errors.
LO 6
Bank Reconciliation for
VideoBuster
Let’s prepare the bank reconciliation
for VideoBuster Company at the end
of October 31, 2011.
9-24
LO 6
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Statement Date 31-Oct-11
Account Number 494 504 2
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Current
Balance
2,050.00
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Daily
Balance
Oct 1
3
9
15
16
17
18
19
20
26
29
31
9-25
119
123
127
122
120
125
121
128
55.00
25.00
50.00
23.00 DM
70.00 CM
200.00
15.00
20.00 NSF
10.00 DM
120.00
135.00
IN
240.00
180.00
100.00
150.00
485.00
8.42
1,609.58
1,794.58
1,949.58
1,999.58
2,126.58
2,541.58
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
$
100.00
150.00
145.00
815.00
(101)
Cash Disbursements Journal
Cheque #
Amount
119
$
55.00
120
200.00
121
120.00
122
70.00
123
25.00
124
150.00
125
15.00
126
200.00
127
50.00
128
135.00
$
1,020.00
(101)
LO 6
VideoBuster Bank Reconciliation
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2011
Bank Balance
Add:
$ 2,050.00
Book Balance
$ 1,404.58
Add:
sub total
Interest earned
sub total
Less: Outstanding cheques
Less:
Adjusted bank balance
Adjusted book balance
$ 1,845.00
Recording Adjusting Entries
from the Bank Reconciliation
GENERAL JOURNAL
Date
Description
2011
Oct. 31 Cash
Collection expense
Notes Receivable
Page 8
PR
Debit
Credit
485.00
15.00
500.00
To record collection by bank
Oct. 31
9-27
LO 6
Recording Adjusting Entries
from the Bank Reconciliation
GENERAL JOURNAL
Date
Description
2011
Oct. 31 Accounts Receivable - Heflin
Cash
Page 8
PR
Debit
Credit
30.00
30.00
To record NSF cheque plus s/c
Oct. 31
23.00
Cash
9-28
23.00
LO 6
Recording Adjusting Entries from
Bank Reconciliation
After posting the reconciling entries the cash
account looks like this . . .
GENERAL LEDGER
Account:
Cash
Date
Item
Acct. No.
PR
Debit
Credit
101
Balance
DR (CR)
2011
Oct.
9-29
31
31
31
31
31
Balance
Adjusting entry
Adjusting entry
Adjusting entry
Adjusting entry
G8
G8
G8
G8
485.00
8.42
30.00
23.00
1,404.58
1,889.58
1,898.00
1,868.00
1,845.00
LO 6
Let’s practice
Exercise 8-10
 Problem 8-8A

9-30