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Microsoft® PowerPoint®
Internal Control
and Cash
CHAPTER 9
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
1.
2.
3.
4.
5.
Define, explain the purpose of, and identify
the principles of internal control.
Define cash and explain how it is reported.
Apply internal control to cash.
Explain and record petty cash fund
transactions.
Explain and identify banking activities and
the control feature they provide.
© 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
6.
7.
Prepare a bank reconciliation and
journalize any resulting adjustment(s).
Calculate the acid-test ratio and explain
its use as an indicator of a company’s
liquidity. (Appendix 9A)
© 2007 McGraw-Hill Ryerson Ltd.
Internal Control System
All policies and procedures used to :
Protect assets
 Ensure reliable accounting
 Promote efficient operations
 Encourage adherence to company policies

© 2007 McGraw-Hill Ryerson Ltd.
Fundamental Principles of
Internal Control
1.
2.
3.
4.
5.
Ensure transactions and activities are
authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and custody of
assets.
Establish a separation of duties
© 2007 McGraw-Hill Ryerson Ltd.
Fundamental 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.
© 2007 McGraw-Hill Ryerson Ltd.
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.
© 2007 McGraw-Hill Ryerson Ltd.
Cash
Is an important asset for every company.
 Control of cash on hand and access to it is
critical.
Cash includes:

Currency
 Coins
 Deposits in bank accounts
 Other items acceptable for deposit

© 2007 McGraw-Hill Ryerson Ltd.
Liquidity
Refers to how easily an asset can be
converted into another asset or used
in paying for services or obligations.
Examples:
 Cash — highly liquid
 A specialized piece of equipment — not
very liquid
© 2007 McGraw-Hill Ryerson Ltd.
Internal Control for Cash
Guidelines:
1. Separate handling of cash from
recordkeeping of cash.
2. Deposit cash receipts daily.
3. Make cash disbursements by
cheque.
© 2007 McGraw-Hill Ryerson Ltd.
Control of Cash Disbursements
All expenditures should be made by
cheque. The only exception is for small
payments from petty cash.
 Separate authorization, cheque signing,
and recordkeeping duties.
 Apply a voucher system.

© 2007 McGraw-Hill Ryerson Ltd.
Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
© 2007 McGraw-Hill Ryerson Ltd.
Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
© 2007 McGraw-Hill Ryerson Ltd.
Petty Cash System of Internal
Control
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.
This is an example of the cost-benefit limitation
© 2007 McGraw-Hill Ryerson Ltd.
Operating a Petty Cash Fund
Prepares
cheque to
establish petty
cash fund.
Treasurer and
Accountant
Petty Cashier
GENERAL JOURNAL
Date
Description
May 1 Petty Cash
Page 4
PR Debit Credit
150
Cash
150
To establish a petty cash fund
© 2007 McGraw-Hill Ryerson Ltd.
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.
© 2007 McGraw-Hill Ryerson Ltd.
Operating a Petty Cash Fund
A cheque is issued and the fund is
replenished when the amount of cash
on hand becomes low.
GENERAL JOURNAL
Date
Description
PR Debit Credit
May 15 Postage Expense
Courier Expense
Cash
Page 4
46
80
126
© 2007 McGraw-Hill Ryerson Ltd.
We use a Cash
Over and Short
account if needed.
Banking Activities and Services
 Bank
account
 Bank deposits and cheques
 Electronic funds transfer
 Bank credit card transactions
 Debit card transactions
© 2007 McGraw-Hill Ryerson Ltd.
Bank Credit Card Transactions
Many companies allow customers to use
bank credit cards for their purchases.
 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.

© 2007 McGraw-Hill Ryerson Ltd.
Debit Card Transactions
Many companies allow customers to use
debit cards for their purchases.
 The bank transfers funds from the
customer’s account to the vendor’s bank
account.
 The bank charges a fee to the vendor.
 The entries are identical to a bank credit
card sale.

© 2007 McGraw-Hill Ryerson Ltd.
Illustration-Bank Credit Card
Transactions
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 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
To record cost of sales
© 2007 McGraw-Hill Ryerson Ltd.
40.00
40.00
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.
© 2007 McGraw-Hill Ryerson Ltd.
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
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
© 2007 McGraw-Hill Ryerson Ltd.
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
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
© 2007 McGraw-Hill Ryerson Ltd.
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
119
123
127
122
120
125
121
128
Why are the
balances different?
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
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
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
© 2007 McGraw-Hill Ryerson Ltd.
Reconciling Items

Bank Statement



Outstanding cheques.
Deposits in transit.
Bank errors.

General Ledger





Non-sufficient funds
cheque (NSF).
Bank service charges.
Interest earned on
bank account.
Collections made by
the bank.
Book errors.
© 2007 McGraw-Hill Ryerson Ltd.
Let’s prepare the bank reconciliation
for VideoBuster Company at the end
of October 31, 2011.
© 2007 McGraw-Hill Ryerson Ltd.
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
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
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
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)
On both the cash
receipts
journal
$
Current
AND the bank
Balance
2,050.00
statement;
therefore,
none of these items is Cash Disbursements Journal
Daily
a Balance
reconciling item. Cheque #
Amount
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
© 2007 McGraw-Hill Ryerson Ltd.
119
120
121
122
123
124
125
126
127
128
$
$
55.00
200.00
120.00
70.00
25.00
150.00
15.00
200.00
50.00
135.00
1,020.00
(101)
National Bank
Hamilton, ON L8P 2X5
VideoBuster Company
901 Main Street
Hamilton, ON L8P 2J8
Bank Statement
Previous
Balance
1,609.58
Total Cheques
and Debits
723.00
Total Deposits
and Credits
1,163.42
Date
Cheques and
Debits
Number Amount
Deposits and
Credits
Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
119
123
127
122
120
125
121
128
On both the cash
disbursements
Current
journal
AND the
Balance
bank
2,050.00statement;
therefore, none of
Daily items is a
these
Balance
reconciling item.
Statement Date 31-Oct-11
Account Number 494 504 2
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
© 2007 McGraw-Hill Ryerson Ltd.
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)
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
Date
Cheques and
Debits
Number Amount
Oct 1
3
9
15
16
17
18
19
20
26
29
31
119
123
127
122
120
125
121
128
Bank Statement
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)
Only in the cash
$
receipts
journal OR
Total Deposits
Current
and Credits theBalance
cash disbursements
1,163.42
2,050.00
journal OR the bank
Deposits and statement; therefore,
Daily
Cash Disbursements Journal
Credits
Balance
Amount each of these items is a Cheque #
Amount
1,609.58
reconciling item.
119
$
55.00
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
1,794.58
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
© 2007 McGraw-Hill Ryerson Ltd.
120
121
122
123
124
125
126
127
128
$
200.00
120.00
70.00
25.00
150.00
15.00
200.00
50.00
135.00
1,020.00
(101)
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
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
The items that
show up only on
the bank statement
are reconciling
items on the book
side of the bank
reconciliation.
2,296.58
2,176.58
2,041.58
2,050.00
© 2007 McGraw-Hill Ryerson Ltd.
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
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
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2011
Book Balance
Add:
1,609.58
Collection of $500 note
1,794.58
less $15 collection fee
1,949.58
Interest earned
485.00
8.42
NSF cheque plus s/c
Cheque printing charge
30.00
23.00
1,999.58
2,126.58
2,541.58Less:
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2007 McGraw-Hill Ryerson Ltd.
1,404.58
493.42
1,898.00
53.00
1,845.00
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
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
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2011
Book Balance
Add:
1,609.58
Collection of $500 note
1,794.58
less $15 collection fee
1,949.58
Interest earned
485.00
8.42
NSF cheque plus s/c
Cheque printing charge
30.00
23.00
1,999.58
2,126.58
2,541.58Less:
2,341.58
2,326.58
2,296.58
2,176.58
2,041.58
2,050.00
© 2007 McGraw-Hill Ryerson Ltd.
1,404.58
493.42
1,898.00
53.00
1,845.00
The items that show
up only on the cash
receipts or cash
disbursements journal
are reconciling items
on the bank side of the
bank reconciliation.
© 2007 McGraw-Hill Ryerson Ltd.
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)
Cash Receipts Journal
Deposit
Date
Amount
Oct 3 $
240.00
9
180.00
15
16
31
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2011
Bank Balance
Add:
Deposit in transit
Less: Outstanding cheques
No. 124
No. 126
$
100.00
150.00
145.00
815.00
(101)
$ 2,050.00
145.00
2,195.00
$ 150.00
200.00
350.00
$ 1,845.00
© 2007 McGraw-Hill Ryerson Ltd.
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)
The Final Product
VIDEOBUSTER COMPANY
Bank Reconciliation
October 31, 2011
Bank Balance
Add:
Deposit in transit
$ 2,050.00
145.00
2,195.00
Less: Outstanding cheques
No. 124
$ 150.00
No. 126
200.00
350.00
Adjusted bank balance
$ 1,845.00
Book Balance
Add: Collection of $500 note
less $15 collection fee
Interest earned
$ 1,404.58
$ 485.00
8.42
493.42
1,898.00
Less:
NSF cheque plus s/c
Cheque printing charge
Adjusted book balance
© 2007 McGraw-Hill Ryerson Ltd.
30.00
23.00
53.00
$ 1,845.00
Recording Adjusting Entries from
the Bank Reconciliation
We journalize the items not previously
recorded in the accounting records.
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 Cash
Interest earned
To record collection by bank
© 2007 McGraw-Hill Ryerson Ltd.
8.42
8.42
Recording Adjusting Entries from
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 Office supplies expense
Cash
To record cheque printing charge
© 2007 McGraw-Hill Ryerson Ltd.
23.00
23.00
Recording Adjusting Entries from
Bank Reconciliation
After posting the reconciling entries the cash
account looks like this . . .
GENERAL LEDGER
Account:
Cash
Date
Acct. No.
Item
PR
Debit
Credit
101
Balance
DR (CR)
2011
Oct.
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
Adjusted balance on October 31.
© 2007 McGraw-Hill Ryerson Ltd.
1,404.58
1,889.58
1,898.00
1,868.00
1,845.00
Review
Discuss the purpose of a bank reconciliation.
A bank reconciliation is a procedure designed to explain
the differences between the balance in a firm's bank
account and the balance on the period's bank statement.
The reconciliation procedure examines the differences
based on the information available to each party and
adjusts for the differences. It also serves as a format for
the discovery and correction of recording errors.
© 2007 McGraw-Hill Ryerson Ltd.
Review
Identify the principles of internal control.
Principles of internal control include the following:
 establishing responsibilities
 maintaining adequate records
 insuring assets and bonding employees
 separating recordkeeping from custody of assets
 dividing responsibilities for related transactions
 applying technological controls
 performing regular independent reviews
© 2007 McGraw-Hill Ryerson Ltd.
Using the Information-Appendix 9A
Acid-Test Ratio
 A measure of a company’s liquidity.
 Similar to current ratio but excludes less
liquid assets.
 Ratio will vary from industry to industry.
© 2007 McGraw-Hill Ryerson Ltd.
Using the Information-Appendix 9A
Acid-Test Ratio =
Quick assets*
Current liabilities
* cash, short-term investments, and receivables
© 2007 McGraw-Hill Ryerson Ltd.
End of Chapter
© 2007 McGraw-Hill Ryerson Ltd.