Internal Control and Accounting for Cash
Chapter 6
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Learning Objectives
1. Define internal control and identify and
describe its objectives.
2. Define cash as it is used in accounting.
3. Describe internal control procedures
related to cash.
4. Describe the purpose of and need for a
petty cash fund.
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Learning Objectives
5. Record the establishment of a petty
cash fund.
6. Record the replenishment of a petty
cash fund.
7. Record the establishment of a change
fund.
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Learning Objectives
8. Record cash shortages and overages.
9. Prepare a bank reconciliation.
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Accounting scandals at Enron and WorldCom shook
the public’s confidence in the reliability of financial
statements.
Congress responded by passing the Sarbanes-Oxley
Act of 2002.
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The purpose of this act, abbreviated as SOX, was to
restore public confidence and trust in the financial
statements of companies.
SOX created a new body, the Public Company
Accounting Oversight Board, to oversee the work of
auditors of public companies.
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Harsh penalties for violators
Public accounting firms may not audit a client’s
books and also provide certain consulting services
for the same client
Increased responsibility of the boards of directors
Companies are required to maintain strong and
effective internal controls over recording business
transactions and preparing financial statements
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Learning Objective 1
Define internal control and identify and
describe its objectives
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The methods and procedures a business uses to
internally protect its assets
A good system of internal control is designed to
 Safeguard assets
 Ensure the accuracy and reliability of
accounting records
 Promote operational efficiency
 Ensure compliance with laws and regulations
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Learning Objective 2
Define cash as it is used in accounting
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Includes currency, coins, checks made payable to
the business, money orders, and amounts on deposit
in banks and other financial institutions
Generally considered the most precious of all assets
Almost everyone wants it
Easily taken if not protected
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Learning Objective 3
Describe internal control procedures
related to cash
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Establish Responsibility
Only properly designated personnel
are authorized to handle cash receipts.
Separation of Duties
The individual who accounts for cash
is different from the persons who
receive and deposit cash.
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Physical Protection
Cash on hand should be in a secure
location and cash should be deposited
daily.
Documentation
Cash register tapes, summaries of
checks received, etc. should be kept
to show the amount of cash received.
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Independent Verification
Cashiers check cash registers,
supervisors count cash receipts daily,
and company treasurer compares cash
receipts with bank deposits.
Keep Only a Small Amount of Cash on Hand
Only a small amount of cash should be
maintained on hand to make small
expenditures.
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Quick Check
The bookkeeper receives cash from customers,
makes the journal entry to record the deposit, and
deposits the cash at the bank. What internal control
procedure is being violated?
a. Keep only a small amount of cash on hand
b. Physical protection
c. Petty cash
d. Documentation
e. Separation of duties
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Review Quiz 6-1
Which of the cash procedures are examples of weak
internal controls? Why?
Answer:
1. Responsibility not established; too many people
have access
2. Good
3. Lacks independent verification
4. Lacks separation of duties
5. Good
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Learning Objective 4
Describe the purpose of and need
for a petty cash fund
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To control cash-most businesses use bank checking
accounts when making cash expenditures
It is not practical to write checks for very small
amounts
Most businesses maintain a petty cash fund which is
a small amount of money kept in the office for
making small expenditures
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Learning Objective 5
Record the establishment of a petty cash fund
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1. Estimate the amount of cash needed in the fund.
2. A check for this amount is written payable to Petty
Cash.
3. The check is then cashed, and the money is placed
in a box, a drawer, or a safe to be used for the fund.
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4. The check is recorded in the journal by
 Debiting the Petty Cash account (an asset)
 Crediting the Cash account
+ asset
- asset
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Petty cashier (usually) is the only person who makes
payments from the fund.
Petty cash voucher
 Prepared for each payment
 Shows the details of the payment
 Serves as proof of payment
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Some firms prefer to record all petty cash payments
on a single sheet called the petty cash payments
record.
A petty cash payments record is not a journal.
It is an auxiliary recordused as a basis for making a
journal entry.
An auxiliary record is a nonessential business record
that is helpful in maintaining records that are
essential.
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Learning Objective 6
Record the replenishment of a petty cash fund
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Normally replenished at month-end or when it nears
depletion or reaches a minimum amount
When replenished, the Petty Cash account is NOT
debited
The accounts debited are determined by analyzing
the petty cash vouchers
The Cash account is credited
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Example
Here is a list of expenses and amounts taken from the
petty cash payments record.
Expense
Office Supplies Expense
Miscellaneous Expense
Amount
$15.00
8.00
Postage Expense
10.84
Cathy Nash, Drawing
10.00
Advertising Expense
25.00
Total
$68.84
Prepare the journal entry to replenish the petty cash fund.
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Example
+ expense
+ expense
+ expense
+ drawing
+ expense
- asset
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Remember!
The Petty Cash account is debited only when the
fund is being established or when the amount in the
fund is increased.
The Petty Cash account is credited only when the
amount of the fund is decreased or eliminated
completely.
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Quick Check
Petty Cash is
a. debited when the Petty Cash Fund is replenished.
b. credited when the Petty Cash Fund is replenished.
c. debited when the Petty Cash Fund is established.
d. credited when the Petty Cash Fund is established.
e. debited when the Petty Cash Fund is eliminated.
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Review Quiz 6-2
1. In general journal form, record the establishment of
the fund on January 2.
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Review Quiz 6-2
2. In general journal form, record the replenishment of
the fund on January 31.
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Learning Objective 7
Record the establishment of a change fund
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Businesses that have many cash transactions usually
establish a change fund.
 An amount of money that is placed in the cash
register drawer
 Used to make change for customers who pay in
cash
The establishment of a change fund is recorded by
 Debiting the Change Fund account
 Crediting the Cash account
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Example
Assume a business decides to establish a change fund
on March 23 for $125.
The following journal entry would be made.
+ asset
- asset
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Learning Objective 8
Record the cash shortages and overages
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A cash shortage results when the amount of cash in
the cash register is less than the amount of cash
sales rung up on the register.
A cash overage results when the amount of cash in
the cash register is more than the cash sales rung up
on the register.
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Used to bring the cash on hand into agreement with
the cash sales
Used to handle both shortages and overages
Does not have a normal balance
 If it has a debit balance, considered an expense
 If it has a credit balance, considered revenue
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Example
Assume cash in the cash register amounts to $598 and
sales based on the cash register tapes amounts to $600.
The following entry would be prepared.
+ asset
no normal balance
+ revenue
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Example
Assume cash in the cash register amounts to $774 and
sales based on the cash register tapes amounts to $769.
The following entry would be prepared.
+ asset
+ revenue
no normal balance
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Quick Check
Cash sales based on the on the cash register tapes
amount to $595. Cash in the cash register drawer
amounts to $592. The journal entry to record cash
sales will include a
a. debit to Cash for $595.
b. credit to Sales for $592.
c. debit to Cash Short and Over for $3.
d. credit to Cash Short and Over for $3.
e. debit to Sales for $595.
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Review Quiz 6-3
Record the sales revenue and the cash shortage in
general journal form.
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Bank Checking Account
an amount of cash on deposit with a bank that the
bank must pay at the written order of the depositor
American Bankers Association (ABA) Transit Number
a number printed on checks and deposit slips that
identifies the bank and the area in which the bank
is located as well as other information
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Lists personal information and contains the signature of
the person or persons who are authorized to write
checks on the account
Kept on file by the bank as an aid in identifying possible
forgeries
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Prepared when coin, currency, or checks are
deposited in a bank account
Indicates
 Name of the depositor
 Account number
 Summarizes the amount deposited
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ABA transit
number
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A signature or stamp on the back of the check
Transfers ownership of the check to the bank
(or to another person or to an individual)
Authorizes payment of the check
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Blank Endorsement
Full Endorsement
Restrictive Endorsement
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A check is a written order directing a bank to pay a
specified sum of money to a designated person or
business.
The person or business who writes a check is called
the drawer.
The bank on which the check is written is called the
drawee.
The person or business to whom a check is made
payable is called the payee.
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Shows what the bank
did with the customer’s
money
Shows the account’s
 Beginning Balance
 Ending Balance
 Cash Receipts
 Payments
 Charges
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Learning Objective 9
Prepare a bank reconciliation
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The balance shown on the bank statement and the
balance in the checkbook normally do not agree at
the end of the month
Bank reconciliation— the process of making the
bank statement agree with the checkbook balance
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Common reasons why the bank statement balance may
not agree with the checkbook balance include:
Outstanding checks
Deposits in transit
Service charges and other bank fees
Errors, either the depositor’s or the bank’s
Bank collections
NSF checks
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1. Add the amount of deposits in transit to the bank
statement balance
2. Subtract the amount of outstanding checks from
the bank statement balance
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3. Add to the checkbook balance the amount of any
interest earned on the account or any collection
made by the bank for the depositor
4. Subtract any charges appearing on the bank
statement from the checkbook balance
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Example
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Quick Check
On a bank reconciliation, a NSF check is
a. added to the checkbook balance.
b. ignored.
c. added to the bank statement balance.
d. subtracted from the bank statement balance.
e. subtracted from the checkbook balance.
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Review Quiz 6-4
Stacy’s Bank Reconciliation Statement
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Example
All checkbook adjustments require a journal entry.
Assume the bank deducted $12 for its service
charge on the depositor’s checking account.
The following journal entry would be required:
+ expense
- asset
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Quick Check
When updating the cash account based on a bank
reconciliation, which of the following requires a
journal entry?
a. Deposits in transit and a NSF check
b. Outstanding checks and a bank collection
c. Bank service charge and a NSF check
d. Bank error and a depositor’s error
e. Bank error and a bank service charge
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Focus on Ethics
Are churches and not-for-profit organizations
more or less susceptible to fraud than for profit
businesses?
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Joining the Pieces
The Bank
Reconciliation
Procedure
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