The Alternative to Debits and Credits
Fifth Edition
Gary A. Porter and Curtis L. Norton
Chapter 6, Slide #1
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Cash

Coin and currency

Checking, savings, and money market accounts

Undeposited, cashier, and certified checks
Chapter 6, Slide #2
LO1

Cash Equivalents

Readily convertible to cash

Original maturity to investor of three months or less

Commercial paper

U.S. Treasury bills

Certain money market funds
Chapter 6, Slide #3

Cash Management

Necessary to ensure company has neither too little nor too much cash on hand

Tools
• Cash flows statement
•
Bank reconciliations
•
Petty cash funds
Chapter 6, Slide #4
LO2

Bank Statements
Cash balance, beginning of period +

Deposits

Customer notes and interest collected by bank

Interest earned

Canceled checks

NSF checks

Service charges
= Cash balance, end of period
Chapter 6, Slide #5

Bank Reconciliation – Step 1
Trace deposits listed on the bank statement to the books. Identify the deposits in transit.
Add to the bank balance.
Deposits in transit:
Late period deposits not yet reflected on bank statement
Chapter 6, Slide #6

Example of Reconciliation
Bank Statement Adjustments: Deposits
Balance per statement, June 30 $3,308.59
Add: Deposit in transit 642.30
Chapter 6, Slide #7

Bank Reconciliation – Step 2
Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.
Outstanding checks:
Checks written but not yet presented to bank
Chapter 6, Slide #8

Example of Reconciliation
Bank Statement Adjustments: Checks Outstanding
Balance per statement, June 30
Add: Deposit in transit
Deduct: Outstanding checks:
No. 496
No. 501
No. 502
Adjusted balance, June 30
$3,308.59
642.30
$ 79.89
213.20
424.75
(717.84)
$3,233.05
Chapter 6, Slide #9

Bank Reconciliation – Step 3
List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
Credit memoranda:
Interest earned, customer notes collected, etc.
Chapter 6, Slide #10

Example of Reconciliation
Cash Account Adjustments: Credit Memoranda
Balance per books, June 30
Add: Customer note collected
Interest on customer note
$500.00
50.00
Interest earned during June 15.45
Error in recording check 498 54.00
$2,895.82
619.45
Chapter 6, Slide #11

Bank Reconciliation – Step 4
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance.
Debit memoranda:
NSF checks, service charges, etc.
Chapter 6, Slide #12

Example of Reconciliation
Cash Account Adjustments: Debit Memoranda
$2,895.82
Balance per books, June 30
Add: Customer note collected
Interest on customer note
$500.00
50.00
Interest earned during June 15.45
Error in recording check 498 54.00
619.45
Deduct: NSF check
Collection fee on note
Service charge for lockbox
Adjusted balance, June 30
Chapter 6, Slide #13
$245.72
16.50
20.00
(282.22)
$3,233.05

Bank Reconciliation – Step 5
Identify errors made by the bank or the company in recording the transactions during the period.
Chapter 6, Slide #14

Bank Reconciliation – Step 6
Use the information collected in steps 1 through 5 to prepare the bank reconciliation.
Bank Reconciliation
Balance per bank $$$
:
Adjusted balance $$$
Balance per books $$$
:
Adjusted balance $$$
Chapter 6, Slide #15
Adjusted balances for book and bank must agree

Example of Reconciliation
Bank Statement Adjustments
Balance per statement, June 30 $3,308.59
Adjusted balance, June 30 $3,233.05
Cash Account Adjustments
Balance per books, June 30 $2,895.82
Adjusted balance, June 30 $3,233.05
Chapter 6, Slide #16

Bank Reconciliation Adjusting
Entries
Bank Reconciliation
Balance per bank $$$
:
Adjusted balance $$$
Balance per books $$$
:
Adjusted balance $$$
Chapter 6, Slide #17
Book adjustments are the basis for adjusting entries

Petty Cash Transactions
1. Establish the fund by writing check to and entrusting cash to petty cash custodian.
2. Disbursements made from fund upon presentation of necessary documentation (receipts).
3. Periodically, the fund is replenished by writing and cashing check in amount needed to bring the fund back to its original balance.
4. Record the expenses.
Chapter 6, Slide #18

Internal Control System

Consists of the policies and procedures necessary to ensure:
• The safeguarding of an entity’s assets
•
The reliability of its accounting records
•
The accomplishment of its overall objectives
Chapter 6, Slide #19
LO3

Sarbanes-Oxley Act of 2002 (SOX)
Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals
Chapter 6, Slide #20

Internal Control
Control
Environment
Accounting
System
Internal
Control
Procedures
Chapter 6, Slide #21

The Control Environment
 Management’s competence and operating style

Personnel policies and practices

Influence of board of directors
Chapter 6, Slide #22

The Accounting System
Methods and records used to report transactions and maintain financial information

Can be manual, fully computerized, or a combination of both

Use of journals is an integral part of any system
Chapter 6, Slide #23

Internal Control Procedures
Independent
Review and
Appraisal
The Design and
Use of Business
Documents
Independent
Verification
Safeguarding
Assets and
Records
Proper
Authorizations
Segregation of Duties
LO4

Proper Authorizations

Authority and responsibility go hand in hand
Chapter 6, Slide #25

Segregation of Duties

Separate physical custody from the accounting for assets
Chapter 6, Slide #26

Independent Verification

One individual or department acts as a check on the work of another
Chapter 6, Slide #27

Safeguarding Assets and Records

Protect assets and accounting records from loss, theft, unauthorized use, etc.
Chapter 6, Slide #28

Independent Review and Appraisal

Provide for periodic review and appraisal of the accounting system and the people operating it
Chapter 6, Slide #29

The Design and Use of Business
Documents

Capture all relevant information about a transaction and assist in proper recording and classification.

Are properly controlled
Chapter 6, Slide #30

Limitations on Internal Control

No system is entirely foolproof
•
Employees in collusion can override the best controls
•
Cost vs. benefit tradeoff
Chapter 6, Slide #31

Computerized Business Documents and Internal Control

Cash receipts should be deposited intact in the bank on a daily basis

All cash disbursements should be made by check
Chapter 6, Slide #32
LO5

Control Over Cash Receipts

Cash received over the counter (e.g., cash sales)

Cash received in the mail (e.g., credit sales)
Chapter 6, Slide #33

Controls Over Cash Received Over the Counter

Cash registers

Locked-in cash register tape

Prenumbered customer receipts

Investigate recurring discrepancies
Chapter 6, Slide #34

Controls over Cash Received in the Mail

Two employees open mail

Prelist prepared

Monthly customer statements
Chapter 6, Slide #35

Document Flow for Merchandise
Purchase
Requisition
Receiving
Report
Purchase
Order
Purchase
Invoice
Chapter 6, Slide #36
Invoice
Approval
Check
Prepared

Chapter 6, Slide #37
End of Chapter 6