Chapter Eight Page 312
Cash and Internal Controls
Objective: To have students demonstrate their knowledge in protecting cash. They will define cash and cash equivalents, identify and apply cash controls both internally and externally. They will administer a petty cash fund, use a voucher system, and prepare a bank reconciliation.
Topics to be covered:
o Both internal and external
o Technology needed
- Cash Controls
o Know types of cash
§ Petty Cash
§ Receipts and Disbursements
§ Days Sales uncollectable
- Banking Activities
o Checking Account
- Used to monitor and control business activities and transactions.
§ Protect Assets
§ Ensure reliable Accounting
§ Promote efficient operations
§ Follow company Policies
§ Follow GAAP
Sarbanes-Oxley Act (SOX)
- Requires all companies traded on an exchange to document and certify the system of internal controls.
o Auditors must evaluate internal controls and issue a report
o Auditors of a client are restricted as to what services they provide to a current client.
o An Auditor (person) can serve a max of seven years on that client without a two-year break.
o Auditors work is overseen by the Public Accounting Oversight Board
o Harsh Penalties of up to 25 years in prison and a fine are imposed.
Principles of Internal Controls
1. Establish Responsibilities – Separation of duties, no two people are to do the same tasks or task in a row.
2. Maintain Adequate Records – Must have details and support. Can use pre-numbered forms
3. Insure Assets and Bond Employees – Assets are insured. Employees are guaranteed (bonded). They won’t steal.
4. Separate Record keeping from custody of assets – Different jobs for different people.
5. Divide responsibilities for related asset transactions – separation of duties.
6. Apply technology to controls – Use cash registers, time clocks, scanners, mobile units, ect.
7. Perform regular and independent reviews – Internal audits first (during the year). Followed by external audits performed by outside independent auditors annually
Limitations of Internal Controls
- Mainly human error not following procedures
Technology and Internal Controls
- This has a big impact
o Now mostly automated
o Improves ability to monitor business activities
Reduced processing time
More extensive testing
Eliminates unnecessary jobs
Less support and documentation
-Both currency and coin (also checks)
Cash Equivalents – Are short term and highly liquid
- Quickly converted to cash (A/R)
- Not sensitive to interest charges
- Usually due within the following three months after issuance
- Cash is the most liquid of all assets (how quickly something turns into cash)
- It is easily hidden or moved
- Degree of Liquidity – a companies ability to pay for its short term obligations
o Handle cash separate from record keeping
o Make deposits promptly
o All disbursements are made by checks in numeric order
- Plan cash receipts to meet cash payments
- Keep a minimum level of cash to operate
o Encourage collection of receivables
o Delay payment of liabilities
o Keep only necessary levels of assets
o Plan expenditures
o Invest excess cash
Cash sales are recorded in the cash receipts journal
Most companies protect the disbursement of cash by using some form of approval of an expenditure system called a voucher system.
Voucher System (pg 322)
Purchase Requisition – Prepared by the initiating department
Purchase Order – Goes to purchasing dept, originating dept, & Accounting
Invoice – From vender, goes to originating dept & acct.
Receiving Report – to Rec., Accounting, and purchasing dept.
Invoice Approval – the “bill” with approved signatures goes to acct dept and A/P
Check Issued – from A/P, recorded into Cash Disbursement Journal
(Voucher approval pg 337)
- Cash kept handy to reimburse employees for minor expenditures that do not have an expense account. Relatively small amounts of ca
- Kept in a small secure place in a box locked up.
- Contains a log of all cash activity
- MUST have a voucher and support
To Set-up a petty cash fund when none is in existence:
Dr. Petty Cash
To reimburse the Petty Cash Fund: (list each expense i)
Dr. Advertising Exp
Dr. Supply Exp.
To increase Fund Balance
To decrease Fund
When all amounts are accounted for and it is still not in balance cash over and short is used. IT can be a debit if more is given out than the receipts support, a credit it there is more cash left in the physical box than the receipts calculate to. The total receipts plus the remaining balance must always equal the total fund balance. The G/L Petty Cash account is only used to start, increase, or decrease the balance.
Bank Account – a record of cash activity setup by the bank for the account holder
Bank Deposit – Lists each individual deposited item can be checks or total cash
Checking account – The place where cash is stored that records cash deposits and cash disbursements by the account holder. This keeps tracks of the activity of cash.
Parts of a Checking (bank) Account
- Signature Card – to verify all users of the account by signature
- Deposit Slip (pg 326)
- Check (pg 327)
- Bank Statement (pg 328)
Shows: Beginning balance
Reduction (debit) to cash by checks and bank charges
Increase to cash by getting deposits (credit)
Adjustments to account
Shows ending bank balance
Proves the actual cash balance of both the bank and the depositors records. They reconcile the balance to agree based on adjusting items that occurred during the period.
Some items include: (page 326)
Cancelled Checks – a check written by the account holder that has been presented for payment by the payee and cash taken out of your account by your bank. These appear on the bank statement and cash disbursement journal (G/L) but not needed to be shown on the bank reconciliation.
Outstanding Checks – Checks written, recorded in the G/L, but not yet presented for payment and the amount has not yet been deducted from your account. This is shown as a reduction to the bank balance on the bank reconciliation.
Service Charges – Fees deducted from your account by the bank for services provided by the bank. These come on the bank statement. These are shown as a reduction to the G/L balance.
Deposits in Transit – (DIT) – Deposits made by the account holder, recorded in the G/L, but not collected by the bank yet. Your bank account has been given the credit for the deposit yet. This is shown as an increase adjustment to the bank balance.
NSF Check – Non-Sufficient-Funds – a bounced check – A check that has been written, presented for payment or collection and there are not enough funds to satisfy the entire check. (no partial payments)
There are nine steps to follow in completing a bank reconciliation: (pg 330)
1. Identify the cash balance on the bank Statement.
2. Identify and list any deposits recorded on books but not on the statement (DIT). In the “addition” section of the bank rec. on the bank side.
3. Identify and list and outstanding checks written, recorded but not cleared (O/S). In the “deduction” section of the bank rec. on the bank side.
4. Compute the adjusted bank balance.
5. Identify the company’s book (G/L) balance of the cash account.
6. Identify and list any unrecorded credit memos from the bank, interest earned, notes collected. These come from the bank statement. This goes on the “addition” section on the book side. These require a J/E to be made and adjustment to cash balance. There will always be a debit to cash as part of the J/E.
7. Identify and list any unrecorded debit memos from the bank, service charges, printing fees, errors, NSF check. This goes on the “deduction” section on the book side. These require a J/E to be made and adjustment to the cash balance. There will always be a credit to cash as part of the J/E.
8. Compute the adjusted book balance.
9. Verify that the two adjusted balances are the same. If not you must find the difference so the balances always agree after adjustments.
Hints on doing a Bank Rec;
To determine which side the adjustments go on ask yourself “Who knows about it?”
When bank errors are found a call to the bank is made to verify and correct them
All items are listed individually and with detail
Days in Sales Uncollectable – How long it takes to collect the amount in the Accounts Receivable account.
(A/R /Net Sales) x 365
Demo Problem pg 332-333
Quick Study, Exercises, and Problems
1. Do QS: 8-4 – Safeguarding Cash pg 342
Ex. 8-7 – Voucher system pg 344
Prob. 8-1 Internal Controls pg 346
QS. 8-1 – Internal Controls Pg. 342
8-2 – Cash Controls Pg. 342
8-3 – Cash Controls Pg. 342
2. Do QS: 8-5 – Petty Cash pg 342
Ex. 8-4 – Petty Cash pg 344
Ex. 8-5 – Petty Cash pg 345
3. Do Prob: 8-3 – Petty Cash pg 346
4. Do QS: 8-6 - Bank Rec Adj., Chart & Terms pg 343
Ex. 8-6 Bank Rec Adj Chart pg 344
8-8 Bank Rec pg. 344
8-9 Bank Rec Adj. J/E (from 8-8) pg 345
5. Do QS. 8-7 Bank Rec pg 343
Ex. 8-10 – Bank Rec pg 345
6. Do Problem 8-4 Bank Rec & J/E pg 347
7. Do Problem 8-5 Bank Rec & J/E pg 348
Days in Sales
8. Do QS: 8-8 pg 343
Ex. 8-11 pg 345