ACC101- PRINCIPLE OF ACCOUNTING

CHAPTER 8: CASH AND INTERNAL CONTROLS

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 OBJECTIVES

INTERNAL CONTROL

C1 Define internal control and identify its purpose and principles.

CONTROL OF CASH

C2 Define cash and cash equivalents and explain how to report them.

P1 Apply internal control to cash receipts and disbursements.

TOOLS OF CONTROL AND ANALYSIS

P2 Explain and record petty cash fund transactions

P3 Prepare a bank reconciliation.

A1 Compute the days’ sales uncollected ratio and use it to assess liquidity.

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 1. Internal Control
C1 1.1. Purpose of Internal Control

An internal control system consists of the policies and procedures

managers use to:
▪ Protect assets.
▪ Ensure reliable accounting.
▪ Promote efficient operations.
▪ Urge adherence to company policies.

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 1. Internal Control
C1 1.1. Purpose of Internal Control

The Sarbanes-Oxley Act (SOX) requires managers and auditors of public companies to
document and certify the system of internal controls. Specific requirements for auditors are:
▪ Auditors must evaluate internal controls and issue internal control reports.
▪ Auditors of a client are restricted as to what consulting services they can perform for that
client.
▪ The person leading an audit can serve no more than seven years without a two-year break.
▪ Auditors’ work is overseen by the Public Company Accounting Oversight Board.
▪ Harsh penalties exist for violators – sentences up to 25 years in prison with severe fines.

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 1. Internal Control
C1 1.2. Principles of Internal Control

Internal control principles common to all companies:

1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.

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 1. Internal Control
C1 1.3. Technology and Internal Control

Reduced More
Processing Extensive Testing
Errors of Records

Crucial
Limited
Separation of
Evidence of
Duties
Processing

Increased
e-commerce
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 1. Internal Control
C1 1.4. Limitations of Internal Control

Human Error Human Fraud Cost-benefit principle

Negligence Intent to
Fatigue defeat internal The costs of internal controls
Misjudgment controls for must not exceed their
Confusion personal gain benefits.

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 2. Control of Cash
C2

An effective system of internal control that protects cash and cash

equivalents should meet three basic guidelines:

Handling cash Cash receipts

is separated from are promptly deposited in
recordkeeping for cash. a bank.

Cash disbursements are

made by check.

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 2. Control of Cash
C2 2.1. Cash, Cash Equivalents, and Liquidity
Cash
✓ Currency, coins
✓ Demand deposit (amounts on deposit in
bank accounts)
✓ Checking accounts
✓ Some savings accounts (time deposits).
✓ Items such as customer checks, cashier
checks, certified checks, and money orders.
short term equitment
^
Cash Equivalents: Short-term, highly liquid
investments that are:
✓ Readily convertible to a known cash amount.
✓ Close to maturity date and not sensitive to
interest rate changes.
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 2. Control of Cash
C2 2.1. Cash, Cash Equivalents, and Liquidity

Liquidity
How easily an asset can be converted into cash
to be used to pay for services or obligations.

Inventory Cash 10
 2. Control of Cash
C2 2.2. Cash Management

The goals of cash management are twofold:

1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.

Effective cash management involves applying the following cash

management principles:
▪ Encourage collection of receivables.
▪ Delay payment of liabilities.
▪ Keep only necessary levels of assets.
▪ Plan expenditures.
▪ Invest excess cash. 11
 2. Control of Cash
P1 2.3. Control of Cash Receipts

Over-the-Counter Cash
Receipts
▪ Cash register with locked-in record
of transactions.
▪ Compare cash register record with
cash reported.

Cash Receipts by Mail

▪ Two people open the mail.
✓ Money to cashier’s office.
✓ List to accounting dept.
✓ Copy of list filed.
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 2. Control of Cash
P1
2.3. Control of Cash Receipts

Cash Over and Short chênh lệch ghi vào acc này

Sometimes errors in making change are discovered from differences between the cash in
the cash register and the record of the amount of cash receipts.
If a cash register’s record shows $550 but the count of cash in the register is $555

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 2. Control of Cash
P1
2.3. Control of Cash Receipts

Cash Over and Short

Sometimes errors in making change are discovered from differences between the cash in
the cash register and the record of the amount of cash receipts.
On the other hand, if a cash register’s record shows $625 but the count of cash in the
register is $621, the entry to record cash sales and its shortage is

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 2. Control of Cash
P1 2.3. Control of Cash Receipts

▪ All expenditures should be made by check. The only exception is for

small payments from petty cash.

▪ Separate authorization for check signing and recordkeeping duties.

▪ Use a voucher system.

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 2. Control of Cash
P1 2.3. Control of Cash Receipts
Voucher System of Control

A voucher system establishes procedures for:

▪ Verifying, approving and recording obligations for eventual cash

disbursements.

▪ Issuing checks for payment of verified, approved and recorded obligations.

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 2. Control of Cash
P1 2.3. Control of Cash Receipts
Voucher System of Control
Sender Receiver
Check
Cashier Supplier (Vendor)
Accounting Invoice Approval Cashier
Receiving Report Accounting, Requesting
Receiving
& Purchasing
Supplier (Vendor) Invoice Accounting
Purchasing Purchase Order Supplier, Requesting,
Receiving & Accounting
Purchase Requisition
Requesting Purchasing and
Accounting

Voucher
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 2. Control of Cash
P2 2.3. Control of Cash Receipts

Petty Cash System of Control

Small payments required in most companies for items such as postage,

courier fees, repairs and supplies.

Petty Cash
Company Petty
Operating a Petty Cashier Cashier
Cash Fund

Accountant 18
 2. Control of Cash
P2 2.3. Control of Cash Receipts

Operating a Petty Cash Fund

Petty
Cashier
Petty Cash

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 2. Control of Cash
P2 2.3. Control of Cash Receipts
Operating a Petty Cash Fund

After the petty cash fund is established, the Petty Cash

account is not debited or credited again unless the
amount of the fund is changed.

Petty
A petty cash fund is used only for business
Cashier
expenses.

Petty cash receipts with either no signature

or a forged signature usually indicate misuse
of petty cash.
43¢

Stamps Courier
$43 $80 20
 2. Control of Cash
P2 2.3. Control of Cash Receipts
Z-Mart’s petty cashier makes several
Operating a Petty Cash Fund November payments from petty cash.

Receipts
$71.3
To reimburse
Company Petty
petty cash fund
Cashier Cashier

Use a Cash Over and Short account if needed

Accountant

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 2. Control of Cash
P2 2.3. Control of Cash Receipts
Increasing or decreasing a petty cash fund.
Assume Z-Mart decides to increase its petty cash fund from $75 to $100 on November 27
when it reimburses the fund. The entries required are to
(1) reimburse the fund as usual (see the preceding November 27 entry)
(2) increase the fund amount as follows.

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 2. Control of Cash
P2 2.3. Control of Cash Receipts

Petty Cash Example

Tension Co. maintains a petty cash fund of $400. The following summary
information was taken from petty cash vouchers for July:

Travel Expenses $79.30

Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48

Let’s look at replenishing the fund if the balance on July 31 was $137.80.
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 2. Control of Cash
P2 2.3. Control of Cash Receipts

Petty Cash Example

What amount of cash will be required to replenish

the petty cash fund?

a. $260.20
b. $262.20
Desired Balance $ 400.00
c. $139.80
Actual Balance 137.80
d. $137.80 Amount Needed $ 262.20

Let’s prepare the journal entry to replenish the petty cash fund.
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 2. Control of Cash
P2 2.3. Control of Cash Receipts

Petty Cash Example

Journal entry to replenish petty cash fund

Dr. Cr.
July 31 Travel Expense 79.30
Entertainment Expense 93.42
Postage Expense 55.00
Office Supplies Expense 32.48
Cash Over and Short 2.00
Cash 262.20

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 3. Banking Activities as Controls
C3
3.1. Basic Bank Services

Bank Accounts Signature Cards Deposit Tickets

Electronic Funds Bank

Checks
Transfer Statements

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 3. Banking Activities as Controls
C3
3.2. Bank Statement
Usually once a month, the bank sends each depositor a bank statement showing
the activity in the account.
Bank Statement
First National Bank
Beginning-of- Nashville, TN 37459 May 31, 2009 End-of-period
period balance. Clothes Mart
balance.
Nashville, TN *
Acct No 278609

Previous Total Current

Balance Total Checks Deposits Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
Checks and other 5/12 111 37.55 Deposits and
debits. 5/15 825.04
other credits.
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65
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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
A bank reconciliation is prepared periodically to explain the difference between
cash reported on the bank statement and the cash balance on company’s books.
Bank Statement
First National Bank
Nashville, TN 37459 May 31, 2006

Why are the

Clothes Mart
*
Nashville, TN
Acct No 278609 balances different?
Previous Total Current
Balance Total Checks Deposits Balance
1488.79 1,367.09 2,604.22 2,725.92 GENERAL LEDGER
5/1 107 55.00
5/2 1,251.88
Account: Cash Acct. No. 102
5/4 108 279.50 Balance
5/7 109 44.75 Date Item PR Debit Credit DR (CR)
5/9 110 21.81
May 31 Balance 2,481.18
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Bank Statement Balance
• Add: Deposits in transit.
• Deduct: Outstanding Checks
• Add or Deduct: Bank errors.
Book Balance
• Add: Collections made by the bank.
• Add: Interest earned on checking account.
• Deduct: Nonsufficient funds check (NSF).
• Deduct: Bank service charge.
• Add or Deduct: Book errors.

▪ Outstanding checks: checks written (or drawn) by the depositor, deducted on the depositor’s
records, and sent to the payees but not yet received by the bank at the bank statement date
▪ Deposits in transit: deposits made and recorded by the depositor but not yet recorded on the
bank statement.
▪ NSF: A company sometimes deposits another party’s check that is uncollectible

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation

Two sections:
1. Reconcile bank statement balance to the adjusted bank balance.
2. Reconcile book balance to the adjusted book balance.
The adjusted balances should be equal.

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Bank Reconciliation Example

Let’s prepare a July 31 bank reconciliation statement for the

Simmons Company.

▪ The July 31 bank statement indicated a balance of $9,610.

▪ The cash general ledger account on that date shows a
balance of $7,430.

Additional information necessary for the reconciliation is shown

on the next screen.

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Bank Reconciliation Example
1. Outstanding checks totaled $2,417.
2. A $500 check mailed to the bank for deposit had not reached the bank
at the statement date.
3. The bank returned a customer’s NSF check for $225 received as
payment on account receivable.
4. The bank statement showed $30 interest earned during July.
5. Check No. 781 for supplies expense cleared the bank for $268 but was
erroneously recorded in our books as $240.
6. A $486 deposit by Acme Company was erroneously credited to our
account by the bank.

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Bank Reconciliation Example
Simmons Company
Bank Reconciliation
July 31, 2010
Bank Balance, July 31 $ 9,610 
Add: Deposit in Transit  500
Less: Bank Error $ 486
Outstanding Checks  2,417 (2,903)
Adjusted Bank Balance, July 31 $ 7,207 

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Bank Reconciliation Example
Simmons Company
Bank Reconciliation
July 31, 2010
Bank Balance, July 31 $ 9,610 
Add: Deposit in Transit  500
Less: Bank Error $ 486
Outstanding Checks 2,417  (2,903)
Adjusted Bank Balance, July 31 $ 7,207 
Book Balance, July 31 $ 7,430  
Add: Interest  30 Balances are
Less: Recording Error
NSF Check
$ 28
225
 (253)
equal (reconciled)

Adjusted Book Balance, July 31 $ 7,207 

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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation

Recording Adjusting Entries from a Bank Reconciliation

Only amounts shown on the book portion of the reconciliation require an
adjusting entry.

Dr. Cr.
July 31 Cash 30
Interest revenue 30

July 31 Supplies expense 28

Accounts receivable 225
Cash 253
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 3. Banking Activities as Controls
P3
3.3. Bank Reconciliation
Recording Adjusting Entries from a Bank Reconciliation

After posting the reconciling entries the cash account looks like this:

GENERAL LEDGER
Account: Cash Acct. No. 101
Balance
Date Item PR Debit Credit DR (CR)
July 31 Balance 7,430
31 Adjusting entry 30 7,460
31 Adjusting entry 253 7,207

Adjusted balance on July 31.

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 Days’ Sales Uncollected
For Ind.
A1 Assignment,
read pg. 351

How much time is likely to pass before we receive cash receipts from credit sales.
càng thấp càng tốt
ý nghĩa: nếu kq ratio là 30 days => cty mất 30days để thu hồi nợ

Days’
Accounts Receivable
Sales = × 365
Net Sales
Uncollected

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Homework

HOMEWORK:
E8-5, 8-8 pg. 362, 8-9 pg. 363
Problem 8-2A, pg. 364, Problem 8-4A, pg. 365 (Wild 22nd ed)

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