Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm
Carole Bowman, Sheridan College
INTERNAL CONTROL AND CASH
Internal control consists of the policies and procedures adopted within a business in order to: 1. optimize resources, and 2. prevent and detect errors and irregularities.
Safeguard its assets 4.INTERNAL CONTROL
Internal control consists of the policies and procedures adopted within a business in order to: 3. Maintain the accuracy and reliability of its accounting records
PRINCIPLES OF INTERNAL CONTROL
Authorization Segregation of duties Documentation procedures Safeguarding assets and records Independent verification
Segregation of duties: The work of one employee should provide a reliable basis for evaluating the work of another employee.PRINCIPLES OF INTERNAL CONTROL
Authorization of transactions and activities: Authorization by the proper individual is important. Control is most effective when only one person is responsible for a given task.
and electronic controls relate primarily to the safeguarding of assets and enhancing accuracy and reliability of the accounting records.
. mechanical. assets and records: Physical.PRINCIPLES OF INTERNAL CONTROL
Documentation procedures: Documents should provide evidence that transactions and events have occured. and use of. Safeguards to control access to.
and reconciliation of information from two sources.PRINCIPLES OF INTERNAL CONTROL
Independent verification: • External verification indicates whether the company’s financial statements fairly present its financial position and results of operations in accordance with GAAP. • Internal verification involves review.
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES AND INDEPENDENT INTERNAL VERIFICATION
Segregation of Duties
Accounting Employee A
Maintains cash balances per books
Assistant Cashier B
Maintains custody of cash on hand
Independent Internal Verification Assistant Comptroller C Makes monthly comparisons: reports any irreconcilable differences to comptroller
LIMITATIONS OF INTERNAL CONTROL
of business Human element
Cash includes coins. and money on hand or on deposit at a bank or similar depository. cheques. currency. money orders.
. Internal control over cash is imperative in order to safeguard cash and assure the accuracy of the accounting records for cash.
CONTROL OVER CASH RECEIPTS
Only designated personnel should be authorized to handle or have access to cash receipts. Different individuals should: 1. receive cash 2. have custody of cash
. record cash receipt transactions 3.
. remittance advices 2.CONTROL OVER CASH RECEIPTS
Documents should include: 1. Access to storage areas should be limited to authorized personnel. deposit slips Cash should be stored in safes and bank vaults. cash register tapes 3. Cash registers should be used in executing over-the-counter receipts.
CONTROL OVER CASH RECEIPTS
Daily cash counts and daily comparisons of total receipts should be made.
. An important tool in control of over-thecounter receipts is cash registers that are visible to customers. All personnel who handle cash receipts should be bonded and required to take vacations.
Different departments or individuals should be assigned the duties of approving an item for payment and paying it.CONTROL OVER CASH DISBURSEMENTS
Payments are made by cheque rather than by cash. Only specified individuals should be authorized to sign cheques. except for petty cash transactions.
1. A cheque writer machine should be used to imprint the amount on the cheque in indelible ink. Blank cheques should be stored in a safe.CONTROL OVER CASH DISBURSEMENTS
Prenumbered cheques should be used and each cheque should be supported by an approved invoice or other document. Access should be restricted to authorized personnel. 2.
Following payment. the approved invoice should be stamped PAID.
.CONTROL OVER CASH DISBURSEMENTS
Each cheque should be compared with the approved invoice before it is issued.
replenishing the fund. and 3. establishing the fund. 2. involves 1. Accounting entries are required when 1.PETTY CASH FUND
A petty cash fund is used to pay relatively small amounts. often called an imprest system. the fund is replenished.
. 2. making payments from the fund. and 3. the fund is established. the amount of the fund is changed. Operation of the fund.
1 Account Titles and Explanation Petty Cash Cash To establish a petty cash fund. Debit Credit
When the fund is established.ESTABLISHING THE FUND
Date Mar. a cheque payable to the petty cash custodian is issued for the stipulated amount.
freight out. $38. $44. $5.
. The fund contains $13 cash and petty cash receipts for postage. 15 Account Titles and Explanation Postage Expense Freight Out Miscellaneous Expense Cash To replenish petty cash fund. Debit Credit
44 38 5
On March 15 the petty cash custodian requests a cheque for $87.REPLENISHING THE FUND
Date Mar. and miscellaneous expenses.
15 Account Titles and Explanation Postage Expense Freight Out Miscellaneous Expense Cash Over and Short Cash To replenish petty cash fund/ Debit 44 38 5 1 Credit
On March 15 the petty cash custodian requests a cheque for $88.
. $44. freight out. The fund contains $12 cash and petty cash receipts for postage. $5.REPLENISHING THE FUND
Date Mar. and miscellaneous expenses. $38.
.USE OF A BANK
The use of a bank minimizes the amount of currency that must be kept on hand and contributes significantly to good internal control over cash. A company can safeguard its cash by using a bank as a depository and clearing house for cheques received and cheques written.
33 4-7 14.929. 20 Total Amount 34. LEE COMPANY 500 QUEEN STREET FREDERICTON.47 4-7 982.28 ============= 4-27 13.276.BANK STATEMENTS
A bank statement shows: 220.127.116.11 4-5 1.00 4-30 461 620.87 4-12 13.260.487.154.781.005. NB.936.55
Balance This Statement 15.45
DEPOSITS AND CHEQUES AND DEBITS CREDITS DAILY BALANCE Date No.907.45
Reconcile Your Account Promptly
Not Sufficient Funds Service Charge
.86 4-5 15.648.185.65 4-8 439 1.585.802.46 4-8 1.60 4-29 459 1.00 4-11 442 1.41 4-13 1.720.30 4-30 DM 30.79 4-3 438 776.60 4-12 443 1. E3B 5C2
Statement Date/Credit Line Closing Date April 30.036.90 4-8 441 2.350.00 ================= 4-29 NSF 425.89 4-8 11. 2003 457923 ACCOUNT NUMBER
Balance Last Statement 13.468.45 4-30 2.767.85 4-3 2.080.00 4-30 15. account balance after each day’s transactions
W.226.00 4-12 757. deposits and other credits made to the account 3.70 4-7 440 1.00 4-11 2.60
Error Correction Interest Earned NSF SC
4-2 16.56 ============== 4-27 1. A.45 4-29 14.805.320.47 4-9 12.95 4-5 436 3.429.65 4-4 17.80 4-3 18.907.063.256.57 4-29 2.154.888.90
Deposits and Credits No.47 4-11 13.00 4-4 437 1.10
Cheques and Debits Total Amount 26 32.15
Symbols: CM DM Credit Memo Debit Memo EC INT
4-2 4.128.545. Amount Date Amount Date Amount 4-2 435 644.218. cheques paid and other debits charged against the account 2.28 4-9 CM 1.420.
RECONCILING THE BANK ACCOUNT
Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors.
. A bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
Deposits in transit
recorded by depositor that have not been recorded by bank written (issued) and recorded by company that have not been presented to/paid by bank
or correct cash balance
g. interest earned)
Charges against depositor’s account (e. RC (returned)/NSF (insufficient funds) cheques) Amounts that increase depositor’s account (e..g. service charges.
Bank Reconciliation Procedures $ Per Bank Statement -outstanding cheques +deposits in transit +/.bank errors = correct cash amount
$ Per Books -NSF cheques -cheque printing or other service charges +notes collected by bank +/.book errors = correct cash amount
Reconciling Journal Entries
Each reconciling item in determining the adjusted balance per books MUST be journalized and posted Do NOT journalize any entries on bank side
Cash in banks 3. Cash on hand 2.
Cash reported on the Balance Sheet includes: 1. Petty cash Cash is listed first in the balance sheet because it is the most liquid asset.
with maturities of three months or less when purchased. short-term notes. and treasury bills. Examples include money market funds. that can be converted into a specific amount of cash.CASH EQUIVALENTS
Cash equivalents are highly liquid investments.
but not excess. quantity
.USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Most important asset Pervasive impact Vulnerable to theft or misuse Balancing act needed to ensure sufficient.
USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Cash Flow Statement : shows where cash came from and what is was used for. Management report: states management’s responsibility for internal controls.
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