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Accounting

Principles

Second Canadian Edition


Weygandt Kieso Kimmel
Trenholm

Prepared by:
Carole Bowman, Sheridan College

CHAPTER

8
INTERNAL CONTROL
AND CASH

INTERNAL CONTROL
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.

INTERNAL CONTROL
Internal control consists of the policies
and procedures adopted within a business
in order to:
3. Safeguard its assets
4. Maintain the accuracy and reliability of
its accounting records

ILLUSTRATION 8-1

PRINCIPLES OF INTERNAL CONTROL


Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification

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.
Segregation of duties: The work of one
employee should provide a reliable
basis for evaluating the work of
another employee.

PRINCIPLES OF INTERNAL CONTROL

Documentation procedures: Documents


should provide evidence that transactions
and events have occured.
Safeguards to control access to, and use of,
assets and records: Physical, mechanical,
and electronic controls relate primarily to
the safeguarding of assets and enhancing
accuracy and reliability of the accounting
records.

PRINCIPLES OF INTERNAL CONTROL


Independent verification:
External verification indicates whether
the companys financial statements
fairly present its financial position and
results of operations in accordance with
GAAP.
Internal verification involves review,
comparison, and reconciliation of
information from two sources.

ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties

Accounting Employee A
Maintains cash balances

Assistant Cashier B

Maintains custody of
cash on hand

Independent Internal Verification


Assistant Comptroller C

Makes monthly comparisons: reports any irreconcilable differences to comptroller

per books

LIMITATIONS OF INTERNAL
CONTROL
Cost/benefit
Collusion
Size

of business
Human element

CASH

Cash includes coins, currency, cheques,


money orders, and money on hand or on
deposit at a bank or similar depository.
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. record cash receipt transactions
3. have custody of cash

CONTROL OVER CASH RECEIPTS


Documents should include:
1. remittance advices
2. cash register tapes
3. deposit slips
Cash should be stored in safes and bank
vaults.
Access to storage areas should be limited to
authorized personnel.
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.
All personnel who handle cash receipts
should be bonded and required to take
vacations.
An important tool in control of over-thecounter receipts is cash registers that are
visible to customers.

CONTROL OVER CASH DISBURSEMENTS

Payments are made by cheque rather


than by cash, except for petty cash
transactions.
Only specified individuals should
be authorized to sign cheques.
Different departments or individuals
should be assigned the duties of approving
an item for payment and paying it.

CONTROL OVER CASH DISBURSEMENTS


Prenumbered cheques should be used and
each cheque should be supported by an
approved invoice or other
document.
Blank cheques should be stored
in a safe.
1. Access should be restricted to
authorized personnel.
2. A cheque writer machine should be
used to imprint the amount on the
cheque in indelible ink.

CONTROL OVER CASH DISBURSEMENTS

Each cheque should be compared with the


approved invoice before it is issued.
Following payment, the approved invoice
should be stamped PAID.

id
a
P

PETTY CASH FUND


A petty cash fund is used to pay relatively small
amounts.
Operation of the fund, often called an imprest
system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.

ESTABLISHING THE FUND

100

100

When the fund is established, a cheque


payable to the petty cash custodian is issued
for the stipulated amount.

REPLENISHING THE FUND


GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation


Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.

Debit

Credit

44
38

On March 15 the petty cash custodian requests a


cheque for $87. The fund contains $13 cash and
petty cash receipts for postage, $44, freight out,
$38, and miscellaneous expenses, $5.

87

REPLENISHING THE FUND


GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation


Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/

Debit

Credit

44
38

88

On March 15 the petty cash custodian requests a


cheque for $88. The fund contains $12 cash and
petty cash receipts for postage, $44, freight out,
$38, and miscellaneous expenses, $5.

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.

BANK STATEMENTS
A bank statement
shows:
1. cheques paid and
other debits charged
against the account
2. deposits and other
credits made to the
account
3. account balance
after each days
transactions

ACCOUNT
STATEMENT

W. A. LEE COMPANY
500 QUEEN STREET

Statement Date/Credit
Line Closing Date

FREDERICTON, NB, E3B 5C2

April 30, 2003


457923
ACCOUNT NUMBER

Balance

Deposits and Credits

Last Statement

No.

Total Amount

13,256.90

20

34,805.10

Balance

Cheques and Debits


Total Amount

This Statement

32,154.55

15,907.45

26

DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date No. Amount
Date
Amount Date Amount
4-2
435
644.95
4-5
436 3,260.00
4-4
437 1,185.79
4-3
438
776.65
4-8
439 1,781.70
4-7
440 1,487.90
4-8
441 2,420.00
4-11
442 1,585.60
4-12
443 1,226.00
=================
4-29
NSF
425.60
4-29
459 1,080.30
4-30
DM
30.00
4-30
461
620.15

4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60

Symbols:

4-2
16,888.80
4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45

CM

Credit Memo

EC

Error Correction

NSF

Not Sufficient Funds

DM

Debit Memo

INT

Interest Earned

SC

Service Charge

Reconcile Your
Account Promptly

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.

Terms
Deposits

in transit

Deposits

recorded by depositor that have not


been recorded by bank

Outstanding

cheques

Cheques

written (issued) and recorded by


company that have not been presented to/paid
by bank

Adjusted

balance

Reconciled

or correct cash balance

Terms
Debit

memoranda

Charges

against depositors account (e.g.


service charges, RC (returned)/NSF
(insufficient funds) cheques)

Credit

memoranda

Amounts

that increase depositors


account (e.g., interest earned)

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

Illustration 8-11

Reconciling Journal Entries


Books
Each

reconciling item in
determining the adjusted
balance per books MUST be
journalized and posted

Bank
Do

NOT journalize any


entries on bank side

REPORTING CASH
Cash reported on the Balance Sheet
includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
Cash is listed first in the balance sheet
because it is the most liquid asset.

CASH EQUIVALENTS

Cash equivalents are highly liquid


investments, with maturities of three
months or less when purchased, that can
be converted into a specific amount of
cash.
Examples include money market funds,
short-term notes, and treasury bills.

USING THE INFORMATION IN THE


FINANCIAL STATEMENTS
Most

important asset
Pervasive impact
Vulnerable to theft or
misuse
Balancing act needed
to ensure sufficient,
but not excess,
quantity

USING THE INFORMATION IN THE


FINANCIAL STATEMENTS
Cash

Flow Statement : shows where cash


came from and what is was used for.
Management report: states managements
responsibility for internal controls.

COPYRIGHT

Copyright 2002 John Wiley & Sons Canada, Ltd. All rights
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