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CH 7

The document discusses internal controls and cash. It defines internal controls as procedures put in place by a company to safeguard assets, ensure accurate financial reporting, promote operational efficiency, and encourage adherence to policies. The key internal control activities are segregation of duties, documentation of procedures, physical and IT controls, independent checks, and human resource controls. It also discusses bank reconciliations, petty cash funds, and how to report cash on the balance sheet.

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Савелий Смирнов
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20 views32 pages

CH 7

The document discusses internal controls and cash. It defines internal controls as procedures put in place by a company to safeguard assets, ensure accurate financial reporting, promote operational efficiency, and encourage adherence to policies. The key internal control activities are segregation of duties, documentation of procedures, physical and IT controls, independent checks, and human resource controls. It also discusses bank reconciliations, petty cash funds, and how to report cash on the balance sheet.

Uploaded by

Савелий Смирнов
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 7

INTERNAL CONTROLS & CASH

Taj Singh, CA, CPA

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Chapter 7: Learning Objectives

1. Define & apply CASH AND INTERNAL CONTROLS


2. Prepare a BANK RECONCILIATION.
3. Describe the operation of a PETTY CASH FUND.
4. Report cash on the balance sheet.

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Cash- most liquid asset

• Coins, currency, cheques, money orders, travellers’ cheques and


money on deposit in a bank or similar depository
• Often combined with Cash equivalents – short term, highly liquid
investments

Cash is the most liquid asset of an organization

Susceptible to theft

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Learning Objective 1

Define internal control

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WHAT ARE INTERNAL CONTROLS?

Good common sense.


In your personal life, you exercise good internal controls when:
• Locking doors (car, home)
• Reviewing bills/credit card statements before paying
• Securing wallets, cash, and credit/debit cards.
• Safeguarding account passwords and keeping them separate
from your computers and bank cards.

Similarly, in an COMPANY, internal controls :


1. help managers be EFFECTIVE and EFFICIENT
2. while avoiding serious problems such as overspending,
operational failures, and violations of law.

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INTERNAL CONTROL ACTIVITIES
1. Establishment of responsibility
• Make specific employees responsible for specific tasks, including
authorization

2. Segregation of duties
• Duties are divided in a manner that eliminates the ability to commit
a fraud and cover it up

3. Documentation procedures
• Rules covering the handling and control of documents (such as pre-
numbering)

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INTERNAL CONTROL ACTIVITIES

4. Physical and IT controls


• Over access to and use of assets and records

5. Independent checks of performance


• Reviews of records and performance by independent employees or
external parties

6. Human resource controls


• Rotation of duties, requiring vacations, background checks

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Limitations of Internal Control
• Reasonable assurance: benefit >
cost
• Human factor: fatigue, carelessness,
indifference, lack of training

• Collusion: two or more employees working


together to overcome segregation control

• Size of business: effective controls are more


difficult in smaller organizations
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Bank Account As a Control Device
• Minimizes amount of cash on hand
• A clearing house for receipts and cheques
• Provides a double record of cash transactions
• Duplicate deposits slips
• Cheques usually require two authorized signatures

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Purpose of bank reconciliation

BANK BALANCE VS. BOOK BALANCE

• with ending balance


 Begin with ending balance
on in general ledger
on bank statement
cash account

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Definitions

1. Outstanding Cheque
2. Outstanding deposit
3. NSF (non-sufficient funds) cheque
4. Cancelled cheque- cheques that have been paid by the
bank on behalf of the depositor and included with the bank
statement
5. Electronic funds transfer – in/out
6. Deposits in transit

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RULE – PUT IT WHERE IT ISN’T!!

1. On bank statement but not in Company’s cash account:

• Add/remove from cash account

2. In Company’s cash account but not on bank statement:

• Add/remove from bank statement

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ONE EXCEPTION TO THE RULE….

ONE EXCEPTION –

• errors corrected where they


occur!!!!

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Bank Reconciliation - Demo
• The bank statement for Lee Company shows a balance per bank of
$15,907.45 on April 30, 2021. On this date, the balance of cash
per book is $11,244.14. The following are reconciling items:
• Deposits in transit: $2,201.40
• Outstanding cheques: No. 445 $3,000; No. 446
$1,401.30; No. 448 $1,502.70
• Electronic receipt: $1,350.55
• Interest earned: $39.76
• NSF Cheque from a customer: $425.60
• Bank charge for NSF cheque: $10
• Bank service charge: $30
• Company errors: Cheque No. 443 was correctly recorded
and paid by the bank, however, it was recorded as
$1,262.00 by Lee. 16
Bank Reconciliation – you can play video (click on
excel sheet to play)

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Journal entries –BOOK SIDE ONLY

Dr. Cash 1,350


Cr. Accounts Receivable 1,350
Record deposits in transit
Dr. Cash 40
Cr. Interest Revenue 40
Record interest earned on bank account
Dr. Accounts Receivable 436
Cr. Cash 436
Record NSF cheque
Dr. Bank charges expense 30
Cr. Cash 30
Record bank charges 19
Bank Reconciliation example
The following data have been gathered for Awesome Accountants Inc. to
assist you in preparing the March 31, 20x8, bank reconciliation:
a) The March 31 bank balance was $4,000 and the cash account showed a
balance of $3,200 on March 31
b) The bank statement included $30 of service charges and $25 of interest on
our account.
c) There was an E-transfer deposit of $900 on the bank statement for the
monthly rent received from a tenant.
d) Cheques #541 and #543 for $205 and $320, respectively, did not appear on
the bank statement and were not returned by the bank with the cancelled
cheques.
e) The March 31 deposit of $4,435 did not appear on the bank statement.
f) The bookkeeper had by mistake recorded a $500 cheque as $5,000. The
cheque was written to a supplier to pay off an accounts payable.
g) Included with the cancelled cheques was a cheque written by another
company for $200, which was deducted from Awesome Accountants Inc.'s
bank account (bank error)
h) The bank statement included an NSF (“non-sufficient funds”) cheque written
by Maxie Company for a $460 payment on account. Bank also deducted $25
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fee to process the NSF cheque.
ADDITIONAL PRACTICE – SEE EXCEL TAB #2

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• Used to pay small amounts

• To establish a petty cash fund:

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Creating the Petty Cash Fund
• Assume on Feb. 28 the business creates a petty cash fund
of $400
The journal entry to start the fund is:

• For each petty cash payment, the custodian


prepares a petty cash ticket or cash voucher

• No journal entries are made for petty cash


payments until the fund is replenished 23
Replenishing Petty Cash

On March 31, the petty cash fund holds $230 in


petty cash and $164 in vouchers (office supplies $46,
delivery expense $34, selling expense $84); note that
there is $6 missing

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Replenishing the Petty Cash

To replenish the petty cash fund on March 31 and


bring the balance back to $400, the journal entry is:

Dr. Office supplies expense 46


Dr. Delivery expense 34
Dr. Selling expense 84
Dr. Cash over/short expense 6
Cr. cash 170

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Internal Control over Cash
Received over the counter

Internal control over cash receipts ensures that cash receipts are
deposited quickly for safekeeping

Cash receipts over the counter:


Customers see the amount the cashier enters into the terminal
A receipt is issued for each sale recorded
The cash drawer should open only when the clerk enters a
transaction
Cash needs to be deposited in the bank, and the machine tape goe
to accounting to record daily sales

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Learning Objective 5

Apply internal controls to cash payments

How do we implement internal controls for cash payments?

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Internal Control over Cash Payments

Payment by cheque is an important internal control


because:

• The cheque provides a record of payment

• The cheque must be signed by an authorized


official or preferably two signatures
The signing official studies the evidence supporting
the cheque (to ensure appropriate, authorized
purchase)
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Reporting Cash on the
Balance Sheet
• Cash is the first asset listed on the balance
sheet because it is the most liquid

• Businesses usually have several bank


accounts and petty cash funds – combined,
it is called “Cash and Cash Equivalents”

• Cash equivalents include term deposits and


certificates of deposit

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That’s a WRAP

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Thank you
douglascollege.ca

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