Presentation on theme: "ACG 2021 Financial Accounting"— Presentation transcript:
1ACG 2021 Financial Accounting Internal Control and Cash
2Learning Objectives Understand Internal Control Use a bank reconciliation as a control deviceAccount for Petty CashUse a budget to manage cash
3Internal ControlInternal control is an organizational plan and related measures that an entity adopts to reach various Goals:Safeguard assetsEncourage adherence to company policiesPromote operational efficiencyEnsure accurate and reliable accounting records
4Failures of Internal Control EnronWorldComOthersLed to Congress Passing Sarbanes-Oxley ActAddress Public Concerns over failedAudits of Public CompaniesInternal Controls at Public Companies
5Bank Accounts as Controls All cash should be deposited into a bank account daily.To draw money from the account, a check is writtenThree parties to a check:maker – signs the checkpayee – to whom the check is writtenbank – on which the check is drawnRemittance advice is an optional attachment that gives the reason for the payment.
6Cash Control Definitions Monthly bank statements are sent to the account holder and should be reconciled.to check (a financial account) against another for accuracy (Webster Online Dictionary)Electronic fund transfer (EFT) is the electronic transfer of cash. No check is written.Payments on behalf of account holder.Deposits made from customers to account holder.Bank statements include both physical checks and EFT payments as well as other transactions on the account.
7Bank Reconciliation Comparison of: Two independently maintained records of a business’s cashThe company’s Cash account (T-Account, the book balance)The bank statementDifferences between the two records generally arise because of timing differences.Deposits were made but after the bank statement was printed and mailed.Checks were written but have not cleared the bank when the bank statement was printed mailed.Reconciliations ensure that the two records agree.
8Bank Reconciliation Items for reconciliation: Items RECORDED by the company but not yet recorded by the bank:Deposits in transitOutstanding checks
9Bank Reconciliation Items for reconciliation: Items recorded by the bank BUT NOT YET recorded by the company.Bank collectionsdeposits received directly by the bank from customersElectronic funds transfersBoth payments and depositsService charges and the cost of printed checksInterest revenue earned on checking accountNonsufficient funds (NSF) checksThese are checks deposited from a business’ customers that don’t have sufficient fundsSo they ‘bounce’Errors by the company or the bank
10Bank ReconciliationThe adjusted bank balance must equal the adjusted books balanceBook Balance = Ending Cash AccountThis is how we ensure Control over Cash
11Reconciling Items Bank Balance Book Balance Add deposits in transit Subtract outstanding checksAdd or subtract corrections of bank errors, as appropriateBook BalanceAdd bank collection items, interest revenue, and EFT receiptsSubtract service charges, NSF checks, and EFT paymentsAdd or subtract corrections of book errors, as appropriate.
12Bank Reconciliation Journal entries are only made for: Adjustments to Book BalanceBank collection items, interest revenue, and EFT receiptsService charges, NSF checks, and EFT paymentsErrors made by the company(bank errors do not require journal entries on the company’s books).
13Bank Reconciliation Illustrated Business Research, Inc., shows a balance on its bank statement of $5, on January 31. The company Cash account has a balance of $3,The January 30 deposit of $1, does not appear on the bank statement.The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.Five company checks, totaling $1,350.14, issued late in January and recorded in the journal have not been paid by the bank.The bank received $ by EFT on behalf of Business Research, Inc.The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214).The bank statement shows interest revenue of $28.01.
14Bank Reconciliation Illustrated Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510.The bank service charge for the month was $14.25.The bank statement shows an NSF check for $52.Business Research pays insurance expense by EFT and has not recorded this $361 payment.
16Journal Entries from Reconciliation (4) CashRent RevenueReceipt of monthly rent(5) Cash 2,114.00Notes Receivable 1,900.00Interest RevenueNote receivable collected by the bank(6) Cash 28.01Interest RevenueInterest earned on bank balance
17Journal Entries from Reconciliation (7) CashAccounts PayableCorrection of check no. 333(8) Miscellaneous Expense 14.25CashBank Service Charge(9) Accounts Receivable 52.00CashNSF customer check returned by bank(10) Insurance ExpenseCashPayment of monthly insurance
18ACG 2021 Financial Accounting Petty CashCash Budgets, andCash on the Balance Sheet
19Petty Cash Petty cash fund is to pay for minor expenses. Fund is opened with a particular amount of cash.A custodian issues cash when needed and places all petty cash tickets and receipts in the box with the remaining cash.The sum of the remaining cash and petty cash tickets should equal the amount established for the fund.Petty cash is an example of an imprest fund.Beginning Cash + Added Cash – Receipts = Ending CashPetty CashBeg BalReceiptsEnd BalAdded Cash
20Petty Cash Journal Entries To establish Petty Cash FundPostage ExpenseOffice Supplies ExpenseMiscellaneous ExpenseCashTo Reimburse the petty cash fund
21Cash Budgets Budget – a financial plan Cash budget plans cash receipts and cash paymentsBeginning cashPlus: Expected ReceiptsLess: Expected PaymentsEquals: Expected Ending cashAllows mangers to know in advance whether they will likely need to borrow money.
22Reporting Cash on the Balance Sheet Cash and Cash Equivalentsliquid assets such as time deposits and certificates of depositRestricted cash must be disclosed separately.CollateralOther non-Operating usesCompensating balances are not included as cash.Minimum cash balance required for loan