1. 8 – Internal Control & Cash
8 – Internal Control & Cash
After studying this chapter, you should be able to:
Objective 2 - Describe the objectives of internal control.
Objective 3 - Describe and illustrate the application of internal controls to cash.
Objective 4 - Describe and illustrate the application of internal controls to cash.
Objective 5 - Describe and illustrate the use of a bank reconciliation in controlling cash.
Objective 6 - Describe the accounting for special-purpose cash funds.

2. Objective 2 To provide reasonable assurance that:
Objectives of Internal Control
8-2
To provide reasonable assurance that:
assets are safeguarded and used for business purposes,
business information is accurate, and
employees comply with laws and regulations.

3. Example of control procedures for an all-night convenience store:
8-2
Example of control procedures for an all-night convenience store:
Locate the cash register near the door, so that it is fully visible from outside the store; have two employees work late hours; employ a security guard.
Deposit cash in the bank daily, before 5 p.m.
Keep only small amounts of cash on hand after 5 p.m. by depositing excess cash in a store safe that can’t be opened by employees on duty.
Install cameras and alarm systems.

4. Warning Signs With Regard to People
Indicators of Internal Control Problems
8-2
Warning Signs With Regard to People
Abrupt change in lifestyle.
Close social relationships with suppliers.
Refusing to take a vacation.
Frequent borrowing from other employees.
Excessive use of alcohol or drugs.

5. Warning Signs from the Accounting System
Indicators of Internal Control Problems
8-2
Warning Signs from the Accounting System
Missing documents or gaps in transaction numbers.
An unusual increase in customer refunds.
Differences between daily cash receipts and bank deposits.
Sudden increase in slow payments.
Backlog in recording transactions.

6. Describe and illustrate the application of internal controls to cash.
Objective 3
Describe and illustrate the application of internal controls to cash.
8-3
Control of Cash Receipts
One of the most important controls to protect cash received in over-the-counter sales is a cash register.
Change Fund
A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.

7. Cash Short and Over
8-3
Cash sales for March 19 totaled $3, per the cash register tape. After removing the change fund, only $3, was on hand.
Mar 19 Cash
Cash Short and Over 8 00
Sales
To record cash sales and actual cash on hand.
Note that the shortage (an expense) was debited to Cash Short and Over. If there were a surplus (i.e. a revenue), the there would be a credit to Cash Short and Over.

8. Electronic Funds Transfers – ensure some kind of control over cash
8-3
Cash may be received from customers through electronic funds transfers. Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills.

9. Describe the nature of a bank account and its use in controlling cash.
Objective 4
Describe the nature of a bank account and its use in controlling cash.
8-4
Use of Bank Accounts
A major reason that businesses use bank accounts is for control purposes.
Bank accounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of transactions.

10. Bank Statement
8-4
A summary received from the bank of all checking account transaction is called a bank statement.

11. Bank Statement
8-4

12. Bank Statement
8-4
(Concluded)

13. EC — Error correction to correct bank error.
8-4
Typical credit or debit memorandum entries found on the bank statement:
EC — Error correction to correct bank error.
NSF — Not sufficient funds check.
SC — Service charge.
ACH — Automated Clearing House entry for electronic funds transfer.
MS — Miscellaneous items.

14. 8-4 -
Example Exercise 8-2
The following items may appear on a bank statement:
(1) NSF check
(2) EFT Deposit
Service Charge
Bank correction of an error from recording a $400 check drawn by the depositor as $40.
Indicate whether the item would appear as a debit or credit memorandum on the bank statement and whether the item would increase or decrease the balance of depositor’s account.

15. Appears on the Bank Statement as a Debit or Credit Memorandum
8-4
Follow My Example 8-2
Appears on the Bank Statement as a Debit or Credit Memorandum
Increases or Decreases the Balance of the Depositor’s Bank Account
Item No.
(1) Debit Memorandum Decreases
(2) Credit Memorandum Increases
(3) Debit Memorandum Decreases
(4) Debit Memorandum Decreases
For Practice: PE 8-2A, PE 8-2B

16. 8-4 Power Networking’s Records and Bank Statement
8-4
Power Networking’s Records and Bank Statement
Power Networking should determine the reason for difference in these two amounts.

17. Objective 5
8-5
Describe and illustrate the use of a bank reconciliation in controlling cash.
A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance.

18. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Power Network prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3, The company’s Cash account has a July 31 balance of $2,

19. A deposit of $816.20 did not appear on the bank statement.
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
$4,175.98
A deposit of $ did not appear on the bank statement.

20. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

21. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Three checks that were written during the period did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $48.60.

22. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Deduct check
NSF $300.00
The bank returned a check for $300 from Power Networking’s customer (Thomas Ivey) because of insufficient funds (NSF).

23. The bank service charges totaled $18.00.
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Deduct check
NSF $300.00
Bank service
charges 18.00
The bank service charges totaled $18.00.

24. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Deduct check
NSF $300.00
Bank service
charges 18.00
Error recording
Check No
327.00
Check No. 879 for $ to Taylor Co. on account, erroneously recorded in journal as $

25. Bank’s records Company’s records
8-5
Bank’s records
Company’s records
Beginning balance $3,359.78
Beginning balance $2,549.99
Add deposit not
recorded by bank
Add note and interest
collected by bank
$4,175.98
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00 No
No ,544.99
Deduct check
NSF $300.00
Bank service
charges 18.00
Error recording
Check No
327.00
Adjusted balance $2,630.99
Adjusted balance $2,630.99

26. 8-5

27. Journal entries must be prepared for those items that affected the company’s (depositor’s) side of the reconciliation.
8-5
Company’s records
Beginning balance $2,549.99
Add note and interest
collected by bank
$2,957.99
Deduct check
NSF $300.00
Bank service
charges 18.00
Error recording
Check No
327.00

28. 8-5 Entry to Record Plus Items July 31 Cash 408 00
Entry to Record Plus Items
8-5
July 31 Cash
Notes Receivable
Interest Income 8 00
Note collected by bank.

29. 8-5 Entry to Record Minus Items July 31 Cash 408 00
Entry to Record Minus Items
8-5
July 31 Cash
Note collected by bank.
Notes Receivable
Interest Income 8 00
31 Accounts Receivable—Thomas Ivey
Miscellaneous Expense
Accounts Payable—Taylor Co
Cash
NSF check, bank service charges, and error in recording Check no. 879.

30. Balance per company records 13,875 Bank service charges 75
8-5
Example
The following data was gathered to use in reconciling the bank account of Photo Op.
Balance per bank $14,500
Balance per company records 13,875
Bank service charges 75
Deposit in transit 3,750
NSF check 800
Outstanding checks 5,250
What is the adjusted balance on the bank reconciliation?
Journalize any necessary entries for Photo OP based upon the bank reconciliation.

31. Describe the accounting for special-purpose cash funds.
Objective 6
Describe the accounting for special-purpose cash funds.
8-6
It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund.

32. 8-6
On August 1, issued Check No. 511 for $500 to established a petty cash fund.
JOURNAL
Page 9
Post Ref.
Date
Description
Debit
Credit
2008
Aug. 1 Petty Cash
Cash
Established petty cash fund issuing Check 511.

33. 8-6
At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $380, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $30.
Aug. 31 Office Supplies
Store Supplies
Miscellaneous Administrative Exp
Cash
Replenished petty cash fund.
Replenishing the petty cash fund physically restores it to its original amount of $500. Note that no entry to Petty Cash is required when the fund is replenished.

34. 8-6
Example Exercise 8-4
Prepare journal entries for each of the following;
Issued check to establish a petty cash fund of $500.
The amount of cash in the petty cash fund is currently $120. Issued a check to replenish the fund based on the following summary of petty cash receipts: office supplies, $300 and miscellaneous administrative expense, $75. Record any missing or additional funds in the cash short and over account.

35. 8-6
Example
Petty Cash 500
Cash 500
Office Supplies 300
Miscellaneous Admin. Expense 75
Cash Short and Over 5
Cash 380