2. INTERNAL CONTROL AND CASH CHAPTER 7

3. 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. CASHCASH

4. Most companies use point of sale cash registers that separate daily sales on the cash register tape according to each type of payment – cash, debit card, credit card or check. The cash register tape shows each transaction, totals for each payment type and overall total. This cash register tape should be locked into the register and removed by a supervisor (or manager) = Cashier should never touch the cash register tape. Internal Conrtol over Cash Receipt

6. At the end of his or her shift, the cashier should count the cash in the register, record the amount and turn over the cash and the record of the amount to either a supervisor or the person responsible for making the bank deposit. The specific procedure will be different for each company, but the basic internal control principle will be the same. The person, who handle the cash should not have access to the cash register tape or the accounting records. (segregaion of duty) Internal Conrtol over Cash Receipt

7. The cash register tape is a source document with which bookkeeper will make journal entry. An independent person (such as manager) must make sure that the amount deposited in bank agrees with the cash register tapes and the accounting records. One very basic control over cash receipts is to ensure that all cash receipts are deposited daily into the bank account. Internal Conrtol over Cash Receipt

8. Only designated personnel should be authorized to handle or have access to cash receipts. (Establishment of Responsibility) Different individuals should: (Segregation of Duty) 1. receive cash (cashier) 2. record cash receipt transactions (bookkeeper) 3. have custody of cash (supervisor) INTERNAL CONTROL OVER CASH RECEIPTS

9. Documents should include: (Documentation Procedure) 1. remittance advices 2. cash register tapes 3. deposit slips from bank Cash should be stored in safes and bank vaults. (Physical Control) Access to storage areas should be limited to authorized personnel. (Physical Control) Cash registers should be used in executing over-the-counter receipts. Internal CONTROL OVER CASH RECEIPTS

10. Daily cash counts (at the end of the day) 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-the- counter receipts is cash registers that are visible to customers. (Customers can see how much each item is being punched.) CONTROL OVER CASH RECEIPTS

11. Debit Card Transactions Sales using debit cards are considered as cash transactions. Debit cards allow customers to spend only what is in their bank account. (unlike credit card) When a debit card sale occurs, the bank immediately deducts the price of the purchase from the customer’s bank account right away. Banks usually charge a fee for each debit card transactions such as 2% of the sale. As a seller, would you prefer debit card payment or check payment? (Think/Pair) CONTROL OVER CASH RECEIPTS

12. Debit Card Transactions With check payment, it takes several days to receive the money. Also the retailer does not have to worry about “bad check” when the payment is made with debit card. Therefore most retailers prefer debit card payment method over check because there is less risk that they might not receive the money. CONTROL OVER CASH RECEIPTS

13. Debit Card Transactions On March 21, ten customers use debit cards to purchase merchandise totalling $800 from Lee Company. Assuming the bank charges Lee Company 50 cents for each transaction, the entry made to record these transactions by Lee Company is as follows: March 21 Cash795 Debit Card Expense5 Sales800 To record debit card sales In addition to the service charge for each transaction, Lee Company will also pay a monthly rental charge for the point of sale equipment. CONTROL OVER CASH RECEIPTS

14. Credit Card Transactions Sales using credit cards such as VISA and Master Card (issued by bank) are considered cash sales by retailer. Banks generally charge the retailer fee (about 3.5% of the credit card sale amount) Most retailers will receive the total credit card sales amount at the end of the day. The fee for credit card transaction is higher than debit card transaction fee, why? Banks take the risk of not collecting money from customers. CONTROL OVER CASH RECEIPTS

15. Credit Card Transactions Suppose on March 21 Lee Company sells $800 of merchandise to customers who use bank credit cards. The banks charge Lee Company a service fee of 3.5% for each credit card sale. The journal entry would be: Mar 21 Cash772 Credit Card Expense28 Sales800 Many retailers issue their own credit cards such Wal-Mart and Sears. They would increase their AR instead of cash account. There is not any credit card expense. CONTROL OVER CASH RECEIPTS

16. P377 BE7.3 P379 E7.3 P384 P7.4 only (b) P383 P7.1 (We did it last week, but it makes sense more now.) Classwork / Homework

17. 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

18. 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

19. Each cheque should be compared with the approved invoice before it is issued. Following payment, the approved invoice should be stamped PAID. Paid CONTROL OVER CASH DISBURSEMENTS

20. 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. PETTY CASH FUND

21. ESTABLISHING THE FUND When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount. 100 100

22. REPLENISHING THE FUND 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. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 15Postage Expense Freight Out Miscellaneous Expense Cash To replenish petty cash fund. 44 38 5 87

23. REPLENISHING THE FUND 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. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit Mar. 15Postage Expense Freight Out Miscellaneous Expense Cash Over and Short Cash To replenish petty cash fund/ 44 38 5 1 88

24. 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. USE OF A BANK

25. BANK STATEMENTS ACCOUNT W. A. LEE COMPANYStatement Date/Credit STATEMENT 500 QUEEN STREETLine Closing Date FREDERICTON, NB, E3B 5C2April 30, 2003 457923 ACCOUNT NUMBER Balance Deposits and CreditsCheques and Debits Balance Last Statement No.Total Amount This Statement 13,256.90 2034,805.102632,154.55 15,907.45 DEPOSITS AND CHEQUES AND DEBITSCREDITSDAILY BALANCE DateNo.AmountDateAmountDateAmount 4-2435644.954-24,276.854-216,888.80 4-54363,260.004-32,137.504-318,249.65 4-44371,185.794-51,350.474-417,063.86 4-3438776.654-7982.464-515,154.33 4-84391,781.704-81,320.284-714,648.89 4-74401,487.904-9 CM1,036.004-811,767.47 4-84412,420.004-112,720.004-912,802.47 4-114421,585.604-12757.414-1113,936.87 4-124431,226.004-131,218.564-1213,468.28 ============================================ 4-29NSF425.604-271,545.574-2713,005.45 4-294591,080.304-292,929.454-2914,429.00 4-30DM30.004-302,128.604-3015,907.45 4-30461620.15 Symbols:CMCredit MemoECError CorrectionNSFNot Sufficient FundsReconcile Your DMDebit MemoINTInterest EarnedSCService ChargeAccount Promptly 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 day’s transactions 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 day’s transactions

26. 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.

27. 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

28. Terms Debit memoranda Charges against depositor’s account (e.g. service charges, RC (returned)/NSF (insufficient funds) cheques) Credit memoranda Amounts that increase depositor’s account (e.g., interest earned)

29. 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

30. 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

31. 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. REPORTING CASH

32. 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. CASH EQUIVALENTS

33. 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

34. 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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