Internal Control and Cash Chapter 10 Internal Control and Cash

10-1 Principles of Internal Control Establishment of responsibility Segregation of duties Documentation procedures Physical, mechanical, and electronic controls Independent internal verification Other controls

10-2 Application of Internal Control to Cash Receipts Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily

10-3 Application of Internal Control to Cash Disbursements Establishment of Responsibility Only designated personnel authorized to sign checks (treasurer) Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have approved invoice Other Controls Stamp invoices PAID

10-4 Bank Reconciliation Format (Date) Cash balance per bank statement $XXX Add: Deposits recorded by business but not by bank (e.g., deposits in transit) XX Less: Charges recorded by business but not by bank (e.g., outstanding checks) Adjusted cash balance per bank Cash balance per books Deposits recorded by bank but not by business (e.g., note collection, interest Charges recorded by bank but not by business (e.g., service charges, NSF checks) Adjusted cash balance per books Differences Caused By 1. Time lags 2. Errors Prepare Adjusting Entries to Correct Books Balances Should Agree

10-5 Preparing the Bank Reconciliation Bank Statement Bank balance June $10,000 Deposits and credits Checks and debits June 1 200.00 #209 10.00 June 10 350.00 #210 25.00 June 20 425.00 #211 52.00 June 25 750.00 CM #213 199.00 June 28 320.00 #216 205.00 #217 650.00 #218 #219 125.00 #220 250.00 NSF S.C. 6.00 Total credits $2,045.00 Total debits $1,847.00 Bank balance June 30 $10,198 Books Bank balance June $10,150 Cash Receipts Cash Disbursements June 10 $350.00 #210 $25.00 June 20 425.00 #211 52.00 June 28 320.00 #212 22.00 June 30 275.00 #213 199.00 Total $1,370.00 #214 Void #215 29.00 #216 205.00 #217 560.00 #218 200.00 #219 125.00 #220 250.00 #221 60.00 #222 126.00 #223 82.00 $1,935.00 Book balance June 30 $9,585 CM – Represents $725 Note Receivable collection plus interest revenue of $50 less bank charges of $25. NSF represents $125 check from ABC Company deposited on 6/20. HINT: One error was made in recording disbursements. Procedures for Finding Differences between Bank and Book Balances: Examine last month’s bank reconciliation and list items that have not change, i.e., outstanding checks from prior month which have not cleared (again) or other reconciling items which were not corrected (bank service charges). Compare all recorded disbursements per books to bank debits (charges) and list differences. Compare all recorded receipts per books to bank credits and list differences. Prepare bank reconciliation from data collected. May Bank Reconciliation Balance per bank statement $10,000 Add: Deposits in transit 200 10,200 Less: Outstanding Checks #201 $40 #209 10 50 Adjusted balance per bank $10,150

10-5 Preparing the Bank Reconciliation (continued) Prepare adjusting entries to adjust cash balance per books to adjusted balance per books. Bank Reconciliation Adjusting Entries June Bank Reconciliation Balance per bank $10,198 Add: Deposit in Transit: June 30 275 10,473 Less: Outstanding checks #201 $40 #212 22 #215 29 #221 60 #222 126 #223 82 359 Adjusted balance per bank $10,114 Balance per books $9,585 Bank collection of N/R 750 $10,335 NSF (ABC Co.) $125 Bank service charge 6 Error: Check #217 90 221 Adjusted balance per book Bank collects a $725 Notes Receivable and $50 Interest Revenue less $25 for bank charges (net $750). Cash 750 Miscellaneous Expense 25 Interest Revenue 50 Notes Receivable 725 Book error of $90 resulted from recording check No. 217 as $560 when actual check amount and invoice amounted to $650 (XYZ Co. – Accounts Payable). Accounts Payable – XYZ Co. 90 Cash Bank service charges of $6. Miscellaneous Expense 6 Cash NSF check for $125 from ABC Company returned by bank. Accounts Receivable – ABC Co. 90 Cash