INTERNAL CONTROL AND CASH Quiz on Thursday Nov 13 CHAPTER 7

Main-in Receipt Many customers still send their checks through the mail. All main in receipts should be opened by two mail clerks. As soon as they open it, they should stamp, “For Deposit only” A list of the checks which are received each day, should be prepared and be copied. CONTROL OVER CASH Receipt

Main-in Receipt One copy of the list should be sent to the cashier’s department, who will take them to the bank for daily deposit. Second copy should be sent to the accounting department for journal entries. At the end of the month, an accounting manager would compare the ledger records with the bank statement. (Segregation of Duty and Performance Review) CONTROL OVER CASH Receipt

Electronic Receipt Some companies would send their money through EFT (electronic funds transfer or online banking) What would be the source document for EFT? Bank statement (shows all changes in the bank account for one month) Electronic Funds Transfer result in better internal control since no cash or checks are handled by company employees. CONTROL OVER CASH Receipt

Payments are usually made by cheque rather than by cash, except for petty cash transactions. Only specified individuals should be authorized to sign cheques. (Some companies require two signatures) Different departments or individuals should be assigned the duties of approving an item for payment and paying it. CONTROL OVER CASH DISBURSEMENTS

Prenumbered cheques should be used and each cheque should be supported by an approved invoice or other source document. Blank cheques should be stored in a safe. 1. Access (to blank check) 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

Purchase Order (=Expense form) Many large companies use purchase orders to improve their internal control over cash disbursements. A purchase order is an authorization form prepared by for each expense. It is usually prepared by the purchasing department. When the goods are received, the receiving report should be matched with purchase order and purchase invoice. CONTROL OVER CASH DISBURSEMENTS

Electronic Payments Many companies use electronic funds transfer system to make payments to suppliers and employees. (instead of issuing checks) Examples are salaries, pre-authorized payments such as loan payment and interest payments The only source document for EFT is bank statement. CONTROL OVER CASH DISBURSEMENTS

Each cheque should be compared with the approved invoice before it is issued. (done by supervisor or manager of the department) Following payment, the approved invoice should be stamped PAID. Paid CONTROL OVER CASH DISBURSEMENTS

A petty cash fund is used to pay relatively small amounts. (For example, buying stamps, paying for taxi, paying for employees’ lunch, paying for UPS etc)  These are too small amounts to use checks or EFT Operation of the fund, often called an imprest system, (=“imprest” means an advance of a specific amount of money for a designated purpose) involves 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund. PETTY CASH FUND

Accounting entries are required when 1. the fund is established, a. appoint an employee to be responsible for the PCF (Authorization) b. determine the size of the fund c. A check is issued to the responsible person’s name and he or she will go to bank to get cash. d. Petty cash is kept in safe place. 2. Making payments from the fund 3. Replenishing the Fund PETTY CASH FUND

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

Accounting entries are not required when 2. Making payments from the fund a. The branch manager has the authority to make payments from the fund in accordance with management policies. (what they can use it for etc…) b. Each payment from the fund should be documented on a pre-numbered petty cash receipts and it must be signed by both the branch manager and the person who used the money. c. No accounting entry is made to record a payment at the time it is made from petty cash. d. The receipts are kept in the petty cash box until the cash needs to be replenished. PETTY CASH FUND

Accounting entries are required when 3. Replenishing the Fund a. When the money in the petty cash fund reaches a minimum level, the fund is replenished. b. The request for reimbursement is made by the branch manager. c. He or she prepares a summary (schedule) of the payments that have been made and send the schedule. d. The controller (or accountant) examines and verifies the receipts and other documentation that these were proper usage of the fund. e. Then the controller would stamp “paid” to these supporting documents. PETTY CASH FUND

Replenishing the Fund Note: We do not change the “petty cash” account. We will decrease the “cash” account. The accountant will replenish what has been used. The accountant will exchange the receipts with check. It does not change the balance of petty cash fund. Sometimes there is a cash shortage or overage. PETTY CASH FUND

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

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/

Classwork / Homework P380 E7.4, E7.5 and E7.6 P384 P7.4 P385 P7.5