1. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 7 1

2. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Organizational plan and all the related measures to: 2 Safeguard assets Encourage employees to follow company policies Ensure accurate, reliable accounting records Promote operational efficiency

3. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Congress passed SOX after the Enron and WorldCom scandals Provisions include: Public companies must issue an internal control report Created Public Company Accounting Oversight Board (PCAOB) to oversee auditors Accounting firms may not both audit and provide consulting services to the same company Stiff penalties for violators (20–25 years in prison) 3

4. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 4

5. 6-5 Cash is the asset most susceptible to theft and fraud. Properly account for assets. Ensure the accuracy of financial records. Safeguard assets. Internal control refers to policies and procedures that are designed to:

6. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-6 Separation of Duties Custody Recording Authorization

7. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-7 Daily Deposits Purchase Approval Prenumbered Checks Payment Approval Cash Controls Check Signatures Bank Reconciliations

8. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cash account in general ledger T-account debits and credits Bank Statement Shows cash receipts and payments Each shows a different balance Timing differences Outstanding checks and deposits EFT transactions Bank Reconciliation Explains all differences between cash record and the bank record Preparer should have no other cash duties 8

9. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-9 Provides information for reconciling journal entries. Explains the difference between cash reported on bank statement and cash balance on company’s books.

10. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-10 Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance Balance per Book + Deposits by Bank + EFT Collections (Credit Memos) - Service Charge - NSF Checks - EFT Payments ± Book Errors = Adjusted Balance

11. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-11 Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance All reconciling items on the book side require an adjusting entry to the cash account. Balance per Book + Deposits by Bank + EFT Collections (Credit Memos) - Service Charge - NSF Checks - EFT Payments ± Book Errors = Adjusted Balance

12. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Bank side Items not yet recorded by bank Deposits in transit Outstanding checks Errors 12

13. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Book Side Item not recorded in the books Bank collections EFT transactions Service charges Interest revenue Nonsufficient funds checks Cost of printed checks Book errors 13

14. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 14

15. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-15 Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page. Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page.

16. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-16 Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank. Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank.

17. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-17

18. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-18 Bank Reconciliation

19. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 6-19 Bank Reconciliation

20. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. BANK BALANCE—ALWAYS Add deposits in transit. Subtract outstanding checks. Add or subtract corrections of bank errors. BOOK BALANCE—ALWAYS Add bank collections, interest revenue, and EFT receipts. Subtract service charges, NSF checks, and EFT payments. Add or subtract corrections of book errors. 20

21. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 21 The following items could appear on a bank reconciliation: a.Outstanding checks, $670. b.Deposits in transit, $1,500. c.NSF check from customer, #548 for $175. d.Bank collection of our note receivable of $800, and interest of $80. (3) A subtraction from the bank balance (3) An addition to the bank balance (2) A subtraction from the book balance (1) An addition to the book balance

22. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 22 The following items could appear on a bank reconciliation: e. Interest earned on bank balance, $20. f. Service charge, $10. g. Book error: We credited Cash for $200. The correct amount was $2,000. h.Bank error: The bank decreased our account by $350 for a check written by another company. (1) An addition to the book balance (2) A subtraction from the book balance (3) An addition to the bank balance

23. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 23 Any item under “book balance” requires a journal entry to adjust the Cash account

24. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 24

25. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Cash fund on site to pay for small expenditures Controls needed: Designate a custodian of petty cash fund Keep a specific amount of cash on hand All payments are supported with a petty cash ticket 25

26. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Check written for specific amount and cashed Check is made payable to Petty cash Journal entry: Debit Petty cash Credit cash 26

27. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 27 Petty cash ticket is a receipt Is prepared when payments are made using the fund It includes:: Date Amount Account involved Person receiving the funds Custodian issuing the funds

28. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Maintaining petty cash at its designated balance Petty cash plus the receipts should always equal designated balance Process is the main internal control feature 28

29. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Total the amounts on petty cash tickets Petty cash tickets plus cash remaining in fund Should equal petty cash fund balance Missing amount is debited or credited to Cash short and over Journal entry is prepared to record expenditures A new check is cashed to replenish the fund Cash is then placed in petty cash box 29

30. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. New account Used whenever a cash fund is short or over May have either a debit or credit balance Reported as expense or revenue depending on ending balance 30

31. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Karen’s Dance Studio created a $370 imprest petty cash fund. During the month, the fund custodian authorized and signed petty cash tickets as follows: 31

32. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Make the general journal entries to: a. Create the petty cash fund and include explanations. 32 (a)Petty Cash370 Cash in bank370 To open the petty cash fund.

33. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. (Continued) b. Record its replenishment. Cash in the fund totals $147, so $13 is missing. Include explanations. 33 (b)Delivery expense25 Postage expense15 Supplies expense ($35 + $80)115 Miscellaneous expense55 Cash short and over13 Cash ($200 − $15)223 To replenish the petty cash fund.

34. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34

35. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. D. J. Harrison’s checkbook lists the following: 35

36. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Harrison’s November bank statement shows the following: 36

37. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. D.J. Bank Reconciliation November 30, 2012 BANK: Balance, November 30, 2012$ 370 Add:Deposit in transit_1,210 1,580 Less:Outstanding checks: Check Number: 626$ 85 627265__350 Adjusted bank balance, November 30, 2012$1,230 BOOKS: Balance, November 30, 2012$1,325 Less:Correction of book error$40 Cost of checks35 Bank service charge_20___95 Adjusted book balance, November 30, 20121,230 1. Prepare Harrison’s bank reconciliation at November 30, 2012. 37