1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Internal Control & Cash Chapter 8

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Define internal control

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Internal Control All policies and procedures managers use to: Safeguard assets Encourage employees to follow company policies Promote operational efficiency Ensure accurate, reliable accounting records

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Sarbanes-Oxley Act Public companies must issue internal control report Independent auditor must evaluate internal controls Created Public Company Accounting Oversight Board – oversees work of auditors of public companies

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Sarbanes-Oxley Act Accounting firms may not both audit and provide certain consulting services for the same client Established penalties for violators

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Objective 2 Describe good internal control procedures

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Components of Internal Control Control environment – management sets the tone Assess risks Control procedures – designed to ensure that company’s goals are achieved Monitor controls – internal auditors Maintain appropriate information system

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 Principles of Internal Control Competent, reliable and ethical personnel –Hire –Train –Supervise Assignment of responsibilities – each employee has clearly defined responsibilities

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Principles of Internal Control Separation of duties - limits fraud, promotes accurate financial statements –Separate operations from accounting –Separate custody of assets from accounting Audit – examination of company’s financial statements and accounting system –Internal auditors –External auditors

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Principles of Internal Control Documents Electronic Devices Other

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Internal Controls for E-Commerce Pitfalls Stolen credit card numbers Computer viruses and Trojans Phishing Security Measures Encryption Firewalls

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 The Limitations of Internal Control Collusion - when two or more employees work together to defraud the company Solution – add more internal control Always consider cost/benefit of controls

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Objective 3 Prepare a bank reconciliation and the related journal entries

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Bank Reconciliation Explains all differences between general ledger cash account and bank statement cash balance –Deposits in transit –Outstanding checks –Bank or book errors –EFT’s –Service charges –NSF checks

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Bank Reconciliation Bank Statement Add: Deduct: Adjusted bank balance Book Balance Add: Deduct: Adjusted book balance Any increase (decrease) to cash that has been recorded in the books, but does not appear on the bank statement Any increase (decrease) to cash that has been recorded by the bank, but has not been recorded in the books yet

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Reconciling Items Bank Statement Add: Deposits in transit. Deduct: Outstanding checks Add or Deduct: Bank errors Book Balance Add: Interest revenue Add: Bank collections Deduct: Nonsufficient funds check (NSF) Deduct: Service charges Add or Deduct: Book errors, EFT transfers

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 S8-6S8-6 Bank balance$3,800 Add: Deposits in transit200 $4,000 Deduct: Outstanding checks900 Reconciled bank balance$3,100 The company has recorded the cash receipts, but the bank does not show the deposit yet The company has recorded the cash disbursements, but the checks have not yet cleared the bank

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 S8-6S8-6 Book balance$2,480 Add: Bank collection from customer630 Interest revenue10 Subtotal$3,120 Deduct: Bank service charge20 Reconciled book balance$3,100 These items appear on the bank statement, but the company has not yet recorded them

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 S8-6S8-6 Bank balance$3,800 Add: Deposits in transit200 $4,000 Deduct: Outstanding checks900 Reconciled bank balance$3,100 Book balance$2,480 Add: Collection from customer630 Interest revenue10 Subtotal$3,120 Deduct: Service charge20 Reconciled book balance$3,100 Ranger Security Systems Bank Reconciliation May 31, 2007

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Adjusting the Books Book balance$2,480 Add: Bank collection from customer630 Interest revenue10 Subtotal$3,120 Deduct: Bank service charge20 Reconciled book balance$3,100 Any reconciling item under “Book Balance” requires a journal entry to adjust the Cash account Remember, you only need to prepare entries for any adjustment to the Book Balance

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 S8-7S8-7 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT May31Cash630 Accounts Receivable- K. Brooks630 Bank collection from customer 31Cash10 Interest Revenue10 Interest earned on bank balance

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 S8-7S8-7 GENERAL JOURNAL DATEDESCRIPTIONREFDEBITCREDIT May31Miscellaneous Expense20 Cash20 Bank service charge

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 Objective 4 Apply internal controls to cash receipts

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 Cash Receipts Over the Counter Receipt is issued for each transaction Cash drawer opens when a transaction is entered At the end of a shift, manager proves cash by comparing cash in drawer with machine’s record of sales At least once a day, cashier deposits cash in bank Register tape sent to accounting department

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 Cash Receipts by Mail Incoming mail opened by a mailroom employee. This person compares the check received with the remittance advice Receipts sent to treasurer and cashier deposits money in bank Remittance advice sent to accounting for journal entries Controller compares records of the day’s –Bank deposit amount from treasurer –Debit to Cash from accounting

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 Objective 5 Apply internal controls to cash payments

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Controls Over Purchase and Payment Send purchase order to supplier – purchasing agent Receive inventory and invoice – receiving department Prepare receiving report – receiving department Make sure all documents agree – treasurer or controller Issue check – treasurer or controller

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 Voucher System Voucher – document authorizing a cash payment Voucher register – similar to a purchases journal Check register – similar to cash payments journal

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 Petty Cash Cash fund kept on hand to pay for small expenditures Designate a custodian of petty cash fund Keep a specific amount of cash on hand All fund payments are supported with a petty cash ticket

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 Establish Petty System General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. May 1Petty Cash200 Cash200 Petty Cash We are using E8-22 to illustrate the petty cash system

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 Making Payments Petty Cash Ticket No. 15 Date: _________________Amount: ________________ Paid to: _______________ For: ___________________ Approved by: ____________ Payment received by: _____________ Debit Account No.: _________ May 2, 2007 $8.00 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller Supplies Expense – Account No. 615 A numbered ticket is prepared for each expenditure

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 Making Payments Petty Cash Ticket No. 15 Date: _________________Amount: ________________ Paid to: _______________ For: ___________________ Approved by: ____________ Payment received by: _____________ Debit Account No.: _________ May 2, 2007 $8.00 Foster’s Office Supply Office Supplies Sharon Kahl Carol Miller 615 Petty Cash

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 Replenish Petty Cash Using information on vouchers, record expenses in journal A new check is cashed for total amount of expenses Cash is placed in petty cash box

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 Replenish Petty Cash Fund General Journal Page 8 DateAccount Titles and DescriptionPRDr.Cr. May 31Delivery Expense22 Postage Expense42 Supplies Expense42 Miscellaneous Expense16 Cash122 Replenish petty cash fund

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 Cash Short and Over Account used whenever a cash fund is short or over May have either a debit or credit balance Reported as miscellaneous expense or revenue depending on ending balance Closed at the end of the accounting period to income summary

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 Objective 6 Make ethical business judgments

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 Framework for Making Ethical Decisions What is the ethical issue? What are the options? What are the possible consequences? What shall I do?

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 End of Chapter 8