1. Internal Control and Cash
Chapter 10
Internal Control and Cash

2. 10-1 Principles of Internal Control
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical, mechanical, and electronic controls
Independent internal verification
Other controls

3. 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

4. 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

5. 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

6. 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 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

7. 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