1. Internal Control and Cash C H A P T E R 8
ACCT 72 - Introductory Accounting
4/25/2017
Internal Control and Cash C H A P T E R 8
Practice:
Ex 8-6
Ex 8-10
Prob 8-4A
Chapter 9

2. ACCT 72 - Introductory Accounting
4/25/2017
Learning Objectives
Define, explain the purpose, and identify the principles of internal control. (LO1)
Define cash and explain how it is reported. (LO2)
Apply internal control to cash. (LO3)
Explain and record petty cash fund transactions. (LO4)
Chapter 9

3. ACCT 72 - Introductory Accounting
4/25/2017
Learning Objectives
Explain and identify banking activities and the control features they provide. (LO5)
Prepare a bank reconciliation and journalize any resulting adjustment(s). (LO6)
Calculate the acid-test ratio and explain its use as an indicator of a company’s liquidity. (Appendix 9A) (LO7)
Chapter 9

4. Internal Control System
ACCT 72 - Introductory Accounting
4/25/2017
Internal Control System
All policies and procedures used to:
Protect assets
Ensure reliable accounting
Promote efficient operations
Encourage adherence to company policies
LO 1
Chapter 9

5. Principles of Internal Control
ACCT 72 - Introductory Accounting
4/25/2017
Principles of Internal Control
Ensure transactions and activities are authorized.
Maintain adequate records.
Insure assets.
Separate recordkeeping and custody of assets.
Establish a separation of duties
LO 1
Chapter 9

6. Principles of Internal Control
ACCT 72 - Introductory Accounting
4/25/2017
Principles of Internal Control
Apply technological controls.
Perform internal and external audits.
Internal controls will vary based on the nature and size of the organization.
LO 1
Chapter 9

7. Limitations of Internal Control
ACCT 72 - Introductory Accounting
4/25/2017
Limitations of Internal Control
Human Error
Negligence
Fatigue
Human Fraud
Intent to defeat internal controls for personal gain.
Costs vs. Benefits
The costs of internal control must not exceed their benefits.
Misjudgment
Confusion
LO 1
Chapter 9

8. ACCT 72 - Introductory Accounting
4/25/2017
Cash
Important asset for every company.
Control of cash and access to it is critical.
Cash includes:
Currency, Coins and Cheques
Deposits in bank accounts
Other items acceptable for deposit
LO 2
Chapter 9

9. Internal Control for Cash
ACCT 72 - Introductory Accounting
4/25/2017
Internal Control for Cash
Guidelines:
Handling of cash v. recordkeeping of cash.
Deposit cash receipts daily.
Make cash disbursements (payments) by cheque.
LO 3
Chapter 9

10. Control of Cash Disbursements
ACCT 72 - Introductory Accounting
4/25/2017
Control of Cash Disbursements
All expenditures should be made by cheque (or EFT).
Authorization (cheque signing) and recordkeeping duties separated
Apply a voucher system.
LO 3
Chapter 9

11. ACCT 72 - Introductory Accounting
4/25/2017
Petty Cash
Good internal control procedures require cash disbursements be made by cheque.
The exception:
Small payments required in most companies for items such as postage, courier fees, repairs, and supplies.
LO 4
Chapter 9

12. Starting a Petty Cash Fund
ACCT 72 - Introductory Accounting
4/25/2017
Starting a Petty Cash Fund
Prepares cheque to establish petty cash fund.
Cashier’s
Office
Petty Cashier
LO 4
Chapter 9

13. Operating a Petty Cash Fund
ACCT 72 - Introductory Accounting
4/25/2017
Operating a Petty Cash Fund
The petty cashier makes payments from this fund for small disbursements.
… and ensures a petty cash receipt is signed by the person receiving the money to easily identify the expenses paid from petty cash.
LO 4
Chapter 9

14. ACCT 72 - Introductory Accounting
4/25/2017
Topping Up the Fund
A cheque is issued and the fund is replenished when the amount of cash becomes low.
QS 8-5 & 8-6
A cash over and short account may be needed.
LO 4
Chapter 9

15. Banking Activities as Controls
ACCT 72 - Introductory Accounting
4/25/2017
Banking Activities as Controls
Basic Bank Services
Bank account
Bank deposits and cheques
Electronic funds transfer
Credit/Debit card transactions
LO 5
Chapter 9

16. Credit Card Transactions
ACCT 72 - Introductory Accounting
4/25/2017
Credit Card Transactions
The risk of bad debts is transferred to the credit card company.
The company collects cash from the sale quickly.
The credit card companies charge a fee to the vendor.
LO 5
Chapter 9

17. Debit Card Transactions
ACCT 72 - Introductory Accounting
4/25/2017
Debit Card Transactions
The bank transfers funds from the customer’s account to the vendor’s bank account.
The bank charges a fee to the vendor.
LO 5
Chapter 9

18. Illustration: Credit Card Transaction
ACCT 72 - Introductory Accounting
4/25/2017
Illustration: Credit Card Transaction
TechCom has $100 of credit card sales with a 4% fee and cash is received immediately (assume cost of sales is $40).
LO 5
Chapter 9

19. ACCT 72 - Introductory Accounting
4/25/2017
Bank Reconciliations
Bank reconciliations are:
Prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books.
An important element of internal control.
LO 6
Chapter 9

20. ACCT 72 - Introductory Accounting
4/25/2017
The bank statement provides information about everything that has gone through the bank account for a given period of time.
CM – Credit Memo
DM – Debit Memo
EC – Error Correction
IN – Interest Earned
NSF – Non-sufficient Funds
OD – Overdraft
SC – Service Charge
LO 6
Chapter 9

21. ACCT 72 - Introductory Accounting
4/25/2017
The general ledger, cash receipts, and cash disbursements journals provide information about everything that has gone through our accounting records for a given period of time.
LO 6
Chapter 9

22. Bank Reconciliation - Example
ACCT 72 - Introductory Accounting
4/25/2017
Bank Reconciliation - Example
Why are the balances different?
Some items are reflected on the bank statement but not in the accounting records and vice versa. *
LO 6
Chapter 9

23. ACCT 72 - Introductory Accounting
4/25/2017
Reconciling Items
Bank Statement
Outstanding cheques.
Deposits in transit.
Bank errors.
General Ledger
Non-sufficient funds cheque (NSF).
Bank service charges.
Interest earned on bank account.
Collections made by the bank.
Book errors.
LO 6
Chapter 9

24. Bank Reconciliation for VideoBuster
ACCT 72 - Introductory Accounting
4/25/2017
Bank Reconciliation for VideoBuster
Let’s prepare the bank reconciliation for VideoBuster Company at the end of October 31, 2011.
LO 6
Chapter 9

25. ACCT 72 - Introductory Accounting
4/25/2017
LO 6
Chapter 9

26. VideoBuster Bank Reconciliation
ACCT 72 - Introductory Accounting
4/25/2017
VideoBuster Bank Reconciliation
Chapter 9

27. Recording Adjusting Entries from the Bank Reconciliation
ACCT 72 - Introductory Accounting
4/25/2017
Recording Adjusting Entries from the Bank Reconciliation
LO 6
Chapter 9

28. Recording Adjusting Entries from the Bank Reconciliation
ACCT 72 - Introductory Accounting
4/25/2017
Recording Adjusting Entries from the Bank Reconciliation
LO 6
Chapter 9

29. Recording Adjusting Entries from Bank Reconciliation
ACCT 72 - Introductory Accounting
4/25/2017
Recording Adjusting Entries from Bank Reconciliation
After posting the reconciling entries the cash account looks like this . . .
LO 6
Chapter 9

30. Let’s practice
Exercise 8-10
Problem 8-8A