Internal Control and Cash

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Internal Control and Cash

• Chapter 8

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Objective 1

• Define internal control.

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Internal Control

• What is internal control?
• It is the organizational plan and all the related
  measures that an entity adopts to
• safeguard assets,
• encourage adherence to company policies,
• promote operational efficiency, and...
• ensure accurate and reliable accounting records.

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Internal Control
Operational Controls
Financial Reporting Controls
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Objective 2

• Tell how to achieve good
• internal control.

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Establishing an Effective System of Internal
Control

• Characteristics of an effective internal control
  system include
• Competent, reliable, and ethical personnel
• Assignment of responsibilities
• Proper authorization
• Separation of duties

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Separation of Duties
Separation of operations from accounting
Separation of the custody of assets from
accounting
Separation of the authorization of
transactions from the custody of related assets
Separation of duties within the accounting
function
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Internal Controls for e-Commerce
Stolen credit card numbers
Computer virus and Trojan horses
Impersonation of companies
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Internal Controls for e-Commerce

• What is an encryption?
• It is the primary method of achieving
  confidentiality in e-commerce.
• Plain-text messages are rearranged by some
  mathematical process.
• The encrypted message cannot be read by anyone
  who does not know the process.

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Internal Controls for e-Commerce
Firewall
The Internet
Corporate Intranet
Network Computers
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The Limitations ofInternal Control

• Most internal control measures can be
  circumvented or overcome.
• Collusion is when two or more employees work as a
  team with the purpose to defraud the firm.

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The Bank Account as aControl Device

• Documents used to control a bank account include
• signature card
• deposit ticket
• check
• bank statement
• bank reconciliation

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The Bank Reconciliation

• What are two records of a businesss cash?
• Cash account in the businesss own general
  ledger.
• The bank statement which tells the actual amount
  of cash the business has in the bank.

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The Bank Reconciliation

• Items recorded by a company not on the bank
  statement
• deposit in transit
• outstanding checks

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The Bank Reconciliation

• Items on a bank statement and not recorded by the
  business
• bank collections
• bank fees
• interest earned on account
• NSF checks

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The Paths That Two Checks Take (Good Check)
Maker writes check to payee.
Makers bank pays the check.
Payee deposits check in bank.
Payees bank sends check to makers bank.
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The Paths That Two Checks Take (NFS Check)
Makers bank balance is not sufficient to pay the
check.
Makers bank sends the worthless check back
to payees bank.
Payee holds worthless check.
Payees bank decreases payees balance.
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Objective 3

• Prepare a bank reconciliation
• and the related journal entries.

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The Bank Reconciliation Example

• At the beginning of July, Sahita, Inc. received
  the Junes bank statement.
• It indicated the following
• The bank balance was 63,275.
• The bank had collected a note receivable from one
  of Sahitas customers in the amount of 1,325.

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The Bank Reconciliation Example

• The bank paid the electric bill of 1,500.
• There was a 200 check returned for NSF.
• Interest earned on the account was 265.
• Bank service charges were 12.

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The Bank Reconciliation Example

• Sahitas books indicates a cash balance of
  66,647.
• A deposit of 11,250 was mailed to the bank on
  June 30.
• Checks issued in June for 8,000 have not yet
  been paid by the bank.

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The Bank Reconciliation Example
Balance per bank, June 30 63,275 Add deposit in
transit 11,250 74,525 Less outstanding
check 8,000 Adjusted bank balance 66,525
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The Bank Reconciliation Example
Balance per books, June 30 66,647 Add Note
receivable collected by the bank
1,325 Interest income
265 68,237 Less Payment of electric
bill 1,500 NSF check 200 Service
charge 12 Adjusted book balance
66,525
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The Bank Reconciliation Example
Balance per books 66,525
Balance per bank 66,525
Equal amounts
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Record Reconciling Items
June 30, 200x Cash
1,325 Notes Receivable 1,325
Notes collected by the bank
June 30, 200x Cash
265 Interest Income
265 Interest earned on bank balance
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Record Reconciling Items
June 30, 200x Utilities Expense
1,500 Cash
1,500 Monthly electricity
expense
June 30, 200x Accounts Receivable NSF 200
Cash
200 NSF check returned by bank
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Record Reconciling Items

• June 30, 200x
• Bank Service Fees 12
• Cash
  12
• Bank service charges

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Objective 4

• Apply internal controls
• to cash receipts.

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Cash ReceiptsOver the Counter

• The terminal should be positioned so that
  customers can see the amount the cashier enters
  into the cash register.
• The cash drawer should open only when the sales
  clerk enters an amount on the keypad.
• The roll of tape locked inside the machine
  records each sale and cash transaction.

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Cash ReceiptsOver the Counter

• Pricing merchandise at uneven amounts means
  that the clerk has to open the cash drawer.
• This requires entering the amount of the sale on
  the keypad and so onto the register tape.

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Cash ReceiptsOver the Counter

• At the end of the day, the cashier deposits the
  cash in the bank.
• The tape goes to accounting.

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Cash Receipts by Mail

• All incoming mail should be opened by a
  mailroom employee.
• This person should compare the check received
  with the remittance advice.
• Cash receipts should be given to the cashier.
• The mailroom employee forwards the remittance
  advice to accounting.

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Cash Receipts by Mail

• Many companies use a lock-box system.
• Customers send their checks directly to an
  address that is a bank account.
• Company personnel do not handle the cash.

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Cash Short and Over

• Assume that the cash register tapes indicate
  sales revenue of 25,000.
• However, the cash received was 24,980.
• What entry would record the days sales?

Cash 24,980 Cash Short
and Over 20
Sales Revenue 25,000 Daily cash
sales
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Objective 5

• Apply internal controls
• to cash payments.

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Control OverApproval of Payments
Purchase Request
Purchase Order
Invoice
Receiving Report
Disbursement Packet
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Control OverApproval of Payments

• The accounting department...
• combines all of these documents,
• checks them for accuracy, and...
• forwards this disbursement packet to designated
  officers for approval and payment.

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Controlling Petty Cash Payments

• On June 15, Sahita Inc. manager decided to
  establish a 250 petty cash fund.
• What is the entry?

June 15, 200x Petty Cash
250 Cash in Bank 250 To
open the petty cash fund
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Controlling Petty Cash Payments

• Jose is the petty cash custodian responsible for
  the fund.
• On June 20, he purchased supplies in the amount
  of 70.
• For each disbursement, he prepares a petty cash
  ticket.
• At all times the amount of cash in the petty cash
  fund plus the petty cash tickets must equal 250.

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Controlling Petty Cash Payments

• Jose also spent 20 for delivery charges and 60
  for coffee and other miscellaneous expenses.
• What is the journal entry to record the
  replenishment of the fund?

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Controlling Petty Cash Payments

• June 30, 20xx
• Supplies 70
• Delivery Expense 20
• Miscellaneous Expense 60
• Cash in Bank 150
• To replenish the petty cash fund

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Objective 6

• Make ethical judgments
• in business.

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Ethics and Accounting
1.00 0.75 0.50 0.25 0.00
Code of Conduct 88
Companies
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Professional Code of Ethics

• Accountants are held to very high standards of
  conduct.
• There is no compromising.
• Would you hire an accountant who is almost
  always honest?
• Internal controls rely upon basic honesty and
  integrity.

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End of Chapter 8