Accounting Systems

1
Accounting Systems Internal Controls

• Chapter 6

2
Internal Controls

• Policies and procedures that
• Protect assets
• Ensure reliable accounting
• Promote efficient operations
• Urge adherence to company policies

3
Internal Controls

• Principles
• Establish reponsibilities
• Maintain adequate records
• Insure assets
• Separate record keeping from custody of assets
• Divide responsibility
• Technological controls

4
Elements

• Control environment
• Risk assessment
• Control procedures
• Monitoring
• Information and communication

5
Control procedures

• Competent personnel
• Rotating duties
• Mandatory vacations
• Separating responsibilities
• Separating operations
• Proof and security measures

6
Limitations of Internal Controls

• Human element
• Error misjudgment, megligence or confusion
• Fraud intent

7
Control of Cash

• Three basic guidelines
• Handling cash is spearate from recordkeeping of
  cash
• Cash receipts are pronptly deposited in a bank
• Cash disbursements are made by check

8
Cash

• Means of payment when paying for assets,
  services, or liabilities
• Liquidity
• Refers to a companys ability to pay for its near
  term obligation
• Cash equivalent are short term highly liquid
  investment assets

9
Importance of Cash

• Cash includes coins, currency, checks, money
  orders, and money on deposit
• Cash register
• Short
• Over

• Short expense
• Over revenue
• Example
• Cash 2,001
• Cash short 1
• Sales 2000

10
Cash Short and Over

• Example 1
• Cash 3400
• Cash short 100
• Sales 3500
• End of period
• balance determines account

11
Bank Reconciliation

• End of month
• Reconcile cash in bank to cash in our records
• Check for accuracy of both

12
Bank reconciliation
King Company Bank Reconciliation July 31,
2000   Cash balance per books 4,000 Add
additions by bank not on books 100 Or
depositors errors 4,100 Deduct deductions by
bank not on books Such as service
charges Depositors error
50 Adjusted balance 4,050   Cash
balance per bank statements 3,950 ending
balance Add additions by depositor not on
Bank statement (outstanding deposits)
200 4,150 Deduct deductions by bank not
recorded (Outstanding checks) 100 Adjusted
balance 4,050
13
Bank Reconciliation Example
Nan Company Bank Reconciliation July 31, 2000
14
Journal Entries

• Corrects to book balance are recorded
• Cash 408
• Notes receivable 400
• Interest income 8

15
Journal entries

• Accts receivable 300
• Bank charge exp 18
• Accts payable 9
• Cash
  327

16
Petty Cash

• Fund for small cash expenses
• Supplies
• Postage
• Food
• Parking

• Establish the fund
• Create Petty Cash
• Asset account
• Petty cash 500
• Cash 500

17
Petty Cash

• Reimburse the account
• Office supplies 200
• Misc exp 100
• Cash 300

18
Homework

• Bank reconciliations
• Ex 6-6.6-8
• Petty cash 6-4, 6-5