Internal Control and Cash

1
CHAPTER
7
INTERNAL CONTROL AND CASH Quiz on Thursday Nov
13
2
CONTROL OVER CASH Receipt

• Main-in Receipt
• Many customers still send their checks through
  the mail.
• All main in receipts should be opened by two mail
  clerks.
• As soon as they open it, they should stamp, For
  Deposit only
• A list of the checks which are received each day,
  should be prepared and be copied.

3
CONTROL OVER CASH Receipt

• Main-in Receipt
• One copy of the list should be sent to the
  cashiers department, who will take them to the
  bank for daily deposit.
• Second copy should be sent to the accounting
  department for journal entries.
• At the end of the month, an accounting manager
  would compare the ledger records with the bank
  statement. (Segregation of Duty and Performance
  Review)

4
CONTROL OVER CASH Receipt

• Electronic Receipt
• Some companies would send their money through EFT
  (electronic funds transfer or online banking)
• What would be the source document for EFT?
• Bank statement (shows all changes in the bank
  account for one month)
• Electronic Funds Transfer result in better
  internal control since no cash or checks are
  handled by company employees.

5
CONTROL OVER CASH DISBURSEMENTS

• Payments are usually made by cheque rather
  than by cash, except for petty cash
  transactions.
• Only specified individuals should
  be authorized to sign cheques. (Some companies
  require two signatures)
• Different departments or individuals should be
  assigned the duties of approving an item for
  payment and paying it.

6
CONTROL OVER CASH DISBURSEMENTS

• Prenumbered cheques should be used and each
  cheque should be supported by an approved
  invoice or other source document.
• Blank cheques should be stored
  in a safe.
• 1. Access (to blank check) should be restricted
  to authorized personnel.
• 2. A cheque writer machine should be
  used to imprint the amount on the cheque in
  indelible ink.

7
CONTROL OVER CASH DISBURSEMENTS

• Purchase Order (Expense form)
• Many large companies use purchase orders to
  improve their internal control over cash
  disbursements.
• A purchase order is an authorization form
  prepared by for each expense.
• It is usually prepared by the purchasing
  department.
• When the goods are received, the receiving report
  should be matched with purchase order and
  purchase invoice.

8
CONTROL OVER CASH DISBURSEMENTS

• Electronic Payments
• Many companies use electronic funds transfer
  system to make payments to suppliers and
  employees. (instead of issuing checks)
• Examples are salaries, pre-authorized payments
  such as loan payment and interest payments
• The only source document for EFT is bank
  statement.

9
CONTROL OVER CASH DISBURSEMENTS

• Each cheque should be compared with the approved
  invoice before it is issued. (done by supervisor
  or manager of the department)
• Following payment, the approved invoice should be
  stamped PAID.

10
PETTY CASH FUND

• A petty cash fund is used to pay relatively
  small amounts.
• (For example, buying stamps, paying for taxi,
  paying for employees lunch, paying for UPS etc)
  ? These are too small amounts to use checks or
  EFT
• Operation of the fund, often called an imprest
  system, (imprest means an advance of a
  specific amount of money for a designated
  purpose) involves
• 1. establishing the fund,
• 2. making payments from the fund, and
• 3. replenishing the fund.

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PETTY CASH FUND

• Accounting entries are required when
• 1. the fund is established,
• a. appoint an employee to be responsible for
  the PCF (Authorization)
• b. determine the size of the fund
• c. A check is issued to the responsible
  persons name and he or she will go to bank
  to get cash.
• d. Petty cash is kept in safe place.
• 2. Making payments from the fund
• 3. Replenishing the Fund

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ESTABLISHING THE FUND

• 100
  
  
  
  
  100

When the fund is established, a cheque payable to
the petty cash custodian is issued for the
stipulated amount.
13
PETTY CASH FUND

• Accounting entries are not required when
• 2. Making payments from the fund
• a. The branch manager has the authority to make
  payments from the fund in accordance with
  management policies. (what they can use it
  for etc)
• b. Each payment from the fund should be
  documented on a pre-numbered petty cash
  receipts and it must be signed by both the
  branch manager and the person who used the
  money.
• c. No accounting entry is made to record a
  payment at the time it is made from petty
  cash.
• d. The receipts are kept in the petty cash box
  until the cash needs to be replenished.

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PETTY CASH FUND

• Accounting entries are required when
• 3. Replenishing the Fund
• a. When the money in the petty cash fund
  reaches a minimum level, the fund is
  replenished.
• b. The request for reimbursement is made by the
  branch manager.
• c. He or she prepares a summary (schedule) of
  the payments that have been made and send
  the schedule.
• d. The controller (or accountant) examines and
  verifies the receipts and other documentation
  that these were proper usage of the fund.
• e. Then the controller would stamp paid to
  these supporting documents.

15
PETTY CASH FUND

• Replenishing the Fund
• Note We do not change the petty cash account.
  
• We will decrease the cash account.
• The accountant will replenish what has been used.
  
• The accountant will exchange the receipts with
  check.
• It does not change the balance of petty cash
  fund.
• Sometimes there is a cash shortage or overage.

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REPLENISHING THE FUND
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 44
  
  
  
  
  38
  
  
  
  
  5
  
  
  
  
  87

Mar. 15
Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.
On March 15 the petty cash custodian requests a
cheque for 87. The fund contains 13 cash and
petty cash receipts for postage, 44, freight
out, 38, and miscellaneous expenses, 5.
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REPLENISHING THE FUND
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit

• 44
  
  
  
  
  38
  
  
  
  
  5
  
  
  
  
  1
  
  
  
  
  
  88

Mar. 15
Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/
On March 15 the petty cash custodian requests a
cheque for 88. The fund contains 12 cash and
petty cash receipts for postage, 44, freight
out, 38, and miscellaneous expenses, 5.
18
Classwork / Homework

• P380 E7.4, E7.5 and E7.6
• P384 P7.4
• P385 P7.5