Accounting principles chapter 08

ESTABLISHING THE FUNDWhen the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount.. REPLENISHING THE FUNDOn March 15 the petty cash cu

Accounting Principles

Second Canadian Edition

Prepared by:

Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel ·

Trenholm

INTERNAL CONTROL

AND CASH CHAPTER

8

Internal control consists of the policies and

procedures adopted within a business in order to:

1 optimize resources, and

2 prevent and detect errors and irregularities

INTERNAL CONTROL

Internal control consists of the policies

and procedures adopted within a business

in order to:

3 Safeguard its assets

4 Maintain the accuracy and reliability of its accounting records

Authorization Segregation of duties Documentation

procedures Safeguarding assets and records

Independent verification

PRINCIPLES OF INTERNAL CONTROL

 Authorization of transactions and activities:

Authorization by the proper individual is

important Control is most effective when only one person is responsible for a given task

 Segregation of duties: The work of one

employee should provide a reliable

basis for evaluating the work of another employee

PRINCIPLES OF INTERNAL CONTROL

 Documentation procedures : Documents

should provide evidence that transactions and events have occured.

 Safeguards to control access to, and use of,

assets and records : Physical, mechanical, and electronic controls relate primarily to the safeguarding of assets and enhancing

accuracy and reliability of the accounting records.

PRINCIPLES OF INTERNAL CONTROL

• Internal verification involves review,

comparison, and reconciliation of information from two sources.

PRINCIPLES OF INTERNAL CONTROL

Independent Internal Verification

RELATIONSHIP BETWEEN SEGREGATION OF DUTIES

AND INDEPENDENT INTERNAL VERIFICATION

 Cash includes coins, currency, cheques,

money orders, and money on hand or on

deposit at a bank or similar depository

 Internal control over cash is imperative in

order to safeguard cash and assure the accuracy of the accounting records for cash

CASH

 Only designated personnel should be

authorized to handle or have access to cash receipts

 Different individuals should:

1 receive cash

2 record cash receipt transactions

3 have custody of cash

CONTROL OVER CASH RECEIPTS

 Documents should include:

1 remittance advices

2 cash register tapes

3 deposit slips

Cash should be stored in safes and bank vaults

Access to storage areas should be limited to authorized personnel

Cash registers should be used in executing over-the-counter receipts

CONTROL OVER CASH RECEIPTS

 Daily cash counts and daily comparisons of

total receipts should be made

 All personnel who handle cash receipts should

be bonded and required to take vacations

 An important tool in control of

over-the-counter receipts is cash registers that are visible

to customers

CONTROL OVER CASH RECEIPTS

 Payments are made by cheque rather

than by cash, except for petty cash

transactions

 Only specified individuals should

be authorized to sign cheques

 Different departments or individuals should

be assigned the duties of approving an item

for payment and paying it

CONTROL OVER CASH DISBURSEMENTS

 Prenumbered cheques should be used and

each cheque should be supported by an

approved invoice or other

2 A cheque writer machine should be

used to imprint the amount on the cheque in indelible ink

CONTROL OVER CASH DISBURSEMENTS

 Each cheque should be compared with the

approved invoice before it is issued

 Following payment, the approved invoice

should be stamped PAID

Pai d

CONTROL OVER CASH DISBURSEMENTS

 A petty cash fund is used to pay relatively small amounts.

 Operation of the fund, often called an imprest system , involves

1 establishing the fund,

2 making payments from the fund, and

3 replenishing the fund.

 Accounting entries are required when

1 the fund is established,

2 the fund is replenished, and

3 the amount of the fund is changed.

PETTY CASH FUND

ESTABLISHING THE FUND

When the fund is established, a cheque

payable to the petty cash custodian is issued

for the stipulated amount.

When the fund is established, a cheque

payable to the petty cash custodian is issued

for the stipulated amount.

100

100

REPLENISHING THE 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.

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.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit Mar 15 Postage Expense

Freight Out Miscellaneous Expense Cash

To replenish petty cash fund.

44

38

5

87

REPLENISHING THE 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.

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.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit Mar 15 Postage Expense

Freight Out Miscellaneous Expense Cash Over and Short Cash

To replenish petty cash fund/

44

38

5

1

88

 The use of a bank minimizes the amount of

currency that must be kept on hand and

contributes significantly to good internal

control over cash

 A company can safeguard

its cash by using a bank as

a depository and clearing

house for cheques received

and cheques written

USE OF A BANK

BANK STATEMENTS

ACCOUNT W A LEE COMPANY Statement Date/Credit

STATEMENT 500 QUEEN STREET Line Closing Date

FREDERICTON, NB, E3B 5C2 April 30, 2003

457923 ACCOUNT NUMBER Balance Deposits and Credits Cheques and Debits Balance Last Statement No Total Amount Total Amount This Statement 13,256.90 20 34,805.10 26 32,154.55 15,907.45

DEPOSITS AND CHEQUES AND DEBITS CREDITS DAILY BALANCE Date No Amount Date Amount Date Amount 4-2 435 644.95 4-2 4,276.85 4-2 16,888.80 4-5 436 3,260.00 4-3 2,137.50 4-3 18,249.65 4-4 437 1,185.79 4-5 1,350.47 4-4 17,063.86 4-3 438 776.65 4-7 982.46 4-5 15,154.33 4-8 439 1,781.70 4-8 1,320.28 4-7 14,648.89 4-7 440 1,487.90 4-9 CM 1,036.00 4-8 11,767.47 4-8 441 2,420.00 4-11 2,720.00 4-9 12,802.47 4-11 442 1,585.60 4-12 757.41 4-11 13,936.87 4-12 443 1,226.00 4-13 1,218.56 4-12 13,468.28

================= ============== ============= 4-29 NSF 425.60 4-27 1,545.57 4-27 13,005.45 4-29 459 1,080.30 4-29 2,929.45 4-29 14,429.00 4-30 DM 30.00 4-30 2,128.60 4-30 15,907.45 4-30 461 620.15

Symbols: CM Credit Memo EC Error Correction NSF Not Sufficient Funds Reconcile Your

A bank statement

shows:

1 cheques paid and

other debits charged

against the account

2 deposits and other

credits made to the

1 cheques paid and

other debits charged

against the account

2 deposits and other

credits made to the

account

3 account balance

after each day’s

transactions

RECONCILING THE BANK ACCOUNT

 Reconciliation is necessary because the

balance per bank and balance per books are seldom in agreement due to time lags and

errors

 A bank reconciliation should be prepared by

an employee who has no other

responsibilities pertaining to cash

 Deposits in transit

been recorded by bank

 Outstanding cheques

company that have not been presented

to/paid by bank

 Adjusted balance

 Debit memoranda

service charges, RC (returned)/NSF

(insufficient funds) cheques)

 Credit memoranda

account (e.g., interest earned)

Reconciling Journal Entries

 Books

determining the adjusted

balance per books MUST be

journalized and posted

entries on bank side

 Cash reported on the Balance Sheet

 Cash equivalents are highly liquid

investments, with maturities of three

months or less when purchased, that can be converted into a specific amount of cash

 Examples include money market funds,

short-term notes, and treasury bills

CASH EQUIVALENTS

USING THE INFORMATION IN THE

quantity

USING THE INFORMATION IN THE

FINANCIAL STATEMENTS

 Cash Flow Statement : shows where cash

came from and what is was used for

 Management report: states management’s

responsibility for internal controls

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