Topic 7 internal controls cash receivables PDF

Explain the application of internal control principles for handling cash.. a decision to over-ride a control Therefore there is a need for good internal controls for handling cash and r

TOPIC 7

INTERNAL CONTROLS, CASH & RECEIVABLES

Topic 7

Learning Objectives Part 1 (of 3) Internal Controls & Bank

Reconciliation

On completion of this topic, you should be able to:

1 Define internal control & appreciate management’s

responsibility in relation to internal control.

2 Identify the effect of business transactions on cash.

3 Describe electronic banking processes.

4 Explain the application of internal control principles for

handling cash.

5 Prepare a bank reconciliation.

6 Discuss the basic principles of cash management

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INTERNAL CONTROLS

Internal controls are the processes used by

management and staff designed to provide

"reasonable assurance" that the business in

running as effectively and efficiently as

possible

• safeguard its assets from employee theft,

robbery and unauthorised use

• enhance the completeness, accuracy and

reliability of its accounting records by

reducing the risk of errors and

• permit the timely preparation of financial

4 Physical, mechanical & electronic controls

5 Independent internal validation

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Limitations of internal controls

 human error and mistakes in

judgement that results in a

breakdown in internal control

 ineffective understanding of the

purpose of a control

 collusion by two or more individuals

to circumvent a control

 a control within a software program

being overridden or disabled

 decisions made by management as

to the nature and extent of the

control it chooses to implement (e.g

a decision to over-ride a control)

Therefore there is a need for good internal controls for handling cash and recording cash transactions

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BANK RECONCILIATION

The Cash at Bank Account as an

internal control device

The Bank Reconciliation

• There are two records of a business’ cash, namely its

Cash at Bank account in its own general ledger and the bank statement, which tells the actual amount

of cash the business has in the bank at a specific point in time

• The balance in the business’ Cash at Bank rarely equals the balance shown on the bank statement at

any particular date

• Differences arise because of a time lag in recording transactions

• To ensure accuracy of the financial records, the firm’s accountant must explain all differences between the firm’s own cash records and the bank statement figures on a certain date

• The result of this process is a document called the

bank reconciliation

The following is required:

 The cash receipts & payments journals

covering the period to be reconciled

reconciliation

The Bank Reconciliation Procedure

Step 1: Check all items and errors from last reconciliation have cleared and tick off on the current bank statement

• Any items still not cleared “roll over” into current reconciliation

• Unmarked entries will explain difference

Step 3: Update cash journals for items captured by bank statement.

Step 4: Deal with errors

• Adjust cash journals for any errors made by entity

• Notify bank of any errors in statement (Note these errors on reconciliation until corrected)

Step 5: Total cash journals and post to ledgers

Step 6: Prepare bank reconciliation

• The bank paid the electric bill of $654 via Direct Debit

• There was a $200 cheque returned for insufficient funds (NSF).

• Interest earned on the account was $26.

• Bank service charges were $12.

The cash receipts & payments journals covering the period to be reconciled for Kelly Cook eTravel’s indicate:

• A cheque for $1,250 from a customer was received at 5pm on September 30 was recorded in the accounts but not deposited in bank.

• Cheques were issued, recorded and mailed to suppliers on the September 29 for $1,263 and thus have yet been paid by the bank The balance in the cash at bank account ledger account for 30/9/2017 is

$27,385 Debit

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PRINCIPLES OF CASH

MANAGEMENT

Topic 7

Learning Objectives

Part 1 (of 3)

On completion of this topic, you should be able to:

1 Define internal control & appreciate management’s

responsibility in relation to internal control.

2 Identify the effect of business transactions on cash.

3 Describe electronic banking processes.

4 Explain the application of internal control principles for

handling cash.

5 Prepare a bank reconciliation.

6 Discuss the basic principles of cash management

1 Identify the different types of receivables.

2 Describe how to value accounts receivables.

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RECEIVABLES

TYPES OF RECEIVABLES

Accounts Receivable (Trade Debtors)

• Specifically relate to the sale of goods or

• include non-trade receivables such as

interest receivable, loans to officers,

advances to employees, and GST receivable

Businesses grant ‘credit’ to customers in order to

increase sales

Why grant ‘credit’

• The benefit: The business increases revenues and profits by making sales to good customers who do not want to pay cash immediately

• The risk/cost: The business will be unable

to collect from some of its credit customers

• This cost is commonly referred to as bad debts expense

• Need to adjust for an estimate of amount

that will become bad and use two methods:

1 Direct write-off method

2 Allowance method

Write-Allowance Method

Ageing of accounts receivable

% of net credit sales

Need to adjust for an estimate of amount

that will become bad and use two methods:

1 Direct write-off method

2 Allowance method

General Journal (Direct Write-Off)

• Used for significant credit

• Estimates % debts will go bad to

• record as bad debts expense and

in Allowance for bad (doubtful) debts

• The amount of the allowance estimated is determined by either

1 Percentage of net credit sales

2 Ageing of accounts receivable

Direct

Write-off Method Allowance Method

Ageing of accounts receivable

% of net credit sales

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ALLOWANCE METHOD

• Ageing of accounts receivable

method, also known as

balance sheet approach

• Analyse Individual accounts

receivable (older accounts

statistically more likely to be

bad)

• Calculates the amount the

allowance for doubtful debts

should be, therefore what is

recorded is an adjustment to

the year end balance

• Exclude GST & consider

existing balance in allowance

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ALLOWANCE METHOD

• Percentage of net sales

method, also referred to as

the income statement

recognise bad debts expense

method to estimate bad debts at year end 31 December 2017 Credit sales for the year were

$30,800 (inc GST) and it is estimated at 1% the amount will be uncollectible

that one of their account customers had gone bankrupt and decided to write off the debt for $88 (inc GST)

1 Identify the different types of receivables.

2 Describe how to value accounts receivables.

Topic 7

Learning Objectives

Part 3 (of 3)

On completion of this topic, you should be able to:

1 Describe how receivables are reported in

financial statements.

2 Describe how to value Notes receivables and

manage receivables.

3 Analyse receivables.

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RECEIVABLES

Accounts Receivable (Trade Debtors)

• Specifically relate to the sale of goods or

provision of services

• Recognised at time of sale usually

Notes (Bills) Receivable

• A note receivable is a formal credit instrument

• It does not always arise from transactions with customers

• It is included as an asset in the financial statements

• Different types, Trade Bills, Commercial Bills, Promissory Notes

• Both accounts and notes receivable can be sold to a 3rd party

• Also known as factoring

• Realise cash to finance trading/other activities

• Minimise costs of credit control

• On 1 Dec 2017 Kelly Cook eTravel accepts a 90

day note receivable at 15% from IslandHops in

settlement of overdue account for $1500

Hop settles the note with cash

CREDIT RISK RATIO is measure of the risk that customers

may not pay their accounts

RECEIVABLES TURNOVER is the number of times

per year on average receivables are collected and the

AVERAGE COLLECTION PERIOD converts this metric to

days by dividing the receivable turnover into 365 These

measure how effective the business is at extending credit

and in collecting debts on that credit

Credit Risk Ratio Allowance for Doubtful Debts 271

Accounts Receivable 4431 Receivables T/O &

Less Sales Returns & Allowances -1260

Net Sales Revenue 47,240

Less Cost of sales (COS) -14,230

GROSS PROFIT 33,010 Operating Expenses

Totsl Non-current Assets 8,667

Topic 7

Learning Objectives

Part 3 (of 3)

On completion of this topic, you should be able to:

1 Describe how receivables are reported in

financial statements.

2 Describe how to value Notes receivables and

manage receivables.

3 Analyse receivables.