Accounting Systems & Internal Controls Chapter 6

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

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

Elements  Control environment  Risk assessment  Control procedures  Monitoring  Information and communication

Control procedures  Competent personnel  Rotating duties  Mandatory vacations  Separating responsibilities  Separating operations  Proof and security measures

Limitations of Internal Controls  Human element Error: misjudgment, megligence or confusion Fraud: intent

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

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

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

Cash Short and Over  Example 1:  Cash 3400  Cash short 100  Sales 3500  End of period  balance determines account

Bank Reconciliation  End of month Reconcile cash in bank to cash in our records Check for accuracy of both

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$3,950ending 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

Bank Reconciliation Example Nan Company Bank Reconciliation July 31, 2000 Bank statement balance $3, Add: outstanding deposits $4, Deduct: outstanding checks No 12$1, $1, Adjusted balance 2, Book balance $2, Add: note and interest collected , Deduct: insufficient funds check $ Service charge Error on check Adjusted balance $2,630.99

Journal Entries  Corrects to book balance are recorded  Cash408  Notes receivable 400  Interest income 8

Journal entries  Accts receivable 300  Bank charge exp 18  Accts payable 9  Cash 327

Petty Cash  Fund for small cash expenses Supplies Postage Food Parking  Establish the fund  Create Petty Cash Asset account  Petty cash 500  Cash 500

Petty Cash  Reimburse the account  Office supplies 200  Misc exp 100  Cash300

Homework  Bank reconciliations Ex  Petty cash: 6-4, 6-5