Principles of Accounting Asst.Prof.Dr. Panchat Akarak p.thipnew1@hotmail.com School of Accounting Chiang Rai Rajabhat University Principles of Accounting

Control of Cash Outline Internal Control Controlling Cash The bank Checking Account Bank Reconciliation Statement Petty Cash Funds The Voucher System

Internal Control An internal control system is the plan of organization and all the procedures and actions taken by an entity to (a) protect its assets against theft and waste, (b) ensure compliance with company policies and Federal law, (c) evaluate the performance of all personnel in the company so as to promote efficiency of operations, and (d) ensure accurate and reliable operating data and accounting reports.

Internal Control a. Assets can be protected by (1) segregation of employee duties, (2) separation of employee function, (3) rotation of employee job assignments, and (4) use of mechanical devices.

Internal Control b. Internal control policies must be followed by employees, and those policies must satisfy the requirements of the Foreign Corrupt Practices Act. C. Internal auditing can assists in evaluating how well company employees are doing their jobs.

Internal Control D. Since source documents serve as documentation of business transactions, from time to time the validity of these documents should be checked. E. For added protection, a company should carry both casualty insurance on assets and fidelity bonds on employees.

Controlling Cash Many business transactions involve cash utilizing a checking account. A. By definition each includes currency, coins, amounts in checking and savings accounts, and money orders, B. Cash also includes certificates of deposit which are interest-bearing deposits at a bank which can be withdrawn at will or at a fixed maturity date.

Controlling Cash C. Cash does not include IOUs, notes receivable, or postage stamps. D. Petty Cash and Cash are the typical cash accounts. E. Management has the following objectives in regard to cash. (1) Account for all cash transactions accurately, so that correct information will be available regarding cash flows and balances.

Controlling Cash (2) Make certain there is enough cash available to pay bills as they come due. (3) Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest. (4) Prevent loss of cash due to theft or fraud.

Controlling Cash Receipts All assets owned by the company must be protected from theft of mishandling, but cash requires additional care. A. Cash is more likely to be the object of theft because it is easily concealed. B. Cash is not readily identifiable and this makes it a likely target for thieves. C. Cash may be more desirable than other company assets because it can be quickly spent to acquire other things of value.

Controlling Cash Receipts The are several basic principles for controlling cash receipts even though these may vary with each business. 1. Records of all cash receipts should be prepared soon after cash is received. 2. All cash receipts should be deposited intact on the day received or the next business day. A. Cash disbursements should not be made from cash receipts but only by check or from petty cash funds.

Controlling Cash Receipts B. If refunds for returned merchandise are made from the cash register, refund tickets should be prepared and approved by a supervisor. 3. The person who handles cash receipts should not record them in the accounting system. 4. The person receiving cash should not also disburse cash.

Controlling Cash Disbursements There are basic control procedures for cash disbursements because most of the firm’s cash is A. All disbursements should be made by check or from petty cash. B. All checks should be serially numbered and access to checks should be limited. C. Preferable, two signatures should be required on each check.

Controlling Cash Disbursements D. If possible, the person who authorizes payment of a bill should not be allowed to sign checks. E. Approved invoices or vouchers should be required to support checks issued. F. The person authorizing disbursements should be certain that payment is in order and is made to the proper payee.

Controlling Cash Disbursements G. When invoices and vouchers are paid, they should be stamped “Paid” with the date and number of the check issued indicated. H. The person(s) who signed the checks should not have access to cancelled checks and should not prepare the bank reconciliation. i. A bank reconciliation should be prepared each month, preferably by a person who has no other cash duties.

Controlling Cash Disbursements J. All voided and spoiled checks should be retained and defaced to prevent their unauthorized use. K. A voucher system may be needed in large firms for close cash control. L. Use of the net price method of recording purchases helps avoid loss of purchase discounts through planned timing of cash payments.

The Bank Checking Account One of the services provided by a bank is a checking account, which is a balance maintained in a bank that is subject to withdrawal by the depositor on demand.

Signature Card A new depositor completes a signature card which provides the signatures of persons authorized to sign checks drawn upon an account.

Deposit Tickets In making a bank deposit, the depositor prepares a deposit ticket which is a form showing the date and the items comprising the deposit; in addition, the depositor’s name, address and bank accounts number is shown.

Check A check is a written order on a bank to pay a specific sum of money to the party designated a the payee by the party issuing the check. A. There are three parties to every bank check transaction: 1. The party issuing the check. 2. The bank on which the check is drawn 3. The party to whose order the check is made payable.

Check B. A remittance advice may be attached to a check informing the payee why the drawer of the check is making this payment.

Bank Statement A bank statement is used by a bank describing the deposits and checks cleared during the period. A. Cancelled checks and original deposit tickets generally are returned with the bank statement.

Bank Statement B. Debit memos and credit memos may also be returned with the bank statement. 1. Debit memos are forms used by banks to explain a deduction from the depositor’s account. Note that the company’s cash account is a liability to the bank and if it wants to reduce that liability, a debit memo is used. 2. Credit memos explain additions to the account. Note that increases to the bank’s liability accounts require credits.

Bank Statement The balance shown in the bank statement usually differs from the balance in the depositor’s Cash in Bank ledger account. 1. Outstanding checks have not yet been deducted from the bank balance. 2. Deposits in transit have not yet been added to the bank balance. 3.Bank errors can occur in a depositor’s account caused by scanners misreading the account number printed in magnetic ink or bank employees encoding on the check the wrong amount.

Bank Statement 4. Service charges have not yet been recognized by the depositor and deducted from the Cash account balance. 5. “Not sufficient funds” checks have not yet been deducted from the depositor’s Cash account balance. 6. The bank may have collected a customer’s note or received a wire transfer of funds which is an inter-bank transfer of funds by telephone. 7. The depositor may have made errors by recording a check in the accounting records for a different amount from the actual figure.

The bank statement usually differs 1. Outstanding checks 2. Deposits in transit 3.Bank errors 4. Service charges 5. Checks returned “Not sufficient funds” 6. collected a customer’s note or received a wire transfer 7. The depositor different amount from the actual figure.

Bank Reconciliation Statement Reed Company Bank Reconciliation, June 30, 2016 Book balance of Cash xxxx Bank statement balance Add: ( )   Deduct: Reconciled balance

Bank Reconciliation Statement A bank reconciliation statement is prepared in order to accounts for the difference between the two balances. A. Both the balance per the bank statement and the balance per the ledger account are adjusted to the true balance of expendable cash. B. The documents used are the bank statement and any accompanying debit and credit memoranda, returned checks, a list of checks issued, and a record of deposits made.

Bank Reconciliation Statement c. After the reconciliation has been prepared, an adjusting entry is prepared to record the previously unrecorded items.

Certified and Cashier’s Checks A certified check is a check drawn by a depositor and taken to its bank for certificating which indicates that the depositor’s balance is large enough to cover the check. A. The amount of the certified check is deducted immediately after certification from the depositor’s checking account.

Certified and Cashier’s Checks B. The certified check now becomes a liability of the bank rather than the depositor. A casher’s check is a check drawn by a bank made out to either the depositor checking account.

Petty Cash Funds Establishing the Fund Petty cash funds are usually established from which small disbursements can be made to avoid writing a check for these small payments. A. The entry to establish a petty cash fund is to debit Petty Cash Fund and to credit Cash for the amount drawn. B. A petty cash cashier is responsible for operation of the fund so that adequate control is maintained over cash disbursements.

Operating The Fund A petty cash voucher is a form which indicates the amount and reason for the petty cash disbursement. A. Voucher should be prepared for each disbursement from the fund. B. Invoices for the expenditure should be stapled to the petty cash voucher. C. The person responsible for petty cash is accountable for having cash and petty cash vouchers equal to the amount of the fund.

Replenishing The Fund To replenish petty cash, a check is drawn for the amount that will restore the fund to its original amount. A. The journal entry is to debit expenses and assets for the amount disbursed and to credit Cash. B. Replenishments are made when the petty cash fund becomes low in currency and at the end of the accounting period.

Replenishing The Fund C. If the petty cash fund is found to be larger than needed, excess petty cash can be transferred back to the Cash account by debiting Cash and crediting Petty Cash. D. Increases in the petty cash fund can be made by debiting Petty Cash and crediting Cash and transferring cash over to the individual responsible for the petty cash fund.

Petty Cash Funds Establishing the Funds Imprest System Dr. Petty Cash Funds xx Cr. Cash xx Fluctuating System

Replenishing The Fund Replenishing The Fund If Imprest System Dr. Expense xx Cr. Cash xx If Fluctuating System Dr. Expense xx Cr. Petty Cash Funds xx

Cash Short and Over The petty cash fund must always be restored to its set amount, so the credit to Cash will always be for the difference between the set amount and the actual cash in the fund. A. Debits will be made for all items vouchered. B. Any discrepancy will be debited or credited to an account called Cash Short and Over.

Cash Short and Over 1. The Cash Short and Over account is an expense or a revenue depending upon whether it has a debit or credit balance. 2. Entries in the Cash Short and Over account may be entered from other change-making funds such as those in the cash register.

Cash Short and Over Cash Over Dr. Cash xx Cr. Sale xx Cash short and over xx Cash Short

Net Price Method Instead of using the gross price method of recording purchases, the net price method can be used which emphasizes the importance of taking purchase discounts. Using the net price method, a purchase is recorded in Purchases and Accounts, Payable net of the discount. 1. Using this approach, the discount is deducted before the transaction is entered in the journal.

Net Price Method 2. The net price method has theoretical merit because the goods are recorded at their actual cash cost. 3. This approach does not show discounts taken. 4. Under this approach if the discount is missed, the lost discount is recorded as a nonoperating expense in an account called Discount lost.

The Voucher System A Voucher system is a set of procedures, special journals, and authorization forms designed to provide control over cash payments.

Procedures for Preparing A Voucher A. Basic data are entered on the voucher from the invoice. B. The invoice, voucher, and receiving report undergo careful examination before the voucher receives approval or disapproval for payment. C. The accounting department notes on the voucher the proper debits and credits, C. Proper entries are made in the voucher register, and the voucher is filed in the unpaid voucher file.

Special Journals Used A voucher register is a multicolumn special journal having a special debit for accounts most frequently debited when a liability is incurred. A. The credit for all entries into the voucher register is to Vouchers Payable. B. After the voucher is entered in the voucher register, it is filed in the unpaid vouchers file.

Special Journals Used C. When the voucher is paid, it is filed in the paid vouchers file and the payment date and check number are inserted in the proper columns in the voucher register. A check register is a special journal showing all checks issued, listed by date and check number.

Special Journals Used 1. Separate columns would be needed for the debit to Vouchers Payable and the credit to Cash since the dollar amounts posted to these two accounts would differ by the amount of the discount taken. 2. An alternative system is to enter the invoices net of discount in the Vouchers Register.

Procedures for Paying a Voucher When a voucher is due for payment, it is removed from the unpaid voucher file and a check is prepared for the amount payable. A. The treasurer usually receives the prepared check, voucher, and supporting documents. B. If the treasurer approves the payment, the check is signed and mailed. C. The voucher is then returned to the accounting department.

Files Maintained in a Voucher System An unpaid voucher file and a paid voucher file are maintained in a voucher system. A. Unpaid vouchers are filed according to their due dates; if the credit terms run from the end of the month, the invoices of each creditor are included in one voucher and then filed by due date. B. The paid voucher file is filed by voucher number in numerical order and contains all vouchers which have been paid.

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