Sarbanes-Oxley, Internal Control, and Cash Chapter 8

Learning Objective 2 Describe and illustrate the objectives and elements of internal control.

Internal Control

Learning Objective 3 Describe and illustrate the application of internal controls to cash.

Cash Controls Over Receipts and Payments Cash includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Cash is the asset most likely to be stolen or used improperly in a business.

Cash Received from Cash Sales

Learning Objective 4 Describe the nature of a bank account and its use in controlling cash.

Impact of Debit and Credit Memos

Learning Objective 5 Describe and illustrate the use of a bank reconciliation in controlling cash.

Bank Reconciliation A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. This is used to determine the adjusted cash balance.

Steps of a Bank Reconciliation

Steps of a Bank Reconciliation

Power Networking Bank Reconciliation Step 1 Power Networking prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3,359.78.

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Step 1

Power Networking Bank Reconciliation Step 2 A deposit on July 31 of $816.20 is not recorded on the bank statement.

Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Step 2

Power Networking Bank Reconciliation Step 3 Three checks that were written during the month did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $48.60.

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Step 3

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,630.99 Adjusted balance Step 4

Power Networking Bank Reconciliation Step 5 The cash balance in Power Networking’s ledger on July 31 is $2,549.99.

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Step 5 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99

Power Networking Bank Reconciliation Step 6 A credit memo on the bank statement indicates that the bank collected a note in the amount of $400 and the related interest of $8 for Power Networking.

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $2,957.99 $4,175.98 Step 6 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99

Power Networking Bank Reconciliation Step 7 A check from a customer (Thomas Ivey) for $300 was returned by the bank because of insufficient funds (NSF) as indicated by a debit memo. A bank service charge of $18 was also indicated by a debit memo.

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct NSF check $300.00 Bank service charges 18.00 Step 7 Adjusted balance $2,630.99

Power Networking Bank Reconciliation Error Check No. 879 for $732.26 to Taylor Company on account was erroneously recorded in the journal as $723.26. When an error is made, two questions are asked: (1) Who made the error? (2) Does correcting the error cause the cash account to go up or down? Power Networking made the error, so the item is placed on the company’s side of the reconciliation. By correcting the error, the cash account goes down. (Thus, it is a deduction on the reconciliation.)

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error Error recording Chk. No. 879 9.00 Adjusted balance $2,630.99

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No. 879 9.00 327.00 Adjusted balance $2,630.99 Adjusted balance $2,630.99 Step 8

Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records Cash balance $3,359.78 Cash balance $2,549.99 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No. 879 9.00 327.00 Adjusted balance $2,630.99 Adjusted balance $2,630.99 Step 9

Power Networking Bank Reconciliation The journal entries for Power Networking, based on the bank reconciliation, are as follows: