Click to edit Master title style Internal Control and Cash

Click to edit Master title style 2 2 Internal control is broadly defined as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations. 8-1

Click to edit Master title style 3 3 1)assets are safeguarded and used for business purposes, 2)business information is accurate, and 3)employees comply with laws and regulations. To provide reasonable assurance that: 8-2 Objectives of Internal Control

Click to edit Master title style 4 4 Employee fraud is the intentional act of deceiving an employer for personal gain. 8-2

Click to edit Master title style 5 5 Example of control procedures for an all- night convenience store:  Locate the cash register near the door, so that it is fully visible from outside the store; have two employees work late hours; employ a security guard.  Deposit cash in the bank daily, before 5 p.m. (Continued) 8-2

Click to edit Master title style 6 6  Keep only small amounts of cash on hand after 5 p.m. by depositing excess cash in a store safe that can’t be opened by employees on duty.  Install cameras and alarm systems. 8-2 (Concluded)

Click to edit Master title style Indicators of Internal Control Problems Warning Signs With Regard to People 1.Abrupt change in lifestyle. 2.Close social relationships with suppliers. 3.Refusing to take a vacation. 4.Frequent borrowing from other employees. 5.Excessive use of alcohol or drugs.

Click to edit Master title style Indicators of Internal Control Problems Warning Signs from the Accounting System 1.Missing documents or gaps in transaction numbers. 2.An unusual increase in customer refunds. 3.Differences between daily cash receipts and bank deposits. 4.Sudden increase in slow payments. 5.Backlog in recording transactions.

Click to edit Master title style 9 9 One of the most important controls to protect cash received in over-the-counter sales is a cash register. 8-3 Control of Cash Receipts

Click to edit Master title style 10 A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund. 8-3 Change Fund

Click to edit Master title style Mar 19Cash Cash Short and Over8 00 To record cash sales and actual cash on hand. Sales Cash sales for March 19 totaled $3, per the cash register tape. After removing the change fund, only $3, was on hand. 8-3 Cash Short and Over Note that the shortage was debited to Cash Short and Over.

Click to edit Master title style Control of Cash Receipts

Click to edit Master title style 13 Cash may be received from customers through electronic funds transfers. Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills. 8-3 Electronic Funds Transfers

Click to edit Master title style 14 A major reason that businesses use bank accounts is for control purposes. Use of Bank Accounts 8-4

Click to edit Master title style 15 Bank accounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of transactions. 8-4

Click to edit Master title style 16 A summary received from the bank of all checking account transaction is called a bank statement. 8-4 Bank Statement

Click to edit Master title style Bank Statement (Continued)

Click to edit Master title style Bank Statement (Concluded) 37

Click to edit Master title style 19 Typical credit or debit memorandum entries found on the bank statement: EC —Error correction to correct bank error. NSF—Not sufficient funds check. SC—Service charge. ACH—Automated Clearing House entry for electronic funds transfer. MS—Miscellaneous items. 8-4

Click to edit Master title style Power Networking should determine the reason for difference in these two amounts. Power Networking’s Records and Bank Statement

Click to edit Master title style 21 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 in order to determine the adjusted cash balance. 8-5

Click to edit Master title style Bank’s records Beginning balance$3, Beginning balance$2, Power Network prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3, The company’s Cash account has a July 31 balance of $2, Company’s records

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, A deposit of $ did not appear on the bank statement. Company’s recordsBank’s records

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking Add note and interest collected by bank $2, Company’s recordsBank’s records

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, Add note and interest collected by bank $2, Three checks that were written during the period did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $ Deduct outstanding checks: No. 812$1, No No , Company’s recordsBank’s records

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, Add note and interest collected by bank $2, Deduct outstanding checks: No. 812$1, No No , The bank returned a check for $300 from customer (Thomas Ivey) because of insufficient funds (NSF). Company’s recordsBank’s records Deduct check NSF$300.00

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, Add note and interest collected by bank $2, Deduct outstanding checks: No. 812$1, No No , Bank service charges18.00 The bank service charges totaled $ Company’s recordsBank’s records Deduct check NSF$300.00

Click to edit Master title style Beginning balance$3, Company’s records Beginning balance$2, Add deposit not recorded by bank $4, Add note and interest collected by bank $2, Deduct outstanding checks: No. 812$1, No No , Bank service charges18.00 Error recording Check No Check No. 879 for $ to Taylor Co. on account, erroneously recorded in journal as $ Bank’s records Deduct check NSF$300.00

Click to edit Master title style Beginning balance$3, Beginning balance$2, Add deposit not recorded by bank $4, Add note and interest collected by bank $2, Deduct outstanding checks: No. 812$1, No No , Deduct check NSF$ Bank service charges Adjusted balance$2, Company’s recordsBank’s records Error recording Check No

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Click to edit Master title style 31 Journal entries must be prepared for those items that affected the company’s (depositor’s) side of the reconciliation. 8-5

Click to edit Master title style Beginning balance$2, Add note and interest collected by bank $2, Deduct check NSF$ Bank service charges Error recording Check No Company’s records

Click to edit Master title style July 31Cash Note collected by bank. Notes Receivable Interest Income8 00 Entry to Record Plus Items

Click to edit Master title style Beginning balance$2, Add note and interest collected by bank $2, Deduct check NSF$ Bank service charges Error recording Check No Company’s records 8-5

Click to edit Master title style July 31Cash Note collected by bank. Notes Receivable Interest Income Accounts Receivable—Thomas Ivey Miscellaneous Expense18 00 Accounts Payable—Taylor Co.9 00 Cash NSF check, bank service charges, and error in recording Check no Entry to Record Minus Items

Click to edit Master title style Example Exercise 8-3 The following data were gathered to use in reconciling the bank account of Photo Op. 58 (Continued) Balance per bank$14,500 Balance per company records13,875 Bank service charges75 Deposit in transit3,750 NSF check800 Outstanding checks5,250

Click to edit Master title style Example Exercise a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Photo OP based upon the bank reconciliation.

Click to edit Master title style 38 Follow My Example For Practice: PE 8-3A, PE 8-3B a.$13,000, as shown below. Bank section of reconciliation: $14,500 – $5,250 + $3,750 = $13,000 Company section of reconciliation: $13,875 – $75 – $800 = $13,000 b.Accounts Receivable800 Miscellaneous Expense75 Cash875

Click to edit Master title style 39 It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund. 8-6

Click to edit Master title style On August 1, issued Check No. 511 for $500 to established a petty cash fund. Post. Ref. JOURNAL DateDescriptionDebitCredit Page 9 Aug. 1 Petty Cash Cash Established petty cash fund issuing Check

Click to edit Master title style At the end of August, the petty cash receipts indicated expenditures for the following items: office supplies, $380, postage (office supplies), $22; store supplies, $35, and miscellaneous administrative items, $30. Aug. 31 Office Supplies Replenished petty cash fund. Cash Store Supplies Miscellaneous Administrative Exp

Click to edit Master title style 42 Replenishing the petty cash fund restores it to its original amount of $500. Note that there is no entry to Petty Cash when the fund is replenished. 8-6

Click to edit Master title style 43 A company’s excess cash is normally invested in highly liquid investments. These investments are called cash equivalents. 8-7