Internal Control and Cash C H A P T E R 8 ACCT 72 - Introductory Accounting 4/25/2017 Internal Control and Cash C H A P T E R 8 Practice: Ex 8-6 Ex 8-10 Prob 8-4A Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Learning Objectives Define, explain the purpose, and identify the principles of internal control. (LO1) Define cash and explain how it is reported. (LO2) Apply internal control to cash. (LO3) Explain and record petty cash fund transactions. (LO4) Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Learning Objectives Explain and identify banking activities and the control features they provide. (LO5) Prepare a bank reconciliation and journalize any resulting adjustment(s). (LO6) Calculate the acid-test ratio and explain its use as an indicator of a company’s liquidity. (Appendix 9A) (LO7) Chapter 9

Internal Control System ACCT 72 - Introductory Accounting 4/25/2017 Internal Control System All policies and procedures used to: Protect assets Ensure reliable accounting Promote efficient operations Encourage adherence to company policies LO 1 Chapter 9

Principles of Internal Control ACCT 72 - Introductory Accounting 4/25/2017 Principles of Internal Control Ensure transactions and activities are authorized. Maintain adequate records. Insure assets. Separate recordkeeping and custody of assets. Establish a separation of duties LO 1 Chapter 9

Principles of Internal Control ACCT 72 - Introductory Accounting 4/25/2017 Principles of Internal Control Apply technological controls. Perform internal and external audits. Internal controls will vary based on the nature and size of the organization. LO 1 Chapter 9

Limitations of Internal Control ACCT 72 - Introductory Accounting 4/25/2017 Limitations of Internal Control Human Error Negligence Fatigue Human Fraud Intent to defeat internal controls for personal gain. Costs vs. Benefits The costs of internal control must not exceed their benefits. Misjudgment Confusion LO 1 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Cash Important asset for every company. Control of cash and access to it is critical. Cash includes: Currency, Coins and Cheques Deposits in bank accounts Other items acceptable for deposit LO 2 Chapter 9

Internal Control for Cash ACCT 72 - Introductory Accounting 4/25/2017 Internal Control for Cash Guidelines: Handling of cash v. recordkeeping of cash. Deposit cash receipts daily. Make cash disbursements (payments) by cheque. LO 3 Chapter 9

Control of Cash Disbursements ACCT 72 - Introductory Accounting 4/25/2017 Control of Cash Disbursements All expenditures should be made by cheque (or EFT). Authorization (cheque signing) and recordkeeping duties separated Apply a voucher system. LO 3 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Petty Cash Good internal control procedures require cash disbursements be made by cheque. The exception: Small payments required in most companies for items such as postage, courier fees, repairs, and supplies. LO 4 Chapter 9

Starting a Petty Cash Fund ACCT 72 - Introductory Accounting 4/25/2017 Starting a Petty Cash Fund Prepares cheque to establish petty cash fund. Cashier’s Office Petty Cashier LO 4 Chapter 9

Operating a Petty Cash Fund ACCT 72 - Introductory Accounting 4/25/2017 Operating a Petty Cash Fund The petty cashier makes payments from this fund for small disbursements. … and ensures a petty cash receipt is signed by the person receiving the money to easily identify the expenses paid from petty cash. LO 4 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Topping Up the Fund A cheque is issued and the fund is replenished when the amount of cash becomes low. QS 8-5 & 8-6 A cash over and short account may be needed. LO 4 Chapter 9

Banking Activities as Controls ACCT 72 - Introductory Accounting 4/25/2017 Banking Activities as Controls Basic Bank Services Bank account Bank deposits and cheques Electronic funds transfer Credit/Debit card transactions LO 5 Chapter 9

Credit Card Transactions ACCT 72 - Introductory Accounting 4/25/2017 Credit Card Transactions The risk of bad debts is transferred to the credit card company. The company collects cash from the sale quickly. The credit card companies charge a fee to the vendor. LO 5 Chapter 9

Debit Card Transactions ACCT 72 - Introductory Accounting 4/25/2017 Debit Card Transactions The bank transfers funds from the customer’s account to the vendor’s bank account. The bank charges a fee to the vendor. LO 5 Chapter 9

Illustration: Credit Card Transaction ACCT 72 - Introductory Accounting 4/25/2017 Illustration: Credit Card Transaction TechCom has $100 of credit card sales with a 4% fee and cash is received immediately (assume cost of sales is $40). LO 5 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Bank Reconciliations Bank reconciliations are: Prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books. An important element of internal control. LO 6 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 The bank statement provides information about everything that has gone through the bank account for a given period of time. CM – Credit Memo DM – Debit Memo EC – Error Correction IN – Interest Earned NSF – Non-sufficient Funds OD – Overdraft SC – Service Charge LO 6 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 The general ledger, cash receipts, and cash disbursements journals provide information about everything that has gone through our accounting records for a given period of time. LO 6 Chapter 9

Bank Reconciliation - Example ACCT 72 - Introductory Accounting 4/25/2017 Bank Reconciliation - Example Why are the balances different? Some items are reflected on the bank statement but not in the accounting records and vice versa. * LO 6 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 Reconciling Items Bank Statement Outstanding cheques. Deposits in transit. Bank errors. General Ledger Non-sufficient funds cheque (NSF). Bank service charges. Interest earned on bank account. Collections made by the bank. Book errors. LO 6 Chapter 9

Bank Reconciliation for VideoBuster ACCT 72 - Introductory Accounting 4/25/2017 Bank Reconciliation for VideoBuster Let’s prepare the bank reconciliation for VideoBuster Company at the end of October 31, 2011. LO 6 Chapter 9

ACCT 72 - Introductory Accounting 4/25/2017 LO 6 Chapter 9

VideoBuster Bank Reconciliation ACCT 72 - Introductory Accounting 4/25/2017 VideoBuster Bank Reconciliation Chapter 9

Recording Adjusting Entries from the Bank Reconciliation ACCT 72 - Introductory Accounting 4/25/2017 Recording Adjusting Entries from the Bank Reconciliation LO 6 Chapter 9

Recording Adjusting Entries from the Bank Reconciliation ACCT 72 - Introductory Accounting 4/25/2017 Recording Adjusting Entries from the Bank Reconciliation LO 6 Chapter 9

Recording Adjusting Entries from Bank Reconciliation ACCT 72 - Introductory Accounting 4/25/2017 Recording Adjusting Entries from Bank Reconciliation After posting the reconciling entries the cash account looks like this . . . LO 6 Chapter 9

Let’s practice Exercise 8-10 Problem 8-8A