1. Accounting Systems & Internal Controls Chapter 6

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

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

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

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

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

7. 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

8. 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

9. 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

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

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

12. 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

13. Bank Reconciliation Example Nan Company Bank Reconciliation July 31, 2000 Bank statement balance $3,359.78 Add: outstanding deposits 816.20 $4,175.98 Deduct: outstanding checks No 12$1,061.00 8 435.39 3 48.60$1,544.99 Adjusted balance 2,630.99 Book balance $2,549.99 Add: note and interest collected 408.00 2,957.99 Deduct: insufficient funds check $300.00 Service charge 18.00 Error on check 9.00 327.00 Adjusted balance $2,630.99

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

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

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

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

18. Homework  Bank reconciliations Ex 6-6.6-8  Petty cash: 6-4, 6-5