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Sarbanes-Oxley, Internal Control, and Cash
Chapter 8
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Learning Objective 2 Describe and illustrate the objectives and elements of internal control.
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Internal Control
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Learning Objective 3 Describe and illustrate the application of internal controls to cash.
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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.
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Cash Received from Cash Sales
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Learning Objective 4 Describe the nature of a bank account and its use in controlling cash.
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Impact of Debit and Credit Memos
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Learning Objective 5 Describe and illustrate the use of a bank reconciliation in controlling cash.
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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.
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Steps of a Bank Reconciliation
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Steps of a Bank Reconciliation
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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,
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Power Networking Bank Reconciliation
Bank’s Records Power Networking’s Records Cash balance $3,359.78 Step 1
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Power Networking Bank Reconciliation
Step 2 A deposit on July 31 of $ is not recorded on the bank statement.
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Power Networking Bank Reconciliation
Power Networking’s Records Bank’s Records Cash balance $3,359.78 Add deposit not recorded by bank $4,175.98 Step 2
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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.
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Power Networking Bank Reconciliation
Bank’s Records Power Networking’s Records Cash balance $3,359.78 Add deposit not recorded by bank $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Step 3
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Power Networking Bank Reconciliation
Bank’s Records Power Networking’s Records Cash balance $3,359.78 Add deposit not recorded by bank $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 $2,630.99 Adjusted balance Step 4
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Power Networking Bank Reconciliation
Step 5 The cash balance in Power Networking’s ledger on July 31 is $2,
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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 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Adjusted balance $2,630.99
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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.
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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 Add note and interest collected by bank $2,957.99 $4,175.98 Step 6 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Adjusted balance $2,630.99
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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.
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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 Add note and interest collected by bank $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Deduct NSF check $300.00 Bank service charges 18.00 Step 7 Adjusted balance $2,630.99
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Power Networking Bank Reconciliation
Error Check No. 879 for $ to Taylor Company on account was erroneously recorded in the journal as $ 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.)
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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 Add note and interest collected by bank $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error Error recording Chk. No Adjusted balance $2,630.99
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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 Add note and interest collected by bank $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No Adjusted balance $2,630.99 Adjusted balance $2,630.99 Step 8
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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 Add note and interest collected by bank $4,175.98 $2,957.99 Deduct outstanding checks: No. 812 $1,061.00 No No ,544.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No Adjusted balance $2,630.99 Adjusted balance $2,630.99 Step 9
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Power Networking Bank Reconciliation
The journal entries for Power Networking, based on the bank reconciliation, are as follows:
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