1. ACG 2021 Financial Accounting
Internal Control and Cash

2. Learning Objectives Understand Internal Control
Use a bank reconciliation as a control device
Account for Petty Cash
Use a budget to manage cash

3. Internal Control
Internal control is an organizational plan and related measures that an entity adopts to reach various Goals:
Safeguard assets
Encourage adherence to company policies
Promote operational efficiency
Ensure accurate and reliable accounting records

4. Failures of Internal Control
Enron
WorldCom
Others
Led to Congress Passing Sarbanes-Oxley Act
Address Public Concerns over failed
Audits of Public Companies
Internal Controls at Public Companies

5. Bank Accounts as Controls
All cash should be deposited into a bank account daily.
To draw money from the account, a check is written
Three parties to a check:
maker – signs the check
payee – to whom the check is written
bank – on which the check is drawn
Remittance advice is an optional attachment that gives the reason for the payment.

6. Cash Control Definitions
Monthly bank statements are sent to the account holder and should be reconciled.
to check (a financial account) against another for accuracy (Webster Online Dictionary)
Electronic fund transfer (EFT) is the electronic transfer of cash. No check is written.
Payments on behalf of account holder.
Deposits made from customers to account holder.
Bank statements include both physical checks and EFT payments as well as other transactions on the account.

7. Bank Reconciliation Comparison of:
Two independently maintained records of a business’s cash
The company’s Cash account (T-Account, the book balance)
The bank statement
Differences between the two records generally arise because of timing differences.
Deposits were made but after the bank statement was printed and mailed.
Checks were written but have not cleared the bank when the bank statement was printed mailed.
Reconciliations ensure that the two records agree.

8. Bank Reconciliation Items for reconciliation:
Items RECORDED by the company but not yet recorded by the bank:
Deposits in transit
Outstanding checks

9. Bank Reconciliation Items for reconciliation:
Items recorded by the bank BUT NOT YET recorded by the company.
Bank collections
deposits received directly by the bank from customers
Electronic funds transfers
Both payments and deposits
Service charges and the cost of printed checks
Interest revenue earned on checking account
Nonsufficient funds (NSF) checks
These are checks deposited from a business’ customers that don’t have sufficient funds
So they ‘bounce’
Errors by the company or the bank

10. Bank Reconciliation
The adjusted bank balance must equal the adjusted books balance
Book Balance = Ending Cash Account
This is how we ensure Control over Cash

11. Reconciling Items Bank Balance Book Balance Add deposits in transit
Subtract outstanding checks
Add or subtract corrections of bank errors, as appropriate
Book Balance
Add bank collection items, interest revenue, and EFT receipts
Subtract service charges, NSF checks, and EFT payments
Add or subtract corrections of book errors, as appropriate.

12. Bank Reconciliation Journal entries are only made for:
Adjustments to Book Balance
Bank collection items, interest revenue, and EFT receipts
Service charges, NSF checks, and EFT payments
Errors made by the company
(bank errors do not require journal entries on the company’s books).

13. Bank Reconciliation Illustrated
Business Research, Inc., shows a balance on its bank statement of $5, on January 31. The company Cash account has a balance of $3,
The January 30 deposit of $1, does not appear on the bank statement.
The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.
Five company checks, totaling $1,350.14, issued late in January and recorded in the journal have not been paid by the bank.
The bank received $ by EFT on behalf of Business Research, Inc.
The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214).
The bank statement shows interest revenue of $28.01.

14. Bank Reconciliation Illustrated
Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510.
The bank service charge for the month was $14.25.
The bank statement shows an NSF check for $52.
Business Research pays insurance expense by EFT and has not recorded this $361 payment.

15. Bank Reconciliation

16. Journal Entries from Reconciliation
(4) Cash
Rent Revenue
Receipt of monthly rent
(5) Cash 2,114.00
Notes Receivable 1,900.00
Interest Revenue
Note receivable collected by the bank
(6) Cash 28.01
Interest Revenue
Interest earned on bank balance

17. Journal Entries from Reconciliation
(7) Cash
Accounts Payable
Correction of check no. 333
(8) Miscellaneous Expense 14.25
Cash
Bank Service Charge
(9) Accounts Receivable 52.00
Cash
NSF customer check returned by bank
(10) Insurance Expense
Cash
Payment of monthly insurance

18. ACG 2021 Financial Accounting
Petty Cash
Cash Budgets, and
Cash on the Balance Sheet

19. Petty Cash Petty cash fund is to pay for minor expenses.
Fund is opened with a particular amount of cash.
A custodian issues cash when needed and places all petty cash tickets and receipts in the box with the remaining cash.
The sum of the remaining cash and petty cash tickets should equal the amount established for the fund.
Petty cash is an example of an imprest fund.
Beginning Cash + Added Cash – Receipts = Ending Cash
Petty Cash
Beg Bal
Receipts
End Bal
Added Cash

20. Petty Cash Journal Entries
To establish Petty Cash Fund
Postage Expense
Office Supplies Expense
Miscellaneous Expense
Cash
To Reimburse the petty cash fund

21. Cash Budgets Budget – a financial plan Cash budget
plans cash receipts and cash payments
Beginning cash
Plus: Expected Receipts
Less: Expected Payments
Equals: Expected Ending cash
Allows mangers to know in advance whether they will likely need to borrow money.

22. Reporting Cash on the Balance Sheet
Cash and Cash Equivalents
liquid assets such as time deposits and certificates of deposit
Restricted cash must be disclosed separately.
Collateral
Other non-Operating uses
Compensating balances are not included as cash.
Minimum cash balance required for loan

23. End of Chapter 4