1. Click to edit Master title style 1 1 8 Internal Control and Cash

2. 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

3. 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

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

5. 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

6. 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)

7. Click to edit Master title style 7 7 8-2 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.

8. Click to edit Master title style 8 8 8-2 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.

9. 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

10. 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

11. Click to edit Master title style 11 27 Mar 19Cash3 142 00 Cash Short and Over8 00 To record cash sales and actual cash on hand. Sales 3 150 00 Cash sales for March 19 totaled $3,150.00 per the cash register tape. After removing the change fund, only $3,142.00 was on hand. 8-3 Cash Short and Over Note that the shortage was debited to Cash Short and Over.

12. Click to edit Master title style 12 28 8-3 Control of Cash Receipts

13. 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

14. 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

15. 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

16. 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

17. Click to edit Master title style 17 36 8-4 Bank Statement (Continued)

18. Click to edit Master title style 18 8-4 Bank Statement (Concluded) 37

19. 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

20. Click to edit Master title style 20 41 8-4 Power Networking should determine the reason for difference in these two amounts. Power Networking’s Records and Bank Statement

21. 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

22. Click to edit Master title style 22 44 8-5 Bank’s records Beginning balance$3,359.78 Beginning balance$2,549.99 Power Network prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3,359.78. The company’s Cash account has a July 31 balance of $2,549.99. Company’s records

23. Click to edit Master title style 23 45 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 A deposit of $816.20 did not appear on the bank statement. Company’s recordsBank’s records

24. Click to edit Master title style 24 46 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 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 408.00 $2,957.99 Company’s recordsBank’s records

25. Click to edit Master title style 25 47 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Add note and interest collected by bank 408.00 $2,957.99 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, $48.60. Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 883 48.60 1,544.99 Company’s recordsBank’s records

26. Click to edit Master title style 26 48 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 883 48.60 1,544.99 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

27. Click to edit Master title style 27 49 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 883 48.60 1,544.99 Bank service charges18.00 The bank service charges totaled $18.00. Company’s recordsBank’s records Deduct check NSF$300.00

28. Click to edit Master title style 28 50 8-5 Beginning balance$3,359.78 Company’s records Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 883 48.60 1,544.99 Bank service charges18.00 Error recording Check No. 879 9.00 327.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26. Bank’s records Deduct check NSF$300.00

29. Click to edit Master title style 29 8-5 Beginning balance$3,359.78 Beginning balance$2,549.99 Add deposit not recorded by bank 816.20 $4,175.98 Add note and interest collected by bank 408.00 $2,957.99 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 883 48.60 1,544.99 Deduct check NSF$300.00 Bank service charges18.00 327.00 Adjusted balance$2,630.99 51 Company’s recordsBank’s records Error recording Check No. 879 9.00

30. Click to edit Master title style 30 52 8-5

31. 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

32. Click to edit Master title style 32 54 8-5 Beginning balance$2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct check NSF$300.00 Bank service charges18.00 327.00 Error recording Check No. 879 9.00 Company’s records

33. Click to edit Master title style 33 55 8-5 July 31Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Income8 00 Entry to Record Plus Items

34. Click to edit Master title style 34 56 Beginning balance$2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct check NSF$300.00 Bank service charges18.00 327.00 Error recording Check No. 879 9.00 Company’s records 8-5

35. Click to edit Master title style 35 57 8-5 July 31Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Income8 00 31Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Expense18 00 Accounts Payable—Taylor Co.9 00 Cash327 00 NSF check, bank service charges, and error in recording Check no. 879. Entry to Record Minus Items

36. Click to edit Master title style 36 8-5 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

37. Click to edit Master title style 37 8-5 Example Exercise 8-3 59 a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Photo OP based upon the bank reconciliation.

38. Click to edit Master title style 38 Follow My Example 8-3 60 8-5 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

39. 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

40. Click to edit Master title style 40 63 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 500 00 2008 Cash 500 00 Established petty cash fund issuing Check 511. 8-6

41. Click to edit Master title style 41 64 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 402 00 Replenished petty cash fund. Cash 467 00 Store Supplies 35 00 Miscellaneous Administrative Exp. 30 00 8-6

42. 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

43. 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