internal control and cash powerpoint slides to accompany fundamental accounting principles, 14ce...
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Internal Internal Control and Control and
CashCash
PowerPoint Slides to accompanyFundamental Accounting Principles, 14ce
Prepared byJoe Pidutti, Durham College
CHAPTER
8
© 2013 McGraw-Hill Ryerson Limited.
1. Define, explain the purpose, and identify the principles of internal control. (LO1)
2. Define cash and explain how it is reported. (LO2)
3. Apply internal control to cash. (LO3)
4. Explain and record petty cash fund transactions. (LO4)
2 © 2013 McGraw-Hill Ryerson Limited.
Learning ObjectivesLearning Objectives
5. Explain and identify banking activities and the control features they provide. (LO5)
6. Prepare a bank reconciliation and journalize any resulting adjustment(s). (LO6)
7. Calculate the acid-test ratio and explain its use as an indicator of a company’s liquidity. (Appendix 8A) (LO7)
3 © 2013 McGraw-Hill Ryerson Limited.
Learning ObjectivesLearning Objectives
All policies and procedures used to :• Protect assets• Ensure reliable accounting• Promote efficient operations• Encourage adherence to company
policies
4 © 2013 McGraw-Hill Ryerson Limited.
Internal Control SystemInternal Control System
LO 1
5 © 2013 McGraw-Hill Ryerson Limited.
1. Ensure transactions and activities are authorized.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping and custody of assets.
5. Establish a separation of duties.
Principles of Internal ControlPrinciples of Internal Control
LO 1
6 © 2013 McGraw-Hill Ryerson Limited.
6. Apply technological controls.
7. Perform internal and external audits.
Internal controls will vary based on the nature and size of the organization.
Principles of Internal ControlPrinciples of Internal Control
LO 1
Human Error• Negligence• Fatigue• Misjudgment• Confusion
Human Fraud
Intent to defeat internal controls for personal gain. Costs vs. Benefits The costs of internal control must not exceed their
benefits.
Limitations of Internal ControlLimitations of Internal Control
7 © 2013 McGraw-Hill Ryerson Limited. LO 1
• Is an important asset for every company.• Control of cash on hand and access to it is
critical.
Cash includes:• Currency • Coins• Deposits in bank accounts• Other items acceptable for deposit
8 © 2013 McGraw-Hill Ryerson Limited.
CashCash
LO 2
• Refers to how easily an asset can be converted into another asset or used in paying for services or obligations.
• Cash and similar assets are called liquid assets.
• Companies must own some liquid assets to pay their obligations.
9 © 2013 McGraw-Hill Ryerson Limited.
LiquidityLiquidity
LO 2
Guidelines:
1. Separate handling of cash from recordkeeping of cash.
2. Deposit cash receipts daily.
3. Make cash disbursements by cheque.
10 © 2013 McGraw-Hill Ryerson Limited.
Internal Control for CashInternal Control for Cash
LO 3
Internal control over cash receipts ensures that all cash received is properly recorded and deposited. These controls include:•The use of cash registers for over-the-counter cash sales.•The separation of recordkeeping and custody of cash.
11 © 2013 McGraw-Hill Ryerson Limited.
Control of Cash ReceiptsControl of Cash Receipts
LO 3
• All expenditures should be made by cheque. The only exception is for small payments from petty cash.
• Separate authorization, cheque signing, and recordkeeping duties.
• Apply a voucher system.
12 © 2013 McGraw-Hill Ryerson Limited.
Control of Cash DisbursementsControl of Cash Disbursements
LO 3
Mini-QuizMini-Quiz
An internal control system is all policies and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
13 © 2013 McGraw-Hill Ryerson Limited.
Mini-QuizMini-Quiz
An internal control system is all policies and procedures managers use to:
a)Protect assets.
b)Ensure reliable accounting.
c)Promote efficient operations.
d)Urge adherence to company policies.
e)All of the above.
14 © 2013 McGraw-Hill Ryerson Limited.
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.
15 © 2013 McGraw-Hill Ryerson Limited.
Petty Cash System of Internal Petty Cash System of Internal ControlControl
LO 4
Cashier’s Office Petty Cashier
GENERAL JOURNAL Page 4Date Description PR Debit Credit
May 1 Petty Cash 150
Cash 150
To establish a petty cash fund
Operating a Petty Cash FundOperating a Petty Cash Fund
Prepares cheque to
establish petty cash fund.
16 © 2013 McGraw-Hill Ryerson Limited. LO 4
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.
17 © 2013 McGraw-Hill Ryerson Limited.
Operating a Petty Cash FundOperating a Petty Cash Fund
LO 4
GENERAL JOURNAL Page 4Date Description PR Debit Credit
May 15 Postage Expense 46
Courier Expense 80
Cash 126
A cheque is issued and the fund is replenished when the amount of cash on hand becomes low.
18 © 2013 McGraw-Hill Ryerson Limited.
Operating a Petty Cash FundOperating a Petty Cash Fund
A cash over and short account is used if needed.
LO 4
19 © 2013 McGraw-Hill Ryerson Limited.
Operating a Petty Cash FundOperating a Petty Cash Fund
LO 4
Cash required to replenish petty cash
= Fund size Cash remaining
-
Cash over/(short)=
Total of petty cash receipts
- Cash required to replenish petty cash
Basic Bank Services• Bank account• Bank deposits and cheques• Electronic funds transfer• Bank credit card transactions• Debit card transactions
20 © 2013 McGraw-Hill Ryerson Limited.
Banking Activities as ControlsBanking Activities as Controls
LO 5
• Many companies allow customers to use bank credit cards for their purchases.
• 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.
21 © 2013 McGraw-Hill Ryerson Limited.
Credit Card TransactionsCredit Card Transactions
LO 5
TechCom has $100 of credit card sales with a 4% fee and cash is received immediately (assume cost of sales is $40).
GENERAL JOURNAL Page 8Description PR Debit Credit
Aug. 15 Cash 96.00
Credit Card Expense 4.00
Sales 100.00
To record credit card expense less 4% fee
15 Cost of Goods Sold 40.00 Merchandise Inventory 40.00
To record cost of sales
Date
22 © 2013 McGraw-Hill Ryerson Limited.
Illustration-Credit Card Illustration-Credit Card TransactionTransaction
LO 5
• Many companies allow customers to use debit cards for their purchases.
• The bank transfers funds from the customer’s account to the vendor’s bank account.
• The bank charges a fee to the vendor.• The entries are identical to a bank credit
card sale.
23 © 2013 McGraw-Hill Ryerson Limited.
Debit Card TransactionsDebit Card Transactions
LO 5
Bank reconciliations are:• Prepared periodically to explain the
difference between cash reported on the bank statement and the cash balance on company’s books.
• An important element of internal control.
Bank ReconciliationsBank Reconciliations
24 © 2013 McGraw-Hill Ryerson Limited. LO 6
The bank statement provides information
about everything that has gone
through the bank account for a given
period of time.
CM – Credit MemoDM – Debit MemoEC – Error CorrectionIN – Interest EarnedNSF – Non-sufficient FundsOD – OverdraftSC – Service Charge
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58 16 23.00 DM 150.00 2,126.58
17 122 70.00 485.00 2,541.58 18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58
29 128 135.00 2,041.58
31 IN 8.42 2,050.00
National BankHamilton, ON L8P 2X5
Bank Statement
Statement Date901 Main Street
Daily Balance
Hamilton, ON L8P 2J8
VideoBuster Company
723.00 1,163.42
Deposits and Credits
Cheques and Debits
Account Number
Total Cheques and Debits
Total Deposits and Credits
25 © 2013 McGraw-Hill Ryerson Limited. LO 6
Cheque # Amount119 55.00$
120 200.00 121 120.00
122 70.00 123 25.00 124 150.00 125 15.00
126 200.00
127 50.00
128 135.00
1,020.00$
(101)
Cash Disbursements Journal
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.
26 © 2013 McGraw-Hill Ryerson Limited. LO 6
*
Bank Reconciliation - Example
27 © 2013 McGraw-Hill Ryerson Limited.
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Total Deposits and Credits
901 Main Street
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement Date
Daily Balance
Hamilton, ON L8P 2J8
VideoBuster Company
723.00 1,163.42
Deposits and Credits
Cheques and Debits
Date Explanation PR Debit Credit Balance30-Sep Balance 1,609.58 31-Oct CR6 815.00 2,424.58 31-Oct CD4 1,020.00 1,404.58
Cash Account # 101
General Ledger Cash Account
Why are the balances different?
Some items are reflected on the bank statement but not in the accounting records and vice versa.
LO 6
Reconciling ItemsReconciling 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.
28 © 2013 McGraw-Hill Ryerson Limited. LO 6
Let’s prepare the bank reconciliation for VideoBuster Company at the end of October 31, 2014.
29 © 2013 McGraw-Hill Ryerson Limited. LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement DateHamilton, ON L8P 2J8
VideoBuster Company
723.00
DateDeposit Amount
Oct 3 $ 240.00
9 180.00
15 100.00 16 150.00 31 145.00
$ 815.00
(101)
Cash Receipts Journal
Cheque # Amount119 55.00$ 120 200.00
121 120.00
122 70.00
123 25.00 124 150.00 125 15.00 126 200.00
127 50.00 128 135.00
1,020.00$
(101)
Cash Disbursements Journal
These items appear on both the
Cash Receipts Journal and the bank statement;
therefore, none of these items is a reconciling item.
30 © 2013 McGraw-Hill Ryerson Limited.
LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Hamilton, ON L8P 2J8
VideoBuster Company
723.00
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement Date
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
DateDeposit Amount
Oct 3 $ 240.00
9 180.00
15 100.00 16 150.00 31 145.00
$ 815.00
(101)
Cash Receipts Journal
Cheque # Amount119 55.00$ 120 200.00
121 120.00
122 70.00
123 25.00 124 150.00 125 15.00 126 200.00
127 50.00 128 135.00
1,020.00$
(101)
Cash Disbursements Journal
These items appear on both
the Cash Disbursements
Journal AND the bank statement;
therefore, none of these items is a reconciling item.
31 © 2013 McGraw-Hill Ryerson Limited.
LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement DateHamilton, ON L8P 2J8
VideoBuster Company
723.00
DateDeposit Amount
Oct 3 $ 240.00
9 180.00
15 100.00 16 150.00 31 145.00
$ 815.00
(101)
Cash Receipts Journal
Cheque # Amount119 55.00$ 120 200.00
121 120.00
122 70.00
123 25.00 124 150.00 125 15.00 126 200.00
127 50.00 128 135.00
1,020.00$
(101)
Cash Disbursements Journal
These items appear only in the Cash
Receipts Journal OR the Cash
Disbursements Journal OR the bank
statement; therefore, each of these items is a reconciling item.
32 © 2013 McGraw-Hill Ryerson Limited.
LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement DateHamilton, ON L8P 2J8
VideoBuster Company
723.00
The items that show up only on the bank statement are reconciling items on the book side of the bank reconciliation.
33 © 2013 McGraw-Hill Ryerson Limited. LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement DateHamilton, ON L8P 2J8
VideoBuster Company
723.00
Book Balance 1,404.58
Add:
Collection of $500 note less $15 collection fee 485.00 Interest earned 8.42 493.42
1,898.00 Less:
NSF cheque plus s/c 30.00 Cheque printing charge 23.00 53.00
1,845.00
Bank ReconciliationOctober 31, 2014
VIDEOBUSTER COMPANY
34 © 2013 McGraw-Hill Ryerson Limited. LO 6
31-Oct-14494 504 2
Previous Balance
Current Balance
1,609.58 2,050.00
DateNumber Amount Amount
Oct 1 1,609.58
3 119 55.00 240.00 1,794.58 9 123 25.00 180.00 1,949.58
15 127 50.00 100.00 1,999.58
16 23.00 DM 150.00 2,126.58
17 122 70.00 CM 485.00 2,541.58
18 120 200.00 2,341.58 19 125 15.00 2,326.58 20 20.00 NSF
10.00 DM 2,296.58
26 121 120.00 2,176.58 29 128 135.00 2,041.58
31 IN 8.42 2,050.00
Daily Balance
1,163.42
Total Deposits and Credits
901 Main Street
Deposits and Credits
Cheques and Debits
National BankHamilton, ON L8P 2X5
Account Number
Total Cheques and Debits
Bank Statement
Statement DateHamilton, ON L8P 2J8
VideoBuster Company
723.00
Book Balance 1,404.58
Add:
Collection of $500 note less $15 collection fee 485.00 Interest earned 8.42 493.42
1,898.00 Less:
NSF cheque plus s/c 30.00 Cheque printing charge 23.00 53.00
1,845.00
Bank ReconciliationOctober 31, 2014
VIDEOBUSTER COMPANY
35 © 2013 McGraw-Hill Ryerson Limited. LO 6
DateDeposit Amount
Oct 3 $ 240.00
9 180.00
15 100.00 16 150.00 31 145.00
$ 815.00
(101)
Cash Receipts Journal
Cheque # Amount119 55.00$ 120 200.00
121 120.00
122 70.00
123 25.00 124 150.00 125 15.00 126 200.00
127 50.00 128 135.00
1,020.00$
(101)
Cash Disbursements Journal
The items that show up only on the Cash Receipts or Cash Disbursements Journal are reconciling items on the bank side of the bank reconciliation.
36 © 2013 McGraw-Hill Ryerson Limited.
LO 6
DateDeposit Amount
Oct 3 $ 240.00
9 180.00
15 100.00 16 150.00 31 145.00
$ 815.00
(101)
Cash Receipts Journal
Cheque # Amount119 55.00$ 120 200.00
121 120.00
122 70.00
123 25.00 124 150.00 125 15.00 126 200.00
127 50.00 128 135.00
1,020.00$
(101)
Cash Disbursements Journal
Bank Balance 2,050.00$
Add:
Deposit in transit 145.00 2,195.00
Less: Outstanding cheques
No. 124 150.00$ No. 126 200.00 350.00
1,845.00$
VIDEOBUSTER COMPANY
Bank ReconciliationOctober 31, 2014
37 © 2013 McGraw-Hill Ryerson Limited.
LO 6
The Final Product
38 © 2013 McGraw-Hill Ryerson Limited.
Bank Balance 2,050.00$ Book Balance 1,404.58$
Add: Add: Collection of $500 note
Deposit in transit 145.00 less $15 collection fee $ 485.00 2,195.00 Interest earned 8.42 493.42
1,898.00 Less: Outstanding cheques Less:
No. 124 150.00$ Cheque printing charge 23.00 No. 126 200.00 350.00 NSF cheque plus fee 30.00 53.00
Adjusted bank balance 1,845.00$ Adjusted book balance 1,845.00$
VIDEOBUSTER COMPANY
Bank ReconciliationOctober 31, 2014
LO 6
Recording Adjusting Entries Recording Adjusting Entries from the Bank Reconciliationfrom the Bank Reconciliation
39 © 2013 McGraw-Hill Ryerson Limited.
GENERAL JOURNAL Page 8Description PR Debit Credit
Oct. 31 Cash 485.00 Collection expense 15.00
Notes Receivable 500.00
To record collection by bank
Oct. 31 Cash 8.42 Interest earned 8.42
To record collection by bank
Date2014
LO 6
GENERAL JOURNAL Page 8Description PR Debit Credit
Oct. 31 Accounts Receivable - Heflin 30.00
Cash 30.00
To record NSF cheque plus s/c
Oct. 31 Office supplies expense 23.00 Cash 23.00
To record cheque printing charge
2014
Date
Recording Adjusting Entries Recording Adjusting Entries from the Bank Reconciliationfrom the Bank Reconciliation
40 © 2013 McGraw-Hill Ryerson Limited. LO 6
Recording Adjusting Entries from Recording Adjusting Entries from Bank ReconciliationBank Reconciliation
After posting the reconciling entries the cash account looks like this . . .
41 © 2013 McGraw-Hill Ryerson Limited.
GENERAL LEDGER
Account: Cash Acct. No. 101 Balance
Date Item PR Debit Credit DR (CR)
2014
Oct. 31 Balance 1,404.58
31 Adjusting entry G8 485.00 1,889.58
31 Adjusting entry G8 8.42 1,898.00 31 Adjusting entry G8 30.00 1,868.00 31 Adjusting entry G8 23.00 1,845.00
Adjusted balance on October 31LO 6
ReviewReview
Discuss the purpose of a bank reconciliation.A bank reconciliation is a procedure designed to explain the differences between the balance in a firm's bank account and the balance on the period's bank statement. The reconciliation procedure examines the differences based on the information available to each party and adjusts for the differences. It also serves as a format for the discovery and correction of recording errors.
42 © 2013 McGraw-Hill Ryerson Limited.
ReviewReview
Identify the principles of internal control. Principles of internal control include the following: • establishing responsibilities• maintaining adequate records• insuring assets and bonding key employees• separating recordkeeping from custody of assets• dividing responsibilities for related transactions• applying technological controls• performing regular independent reviews
43 © 2013 McGraw-Hill Ryerson Limited.
Acid-Test Ratio• A measure of a company’s liquidity.• Similar to current ratio but excludes less
liquid assets.• Ratio will vary from industry to industry.
44 © 2013 McGraw-Hill Ryerson Limited.
Using the Information-Appendix 8AUsing the Information-Appendix 8A
LO 7
Acid-Test Ratio =
45 © 2013 McGraw-Hill Ryerson Limited.
Quick assets*
Current liabilities
* cash, short-term investments, and receivables
LO 7
Using the Information-Appendix 8AUsing the Information-Appendix 8A
End of Chapter End of Chapter
46 © 2013 McGraw-Hill Ryerson Limited.