weygandt, kieso, kimmel, trenholm, kinnear accounting principles, fifth canadian edition © 2010...

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fifth Canadian Edition © 2010 John Wiley & Sons Canada, Ltd.

Prepared by:

Debbie Musil

Kwantlen Polytechnic University

Chapter 7 Internal Control and Cash


Internal Control and Cash

• Internal control• Control framework and activities• Limitations of internal control

• Cash controls• Controls over cash receipts and disbursements

• Using a bank• Using and reconciling a bank account

• Reporting cash


Internal Control

• The process that management designs and implements to help achieve:• Reliable financial reporting• Effective and efficient operations• Compliance with laws and regulations

• Effective control framework has five components:• Control environment• Risk assessment• Control activities

• Information and communication

• Monitoring


Control Framework• Control environment

• Create a culture that values clear rules and expects everyone to follow the rules

• Risk assessment• Evaluate internal vulnerabilities and

connection with external environment• Control activities

• Policies and procedures that help ensure management’s directions are followed


Control Framework 2

• Information and communication• Identify, collect and communicate relevant

information• Monitoring

• Identifying and reporting problems to appropriate levels


Control Activities

• Establishment of responsibility• Make specific employees responsible for

specific tasks, including authorization• Segregation of duties

• Duties are divided in a manner that eliminates the potential for errors or irregularities

• Documentation procedures• Rules covering the handling and control of

documents


Control Activities 2

• Physical and IT controls• Over access to and use of assets and records

• Independent checks of performance• Reviews of records and performance

• Internal reviews by independent employees or internal audit

• Independent external reviews by external auditors• Human resource controls

• Bonding, rotation of duties, requiring vacations


Limitations of Internal Control

• Reasonable assurance: cost of internal control should not be more than expected benefit

• Human element: fatigue, carelessness, lack of training

• Collusion: two or more employees working together to overcome segregation control

• Size of business: effective controls are more difficult in smaller organizations


Cash Controls

• Effective control over cash is essential to:• Safeguard cash• Ensure the accuracy of accounting records

• Types of cash receipts:• Over-the-counter• Bank debit and credit card transactions• Mail-in receipts• Receipts via electronic funds transfer (EFT)


Control Over Cash Receipts

• Responsibility:• Only designated personnel are authorized to

handle cash receipts• Segregation of duties:

• Different individuals receive and record cash receipts, have custody of cash

• Documentation procedures:• Use remittance advices, cash register tapes,

deposit slips


Control Over Cash Receipts 2

• Physical controls:• Store cash in safes and bank vaults• Limit access• Use cash registers

• Independent checks of performance:• Daily cash counts and comparisons of receipts

• Human resource controls:• Deposit cash daily; bonding; require vacations


Debit Card Transactions

• Sales using debit cards are considered cash transactions• Retailer receives cash directly into bank

account at some regular interval (e.g. daily)• Proceeds received are net of transaction fees

Mar. 21 Cash 795 Debit card Expense (10 x $0.50) 5

Sales 800 To record debit card sales


Bank Credit Card Transactions

• Sales using bank credit cards are also considered cash transactions• Retailer receives cash directly into bank

account• Proceeds received are net of transaction fees

• Fees are generally higher than debit card fees

Mar. 21 Cash 772 Credit card Expense ($800 x 3.5%) 28

Sales 800 To record bank credit card sales


Mail-in and Electronic Receipts

• Mail-in receipts:• Open mail in presence of two clerks• Stamp cheques “For Deposit Only”• Prepare duplicate cheque list, signed by each clerk

• Electronic receipts:• On-line banking: cash transferred from customer’s

bank account to company’s bank account• Company journalizes from its bank statement• Pre-authorized payments: company initiates payment

and automatically journalizes


Control Over Cash Disbursements

• Made by cheque, EFT or petty cash• Responsibility:

• Only designated individuals can sign cheques• Segregation of duties:

• Different people approve and make payments• Documentation procedures:

• Use pre-numbered cheques and account for numerical continuity

• Supported by approved invoice or similar


Control Over Cash Disbursements 2

• Physical and IT controls:• Secure blank cheques and restrict access• Print cheques electronically or use writer

• Independent checks of performance:• Compare cheques to invoices• Reconcile bank statement regularly

• Human resources:• Hire bonded personnel


Petty Cash Fund

• Used to pay small amounts• To establish a petty cash fund:

• Appoint a custodian who is responsible for it• Determine the appropriate size of the fund

Mar. 1 Petty Cash 100 Cash 100

To establish a petty cash fund


Petty Cash Fund 2

• Making payments from the fund:• Usually limited in size and type of transaction• No accounting entry when payment is made

• Replenishing the fund:• Done when fund reaches some set minimum• Custodian prepares a summary of payments,

supported by receipts and other documents• Reviewed and approved independently• Used as a basis for accounting entry


Petty Cash Fund 3

• Cash shortage or overage• Recognized when fund replenished• Becomes an expense or revenue

• Fund can be increased (if not large enough) or decreased (if too large) when replenished

Mar. 15 Petty Cash 25 Postage Expense 44 Merchandise Inventory 38 Miscellaneous Expense 5 Cash Over and Short 1

Cash 113 To replenish petty cash and increase fund size by $25


Use of a Bank Account

• Strengthens internal controls over cash• Minimizes the amount of cash on hand• A clearing house for receipts and cheques• Provides a double record of cash transactions

• Bank deposits and cheques• Duplicate deposits slips are stamped by bank• Cheques usually require two authorized

signatures


Bank Statement

ACCOUNT LEE COMPANY Statement Date/CreditSTATEMENT 500 QUEEN STREET Line Closing Date

FREDERICTON, NB, E3B 5C2 April 30, 2011

457923ACCOUNT NUMBER

Balance Deposits and Credits Cheques and Debits BalanceLast Statement No. Total Amount Total Amount This Statement

20 34,805.10 26 32,154.55 15,907.45

DEPOSITS ANDCHEQUES AND DEBITS CREDITS DAILY BALANCEDate No. Amount Date Amount Date Amount

4-1 435 644.95 4-1 4,276.85 4-1 16,888.804-4 438 4-4 2,137.50 4-4 18,249.654-5 437 1,185.79 4-6 1,350.47 4-6 18,414.334-5 436 3,260.00 4-7 982.46 4-7 16,136.794-7 440 4-11 2,355.28 4-11 17,004.174-8 439 4-12 2,720.00 4-12 17,942.474-8 442 2,420.00 4-14 757.41 4-14 16,279.884-11 441 1,585.60 4-15 1,218.56 4-15 15,912.844-12 443 1,226.00 4-15 15,402.26================= ============== =============4-18 NSF 425.60 4-25 16,555.564-29 444 3,467.11 4-29 14,439.004-28 DM 40.00 4-30 15,907.454-29 461 659.91Symbols: CM Credit Memo EC Error Correction NSF Not Sufficient Funds Reconcile Your

DM Debit Memo INT Interest Earned SC Service Charge Account Promptly

Cheques paid

Account balance

Deposits received

Credit memorandum:For interest, EFT’s and other credits

Debit memorandum:For service and other charges (including NSF fee)

13,256.90

776.65

1,487.901,781.70

4-29 CM 39.764-29 2,128.604-27 1,350.554-25 1,578.90

715.42

4-15


Reconciling the Bank Account

• Bank balance almost never agrees to depositor’s balance• Due to time lags and errors in recording transactions

• The two balances must be reconciled• Called preparing a bank reconciliation• Done by an employee who has no responsibilities

related to cash• Balance per books and per bank are both

reconciled to their adjusted (correct) balance


Reconciling Items per Bank

Balance per bank+ Deposits in transit

• Deposits recorded by depositor that have not been recorded by bank

- Outstanding cheques• Cheques issued & recorded by company that

have not been presented to bank

± Bank errors= Adjusted cash balance per bank


Reconciling Items per Books

Balance per books+ Credit memoranda

• Amounts credited to company by bank, such as interest earned, EFT deposits, etc.

- Debit memoranda• Charges levied by bank against depositor’s

account – service charges, NSF charges, etc.

± Company errors= Adjusted cash balance per books


Entries from Bank Reconciliation

• Each reconciling item required to calculate adjusted cash balance per books must be journalized• To ensure that these are accounted for by

company• Each reconciling item required to calculate

adjusted cash balance per bank is NOT journalized• Will be recorded by bank when received


Reporting Cash

• Cash on the balance sheet includes:• Coins, currency, cheques, money on deposit• Bank debit and credit card transactions• Cash equivalents: investments with a term of

three months or less that are easily sold• Listed first on the balance sheet, as it is

the most liquid• Bank overdrafts are reported as a liability• Restricted cash is reported separately


COPYRIGHT

Copyright © 2010 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.

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