Accounting

Principles
Second Canadian Edition
Prepared by:
Carole Bowman, Sheridan College
Weygandt Kieso Kimmel Trenholm
INTERNAL CONTROL
AND CASH
CHAPTER
8
Internal control consists of the policies and
procedures adopted within a business in
order to:
1. optimize resources, and
2. prevent and detect errors and
irregularities.
INTERNAL CONTROL
INTERNAL CONTROL
Internal control consists of the policies and
procedures adopted within a business in
order to:
3. Safeguard its assets
4. Maintain the accuracy and reliability of
its accounting records
Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification

ILLUSTRATION 8-1
PRINCIPLES OF INTERNAL CONTROL
Authorization of transactions and activities:
Authorization by the proper individual is
important. Control is most effective when
only one person is responsible for a given
task.
Segregation of duties: The work of one
employee should provide a reliable
basis for evaluating the work of
another employee.
PRINCIPLES OF INTERNAL CONTROL
Documentation procedures: Documents
should provide evidence that transactions
and events have occured.
Safeguards to control access to, and use of,
assets and records: Physical, mechanical,
and electronic controls relate primarily to
the safeguarding of assets and enhancing
accuracy and reliability of the accounting
records.

PRINCIPLES OF INTERNAL CONTROL
Independent verification:
External verification indicates whether
the companys financial statements
fairly present its financial position and
results of operations in accordance with
GAAP.
Internal verification involves review,
comparison, and reconciliation of
information from two sources.
PRINCIPLES OF INTERNAL CONTROL
Independent Internal Verification
ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Accounting Employee A Assistant Cashier B
Assistant Comptroller C
Maintains cash balances Maintains custody of
per books cash on hand






Makes monthly comparisons: reports any irreconcilable differences to comptroller
Segregation
of Duties
LIMITATIONS OF INTERNAL
CONTROL
Cost/benefit
Collusion
Size of business
Human element
Cash includes coins, currency, cheques,
money orders, and money on hand or on
deposit at a bank or similar depository.
Internal control over cash is imperative in
order to safeguard cash and assure
the accuracy of the
accounting records for cash.
CASH
Only designated personnel should be
authorized to handle or have access to cash
receipts.
Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash
CONTROL OVER CASH RECEIPTS
Documents should include:
1. remittance advices
2. cash register tapes
3. deposit slips
Cash should be stored in safes and bank
vaults.
Access to storage areas should be limited to
authorized personnel.
Cash registers should be used in executing
over-the-counter receipts.
CONTROL OVER CASH RECEIPTS
Daily cash counts and daily comparisons of
total receipts should be made.
All personnel who handle cash receipts
should be bonded and required to take
vacations.
An important tool in control of over-the-
counter receipts is cash registers that are
visible to customers.
CONTROL OVER CASH RECEIPTS
Payments are made by cheque rather
than by cash, except for petty cash
transactions.
Only specified individuals should
be authorized to sign cheques.
Different departments or individuals
should be assigned the duties of approving
an item for payment and paying it.
CONTROL OVER CASH DISBURSEMENTS
Prenumbered cheques should be used and
each cheque should be supported by an
approved invoice or other
document.
Blank cheques should be stored
in a safe.
1. Access should be restricted to
authorized personnel.
2. A cheque writer machine should be
used to imprint the amount on the
cheque in indelible ink.
CONTROL OVER CASH DISBURSEMENTS
Each cheque should be compared with the
approved invoice before it is issued.
Following payment, the approved invoice
should be stamped PAID.
CONTROL OVER CASH DISBURSEMENTS
A petty cash fund is used to pay relatively small
amounts.
Operation of the fund, often called an imprest
system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.
PETTY CASH FUND
ESTABLISHING THE FUND

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit
Mar. 1 Petty Cash
Cash
To establish a petty cash fund.




When the fund is established, a cheque
payable to the petty cash custodian is issued
for the stipulated amount.
100
100
REPLENISHING THE FUND
On March 15 the petty cash custodian requests a
cheque for $87. The fund contains $13 cash and
petty cash receipts for postage, $44, freight out,
$38, and miscellaneous expenses, $5.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 15 Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.
44
38
5
87
REPLENISHING THE FUND
On March 15 the petty cash custodian requests a
cheque for $88. The fund contains $12 cash and
petty cash receipts for postage, $44, freight out,
$38, and miscellaneous expenses, $5.
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 15 Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/
44
38
5
1
88
The use of a bank minimizes the amount of
currency that must be kept on hand and
contributes significantly to good internal
control over cash.
A company can safeguard
its cash by using a bank as
a depository and clearing
house for cheques received
and cheques written.
USE OF A BANK
BANK STATEMENTS
ACCOUNT W. A. LEE COMPANY Statement Date/Credit
STATEMENT 500 QUEEN STREET Line Closing Date
FREDERICTON, NB, E3B 5C2 April 30, 2003
457923
ACCOUNT NUMBER
Balance Deposits and Credits Cheques and Debits Balance
Last Statement No. Total Amount Total Amount This Statement
13,256.90 20 34,805.10 26 32,154.55 15,907.45
DEPOSITS AND
CHEQUES AND DEBITS CREDITS DAILY BALANCE
Date No. Amount Date Amount Date Amount
4-2 435 644.95 4-2 4,276.85 4-2 16,888.80
4-5 436 3,260.00 4-3 2,137.50 4-3 18,249.65
4-4 437 1,185.79 4-5 1,350.47 4-4 17,063.86
4-3 438 776.65 4-7 982.46 4-5 15,154.33
4-8 439 1,781.70 4-8 1,320.28 4-7 14,648.89
4-7 440 1,487.90 4-9 CM 1,036.00 4-8 11,767.47
4-8 441 2,420.00 4-11 2,720.00 4-9 12,802.47
4-11 442 1,585.60 4-12 757.41 4-11 13,936.87
4-12 443 1,226.00 4-13 1,218.56 4-12 13,468.28
================= ============== =============
4-29 NSF 425.60 4-27 1,545.57 4-27 13,005.45
4-29 459 1,080.30 4-29 2,929.45 4-29 14,429.00
4-30 DM 30.00 4-30 2,128.60 4-30 15,907.45
4-30 461 620.15
Symbols: CM Credit Memo EC Error Correction NSF Not Sufficient Funds Reconcile Your
DM Debit Memo INT Interest Earned SC Service Charge Account Promptly
A bank statement
shows:
1. cheques paid and
other debits charged
against the account
2. deposits and other
credits made to the
account
3. account balance
after each days
transactions
RECONCILING THE BANK ACCOUNT
Reconciliation is necessary because the
balance per bank and balance per books
are seldom in agreement due to time lags
and errors.
A bank reconciliation should be prepared
by an employee who has no other
responsibilities pertaining to cash.
Terms
Deposits in transit
Deposits recorded by depositor that have not
been recorded by bank
Outstanding cheques
Cheques written (issued) and recorded by
company that have not been presented
to/paid by bank
Adjusted balance
Reconciled or correct cash balance
Terms
Debit memoranda
Charges against depositors account (e.g.
service charges, RC (returned)/NSF
(insufficient funds) cheques)
Credit memoranda
Amounts that increase depositors
account (e.g., interest earned)
Bank Reconciliation
Procedures

$ Per Bank Statement
-outstanding cheques
+deposits in transit
+/- bank errors
= correct cash amount

$ Per Books
-NSF cheques
-cheque printing or
other service charges
+notes collected by
bank
+/- book errors
= correct cash amount

Illustration 8-11
Reconciling Journal Entries
Books
Each reconciling item in
determining the adjusted
balance per books MUST be
journalized and posted
Bank
Do NOT journalize any
entries on bank side
Cash reported on the Balance Sheet
includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
Cash is listed first in the balance sheet
because it is the most liquid asset.
REPORTING CASH
Cash equivalents are highly liquid
investments, with maturities of three
months or less when purchased, that can
be converted into a specific amount of
cash.
Examples include money market funds,
short-term notes, and treasury bills.
CASH EQUIVALENTS
USING THE INFORMATION IN THE
FINANCIAL STATEMENTS
Most important asset
Pervasive impact
Vulnerable to theft or
misuse
Balancing act needed
to ensure sufficient,
but not excess,
quantity
USING THE INFORMATION IN THE
FINANCIAL STATEMENTS
Cash Flow Statement : shows where cash
came from and what is was used for.
Management report: states managements
responsibility for internal controls.
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