Accounting principles chapter 08

Accounting
Principles

Second Canadian Edition
Weygandt · Kieso · Kimmel ·
Trenholm

Prepared by:
Carole Bowman, Sheridan College


CHAPTER

8
INTERNAL CONTROL
AND CASH


INTERNAL CONTROL
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 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


ILLUSTRATION 8-1

PRINCIPLES OF INTERNAL CONTROL
Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification


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 company’s 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.

ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties

Accounting Employee A
Maintains cash balances

Assistant Cashier B

Maintains custody of
cash on hand

Independent Internal Verification
Assistant Comptroller C

Makes monthly comparisons: reports any irreconcilable differences to comptroller

per books


LIMITATIONS OF INTERNAL
CONTROL
 Cost/benefit
 Collusion
 Size

of business

 Human element


CASH




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.


CONTROL OVER CASH RECEIPTS




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-thecounter receipts is cash registers that are visible
to customers.


CONTROL OVER CASH DISBURSEMENTS





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.

id
a
P


PETTY CASH FUND
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.



ESTABLISHING THE FUND

100

100

When the fund is established, a cheque
payable to the petty cash custodian is issued
for the stipulated amount.


REPLENISHING THE FUND
GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.

Debit

Credit

44
38

5

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.

87


REPLENISHING THE FUND
GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation
Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/

Debit

Credit

44
38

5

1

88

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.


USE OF A BANK
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.



BANK STATEMENTS
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 day’s
transactions

ACCOUNT
STATEMENT

W. A. LEE COMPANY
500 QUEEN STREET

Statement Date/Credit
Line Closing Date

FREDERICTON, NB, E3B 5C2

April 30, 2003
457923
ACCOUNT NUMBER

Balance

Deposits and Credits

Last Statement

No.

Total Amount

13,256.90

20

34,805.10

Balance

Cheques and Debits
Total Amount

This Statement

32,154.55

15,907.45

26

DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date No. Amount
Date
Amount Date Amount
4-2
435
644.95

4-5
436 3,260.00
4-4
437 1,185.79
4-3
438
776.65
4-8
439 1,781.70
4-7
440 1,487.90
4-8
441 2,420.00
4-11
442 1,585.60
4-12
443 1,226.00
=================
4-29
NSF
425.60
4-29
459 1,080.30
4-30
DM
30.00
4-30
461
620.15

4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60

Symbols:

4-2
16,888.80

4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45

CM

Credit Memo

EC

Error Correction

NSF

Not Sufficient Funds

DM

Debit Memo

INT

Interest Earned

SC

Service Charge

Reconcile Your
Account Promptly


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