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Internal Control
Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
Chapter 8
Copyright © Houghton Mifflin Company. All rights reserved. 8–2
Learning Objectives
1. Define internal control, explain its basic components and limitations, and give examples of control activities.
2. Apply internal control activities to common merchandising transactions.
3. Demonstrate the control of cash by preparing a bank reconciliation.
Copyright © Houghton Mifflin Company. All rights reserved. 8–3
Supplemental Objectives
4. Demonstrate the use of a simple imprest system.
5. Define voucher system and describe the components and operation of a voucher system.
Copyright © Houghton Mifflin Company. All rights reserved. 8–4
Internal Control: Basic Components and Control Activities
• Objective 1– Define internal control, explain its basic
components and limitations, and give examples of control activities
Copyright © Houghton Mifflin Company. All rights reserved. 8–5
Internal Control
… is all the policies and procedures management uses to ensure
the reliability of financial reporting
compliance with laws and regulations
and the effectiveness and efficiency of operations
Copyright © Houghton Mifflin Company. All rights reserved. 8–6
Management
• Is responsible for establishing a satisfactory system of internal controls
• Must safeguard the firm’s assets and have reliable accounting records
• Ensure that employees comply with legal requirements and operate the company in the best way possible
Copyright © Houghton Mifflin Company. All rights reserved. 8–7
Components of Internal Control
• Management must establish five interrelated components of internal control
1. Control environment
2. Risk assessment
3. Information and communication
4. Control activities
5. Monitoring
Copyright © Houghton Mifflin Company. All rights reserved. 8–8
The Control Environment
• Is created by the overall attitude, awareness, and actions of management
• Includes management’s – Integrity and ethics
– Philosophy and operating style
– Organizational structure
– Method of assigning authority and responsibility
– Personal policies and practices
• Managers must ensure that employees are trained and informed
Copyright © Houghton Mifflin Company. All rights reserved. 8–9
Risk Assessment
… identifies areas where the risk is high for
loss of assets
or inaccuracies in the accounting records
so that adequate controls can be implemented
• For example, in retail stores the risk is high that– Employees will take cash
– Customers will shoplift
Copyright © Houghton Mifflin Company. All rights reserved. 8–10
Information and Communication
… relates to the accounting systems established by management, which should
identify
assemble
analyze
classify
record
and report
a company’s transactions
Copyright © Houghton Mifflin Company. All rights reserved. 8–11
Control Activities
… are the policies and procedures management puts in place to see that its directives are carried out
• Safeguard a company’s assets
• Ensure the reliability of accounting records
Copyright © Houghton Mifflin Company. All rights reserved. 8–12
Monitoring
… involves management’s regular assessment of the quality of internal
controlincluding periodic review of compliance
with all policies and procedures
• Larger companies hire internal auditors to review the company’s system of internal controls
• Managers and owners should conduct these reviews for smaller companies
Copyright © Houghton Mifflin Company. All rights reserved. 8–13
Control Activities
• Are a principal way in which internal control is implemented in the accounting system
• Safeguard a company’s assets and ensure the reliability of accounting records
• Include– Authorization
– Recording transactions
– Documents and records
– Physical controls
– Periodic independent verification
– Separation of duties
– Sound personnel procedures
Copyright © Houghton Mifflin Company. All rights reserved. 8–14
Control Activities (cont’d)
• Authorization– All transactions and activities should be properly
authorized by management
• Recording transactions– All transactions should be recorded
• Facilitates preparation of financial statements
• Establishes accountability for assets
• Documents and records– Documents should be adequately designed and
used to ensure proper recording of transactions
Control Activities (cont’d)
• Physical controls– Permit access to assets only with management’s
authorization
• Periodic independent verification– Records should be checked against assets by
someone other than those responsible for those records and assets
• Separation of duties– Functional responsibilities should be separated
• Different individuals or departments should be responsible for custody of assets and the record keeping for those assets
Copyright © Houghton Mifflin Company. All rights reserved. 8–16
Bonding is the process of checking an employee’s background and insuring the company against theft by that person
Control Activities (cont’d)
• Sound personnel procedures– Supervision
– Rotation of key personnel among different jobs
– Mandatory vacations
– Bonding personnel who handle cash or inventories
Copyright © Houghton Mifflin Company. All rights reserved. 8–17
Limitations of Internal Control
• Human error– Misunderstandings
– Mistakes in judgment
– Carelessness
– Distraction
– Fatigue
• Separation of duties can be defeated through collusion– Employees secretly agreeing to deceive the
company
Copyright © Houghton Mifflin Company. All rights reserved. 8–18
Limitations of Internal Control
• Established procedures may become ineffective against employees’ errors or dishonesty
• Controls may become ineffective due to conditions that have changed
• Costs of internal control systems may exceed the benefits
Copyright © Houghton Mifflin Company. All rights reserved. 8–19
Discussion
Q. Why is the separation of duties necessary to ensure sound internal control?
What does this principle assume about the relationships of employees in a company and the possibility of two or more of them stealing from the company?
A. Separation of duties is important to sound internal control because a person who combines the responsibilities of keeping records, operating a department, and managing assets would be able to misappropriate assets without detection
The separation of duties assumes that two or more employees will not work together to overcome internal controls
Copyright © Houghton Mifflin Company. All rights reserved. 8–20
Internal Control Over Merchandising Transactions
• Objective 2– Apply internal control activities to common
merchandising transactions
Copyright © Houghton Mifflin Company. All rights reserved. 8–21
Internal Control Over Merchandising Transactions
Cash sales receipts
Purchases
Cash payments
• Sound internal control activities are very important when assets are involved
• Assets are particularly vulnerable when they enter or leave a business, as with merchandising transactions
Copyright © Houghton Mifflin Company. All rights reserved. 8–22
Internal Control and Management Goals
• Two key goals for the success of merchandising businesses
1. To prevent losses of cash or inventory as a result of theft or fraud
2. To provide accurate records of merchandising transactions and account balances
Copyright © Houghton Mifflin Company. All rights reserved. 8–23
Internal Control and Management Goals (cont’d)
• Three broader goals for management are
1. Keeping enough inventory on hand without overstocking
2. Keeping enough cash on hand to pay for purchases within the discount period
3. Keeping credit losses as low as possible by making credit sales only to customers who are likely to pay on time
Copyright © Houghton Mifflin Company. All rights reserved. 8–24
The Cash Budget
… projects future cash receipts and disbursements
• Is one control used to meet broader management goals
• Used to maintain adequate cash balances so that a company can– Take advantage of discounts on purchases
– Prepare to borrow money when necessary
– Pay bills when they are due
Copyright © Houghton Mifflin Company. All rights reserved. 8–25
Separation of Duties
… is a control procedure for safeguarding a company’s assets
in which the responsibilities for custody of assets and record keeping for those assets
are held by separate individuals or departments
Copyright © Houghton Mifflin Company. All rights reserved. 8–26
Separation of Duties (cont’d)
• Makes theft without detection extremely unlikely– Unless two or more employees conspire
• Easier to accomplish in large businesses versus smaller ones– With smaller businesses, one person may
have to carry out several duties
Copyright © Houghton Mifflin Company. All rights reserved. 8–27
Internal Control over Cash
• Varies based on the size and nature of the business
• Most firms should use the following procedures
1. Separate the functions of • Authorization
• Recordkeeping
• Custodianship of cash
2. Limit the number of people who have access to cash
Copyright © Houghton Mifflin Company. All rights reserved. 8–28
Internal Control over Cash (cont’d)
3. Designate specific people who are responsible for handling cash
4. Use bank facilities as much as possible• Keep the amount of cash on hand to a minimum
5. Bond all employees who have access to cash
6. Physically protect cash on hand by using• Cash registers• Cashiers’ cages• Safes
Copyright © Houghton Mifflin Company. All rights reserved. 8–29
Internal Control over Cash (cont’d)
7. Have a person who does not handle cash make periodic independent verifications of cash on hand
8. Record all cash receipts promptly
9. Deposit all cash receipts promptly
10. Make payments by check rather than by currency
11. Have a person who does not authorize, handle, or record cash transactions reconcile the Cash account
Copyright © Houghton Mifflin Company. All rights reserved. 8–30
Control of Cash Sales Receipts
• Cash may be received– Over the counter
– By mail
– In currency
– In the form of a check
• Cash receipts should be recorded immediately upon receipt– Record by making an entry in a cash receipts
journal
– This establishes a written record of cash receipts• Should prevent errors and make theft more difficult
Copyright © Houghton Mifflin Company. All rights reserved. 8–31
Control of Cash Received Through the Mail
• Customers should be encouraged to pay by check or credit card– Cash payments are too vulnerable to theft
by employees
• Cash receipts should be handled by two or more employees
Copyright © Houghton Mifflin Company. All rights reserved. 8–32
Control of Cash Received Through the Mail (cont’d)
• Employee opening the mail should make a list in triplicate of the money received including– Each payer’s name
– Purpose for which money was sent
– Amount
• Copy 1– Goes with the cash to the cashier who
deposits the money
Copyright © Houghton Mifflin Company. All rights reserved. 8–33
Control of Cash Received Through the Mail (cont’d)
• Copy 2– Goes to the accounting department for recording
• Copy 3– Kept by the person who opens the mail
• Errors can easily be caught because the amount deposited by the cashier must agree with the amount received and the amount recorded in the cash receipts journal
Copyright © Houghton Mifflin Company. All rights reserved. 8–34
Control of Cash Received over the Counter
• Two common tools– Cash registers
– Prenumbered sales tickets
• Ensure good internal control by separating responsibility for– Cash receipts
– Cash deposits
– Recordkeeping
Copyright © Houghton Mifflin Company. All rights reserved. 8–35
Using Cash Registers
• Amount of cash sale should be rung up at time of sale
• Place register so customer can see amounts recorded
• Each register should have a locked-in tape
– Prints the day’s transactions
• At day’s end, cashier counts cash in the register and turns it into the cashier’s office
Copyright © Houghton Mifflin Company. All rights reserved. 8–36
Using Cash Registers
• Another employee takes the tape out of the register and records the cash receipts for the day in the cash receipts journal
• The amount of cash turned in and the amount recorded on the tape should agree– If not, any differences should be explained
• Large retail chains may have each cash register tied into a computer that records each transaction as it occurs
Copyright © Houghton Mifflin Company. All rights reserved. 8–37
Control of Purchases and Cash Disbursements
• Pay cash only based on specific authorization backed by proof of validity and amount of claim
• Separate purchasing and payment duties
• Have at least two people document and verify every action
Copyright © Houghton Mifflin Company. All rights reserved. 8–38
Internal Control for Purchasing and Paying for Goods and Services
Copyright © Houghton Mifflin Company. All rights reserved. 8–39
Documents Used in an Internal Control Plan for Purchases and Cash Disbursements
• Example of a typical sequence– Purchase requisition– Purchase order– Invoice– Receiving report– Check authorization– Check– Bank statement
• Many variations of this sequence exist
Copyright © Houghton Mifflin Company. All rights reserved. 8–40
Step 1: A formal request for a purchase is approved by the department head and forwarded to the purchasing department
Copyright © Houghton Mifflin Company. All rights reserved. 8–41
Step 2: The purchasing department prepares a purchase order, which states quantity, description, price, terms, and other shipping instructions. The
purchase order is sent to the vendor (seller) and a copy goes to the accounting department
Copyright © Houghton Mifflin Company. All rights reserved. 8–42
Step 3: The vendor (seller) ships the items and mails an invoice separately to the accounting department
Copyright © Houghton Mifflin Company. All rights reserved. 8–43
Step 4: When the goods reach the receiving department, an employee fills out a receiving report, which is sent to the accounting department
where it is compared with the invoice
Copyright © Houghton Mifflin Company. All rights reserved. 8–44
Step 5: The accounting department completes a check authorization and attaches copies of the purchase order, invoice, and receiving report.
These are sent to the treasurer.
Copyright © Houghton Mifflin Company. All rights reserved. 8–45
Step 6: The treasurer examines the documents and issues a check, which is sent to the vendor
Copyright © Houghton Mifflin Company. All rights reserved. 8–46
Step 7: After the check is cashed by the vendor, it is canceled by the bank and returned with the company’s bank statement. If a check was filled out for the wrong amount or altered, it will show up on the bank reconciliation
Copyright © Houghton Mifflin Company. All rights reserved. 8–47
Discussion
Q. Name the documents needed for an internal control plan for purchases and cash disbursements
– Purchase requisition
– Purchase order
– Invoice
– Receiving report
– Check authorization
– Check with a remittance advice
– Bank statement
Copyright © Houghton Mifflin Company. All rights reserved. 8–48
Accounting For Discounts
• Objective 3– Demonstrate the control of cash by
preparing a bank reconciliation
Copyright © Houghton Mifflin Company. All rights reserved. 8–49
Bank Reconciliations
… account for the difference between the balance appearing on the bank
statement and the balance of the Cash account in a company’s records
• Are a necessary step in internal control
Copyright © Houghton Mifflin Company. All rights reserved. 8–50
Bank Reconciliations (cont’d)
• Most common transactions shown in a company’s records but not entered in the bank records include– Outstanding checks
• Checks the company has issued and recorded but do not yet appear on the bank statement
– Deposits in transit• Deposits mailed or taken to the bank but not
received in time to be recorded on the bank statement
Copyright © Houghton Mifflin Company. All rights reserved. 8–51
Bank Reconciliations (cont’d)
• Most common transactions that appear on the bank statement but not in a company’s records include– Service charges
• Fees charged by the bank on checking accounts
– NSF (nonsufficient funds) checks• Checks deposited by the company that are not paid
when presented by the bank to the issuer’s bank
• The bank charges the company’s account and returns the check to the company
Copyright © Houghton Mifflin Company. All rights reserved. 8–52
Bank Reconciliations (cont’d)
– Miscellaneous debits and credits• Fees charged by the bank for stopping
payment on checks and printing checks
• Amounts are reported to the company by a debit memorandum included with the monthly bank statement
– Interest income• Banks commonly pay interest on certain
accounts
Copyright © Houghton Mifflin Company. All rights reserved. 8–53
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Balance per books $2,415.91
Add deposit of October 31 in transit 276.00
Illustration of a Bank Reconciliation
1. A $276.00 deposit was mailed to the bank on October 31 and has not been recorded by the bank
Copyright © Houghton Mifflin Company. All rights reserved. 8–54
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Balance per books $2,415.91
Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50
Illustration of a Bank Reconciliation
2. Five checks issued in October or earlier have not been paid by the bank
Copyright © Houghton Mifflin Company. All rights reserved. 8–55
Illustration of a Bank Reconciliation
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91
3. A deposit of October 6 was incorrectly recorded in the company’s books as $330.00. The bank correctly recorded the deposit as $300.00
Less: Overstatement of deposit of October 6 $ 30.00
Copyright © Houghton Mifflin Company. All rights reserved. 8–56
Illustration of a Bank Reconciliation
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91 Less: Overstatement of deposit of October 6 $ 30.00
4. A credit memorandum was enclosed with the bank statement showing a note had been collected in the amount of $280.00 along with interest of $20.00. A debit memorandum was enclosed for the $5.00 collection fee
Add: Note receivable collected by bank $280.00 Interest income on note 20.00 Collection fee 5.00
Copyright © Houghton Mifflin Company. All rights reserved. 8–57
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91 Add: Note receivable collected by bank $280.00 Interest income on note 20.00 Less: Overstatement of deposit of October 6 $ 30.00 Collection fee 5.00
NSF check of Arthur Clubb 128.14
Illustration of a Bank Reconciliation
5. An NSF check was returned with the statement for $128.14. The NSF check from Arthur Clubb was not reflected in the company’s books
Copyright © Houghton Mifflin Company. All rights reserved. 8–58
Service charge 12.50
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91 Add: Note receivable collected by bank $280.00 Interest income on note 20.00 Less: Overstatement of deposit of October 6 $ 30.00 Collection fee 5.00 NSF check of Arthur Clubb 128.14
Illustration of a Bank Reconciliation
6. A debit memorandum for the monthly $12.50 service charge was enclosed with the bank statement
Copyright © Houghton Mifflin Company. All rights reserved. 8–59
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91 Add: Note receivable collected by bank $280.00 Interest income on note 20.00 Less: Overstatement of deposit of October 6 $ 30.00 Collection fee 5.00 NSF check of Arthur Clubb 128.14 Service charge 12.50
Interest income 15.62
Illustration of a Bank Reconciliation
7. Interest earned by the company on its average balance was $15.62
Copyright © Houghton Mifflin Company. All rights reserved. 8–60
$2,731.53
$3,747.07
Martin Maintenance Company Bank Reconciliation
October 31, 20xx Balance per bank, October 31 $3,471.07 Add deposit of October 31 in transit 276.00 Less outstanding checks: No. 551 $150.00 No. 576 40.68 No. 578 500.00 No. 579 370.00 No. 580 130.50 1,191.00 Balance per books $2,415.91 Add: Note receivable collected by bank $280.00 Interest income on note 20.00 Interest income 15.62 Less: Overstatement of deposit of October 6 $ 30.00 Collection fee 5.00 NSF check of Arthur Clubb 128.14 Service charge 12.50
Adjusted bank balance, October 31 $2,555.89
175.64
Adjusted book balance, October 31 $2,555,89
315.62
Illustration of a Bank Reconciliation
After all items have been listed on the reconciliation, total the columns. The adjusted bank balance should equal the adjusted book balance
Copyright © Houghton Mifflin Company. All rights reserved. 8–61
Oct. 31 Cash 300.00 Notes Receivable 280.00 Interest Income 20.00 Note receivable of $280.00 and
interest of $20.00 collected by bank from A. Jacobs
Oct. 31 Cash 15.62 Interest Income 15.62 Interest on average bank account
balance
Recording Transactions After Reconciliation
• All items reported by the bank but not yet recorded by the company must be recorded in the general journal
Copyright © Houghton Mifflin Company. All rights reserved. 8–62
Oct. 31 Sales 30.00 Cash 30.00 Correction of error in recording a $300.00
deposit as $330.00
31 Accounts Receivable 128.14 Cash 128.14 NSF check of Arthur Clubb returned by
bank
31 Bank Service Charges Expense 17.50 Cash 17.50 Bank service charge ($12.50) and collection
fee ($5.00) for October
Recording Transactions After Reconciliation (cont’d)
Copyright © Houghton Mifflin Company. All rights reserved. 8–63
Discussion
Q. Would a deposit in transit be included as an
adjustment to the bank balance or book
balance on a bank reconciliation? Would it
be added to or subtracted from the
balance?
A. A deposit in transit would be added to the bank
balance on a bank reconciliation. The deposit
was recorded in the books before being sent to
the bank and is therefore already reflected in the
book balance.
Copyright © Houghton Mifflin Company. All rights reserved. 8–64
Petty Cash Procedures
• Supplemental Objective 4– Demonstrate the use of a simple imprest
system
Copyright © Houghton Mifflin Company. All rights reserved. 8–65
Petty Cash Fund
• Used for small disbursements that are impractical to pay by check– Postage stamps
– Incoming postage
– Shipping charges due
– Other minor purchases• Pens, paper, etc.
• The cash fund can be controlled by using an imprest system
Copyright © Houghton Mifflin Company. All rights reserved. 8–66
Imprest System
• A petty cash fund established for a fixed amount
• Each payment from the fund is documented by a voucher
• The fund is periodically reimbursed by the exact amount necessary to restore it to the original balance– Based on the vouchers
Copyright © Houghton Mifflin Company. All rights reserved. 8–67
Establishing the Petty Cash Fund
• Determine – Amount needed to cover small expenditures for a two- to
four-week period– Employee who will administer the petty cash fund
• Company issues a check for this amount, which is cashed
• The money is placed in the petty cash box, drawer, or envelope
Oct 14 Petty Cash 100.00 Cash 100.00 To establish the petty cash fund
Copyright © Houghton Mifflin Company. All rights reserved. 8–68
Discussion
Q. What is an imprest petty cash system?
A. An imprest patty cash system is a petty cash
fund established for a fixed amount. Each
payment from the fund is documented by a
voucher. The fund is periodically reimbursed by
the exact amount necessary to restore it to the
original balance. This amount should equal the
total amount of the vouchers
Copyright © Houghton Mifflin Company. All rights reserved. 8–69
Voucher Systems
• Supplemental Objective 5– Define voucher system and described the
components and operation of a voucher system
Copyright © Houghton Mifflin Company. All rights reserved. 8–70
Voucher System
… is any system that gives documentary proof of and written authorization for
business transactions
• Consists of records and procedures for systematically gathering, recording, and paying expenditures
Copyright © Houghton Mifflin Company. All rights reserved. 8–71
Voucher System
• Internal control provided by separating duties and responsibilities in the following functions
1. Authorization of expenditures
2. Receipt of goods and services
3. Validation of liability• By examination of invoices from suppliers for
correctness of prices, extensions (quantity x price), shipping costs, and credit terms
4. Payment of expenditure by check
Copyright © Houghton Mifflin Company. All rights reserved. 8–72
Voucher System
• Every liability must be recorded as soon as it is incurred by preparing a voucher
– A voucher is a written authorization and checks are issued only for approved vouchers
• No one person has the authority to both incur expenses and to issue checks
• The written approval for each transaction leaves a trail of documentary evidence called an audit trail
Copyright © Houghton Mifflin Company. All rights reserved. 8–73
Components of a Voucher System
1. Vouchers
2. Voucher checks
3. A voucher register
4. A check register
• Most systems have these components, although there is more than one way to set up a voucher system
Copyright © Houghton Mifflin Company. All rights reserved. 8–74
Vouchers
… serve as the basis of an accounting entry
• All vouchers are sequentially numbered
• A separate voucher is attached to each bill as it comes in
Copyright © Houghton Mifflin Company. All rights reserved. 8–75
Front of a Voucher Form
Contains important information about the expenditure and the authorizing signatures required for payment
Copyright © Houghton Mifflin Company. All rights reserved. 8–76
Back of a Voucher Form
Contains information about the accounts
Copyright © Houghton Mifflin Company. All rights reserved. 8–77
Voucher Checks
… tell the payee the reason the check was issued
• The information is written either on the check itself or on a detachable stub
• Regular checks can also be used efficiently
Copyright © Houghton Mifflin Company. All rights reserved. 8–78
Voucher Register
… …is a book of original entry in which vouchers are recorded after they have
been approved
• Takes the place of a purchases journal in companies that use special-purpose journals
Copyright © Houghton Mifflin Company. All rights reserved. 8–79
Voucher Register (cont’d)
• All expenditures are recorded in a voucher register– Only purchases of merchandise on credit
are recorded in a single-column purchases journal
• A Vouchers Payable column replaces the Accounts Payable column
8–80Copyright © Houghton Mifflin Company. All rights reserved.
Voucher Register
Voucher Register
Payment Credit Debits
Date Voucher Number Payee Date
Check No.
Vouchers Payable Purchases Freight In
Store Supplies
20xx July 1 701 Common Utility 7/6 203 75
2 702 Ade Realty 7/2 201 400 2 703 Buy Rite Supplies 7/6 202 25 3 704 Belmont Products 7/13 205 1,200 1,200 6 705 M&M Freight 60 31 718 Maintenance Company 175 31 719 Store Supply Company 350 350 18,990 3,450 185 350 (211) (511) (512) (116)
Page 1 Debits
Other Accounts
Office Supplies
Sales Salaries Expense
Office Salaries Expense
Maint-enance
Expense, Selling
Maint-enance
Expense, Office
Utilities Expense Name No. Amount
75 Rent Expense 631 400
25 100 75
45 2,800 1,600 100 75 75 10,310 (117) (611) (612) (621) (622) (635) (√)
Copyright © Houghton Mifflin Company. All rights reserved. 8–81
Check Register
… is the journal in which checks are listed as they are written
• Replaces the cash payments journal– The incurrence of a liability is recorded in
the voucher register
– Its payment is recorded in the check register
8–82Copyright © Houghton Mifflin Company. All rights reserved.
Check Register
Check Register
Debit Credits
Date Check
No. Payee Voucher
No. Vouchers Payable
Purchases Discounts Cash
20xx July 2 201 Ade Realty 702 400 400
6 202 Buy Rite Supplies 703 25 25 6 203 Common Utility 701 75 75 7 204 J. Jay, Petty Cash 706 50 50 13 205 Belmont Products 704 1,200 24 1,176 14 206 Payroll 711 2,200 2,200 17 207 First National Bank 712 4,250 4,250 18 208 Belmont Products 707 600 12 588 22 209 Livingstone Wholesale 710 785 15 770 30 210 Payroll 716 2,200 2,200 31 211 J. Jay, Petty Cash 717 47 47 11,832 51 11,781 (211) (513) (111)
Copyright © Houghton Mifflin Company. All rights reserved. 8–83
Operation of a Voucher System
• Five steps in the operation of a voucher system
1. Preparing the voucher
2. Recording the voucher
3. Paying the voucher
4. Posting the voucher and check registers
5. Summarizing unpaid vouchers
Copyright © Houghton Mifflin Company. All rights reserved. 8–84
Preparing the Voucher
• Prepare a voucher for each expenditure
• Attach all documents to the voucher to submit it for approval
– Purchase orders
– Invoices
– Receiving reports
Copyright © Houghton Mifflin Company. All rights reserved. 8–85
Preparing the Voucher
• If a separate account is used for payroll, a voucher is prepared to cover the total payroll
– The check for the voucher is deposited in the payroll account
– Individual payroll checks are drawn on the payroll account
Copyright © Houghton Mifflin Company. All rights reserved. 8–86
Recording the Voucher
• All approved vouchers should be recorded in the voucher register
Vouchers that do not have appropriate approvals should be investigated immediately
Voucher Register Payment Credit Debits
Other Accounts Date
Voucher No. Payee Date
Check No.
Vouchers Payable Purchases
Utilities Expense Name No. Amount
20xx
July 3 704 Belmont 7/13 205 1,200 1,200 Products
Copyright © Houghton Mifflin Company. All rights reserved. 8–87
Paying the Voucher
• Vouchers are placed in an unpaid voucher file after being recorded
– May be filed by due date and by vendor within due date so that checks can be written at the appropriate times• Ensures that discounts for prompt payment
can be taken
• After payment, vouchers are filed by voucher number
Copyright © Houghton Mifflin Company. All rights reserved. 8–88
Paying the Voucher (cont’d)
• A few days before the voucher is due– A check for the correct amount,
accompanied by the voucher and supporting documents, is presented to the person authorized to sign the checks
– Payment is entered in the check registerCheck Register
Debit Credits
Date Check
No. Payee Voucher
No. Vouchers Payable
Purchases Discounts Cash
20xxJuly 13 205 Belmont Products 704 1,200 24 1,176
Copyright © Houghton Mifflin Company. All rights reserved. 8–89
• At the time the merchandise is returned or the allowance given
1. Record an entry on the general journal
2. Make a notation on the voucher in the voucher file
Purchase Return or Allowance Applied to a Voucher
Vouchers Payable xxx Purchases Returns and Allowances xxx
Some companies cancel the original voucher and prepare a new one for the amount to be paid
Copyright © Houghton Mifflin Company. All rights reserved. 8–90
Purchase Return or Allowance Applied to a Voucher (cont’d)
• At the time of payment, only the net amount of the voucher should be paid and recorded in the check register
– Net amount • Original amount less return or allowance
and any applicable discount
Copyright © Houghton Mifflin Company. All rights reserved. 8–91
Posting the Voucher and Check Registers
• Very similar to posting the purchases journal and cash payments journal
• Difference– The Vouchers Payable account is
substituted for the Accounts Payable account
Copyright © Houghton Mifflin Company. All rights reserved. 8–92
Summarizing Unpaid Vouchers
• At the end of each accounting period, total the unpaid voucher file to prove the balance of the Vouchers Payable account
– Because the sum of the unpaid vouchers should always equal the credit balance of the Vouchers Payable account, a subsidiary ledger is unnecessary
Copyright © Houghton Mifflin Company. All rights reserved. 8–93
Schedule of Unpaid Vouchers
Thomas Appliance Company Schedule of Unpaid Vouchers
July 31, 20xx
Payee Voucher Number Amount
M&M Freight 705 $ 60
M&M Freight 708 30
Mack Truck 709 5,600
Livingstone Wholesale 713 525
Belmont Products 714 400
M&M Freight 715 18
Maintenance Company 718 175
Store Supply Company 719 350
Total Unpaid Vouchers $7,158
Copyright © Houghton Mifflin Company. All rights reserved. 8–94
Reconciling the Voucher Register and Check Register
Vouchers Payable credit from the voucher register $18,990
Voucher Register
Payment Credit Debits
Date Voucher Number Payee Date
Check No.
Vouchers Payable Purchases Freight In
Store Supplies
20xx July 1 701 Common Utility 7/6 203 75
2 702 Ade Realty 7/2 201 400 2 703 Buy Rite Supplies 7/6 202 25 3 704 Belmont Products 7/13 205 1,200 1,200 6 705 M&M Freight 60 31 718 Maintenance Company 175 31 719 Store Supply Company 350 350 18,990 3,450 185 350 (211) (511) (512) (116)
Copyright © Houghton Mifflin Company. All rights reserved. 8–95
Vouchers Payable credit from the voucher register $18,990
Reconciling the Voucher Register and Check Register
Less Vouchers Payable from the check register 11,832
Check Register Debit Credits
Date Check
No. Payee Voucher
No. Vouchers Payable
Purchases Discounts Cash
20xx July 2 201 Ade Realty 702 400 400
6 202 Buy Rite Supplies 703 25 25 6 203 Common Utility 701 75 75 7 204 J. Jay, Petty Cash 706 50 50 13 205 Belmont Products 704 1,200 24 1,176 14 206 Payroll 711 2,200 2,200 17 207 First National Bank 712 4,250 4,250 18 208 Belmont Products 707 600 12 588 22 209 Livingstone Wholesale 710 785 15 770 30 210 Payroll 716 2,200 2,200 31 211 J. Jay, Petty Cash 717 47 47 11,832 51 11,781 (211) (513) (111)
Copyright © Houghton Mifflin Company. All rights reserved. 8–96
Vouchers Payable credit from the voucher register $18,990 Less Vouchers Payable from the check register 11,832 Vouchers Payable credit balance from the schedule of unpaid vouchers $ 7,158
Reconciling the Voucher Register and Check Register
Thomas Appliance Company Schedule of Unpaid Vouchers
July 31, 20xx
Payee Voucher Number Amount
M&M Freight 705 $ 60
M&M Freight 708 30
Mack Truck 709 5,600
Livingstone Wholesale 713 525
Belmont Products 714 400
M&M Freight 715 18
Maintenance Company 718 175
Store Supply Company 719 350
Total Unpaid Vouchers $7,158
Copyright © Houghton Mifflin Company. All rights reserved. 8–97
Vouchers Payable and the Balance Sheet
• The account title Vouchers Payable may appear on a company's balance sheet
• Preferred term is Accounts Payable, even when a voucher system is in place
Copyright © Houghton Mifflin Company. All rights reserved. 8–98
Discussion
Q. Is a voucher the same thing as a
check?
A. No. A voucher is a written authorization
prepared for each expenditure when it
becomes an obligation to pay. Checks
are written only for approved vouchers
Copyright © Houghton Mifflin Company. All rights reserved. 8–99
Time for Review
1. Define internal control, explain its basic components and limitations, and give examples of control activities
2. Apply internal control activities to common merchandising transactions
3. Demonstrate the control of cash by preparing a bank reconciliation
Copyright © Houghton Mifflin Company. All rights reserved. 8–100
And Finally …
4. Demonstrate the use of a simple imprest system
5. Define voucher system and describe the components and operation of a voucher system