ACCOUNTING PRINCIPAL Ppt 08

Accounting Accounting PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by: Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel · Trenholm

INTERNAL CONTROL INTERNAL CONTROL AND CASHAND CASH

CHAPTERCHAPTER

88

Internal control consists of the policies and procedures adopted within a business in order to:1. optimize resources, and2. prevent and detect errors and irregularities.

INTERNAL CONTROLINTERNAL CONTROL

INTERNAL CONTROLINTERNAL CONTROL

Internal control consists of the policies and procedures adopted within a business in order to:3. Safeguard its assets4. Maintain the accuracy and reliability of

its accounting records

AuthorizationSegregation of dutiesDocumentation

proceduresSafeguarding assets and

recordsIndependent verification

ILLUSTRATION ILLUSTRATION 8-18-1 PRINCIPLES OF INTERNAL CONTROLPRINCIPLES 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 CONTROLPRINCIPLES 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.


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.


Independent Internal Verification

ILLUSTRATION ILLUSTRATION 8-3 8-3 RELATIONSHIP BETWEEN SEGREGATION OF DUTIES RELATIONSHIP BETWEEN SEGREGATION OF DUTIES

AND INDEPENDENT INTERNAL VERIFICATIONAND 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 LIMITATIONS OF INTERNAL CONTROLCONTROL

Cost/benefitCollusion Size of businessHuman 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.

CASHCASH

Only designated personnel should be authorized to handle or have access to cash receipts.

Different individuals should:1. receive cash2. record cash receipt transactions3. have custody of cash

CONTROL OVER CASH RECEIPTSCONTROL OVER CASH RECEIPTS

Documents should include:1. remittance advices2. cash register tapes3. 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.


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.


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 DISBURSEMENTSCONTROL 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.


Each cheque should be compared with the approved invoice before it is issued.

Following payment, the approved invoice should be stamped PAID.

Paid


A petty cash fund is used to pay relatively small amounts.

Operation of the fund, often called an imprest system, involves1. establishing the fund,2. making payments from the fund, and3. replenishing the fund.

Accounting entries are required when1. the fund is established,2. the fund is replenished, and3. the amount of the fund is changed.

PETTY CASH FUNDPETTY CASH FUND

ESTABLISHING THE FUNDESTABLISHING THE FUND

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

100 100

REPLENISHING THE FUNDREPLENISHING 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 JOURNALDate Account Titles and Explanation Debit Credit

Mar. 15 Postage ExpenseFreight OutMiscellaneous Expense Cash

To replenish petty cash fund.

44 38 5 87

REPLENISHING THE FUNDREPLENISHING 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 JOURNALDate Account Titles and Explanation Debit Credit

Mar. 15 Postage ExpenseFreight OutMiscellaneous ExpenseCash 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 BANKUSE OF A BANK

BANK STATEMENTSBANK STATEMENTS

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

FREDERICTON, NB, E3B 5C2 April 30, 2003

457923ACCOUNT NUMBER

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

13,256.90 20 34,805.10 26 32,154.55 15,907.45

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

4-2 435 644.95 4-2 4,276.85 4-2 16,888.804-5 436 3,260.00 4-3 2,137.50 4-3 18,249.654-4 437 1,185.79 4-5 1,350.47 4-4 17,063.864-3 438 776.65 4-7 982.46 4-5 15,154.334-8 439 1,781.70 4-8 1,320.28 4-7 14,648.894-7 440 1,487.90 4-9 CM 1,036.00 4-8 11,767.474-8 441 2,420.00 4-11 2,720.00 4-9 12,802.474-11 442 1,585.60 4-12 757.41 4-11 13,936.874-12 443 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 13,005.454-29 459 1,080.30 4-29 2,929.45 4-29 14,429.004-30 DM 30.00 4-30 2,128.60 4-30 15,907.454-30 461 620.15Symbols: 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 day’s transactions

RECONCILING THE BANK ACCOUNTRECONCILING 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.

TermsTerms

Deposits in transitDeposits recorded by depositor that have not

been recorded by bankOutstanding cheques

Cheques written (issued) and recorded by company that have not been presented to/paid by bank

Adjusted balanceReconciled or correct cash balance

TermsTerms

Debit memorandaCharges against depositor’s account (e.g.

service charges, RC (returned)/NSF (insufficient funds) cheques)

Credit memorandaAmounts that increase depositor’s

account (e.g., interest earned)

Bank ReconciliationProcedures

$ 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 EntriesReconciling Journal Entries

BooksEach reconciling item in

determining the adjusted balance per books MUST be journalized and posted

BankDo NOT journalize any

entries on bank side

Cash reported on the Balance Sheet includes:

1. Cash on hand2. Cash in banks3. Petty cash

Cash is listed first in the balance sheet because it is the most liquid asset.

REPORTING CASHREPORTING 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 EQUIVALENTSCASH EQUIVALENTS

USING THE INFORMATION IN THE USING THE INFORMATION IN THE FINANCIAL STATEMENTSFINANCIAL STATEMENTS

Most important assetPervasive impactVulnerable to theft or

misuseBalancing act needed

to ensure sufficient, but not excess, quantity

USING THE INFORMATION IN THE USING THE INFORMATION IN THE FINANCIAL STATEMENTSFINANCIAL STATEMENTS

Cash Flow Statement : shows where cash came from and what is was used for.

Management report: states management’s responsibility for internal controls.

COPYRIGHTCOPYRIGHT

Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / 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.

Economy & Finance

ACCOUNTING PRINCIPAL Ppt 08