INTERNAL CONTROL AND ACCOUNTING FOR CASH

1. INTERNAL CONTROL AND ACCOUNTING FOR CASH • Definition of Cash • Importance of Cash Control • Cash Control

2. Cash management and control • Why cash management and control is important? • All transactions eventually lead to receiving and paying cash • Cash is easily stolen and misappropriated

3. Internal Control over Cash Receipts • Establishment of responsibility • Only designated personnel are authorised to handle cash receipts • Separation of function/duties • Separate the functions in the handling of cash from the maintenance of accounting record

4. Internal Control over Cash Receipts (cont’d) • Documentation procedures • Use cash register tapes and deposit slips or sequentially electronic receipt numbers • Physical, mechanical and electronic controls • Store cash in safes, bank cash frequently or have customer use direct deposits to the account • Independent internal verification • Supervisors count cash receipts daily, banking clerk compares total receipts with bank deposits daily, compare accounting records with bank records (prepare bank reconciliation)

5. Internal Control for Cash Payments • Establishment of responsibility • Segregation of duties • Different individuals approve and made payments, cheque signers do not record payment • Documentation procedures • Use prenumbered cheques and account for them in sequence, each cheque must have approved invoice

6. Internal Control for Cash Payments • Physical , mechanical and electronic controls • Store blank cheques in safe with limited access • Independent internal verification • Compare cheques with invoices, reconcile bank account monthly

7. Basic Principles of Cash Management • Increase the speed of collection of receivables • Keep inventory levels low • Do not pay earlier than necessary • Plan the timing of major expenditures • Invest idle cash

8. Importance of Cash Control • Management in any organisation is responsible for the safeguarding of cash as follows: • Ensure that all cash transaction are accurately and systematically recorded • Ensure the availability of adequate amounts of cash for the payment of bills and expenses • Avoid an unnecessary large amount of cash that lies idle in the business. Excess cash should be invested for gainful returns • Identify the procedures to prevent cash losses from fraud and theft

9. What is Cash? 3 Cash includes coins, currency (paper money), checks, and money orders. Cash is the asset most likely to be stolen or used improperly in a business.

10. 3 Sources of Cash Businesses normally receive cash from two main sources: • Customers purchasing products or services. • Customers making payments on account.

11. 3 Control of Cash Receipts One of the most important controls to protect cash received in over-the-counter sales is a cash register.

12. Using the Cash Register to Control Cash 3

13. Control of Cash Receipts 3 A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.

14. Cash Received in Mail 3 Cash is received in the mail when customers pay their bills. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment.

15. 3 Cash may be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills.

16. Control of Cash Payments 3 The control of cash payments should provide reasonable assurance that: • Payments are made for only authorized transactions. • Cash is used effectively and efficiently.

17. 3 A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized.

18. 3 Avoucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer.

19. Bank Accounts 4 A major reason that businesses use bank accounts is for internal control. Some of the control advantages of using bank accounts are as follows: • Bank accounts reduce the amount of cash on hand. • Bank accounts provide an independent recording of cash transactions. • Use of bank accounts facilitates the transfer of funds using EFT systems.

20. 4 A summary received from the bank of all checking account transactions is called a bank statement.

21. Impact of Debit and Credit Memos 4

22. Bank Statement (continued)

23. 4 Bank Statement (continued)

24. 4 Typical credit or debit memorandum entries found on the bank statement: EC — Error correction to correct bank error. NSF — Not sufficient funds check. SC — Service charge. ACH — Automated Clearing House entry for electronic funds transfer. MS — Miscellaneous items.

25. Bank reconciliation 5 A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance.

26. The Adjusted Balance 5 Must be equal

27. Steps in a Bank Reconciliation 5 (continued)

28. 5 Steps in a Bank Reconciliation

29. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Step 1 Power Networking prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3,359.78. The company’s Cash account has a July 31 balance of $2,549.99.

30. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Step 2 A deposit of $816.20 did not appear on the bank statement.

31. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Step 3 Three checks that were written during the period did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $48.60.

32. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,957.99 Step 4 The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

33. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,957.99 Deduct check NSF $300.00 Step 5 The bank returned a check for $300 from customer (Thomas Ivey) because of insufficient funds (NSF).

34. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,957.99 Deduct check NSF $300.00 Bank service charges 18.00 Step 6 Bank service charges for the month, $18.

35. 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,957.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No. 879 9.00 Step 7 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26.

36. 327.00 Adjusted balance Adjusted balance $2,630.99 $2,630.99 5 Power Networking’s Records Bank’s Records Beginning balance $2,549.99 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Add note and interest collected by bank 408.00 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $2,957.99 Deduct check NSF $300.00 Bank service charges 18.00 Error recording Chk. No. 879 9.00

37. 5 Bank Reconciliation for Power Networking

38. 5 The journal entries for Power Networking, based on the bank reconciliation in previous slideare as follows:

39. 5 Example Bank Reconciliation The following data were gathered to use in reconciling the bank account of Photo Op. Balance per bank............................................. $14,500 Balance per company records………………. 13,875 Bank service charges………………………… 75 Deposit in transit…………………………….. 3,750 NSF check……………………………………. 800 Outstanding checks………………………….. 5,250 What is the adjusted balance on the bank reconciliation? Journalize any necessary entries for Photo OP based upon the bank reconciliation. 8-63

40. 6 Petty Cash Fund It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund.

41. 6 A petty cash fund of $500 is established on August 1. The entry to record the transaction is as follows:

42. 6 IMPORTANT! The only time Petty Cash is debited is when the fund is initially established or when the fund is increased. The only time Petty Cash is credited is when the fund is being decreased.

43. 6 At the end of August, the petty cash receipts indicate expenditures for the following items: Office supplies $380 Postage (debit Office Supplies) 22 Store supplies 35 Misc. administrative expenses 30 Total $467

44. 6 Example Petty Cash Fund Prepare journal entries for each of the following; Issued check to establish a petty cash fund of $500. The amount of cash in the petty cash fund is currently $120. Issued a check to replenish the fund, based on the following summary of petty cash receipts: office supplies, $300 and miscellaneous administrative expense, $75. Record any missing funds in the cash short and over account. 8-70

45. 6 Example Exercise 8-4 (continued) • Petty Cash………………………........ 500 • Cash…………………………........ 500 • Office Supplies………………………. 300 • Miscellaneous Admin. Expense….. 75 • Cash Short and Over……………….. 5 • Cash……………………………….. 380 8-71

46. Cash Equivalents 7 A company’s excess cash is normally invested in highly liquid investments. These investments are called cash equivalents.

48. 7 Companies that have invested excess cash in cash equivalents usually report Cash andcash equivalents as one amount on the balance sheet.