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Financial Accounting and Accounting Standards

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Question 2-19 (textbook) No, Jim is not correct . The proper sequence is as follows : ( b ) Business transaction occurs. ( c ) Information entered in the journal. – PowerPoint PPT presentation

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Title: Financial Accounting and Accounting Standards


1
Accounting- How it works
2
Chapter 8
  • Internal Control and
  • Bank Reconciliation

Accounting Principles, Ninth Edition
3
Study Objectives
  • Internal control and Bank Reconciliation
  • Internal control and Bank Reconciliation
  • Indicate the features of a bank statement.
  • Prepare a bank reconciliation.
  • Explain the reporting of cash.

4
Fraud, Internal Control, and Cash
Fraud and Internal Control
Cash Controls
Control Features Use of a Bank
Reporting Cash
  • Fraud
  • The Sarbanes-Oxley Act
  • Internal control
  • Principles of internal control
  • Limitations
  • Cash equivalents
  • Restricted cash
  • Compensating balances
  • Making deposits
  • Writing checks
  • Bank statements
  • Reconciling the bank account
  • Electronic funds transfer (EFT) system
  • Cash receipts controls
  • Cash disbursements controls

5
Internal Control
Internal Control
  • Methods and measures adopted to
  • Safeguard assets.
  • Enhance accuracy and reliability of accounting
    records.
  • Increase efficiency of operations, and
  • Ensure compliance with laws and regulations.

Under the Sarbanes-Oxley Act, all publicly traded
U.S. corporations are required to maintain an
adequate system of internal control.
SO 1 Define fraud and internal control.
6
Internal Control
Principles of Internal Control Activities
  • Measures vary with
  • managements assessment of the risks faced.
  • size and nature of the company.
  • Six principles of controls activities
  • Establishment of responsibility
  • Segregation of duties
  • Documentation procedures
  • Physical controls
  • Independent internal verification
  • Human resource controls

SO 2 Identify the principles of internal control.
7
Internal Control
Limitations of Internal Control
  • Costs should not exceed benefit.
  • Human element.
  • Size of the business.

SO 2 Identify the principles of internal control.
8
Control Features Use of a Bank
  • Contributes to good internal control over cash.
  • Minimizes the amount of currency on hand.
  • Creates a double record of bank transactions.
  • Bank reconciliation.

SO 6 Indicate the control features of a bank
account.
9
BANK STATEMENTS STUDY OBJECTIVE 1
  • A bank statement shows
  • 1 Checks paid and other debits charged against
    the account
  • 2 Deposits and other credits made to the account
  • 3 Account balance after each days transactions

10
Control Features Use of a Bank
Illustration 8-10
  • Bank Statements
  • Debit Memorandum
  • Bank service charge
  • NSF (not sufficient funds)
  • Credit Memorandum
  • Collect notes receivable.
  • Interest earned.

SO 6 Indicate the control features of a bank
account.
11
Control Features Use of a Bank
Reconciling the Bank Account
  • Reconcile balance per books and balance per bank
    to their adjusted (corrected) cash balances.
  • Reconciling Items
  • Deposits in transit.
  • Outstanding checks.
  • Errors.
  • Bank memoranda.

SO 7 Prepare a bank reconciliation.
12
Control Features Use of a Bank
Reconciliation Procedures
Illustration 8-11
Deposit in Transit - Outstanding Checks -
Bank Errors
  • Notes collected by bank
  • - NSF (bounced) checks
  • - Check printing or other service charges
  • - Company Errors

CORRECT BALANCE
CORRECT BALANCE
SO 7 Prepare a bank reconciliation.
13
BANK RECONCILIATION
14
Control Features Use of a Bank
Illustration The bank statement for Laird
Company (Illustration 8-10), shows a balance per
bank of 15,907.45 on April 30, 2010. On this
date the balance of cash per books is 11,589.45.
Using the four reconciliation steps, Laird
determines the following reconciling items.
15
Control Features Use of a Bank
Illustration a) Prepare a bank reconciliation
at April 30.
Cash balance per bank statement 15,907.45
Add Deposit in transit 2,201.40
Less Outstanding checks (5,904.00)
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45
Add Error in recording check no. 443 36.00
Collection of notes interest - fee 1,035.00
Less NSF check (425.60)
Bank service charge (30.00)
Adjusted cash balance per books 12,204.85
Illustration 8-12
SO 7 Prepare a bank reconciliation.
16
Control Features Use of a Bank
The company records each reconciling item used to
determine the adjusted cash balance per
books. Collection of Note Receivable Assuming
interest of 50 has not been accrued and
collection fee is charged to Miscellaneous
Expense, the entry is
Cash 1,035.00
Apr. 30
Miscellaneous expense 15.00
Notes receivable 1,000.00
Interest revenue 50.00
SO 5 Describe the operation of a petty cash fund.
17
Control Features Use of a Bank
Book Error The cash disbursements journal shows
that check no. 443 was a payment on account to
Andrea Company, a supplier. The correcting entry
is
Cash 36.00
Apr. 30
Accounts payable 36.00
SO 5 Describe the operation of a petty cash fund.
18
Control Features Use of a Bank
NSF Check As indicated earlier, an NSF check
becomes an account receivable to the depositor.
The entry is
Accounts receivable 425.60
Apr. 30
Cash 425.60
Bank Service Charges Depositors debit check
printing charges (DM) and other bank service
charges (SC) to Miscellaneous Expense. The entry
is
Miscellaneous 30.00
Apr. 30
Cash 30.00
SO 5 Describe the operation of a petty cash fund.
19
Control Features Use of a Bank
Review Question
The reconciling item in a bank reconciliation
that will result in an adjusting entry by the
depositor is a. outstanding checks. b. deposit
in transit. c. a bank error. d. bank service
charges.
SO 7 Prepare a bank reconciliation.
20
Control Features Use of a Bank
  • Electronic Funds Transfers (EFT)
  • Disbursement systems that uses wire, telephone,
    or computers to transfer cash balances between
    locations.
  • EFT transfers normally result in better internal
    control since no cash or checks are handled by
    company employees.

SO 7 Prepare a bank reconciliation.
21
Control Features Use of a Bank
Discussion Question
Q8-23. Lori Figgs is confused about the lack of
agreement between the cash balance per books and
the balance per the bank. Explain the causes for
the lack of agreement to Lori, and give an
example of each cause. See notes page for
discussion
SO 7 Prepare a bank reconciliation.
22
Reporting Cash
Cash consists of coins, currency (paper money),
checks, money orders, and money on hand or on
deposit in a bank or similar depository.
Illustration 8-14
  • Cash equivalents
  • Restricted cash
  • Compensating balances

SO 8 Explain the reporting of cash.
23
Reporting Cash
Review Question
  • Which of the following statements correctly
    describes the reporting of cash?
  • Cash cannot be combined with cash equivalents.
  • Restricted cash funds may be combined with Cash.
  • Cash is listed first in the current assets
    section.
  • Restricted cash funds cannot be reported as a
    current asset.

SO 8 Explain the reporting of cash.
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