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Internal Control and Cash

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Chapter 8 Objective 1 Internal Control What is internal control? It is the organizational plan and all the related measures that an entity adopts to safeguard ... – PowerPoint PPT presentation

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Title: Internal Control and Cash


1
Internal Control and Cash
  • Chapter 8

2
Objective 1
  • Define internal control.

3
Internal Control
  • What is internal control?
  • It is the organizational plan and all the related
    measures that an entity adopts to
  • safeguard assets,
  • encourage adherence to company policies,
  • promote operational efficiency, and...
  • ensure accurate and reliable accounting records.

4
Internal Control
Operational Controls
Financial Reporting Controls
5
Objective 2
  • Tell how to achieve good
  • internal control.

6
Establishing an Effective System of Internal
Control
  • Characteristics of an effective internal control
    system include
  • Competent, reliable, and ethical personnel
  • Assignment of responsibilities
  • Proper authorization
  • Separation of duties

7
Separation of Duties
Separation of operations from accounting
Separation of the custody of assets from
accounting
Separation of the authorization of
transactions from the custody of related assets
Separation of duties within the accounting
function
8
Internal Controls for e-Commerce
Stolen credit card numbers
Computer virus and Trojan horses
Impersonation of companies
9
Internal Controls for e-Commerce
  • What is an encryption?
  • It is the primary method of achieving
    confidentiality in e-commerce.
  • Plain-text messages are rearranged by some
    mathematical process.
  • The encrypted message cannot be read by anyone
    who does not know the process.

10
Internal Controls for e-Commerce
Firewall
The Internet
Corporate Intranet
Network Computers
11
The Limitations ofInternal Control
  • Most internal control measures can be
    circumvented or overcome.
  • Collusion is when two or more employees work as a
    team with the purpose to defraud the firm.

12
The Bank Account as aControl Device
  • Documents used to control a bank account include
  • signature card
  • deposit ticket
  • check
  • bank statement
  • bank reconciliation

13
The Bank Reconciliation
  • What are two records of a businesss cash?
  • Cash account in the businesss own general
    ledger.
  • The bank statement which tells the actual amount
    of cash the business has in the bank.

14
The Bank Reconciliation
  • Items recorded by a company not on the bank
    statement
  • deposit in transit
  • outstanding checks

15
The Bank Reconciliation
  • Items on a bank statement and not recorded by the
    business
  • bank collections
  • bank fees
  • interest earned on account
  • NSF checks

16
The Paths That Two Checks Take (Good Check)
Maker writes check to payee.
Makers bank pays the check.
Payee deposits check in bank.
Payees bank sends check to makers bank.
17
The Paths That Two Checks Take (NFS Check)
Makers bank balance is not sufficient to pay the
check.
Makers bank sends the worthless check back
to payees bank.
Payee holds worthless check.
Payees bank decreases payees balance.
18
Objective 3
  • Prepare a bank reconciliation
  • and the related journal entries.

19
The Bank Reconciliation Example
  • At the beginning of July, Sahita, Inc. received
    the Junes bank statement.
  • It indicated the following
  • The bank balance was 63,275.
  • The bank had collected a note receivable from one
    of Sahitas customers in the amount of 1,325.

20
The Bank Reconciliation Example
  • The bank paid the electric bill of 1,500.
  • There was a 200 check returned for NSF.
  • Interest earned on the account was 265.
  • Bank service charges were 12.

21
The Bank Reconciliation Example
  • Sahitas books indicates a cash balance of
    66,647.
  • A deposit of 11,250 was mailed to the bank on
    June 30.
  • Checks issued in June for 8,000 have not yet
    been paid by the bank.

22
The Bank Reconciliation Example
Balance per bank, June 30 63,275 Add deposit in
transit 11,250 74,525 Less outstanding
check 8,000 Adjusted bank balance 66,525
23
The Bank Reconciliation Example
Balance per books, June 30 66,647 Add Note
receivable collected by the bank
1,325 Interest income
265 68,237 Less Payment of electric
bill 1,500 NSF check 200 Service
charge 12 Adjusted book balance
66,525
24
The Bank Reconciliation Example
Balance per books 66,525
Balance per bank 66,525
Equal amounts
25
Record Reconciling Items
June 30, 200x Cash
1,325 Notes Receivable 1,325
Notes collected by the bank
June 30, 200x Cash
265 Interest Income
265 Interest earned on bank balance
26
Record Reconciling Items
June 30, 200x Utilities Expense
1,500 Cash
1,500 Monthly electricity
expense
June 30, 200x Accounts Receivable NSF 200
Cash
200 NSF check returned by bank
27
Record Reconciling Items
  • June 30, 200x
  • Bank Service Fees 12
  • Cash
    12
  • Bank service charges

28
Objective 4
  • Apply internal controls
  • to cash receipts.

29
Cash ReceiptsOver the Counter
  • The terminal should be positioned so that
    customers can see the amount the cashier enters
    into the cash register.
  • The cash drawer should open only when the sales
    clerk enters an amount on the keypad.
  • The roll of tape locked inside the machine
    records each sale and cash transaction.

30
Cash ReceiptsOver the Counter
  • Pricing merchandise at uneven amounts means
    that the clerk has to open the cash drawer.
  • This requires entering the amount of the sale on
    the keypad and so onto the register tape.

31
Cash ReceiptsOver the Counter
  • At the end of the day, the cashier deposits the
    cash in the bank.
  • The tape goes to accounting.

32
Cash Receipts by Mail
  • All incoming mail should be opened by a
    mailroom employee.
  • This person should compare the check received
    with the remittance advice.
  • Cash receipts should be given to the cashier.
  • The mailroom employee forwards the remittance
    advice to accounting.

33
Cash Receipts by Mail
  • Many companies use a lock-box system.
  • Customers send their checks directly to an
    address that is a bank account.
  • Company personnel do not handle the cash.

34
Cash Short and Over
  • Assume that the cash register tapes indicate
    sales revenue of 25,000.
  • However, the cash received was 24,980.
  • What entry would record the days sales?

Cash 24,980 Cash Short
and Over 20
Sales Revenue 25,000 Daily cash
sales
35
Objective 5
  • Apply internal controls
  • to cash payments.

36
Control OverApproval of Payments
Purchase Request
Purchase Order
Invoice
Receiving Report
Disbursement Packet
37
Control OverApproval of Payments
  • The accounting department...
  • combines all of these documents,
  • checks them for accuracy, and...
  • forwards this disbursement packet to designated
    officers for approval and payment.

38
Controlling Petty Cash Payments
  • On June 15, Sahita Inc. manager decided to
    establish a 250 petty cash fund.
  • What is the entry?

June 15, 200x Petty Cash
250 Cash in Bank 250 To
open the petty cash fund
39
Controlling Petty Cash Payments
  • Jose is the petty cash custodian responsible for
    the fund.
  • On June 20, he purchased supplies in the amount
    of 70.
  • For each disbursement, he prepares a petty cash
    ticket.
  • At all times the amount of cash in the petty cash
    fund plus the petty cash tickets must equal 250.

40
Controlling Petty Cash Payments
  • Jose also spent 20 for delivery charges and 60
    for coffee and other miscellaneous expenses.
  • What is the journal entry to record the
    replenishment of the fund?

41
Controlling Petty Cash Payments
  • June 30, 20xx
  • Supplies 70
  • Delivery Expense 20
  • Miscellaneous Expense 60
  • Cash in Bank 150
  • To replenish the petty cash fund

42
Objective 6
  • Make ethical judgments
  • in business.

43
Ethics and Accounting
1.00 0.75 0.50 0.25 0.00
Code of Conduct 88
Companies
44
Professional Code of Ethics
  • Accountants are held to very high standards of
    conduct.
  • There is no compromising.
  • Would you hire an accountant who is almost
    always honest?
  • Internal controls rely upon basic honesty and
    integrity.

45
End of Chapter 8
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