Accounting

Principles
Second Canadian Edition
Weygandt · Kieso · Kimmel · Trenholm

Prepared by:
Carole Bowman, Sheridan College
 CHAPTER

INTERNAL CONTROL
AND CASH
 INTERNAL CONTROL

Internal control consists of the policies and

procedures adopted within a business in
order to:
1. optimize resources, and
2. prevent and detect errors and
irregularities.
 INTERNAL CONTROL

Internal control consists of the policies and

procedures adopted within a business in
order to:
3. Safeguard its assets
4. Maintain the accuracy and reliability of
its accounting records
 ILLUSTRATION 8-1
PRINCIPLES OF INTERNAL CONTROL

Authorization
Segregation of duties
Documentation
procedures
Safeguarding assets and
records
Independent verification
PRINCIPLES 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 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.
PRINCIPLES OF INTERNAL CONTROL

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.
 ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties

Accounting Employee A Assistant Cashier B

Maintains cash balances Maintains custody of
per books cash on hand

Independent Internal Verification

Assistant Comptroller C
Makes monthly comparisons: reports any irreconcilable differences to comptroller
LIMITATIONS OF INTERNAL
CONTROL
 Cost/benefit
 Collusion
 Size
of business
 Human element
 CASH
 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.
 CONTROL OVER CASH RECEIPTS

 Only designated personnel should be

authorized to handle or have access to cash
receipts.
 Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash
 CONTROL OVER CASH RECEIPTS

 Documents should include:

1. remittance advices
2. cash register tapes
3. 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.
 CONTROL OVER CASH 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.
CONTROL OVER CASH DISBURSEMENTS

 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 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.
CONTROL OVER CASH DISBURSEMENTS

 Each cheque should be compared with the

approved invoice before it is issued.
 Following payment, the approved invoice
should be stamped PAID.
 PETTY CASH FUND

 A petty cash fund is used to pay relatively small

amounts.
 Operation of the fund, often called an imprest
system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
 Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.
 ESTABLISHING THE FUND

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 1 Petty Cash 100
Cash 100
To establish a petty cash fund.

When the fund is established, a cheque

payable to the petty cash custodian is issued
for the stipulated amount.
 REPLENISHING THE FUND

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 15 Postage Expense 44
Freight Out 38
Miscellaneous Expense 5
Cash 87
To replenish petty cash 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.
 REPLENISHING THE FUND

GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
Mar. 15 Postage Expense 44
Freight Out 38
Miscellaneous Expense 5
Cash Over and Short 1
Cash 88
To replenish petty cash 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.
 USE OF A BANK

 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.
 BANK STATEMENTS

A bank statement
shows: ACCOUNT W. A. LEE COMPANY Statement Date/Credit
STATEMENT 500 QUEEN STREET Line Closing Date
1. cheques paid and FREDERICTON, NB, E3B 5C2 April 30, 2003

other debits charged 457923

ACCOUNT NUMBER

against the account Balance

Last Statement
Deposits and Credits
No. Total Amount
Cheques and Debits
Total Amount
Balance
This Statement
13,256.90 20 34,805.10 26 32,154.55 15,907.45
2. deposits and other DEPOSITS AND
CHEQUES AND DEBITS CREDITS DAILY BALANCE
credits made to the Date No. Amount Date Amount Date Amount

account 4-2
4-5
435 644.95
436 3,260.00
4-2
4-3
4,276.85
2,137.50
4-2
4-3
16,888.80
18,249.65
4-4 437 1,185.79 4-5 1,350.47 4-4 17,063.86
3. account balance 4-3
4-8
438 776.65
439 1,781.70
4-7
4-8
982.46
1,320.28
4-5
4-7
15,154.33
14,648.89

after each day’s 4-7

4-8
440 1,487.90
441 2,420.00
4-9 CM
4-11
1,036.00
2,720.00
4-8
4-9
11,767.47
12,802.47
4-11 442 1,585.60 4-12 757.41 4-11 13,936.87
transactions 4-12 443 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 13,005.45
4-29 459 1,080.30 4-29 2,929.45 4-29 14,429.00
4-30 DM 30.00 4-30 2,128.60 4-30 15,907.45
4-30 461 620.15
Symbols: CM Credit Memo EC Error Correction NSF Not Sufficient Funds Reconcile Your

DM Debit Memo INT Interest Earned SC Service Charge Account Promptly

RECONCILING 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.
 Terms

 Deposits in transit
 Deposits recorded by depositor that have not
been recorded by bank
 Outstanding cheques
 Cheques written (issued) and recorded by
company that have not been presented
to/paid by bank
 Adjusted balance
 Reconciled or correct cash balance
 Terms

 Debit memoranda
 Charges against depositor’s account (e.g.
service charges, RC (returned)/NSF
(insufficient funds) cheques)
 Credit memoranda
 Amounts that increase depositor’s
account (e.g., interest earned)
 Illustration 8-11
Bank Reconciliation
Procedures

$ 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
Reconciling Journal Entries

 Books
 Each reconciling item in
determining the adjusted
balance per books MUST be
journalized and posted
 Bank
 Do NOT journalize any
entries on bank side
 REPORTING CASH

 Cash reported on the Balance Sheet

includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
 Cash is listed first in the balance sheet
because it is the most liquid asset.
 CASH EQUIVALENTS

 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.
USING THE INFORMATION IN THE
FINANCIAL STATEMENTS

 Most important asset

 Pervasive impact
 Vulnerable to theft or
misuse
 Balancing act needed
to ensure sufficient,
but not excess,
quantity
 USING THE INFORMATION IN THE
FINANCIAL STATEMENTS

 Cash Flow Statement : shows where cash

came from and what is was used for.
 Management report: states management’s
responsibility for internal controls.
 COPYRIGHT

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