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Chapter 8 - note
Principles of Accounting I (ACCT 1110)
Douglas College
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Chapter 8 INTERNAL CONTROL and CASH
INTERNAL CONTROL
As an organization becomes more complex and acquires more employees, the owners and other stakeholders need assurance that the objectives of the organization are being carried out. Assets need to be protected and procedures need to be formalized.
The policies and procedures of a properly designed internal control system will have the following objectives:
protect assets, ensure reliable accounting, promote efficient operations, and encourage adherence to company policies.
A good internal control system will have the following principles:
establish responsibilities for each task clearly and for one person. maintain adequate records to help protect assets by ensuring that employees use prescribed procedures. insure assets and bond key employees to reduce risk of loss from casualty and theft. separate recordkeeping from custody of assets. divide responsibilities for related transactions between two or more individuals or departments. apply technological controls. perform regular and independent reviews to ensure that internal control procedures are followed.
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VERIFICATION: internal and external auditors
Internal auditors are employees of the company who evaluate, on a continuous basis, the effectiveness of the company’s system of internal control. That is, they review the activities of departments and individuals to ensure prescribed internal control procedures are being followed.
External auditors are public accountants who are independent of the company. They are engaged by the owners of the company. Their prime service is the attest function which involves the impartial review or audit of the company’s financial statements. This function lends credibility to the statements due to their independence from the company and its owners. The public accountant attaches an opinion about the statements as follows:
“We have audited the financial statements of ABC Company (the Company), which comprise the statement of financial position as at December 31, 2019, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).”
INTERNAL CONTROL and CASH
Cash is the most likely asset to be subject to fraud or theft due to its high degree of liquidity. Accordingly, companies adopt internal control procedures which apply to cash and other assets as well as all phases of their operations.
separate handling of cash from recordkeeping of cash. cash receipts are promptly deposited in a bank cash disbursements are made by cheque.
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PETTY CASH
While most cash disbursements are made with cheques, a company also needs real cash to make incidental expenditures for such things as: parking, postage, pay telephone, COD deliveries, and any unexpected emergency supplies.
To establish a Petty Cash Fund, the company prepares a cheque payable to the employee who will be responsible for looking after the money. After the cheque is cashed at the bank, the proceeds are placed in a safe and secure place, typically a small lockable metal box. The metal box and its contents are placed under the custody of one employee, called the Petty Cash Custodian.
Jan 1 Petty Cash Fund 250 Cash To establish Petty Cash Fund.
Note: there is no change in total assets.
Other “cash accounts” include:
Cash on Hand Bank
Not yet deposited
MECHANICS OF AN IMPREST PETTY CASH SYSTEM
As each receipt is presented to the custodian for payment, the custodian replaces the cash in the metal box with the receipt. Thus, the total $value of all the cash and all the receipts in the metal box will always equal the original established amount of the fund (i. $250). Eventually, after the “old” cash is nearly depleted, the fund is reimbursed with "new" cash. The company issues another cheque for whatever amount is necessary to bring the physical amount of cash in the metal box up to the original amount of the fund (i. $250).
Various Expense XXX Cash/Bank XXX
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Larson “Fundamental Accounting Principles”, 8th ed., P7-10, pages 388 - 389
Dixon’s Florist completed these petty cash transactions:
May 4
Drew a $75 cheque to establish a petty cash fund, cashed it, and turned the proceeds and the petty cashbox over to Gayle Bates, petty cash custodian 6 Paid $12 parcel post charges on merchandise sold to a customer and delivered by mail. 8 Paid $14 to have the office windows washed. 11 Purchased office supplies with petty cash, $25. 12 Susan Dixon, owner of the business, signed a petty cash receipt and took $ from petty cash for coffee money. 14 Paid $13 COD delivery charges on merchandise purchased for resale 15 Gayle Bates noted that only $2 remained in the petty cashbox. Thus, she sorted the petty cash receipts in terms of accounts affected (see below). She then exchanged the receipts for a cheque to reimburse the fund. However, since the fund had been exhausted so quickly, the cheque was made sufficiently large to increase the size of the fund to $150.
To establish Petty Cash Fund.
Summary of Petty Cash Payments: (May 4 to May 14)
Delivery Expense Office Supplies Miscellaneous Expense Withdrawals Transportation-in Inventory
add: actual physical cash
The original amount established in the Petty Cash Fund ($75) is intended to cover disbursements for approximately one month. If the fund is regularly depleted in less than a month, it may be necessary to increase the fund permanently above this original amount.
The cheque's total amount must cover:
a) to reimburse $73. b). to increase 75. $148.
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Jun 1 Paid $16 COD delivery charges on merchandise purchased for resale. 5 Purchased paper clips and pencils with petty cash, $10. 10 Paid $114 COD delivery charges on merchandise purchased for resale. 12 Gayle Bates sorted the petty cash receipts and exchanged them for a cheque to replenish the fund for expenditures. There was $1 remaining in the petty cashbox; she could not explain the shortage.
To reimburse Petty Cash Fund.
In summary, Petty Cash Fund general ledger account is only used to:
- Establish or
- Increase (or Decrease)
This account is never used to reimburse the fund!
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BANK RECONCILIATION
In accounting terms, "to reconcile" means to account for or to identify differences between two related balances. "Reconciling the bank", therefore, means the process of identifying the differences in the month- end cash balances between:
, as recorded by the company
, as recorded by the bank
Timing is the main reason for differences between these balances. That is, cheques and deposits are often not recorded by the company and by the bank on the same day. Also, different errors and different omissions can be made by both the company and the bank.
Once all the differences have been identified, a Bank Reconciliation Schedule is prepared. This schedule simply lists these identified differences between the two balances.
items on a bank statement items in the general ledger but NOT in general ledger: but NOT on a bank statement:
service charges outstanding cheques interest charges and interest earned debit card entries ATM withdrawals loan payments electronic deposits outstanding deposits NSF customer cheques returned and charges collection of promissory notes bank errors
After the schedule is complete, the company prepares an adjusting journal entry to correct and to adjust the general ledger cash balance.
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Golf Company BANK RECONCILIATION February 29, 2020
BALANCE, per GENERAL LEDGER, UNADJUSTED ADD: Collection of Promissory Note Collection of int. on Promissory Note
Cheque # 297 recorded as Cheque # 297 drawn as
LESS: Collection fee NSF – Jan Bellor Bank Service Charge
BALANCE, per GENERAL LEDGER, ADJUSTED
BALANCE, per BANK STATEMENT, UNADJUSTED ADD: Outstanding Deposit Feb 29/
LESS: Outstanding Cheques
BALANCE, per BANK STATEMENT, ADJUSTED
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Chapter 8 - note
Course: Principles of Accounting I (ACCT 1110)
University: Douglas College
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