Cash and

Chapter
Internal

9 Controls
100 Shares

Cash????
$1 par value

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 Learning
Learning Objectives
Objectives
 Define internal control  Define cash and cash
and identify its purpose equivalents and explain
and principles how to report them
 Describe the impact of  Explain internal control
technology on internal over cash receipts
control  Describe internal control
 Discuss the limitations over cash
of internal control disbursements
 Prepare a bank
reconciliation

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Purpose
Purpose of
of Internal
Internal Control
Control
Policies
Policies and
and procedures
procedures
managers
managers use use to
to .. .. ..
 Protect
Protect assets.
assets.
 Ensure
Ensure reliable
reliable
accounting.
accounting.
 Promote
Promote efficient
efficient
operations.
operations.
 Urge
Urge adherence
adherence to to
company
company policies.
policies.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Principles
Principles of
of Internal
Internal Control
Control
 Establish
Establish responsibilities.
responsibilities.
 Maintain
Maintain adequate
adequate records.
records.
 Insure
Insure assets
assets and
and bond
bond key
key employees.
employees.
 Separate
Separate recordkeeping
recordkeeping from
from custody
custody
of
of assets.
assets.
 Divide
Divide responsibility
responsibility for
for related
related
transactions.
transactions.

 Apply
Apply technological
technological controls.
controls.

 Perform
Perform regular regular and and independent
independent
reviews.
reviews.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Technology
Technology and
and Internal
Internal Control
Control

Reduced More
Processing Extensive Testing
Errors of Records

Limited Crucial
Evidence of Separation of
Processing Duties

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Limitations
Limitations of
of Internal
Internal Control
Control

Human Error Human Fraud

Negligence Intent to
Fatigue defeat internal
Misjudgment controls for
Confusion personal gain

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Limitations
Limitations of
of Internal
Internal Control
Control
The costs of internal controls
must not exceed their benefits.

Benefits Costs

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Control
Control of
of Cash
Cash
An effective system of internal control that
protects cash and cash equivalents should meet
three basic guidelines:

Handling cash is
Cash receipts are
separated from
promptly deposited
recordkeeping of
in a bank.
cash.

Cash disbursements
are made by check.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Cash,
Cash, Cash
Cash Equivalents,
Equivalents, and
and Liquidity
Liquidity
Cash
Currency, coins and amounts on deposit in bank accounts,
checking accounts, and some savings accounts.

Cash Equivalents
Short-term, highly liquid investments that are:
Readily convertible to a known cash amount
Close to maturity date and not sensitive to
interest rate changes
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Cash,
Cash, Cash
Cash Equivalents,
Equivalents, and
and Liquidity
Liquidity
Liquidity
How easily an asset can be converted into
another asset or be used in paying for
services or obligations.

Inventory Cash
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Control
Control of
of Cash
Cash Receipts
Receipts
Over-the-Counter Cash Cash Receipts By Mail
Receipts  Two people open the mail.
 Cash register with • Money to cashier’s
locked-in record of office.
transactions. • List to accounting
 Compare cash register dept.
record with cash • Copy of list filed.
reported.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Control
Control of
of Cash
Cash Disbursements
Disbursements
 All
All expenditures
expenditures made by check. The onlyonly
exception
exception is
is for
for small
small payments
payments from
from petty
petty
cash.
cash.
 Separate
Separate authorization,
authorization, check
check signing
signing and
and
recordkeeping
recordkeeping duties.
duties.
 Use
Use aa voucher
voucher system.
system.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Voucher
Voucher System
System of
of Control
Control
A voucher system establishes procedures
for:
Verifying,
 Verifying, approving
approving andand recording
recording
obligations
obligations for
for eventual
eventual cash
cash disbursement.
disbursement.
Issuing
 Issuing checks
checks forfor payment
payment of
of verified,
verified,
approved
approved andand recorded
recorded obligations.
obligations.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Voucher
Voucher System
System of
of Control
Control
Check
Cashier Supplier (Vendor)
Accounting Invoice Approval Cashier
Receiving Report Accounting, Requesting
Receiving
& Purchasing
Supplier (Vendor) Invoice
Accounting
Purchasing Purchase Order Supplier, Requesting,
Receiving & Accounting
Purchase Requisition
Requesting Purchasing and
Accounting

Voucher
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 Petty
Petty Cash
Cash System
System of
of Control
Control
Small
Small payments
payments required in most companies for
items
items such
such as
as postage,
postage, courier
courier fees,
fees, minor
minor
repairs
repairs and
and low-cost
low-cost supplies.
supplies.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Operating
Operating aa Petty
Petty Cash
Cash Fund
Fund

Petty Cashier

Company Petty
Cashier Cashier

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Operating
Operating aa Petty
Petty Cash
Cash Fund
Fund

Petty Cashier

Company Petty
Cashier Cashier

May 1 Petty cash 400

Cash 400

Accountant
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 Operating
Operating aa Petty
Petty Cash
Cash Fund
Fund

Petty cash
receipts with
either no Receipts
Petty
signature or a Cashier
forged signature
usually indicate
misuse of petty 37¢

cash. Stamps Courier

$45 $80
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Operating
Operating aa Petty
Petty Cash
Cash Fund
Fund

Receipts

$125
To reimburse
Company petty cash fund Petty
Cashier Cashier

M a y 31 Posta ge e x pe nse 45
Use a Cash De live ry e x pe nse 80
Over and Short Ca sh 125
account if needed.

Accountant
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Petty
Petty Cash
Cash Example
Example
Tension Co. maintains a petty cash fund of $400.
The following summary information was taken from
petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48

Let’s look at replenishing the fund if the balance on

July 31 was $137.80.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Petty
Petty Cash
Cash Example
Example
What
What amount
amount of
of cash
cash will
will be
be required
required to
to
replenish
replenish the
the petty
petty cash
cash fund?
fund?

a.
a. $260.20
$260.20
b.
b. $262.20
$262.20
c.
c. $139.80
$139.80
d.
d. $137.80
$137.80

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Petty
Petty Cash
Cash Example
Example
What
What amount
amount of
of cash
cash will
will be
be required
required to
to
replenish
replenish the
the petty
petty cash
cash fund?
fund?

a.
a. $260.20
$260.20
b.
b. $262.20
$262.20
c.
c. $139.80
$139.80
d.
d. $137.80
$137.80

Let’s prepare the journal entry to replenish the

petty cash fund. © The McGraw-Hill Companies, Inc., 2007
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana
 Petty
Petty Cash
Cash Example
Example
Here is the journal entry to replenish the
petty cash fund.
July 31 Travel Expense 79.30
Entertainment Expense 93.42
Postage Expense 55.00
Office Supplies Expense 32.48
Cash Over and Short 2.00
Cash 262.20

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Banking
Banking Activities
Activities as
as Controls
Controls

Bank Accounts Signature Cards Deposit Tickets

Electronic
Bank
Checks Funds
Statements
Transfer
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Bank
Bank Reconciliation
Reconciliation
A bank reconciliation is prepared periodically to explain
the difference between cash reported on the bank
statement and the cash balance on company’s books.
Bank Statement
First National Bank
Nashville, TN 37459 May 31, 2002

Clothes Mart Why are the

Nashville, TN
Acct No 278609 * balances different?
Previous Total Current
Balance Total Checks Deposits Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Reconciling
Reconciling Items
Items
Bank
Bank Statement
Statement Balance
Balance Book
Book Balance
Balance
Deduct:
 Deduct: Outstanding
Outstanding Deduct:
 Deduct: Nonsufficient
Nonsufficient
checks.
checks. funds
funds check
check (NSF).
(NSF).
Add:
 Add: Deposits
Deposits in
in Deduct:
transit.
 Deduct: Bank
Bank service
service
transit. charge.
charge.
Add
 Add or
or Deduct:
Deduct: Bank
Bank
errors.
errors. Add:
 Add: Interest
Interest earned
earned
on
on checking
checking account.
account.
Add:
 Add: Collections
Collections
made
made by
by the
the bank.
bank.
Add
 Add or
or Deduct:
Deduct:
Book
Book errors.
errors.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Bank
Bank Reconciliation
Reconciliation
Two sections:
 Reconcile
Reconcile bank
bank statement
statement balance
balance to
to the
the
adjusted
adjusted bank
bank balance.
balance.
 Reconcile
Reconcile book
book balance
balance to
to the
the adjusted
adjusted book
book
balance.
balance.
The adjusted
adjusted balances
balances should
should be
be equal.
equal.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Bank
Bank Reconciliation
Reconciliation Example
Example
Let’s
Let’s prepare
prepare aa July
July 31
31 bank
bank reconciliation
reconciliation
statement
statement for
for the
the Simmons
Simmons Company.
Company.

 The
The July
July 31
31 bank
bank statement
statement indicated
indicated aa
balance
balance of
of $9,610.
$9,610.
 The
The cash
cash general
general ledger
ledger account
account on
on that
that
date
date shows
shows aa balance
balance of
of $7,430.
$7,430.

Additional
Additional information
information necessary
necessary for
for the
the
reconciliation
reconciliation is
is shown
shown on
on the
the next
next screen.
screen.
Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Bank
Bank Reconciliation
Reconciliation Example
Example
 Outstanding checks totaled $2,417.
 A $500 check mailed to the bank for deposit had not
reached the bank at the statement date.
 The bank returned a customer’s NSF check for $225
received as payment on account receivable.
 The bank statement showed $30 interest earned during July.
 Check No. 781 for supplies expense cleared the bank for
$268 but was erroneously recorded in our books as $240.
 A $486 deposit by Acme Company was erroneously credited
to our account by the bank.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 SIMMONS COMPANY

BANK RECONCILIATION

AS AT 31 July 2006

Bank Balance, 31 July $ 9,610

Deposit in Transit 500
Bank Error $ (486)
Outstanding Checks (2,417)
Adjusted Balance, 31 July $ 7,207

Book Balance, 31 July $ 7,430

Interest 30
Recording Error $ (28)
NSF Check (225)
Adjusted
Larson, Wild, Chiapetta,Balance, 31Aryati,
Ropidah, Haslinda, July Liana $ ©7,207
The McGraw-Hill Companies, Inc., 2007
 







Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Recording
Recording Adjusting
Adjusting Entries
Entries from
from aa
Bank
Bank Reconciliation
Reconciliation
Only amounts shown on the book portion of
the reconciliation require an adjusting entry.

July 31 Cash 30
Interest revenue 30

July 31 Supplies expense 28

Accounts receivable 225
Cash 253

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 Recording
Recording Adjusting
Adjusting Entries
Entries from
from Bank
Bank
Reconciliation
Reconciliation
After posting the reconciling entries the cash
account looks like this . . .

Adjusted
Adjusted balance
balance on
on July
July 31.
31.

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007
 End of Topic 9

Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana © The McGraw-Hill Companies, Inc., 2007