ch08
TRANSCRIPT
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Accounting Accounting PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition
Prepared by: Carole Bowman, Sheridan College
Weygandt · Kieso · Kimmel · Trenholm
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INTERNAL CONTROL INTERNAL CONTROL AND CASHAND CASH
CHAPTERCHAPTER
88
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Internal control consists of the policies and procedures adopted within a business in order to:1. optimize resources, and2. prevent and detect errors and irregularities.
INTERNAL CONTROLINTERNAL CONTROL
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INTERNAL CONTROLINTERNAL CONTROL
Internal control consists of the policies and procedures adopted within a business in order to:3. Safeguard its assets4. Maintain the accuracy and reliability of
its accounting records
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AuthorizationSegregation of dutiesDocumentation
proceduresSafeguarding assets and
recordsIndependent verification
ILLUSTRATION ILLUSTRATION 8-18-1 PRINCIPLES OF INTERNAL CONTROLPRINCIPLES OF INTERNAL CONTROL
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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 CONTROLPRINCIPLES OF INTERNAL CONTROL
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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 CONTROLPRINCIPLES OF INTERNAL CONTROL
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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.
PRINCIPLES OF INTERNAL CONTROLPRINCIPLES OF INTERNAL CONTROL
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Independent Internal Verification
ILLUSTRATION ILLUSTRATION 8-3 8-3 RELATIONSHIP BETWEEN SEGREGATION OF DUTIES RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATIONAND INDEPENDENT INTERNAL VERIFICATION
Accounting Employee A Assistant Cashier B
Assistant Comptroller C
Maintains cash balances Maintains custody of per books cash on hand
Makes monthly comparisons: reports any irreconcilable differences to comptroller
Segregation of Duties
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LIMITATIONS OF INTERNAL LIMITATIONS OF INTERNAL CONTROLCONTROL
Cost/benefitCollusion Size of businessHuman element
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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.
CASHCASH
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Only designated personnel should be authorized to handle or have access to cash receipts.
Different individuals should:1. receive cash2. record cash receipt transactions3. have custody of cash
CONTROL OVER CASH RECEIPTSCONTROL OVER CASH RECEIPTS
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Documents should include:1. remittance advices2. cash register tapes3. 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 RECEIPTSCONTROL OVER CASH RECEIPTS
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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 RECEIPTSCONTROL OVER CASH RECEIPTS
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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 DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS
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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 DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS
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Each cheque should be compared with the approved invoice before it is issued.
Following payment, the approved invoice should be stamped PAID.
Paid
CONTROL OVER CASH DISBURSEMENTSCONTROL OVER CASH DISBURSEMENTS
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A petty cash fund is used to pay relatively small amounts.
Operation of the fund, often called an imprest system, involves1. establishing the fund,2. making payments from the fund, and3. replenishing the fund.
Accounting entries are required when1. the fund is established,2. the fund is replenished, and3. the amount of the fund is changed.
PETTY CASH FUNDPETTY CASH FUND
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ESTABLISHING THE FUNDESTABLISHING THE FUND
When the fund is established, a cheque payable to the petty cash custodian is issued for the stipulated amount.
100 100
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REPLENISHING THE FUNDREPLENISHING THE 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.
GENERAL JOURNALDate Account Titles and Explanation Debit Credit
Mar. 15 Postage ExpenseFreight OutMiscellaneous Expense Cash
To replenish petty cash fund.
44 38 5 87
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REPLENISHING THE FUNDREPLENISHING THE 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.
GENERAL JOURNALDate Account Titles and Explanation Debit Credit
Mar. 15 Postage ExpenseFreight OutMiscellaneous ExpenseCash Over and Short Cash To replenish petty cash fund/
44 38 5 1 88
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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.
USE OF A BANKUSE OF A BANK
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BANK STATEMENTSBANK STATEMENTS
ACCOUNT W. A. LEE COMPANY Statement Date/CreditSTATEMENT 500 QUEEN STREET Line Closing Date
FREDERICTON, NB, E3B 5C2 April 30, 2003
457923ACCOUNT NUMBER
Balance Deposits and Credits Cheques and Debits BalanceLast Statement No. Total Amount Total Amount This Statement
13,256.90 20 34,805.10 26 32,154.55 15,907.45
DEPOSITS ANDCHEQUES AND DEBITS CREDITS DAILY BALANCEDate No. Amount Date Amount Date Amount
4-2 435 644.95 4-2 4,276.85 4-2 16,888.804-5 436 3,260.00 4-3 2,137.50 4-3 18,249.654-4 437 1,185.79 4-5 1,350.47 4-4 17,063.864-3 438 776.65 4-7 982.46 4-5 15,154.334-8 439 1,781.70 4-8 1,320.28 4-7 14,648.894-7 440 1,487.90 4-9 CM 1,036.00 4-8 11,767.474-8 441 2,420.00 4-11 2,720.00 4-9 12,802.474-11 442 1,585.60 4-12 757.41 4-11 13,936.874-12 443 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 13,005.454-29 459 1,080.30 4-29 2,929.45 4-29 14,429.004-30 DM 30.00 4-30 2,128.60 4-30 15,907.454-30 461 620.15Symbols: CM Credit Memo EC Error Correction NSF Not Sufficient Funds Reconcile Your
DM Debit Memo INT Interest Earned SC Service Charge Account Promptly
A bank statement shows:
1. cheques paid and other debits charged against the account
2. deposits and other credits made to the account
3. account balance after each day’s transactions
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RECONCILING THE BANK ACCOUNTRECONCILING 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.
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TermsTerms
Deposits in transitDeposits recorded by depositor that have not
been recorded by bankOutstanding cheques
Cheques written (issued) and recorded by company that have not been presented to/paid by bank
Adjusted balanceReconciled or correct cash balance
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TermsTerms
Debit memorandaCharges against depositor’s account (e.g.
service charges, RC (returned)/NSF (insufficient funds) cheques)
Credit memorandaAmounts that increase depositor’s
account (e.g., interest earned)
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Bank ReconciliationProcedures
$ 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
Illustration 8-11
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Reconciling Journal EntriesReconciling Journal Entries
BooksEach reconciling item in
determining the adjusted balance per books MUST be journalized and posted
BankDo NOT journalize any
entries on bank side
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Cash reported on the Balance Sheet includes:
1. Cash on hand2. Cash in banks3. Petty cash
Cash is listed first in the balance sheet because it is the most liquid asset.
REPORTING CASHREPORTING CASH
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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.
CASH EQUIVALENTSCASH EQUIVALENTS
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USING THE INFORMATION IN THE USING THE INFORMATION IN THE FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Most important assetPervasive impactVulnerable to theft or
misuseBalancing act needed
to ensure sufficient, but not excess, quantity
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USING THE INFORMATION IN THE USING THE INFORMATION IN THE FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Cash Flow Statement : shows where cash came from and what is was used for.
Management report: states management’s responsibility for internal controls.
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COPYRIGHTCOPYRIGHT
Copyright © 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.