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    Internal Control and

    Accounting for Cash

    Chapter Six

    Copyright 2011 by The McGraw-Hi ll Companies, I nc. All ri ghts reserved.McGraw-Hill/Irwin

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    6-1

    Key Features of Internal Control

    1. Separation of Duties

    2. Quality of Employees

    3. Bonded Employees

    4. Required Absences

    5. Procedures Manual

    6. Authority and Responsibility

    7. Prenumbered Documents8. Physical Control

    9. Performance Evaluations

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    6-2

    Accounting for Cash

    ControllingCash

    Cash receiptsshouldbe recorded

    immediately uponreceipt and deposited

    intact daily.

    Cash paymentsshouldbe made by

    prenumbered check.

    Up to date signaturecardshould be

    maintained.

    A deposit ticketshould be used for

    all deposits.

    A monthly bankreconciliation shouldbe prepared by an

    independent party.

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    6-3

    Reconciling the Bank Statement

    Unadjusted bank balance

    Add + Deposits in transit

    Deduct - Outstanding checksEquals = True cash balance

    Adjustment to the Bank Balance

    The bank reconciliation reports on the differencesbetween the balance on the bank statement and the

    balance in the general ledger cash account. Thereconciliation results in the true cash balancethat

    will appear on the balance sheet.

    Unadjusted book balance

    Add + Accounts receivable collectionsAdd + Interest earned

    Deduct - Bank service charges

    Deduct - Non-sufficient funds (NSF) check

    Equals = True cash balance

    Adjustments to the Book Balance

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    6-4

    Reconciling the Bank Statement

    If an error is found on the bank statement, anadjustment for it is made to the unadjustedbank balance to determine the true cash

    balance. An error made on our books requiresan adjusting journal entry to correct.

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    6-5

    Bank Reconciliation

    Green Shades Resorts, Inc. is preparing the bankreconciliation for the month of September.

    1. The Sept 30thbalance on the bank statement is$3,516.45, and the Cash general ledger balance on thisdate is $3,361.22 .

    2. There was a deposit in transit in the amount of $724.11.

    3. The bank erroneously deducted a $25 check drawn on

    the books of Green Valley Resorts from our account.4. At September 30ththree checks are outstanding. Check

    639 dated 9/18 for $13.75; Check 646 dated 9/20 for$29.00; and Check 672 dated 9/27 for $192.50 .

    More Information

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    Bank Reconciliation

    5. During the month of September the bank collected anaccount receivable for us in the amount of $940.00 .

    6. A check actually written for $36.45 for supplies waserroneously recorded in our records by the bookkeeperas $63.45.

    7. The bank assessed a service charge of $8.40 forSeptember.

    8. We deposited a NSF check in the amount of $289.51 .

    Lets prepare the bank reconciliation

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    Bank Reconciliation

    Unadjusted Bank Balance, September 30 3,516.45$

    Add: Deposits in transit 724.11

    Bank error: Check drawn on GVRI charged to GSRI 25.00

    Less: Outstanding checks

    Check No. 639 - September 18 13.75

    Check No. 646 - September 20 29.00

    Check No. 672 - September 27 192.50 (235.25)

    True Cash balance, September 30 4,030.31$

    Unadjusted Book Balance, September 30 3,361.22$Add: Receivable collected by bank 940.00

    Error: Check 633 recorded as 63.45 not 36.45 27.00

    Less: Bank service charge (8.40)

    NSF Check (289.51)

    True Cash balance, September 30 4,030.31$

    Green Shades Resorts, Inc.

    Bank Reconciliation Statement

    September 30, 2011

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    Adjusting the Books

    Every reconciling item that appears on the unadjustedbook balance section requires a journal entry to adjust

    the general ledger cash balance to the true cash balance.

    Account Title Debit Credit

    Cash 967.00

    Accounts Receivable 940.00

    Supplies Expense 27.00

    Bank service charge expense 8.40

    Accounts receivable 289.51

    Cash 297.91

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    Cash Short and Over

    When using a cash register, employeessometimes make mistakes in collecting cash or

    making change for customers. If the cash registerdoes not reconcile by a small amount at the endof the day, we use an account called cash short

    and over to force a balance.

    Assume a cash

    register was to havea balance of $500,but contained only$499 at the end of

    the day.

    Account Title Debit Credit

    Cash 499.00

    Cash short and over 1.00

    Sales 500.00

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    Using Petty Cash Funds

    A petty cash fund is used to make smallexpenditures that cannot wait for the formal check-writing process. The fund is operated on an imprest

    basis. This means that when the fund gets low oncash it is replenished. The petty cashier is alwaysresponsible for the cash in the fund. This is an

    excellent internal control.

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    Using Petty Cash Funds

    Record expenses paid from the petty cash fund.

    Account Title Debit Credit

    Misc. Expense 216.00

    Cash 216.00

    Treasurer preparesa $216.00 checkpayable to thepetty cashier.

    Petty cashier takesthe check to the bank

    and gets $216.00cash for the fund.

    The fund is now returned to its $300 balance.

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    6-12

    The Financial Analyst

    How can afinancial

    analyst knowthat a

    companyreally did

    follow GAAP? Certified Public Accountants

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    6-13

    Materiality and Financial Audits

    Auditors do not guarantee that financialstatements are absolutely correctonly

    that they are materiallycorrect.

    Material ItemAn error, or other

    reporting problem, that

    would influence thedecision of an average

    prudent investor.

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    6-14

    Types of Audit Opinions

    Unqualified Adverse

    Qualified Disclaimer