Ch.6 Internal Control and Accounting for Cash

Transcription

1 Ch.6 Internal Control and Accounting for Cash Internal control and its objectives Understand cash and internal control procedures related to cash Accounting for petty cash Combined Journal Prepare a bank reconciliation 1

2 The Sarbanes-Oxley Act of 2002 Congress responded by passing the Sarbanes-Oxley Act of 2002 Among other provisions, companies are required to maintain strong and effective internal controls over recording business transactions and preparing financial statements 2

3 Internal Control The methods and procedures a business uses to internally protect its assets A good system of internal control is designed to Safeguard assets Ensure the accuracy and reliability of accounting records Promote operational efficiency Ensure compliance with laws and regulations 3

4 4 Objectives of Internal Control

5 Cash Includes currency, coins, checks made payable to the business, money orders, and amounts on deposit in banks and other financial institutions Generally considered the most precious of all assets Almost everyone wants it Easily taken if not protected 5

6 Steps in Controlling and Protecting Cash Establish Responsibility Only properly designated personnel are authorized to handle cash receipts. 6 Separation of Duties The individual who accounts for cash is different from the persons who receive and deposit cash.

7 Steps in Controlling and Protecting Cash Physical Protection Cash on hand should be in a secure location and cash should be deposited daily. 7 Documentation Cash register tapes, summaries of checks received, etc. should be kept to show the amount of cash received.

8 Steps in Controlling and Protecting Cash Independent Verification Cashiers check cash registers, supervisors count cash receipts daily, and company treasurer compares cash receipts with bank deposits. 8 Keep Only a Small Amount of Cash on Hand Only a small amount of cash should be maintained on hand to make small expenditures.

9 The Petty Cash Account To control cash, most businesses use bank checking accounts when making cash expenditures It is not practical to write checks for very small amounts 9 Most businesses maintain a petty cash fund which is a small amount of money kept in the office for making small expenditures

10 Establishing a Petty Cash Fund 1. Estimate the amount of cash needed in the fund. 2. A check for this amount is written payable to Petty Cash. 3. The check is then cashed, and the money is placed in a box, a drawer, or a safe to be used for the fund. 10

11 Establishing a Petty Cash Fund 4. The check is recorded in the journal by Debiting the Petty Cash account (an asset) Crediting the Cash account + asset - asset 11

12 Making Payments from the Petty Cash Fund Petty cashier (usually) is the only person who makes payments from the fund. Petty cash voucher Prepared for each payment Shows the details of the payment Serves as proof of payment 12

13 13 Petty Cash Voucher

14 Maintaining the Petty Cash Payments Record 14 Some firms prefer to record all petty cash payments on a single sheet called the petty cash payments record. A petty cash payments record is not a journal. It is an auxiliary record used as a basis for making a journal entry. An auxiliary record is a nonessential business record that is helpful in maintaining records that are essential.

15 Petty Cash Payments Record 15

16 Replenishing the Petty Cash Fund Normally replenished at month-end or when it nears depletion or reaches a minimum amount When replenished, the Petty Cash account is NOT debited The accounts debited are determined by analyzing the petty cash vouchers The Cash account is credited 16

17 Example Replenishing the Petty Cash Fund Here is a list of expenses and amounts taken from the petty cash payments record. 17 Expense Amount Office Supplies Expense $15.00 Miscellaneous Expense 8.00 Postage Expense Cathy Nash, Drawing Advertising Expense Total $68.84 Prepare the journal entry to replenish the petty cash fund.

18 Example Replenishing the Petty Cash Fund + expense + expense + expense + drawing + expense - asset 18

19 Please keep in your mind! The Petty Cash account is debited only when the fund is being established or when the amount in the fund is increased. The Petty Cash account is credited only when the amount of the fund is decreased or eliminated completely. 19

20 The Change Fund Account Businesses that have many cash transactions usually establish a change fund. An amount of money that is placed in the cash register drawer Used to make change for customers who pay in cash The establishment of a change fund is recorded by Debiting the Change Fund account 20 Crediting the Cash account

21 Example Establishing the Change Fund Assume a business decides to establish a change fund on March 23 for $125. The following journal entry would be made. + asset - asset 21

22 The Cash Short and Over Account A cash shortage results when the amount of cash in the cash register is less than the amount of cash sales rung up on the register. A cash overage results when the amount of cash in the cash register is more than the cash sales rung up on the register. 22

23 The Cash Short and Over Account Used to bring the cash on hand into agreement with the cash sales Used to handle both shortages and overages Does NOT have a normal balance o If it has a debit balance, considered an expense 23 o If it has a credit balance, considered revenue

24 Example Assume cash in the cash register amounts to $598 and sales based on the cash register tapes amounts to $600. The following entry would be prepared. + asset no normal balance + revenue 24

25 Example Assume cash in the cash register amounts to $774 and sales based on the cash register tapes amounts to $769. The following entry would be prepared. + asset + revenue no normal balance 25

26 Combined Journal A multicolumn journal used by small businesses to help save journalizing and posting time AKA combination journal Has two special columns for recording debits and credits to Cash, and various other special columns for recording transactions that occur often Has two general columns for recording transactions that occur less often 26

27 Combined Journal 27

28 Designing a Combined Journal 28 Designed to fit the individual needs of the business using it Special columns should be set up for those accounts that are most often affected by business transactions Cash Debit Column Cash Credit Column Accounts Payable Debit Column Accounts Payable Credit Column Fees Earned Credit Column Salaries Expense Debit Column General Debit and Credit Columns When the month s transactions have been journalized, each column of the combined journal should be totaled

29 Recording Business Transactions in a Combined Journal Two transactions to record on Jun. 1: 1. Issued Check No. 120 for June rent, $ Received cash for services performed, $400 On the next slide, we ll see these transactions along with all of Diana s transactions for the month of June recorded in a combined journal: 29

30 Recording Business Transactions in a Combined Journal 30

31 Proving the Combined Journal Total and prove the equality of the debits and credits. Diana adds her total debit columns and her total credit columns as shown below: Column Totals Column Titles Debit Credit Cash $ 4,696 $ 6,375 General 16,775 11,200 Accounts Payable 1,650 2,350 Fees Earned 0 4,496 Salaries Expense 1,300 0 Totals $ 24,421 $ 24,421 31

32 Posting the General Columns 32 The procedure for posting amounts in the General Debit and Credit columns is similar to posting from a two-column journal. The steps to complete the posting process: 1. Enter the date of the entry in the Date column of the appropriate account. 2. Enter the amount of the entry in the Debit column of the appropriate account. 3. Calculate the new balance of the account by adding the current posting to the previous balance. 4. Enter the reference CJ and the page number of the combined journal in the P.R. column of the appropriate account. 5. Enter the number of the account in the P.R. column of the combined journal.

33 Posting the General Columns Let s look at Diana s first transaction in her combined journal to record rent paid of $600 for the current month. The steps to complete the posting process for the first transaction are: 6. Enter the date of the entry (Jun. 1) in the Date column of the Rent Expense account. 7. Enter the amount of the entry ($600) in the Debit column of the Rent Expense account. 8. Calculate the new balance of the Rent Expense account by adding the current posting to the previous balance: $600 + $3,000 = $3, Enter the reference CJ and the page number of the combined journal (6) in the P.R. column of the Rent Expense account Enter the number of the Rent Expense account (516) in the P.R. column of the combined journal.

34 Posting an Entry from the General column of a Combined Journal

35 Posting the Totals of the Special Columns Special columns are used only for recording debits or credits to specific accounts. Only the TOTALS of the special columns are posted, not the individual numbers in the columns. The number of each account to which a posting is made is written in parentheses directly below the special column total. 35

36 Posting the Special Columns of a Combined Journal 36

37 Bank Checking Accounts Bank Checking Account an amount of cash on deposit with a bank that the bank must pay at the written order of the depositor American Bankers Association (ABA) Transit Number a number printed on checks and deposit slips that identifies the bank and the area in which the bank is located as well as other information 37

38 The Signature Card Lists personal information and contains the signature of the person or persons who are authorized to write checks on the account 38 Kept on file by the bank as an aid in identifying possible forgeries

39 Deposit Slip Prepared when coin, currency, or checks are deposited in a bank account Indicates Name of the depositor Account number Summarizes the amount deposited 39

40 Deposit Slip ABA transit number 40

41 Endorsement A signature or stamp on the back of the check Transfers ownership of the check to the bank (or to another person or to an individual) Authorizes payment of the check 41

42 Common Forms of Endorsement Blank Endorsement Full Endorsement Restrictive Endorsement 42

43 Writing Checks A check is a written order directing a bank to pay a specified sum of money to a designated person or business. The person or business who writes a check is called the drawer. The bank on which the check is written is called the drawee. The person or business to whom a check is made payable is called the payee. 43

44 The Bank Statement Shows what the bank did with the customer s money Shows the account s Beginning Balance Ending Balance Cash Receipts Payments Charges 44

45 Reconciling the Bank Statement The balance shown on the bank statement and the balance in the checkbook normally do not agree at the end of the month Bank reconciliation the process of making the bank statement agree with the checkbook balance 45

46 Reconciling the Bank Statement Common reasons why the bank statement balance may not agree with the checkbook balance include: Outstanding checks Deposits in transit Service charges and other bank fees Errors, either the depositor s or the bank s Bank collections NSF checks 46

47 Steps in Reconciling the Bank Statement Add the amount of deposits in transit to the bank statement balance Subtract the amount of outstanding checks from the bank statement balance Add to the checkbook balance the amount of any interest earned on the account or any collection made by the bank for the depositor Subtract any charges appearing on the bank statement from the checkbook balance 47

48 Example A Completed Bank Reconciliation Statement 48

49 Example Updating Cash Records All checkbook adjustments require a journal entry. Assume the bank deducted $12 for its service charge on the depositor s checking account. The following journal entry would be required: + expense - asset 49