Accounting

Principles

Second Canadian Edition

Weygandt Kieso Kimmel Trenholm

Prepared by:

Carole Bowman, Sheridan College

CHAPTER

8
INTERNAL CONTROL
AND CASH

INTERNAL CONTROL
Internal control consists of the policies and
procedures adopted within a business to:
1. optimize resources, and
2. prevent and detect errors and irregularities.
3. Safeguard its assets
4. Maintain the accuracy and reliability of
its accounting records

ILLUSTRATION 8-1

PRINCIPLES OF INTERNAL CONTROL

- Authorization
- Segregation of duties
- Documentation Procedures
- Safeguarding Assets and
Records
- Independent verification

PRINCIPLES OF INTERNAL CONTROL

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 CONTROL

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 CONTROL

Independent verification:
External verification indicates whether
the companys 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.

ILLUSTRATION 8-3
RELATIONSHIP BETWEEN SEGREGATION OF DUTIES
AND INDEPENDENT INTERNAL VERIFICATION
Segregation
of Duties

Accounting Employee A

Assistant Cashier B

Maintains cash balances per book

Maintains custody of cash on hand

Assistant Comptroller C
Makes monthly comparisons: reports any irreconcilable differences to comptroller
Independent Internal Verification

LIMITATIONS OF INTERNAL CONTROL

Costs vs. benefits

(Costs should not exceed benefits)

Collusion
(2 or more people work together to get
around control)
Size of business
Human element
(Ineffectiveness of employees)

CASH
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.

CONTROL OVER CASH RECEIPTS

Only designated personnel should be

authorized to handle or have access to cash

receipts.
Different individuals should:
1. receive cash
2. record cash receipt transactions
3. have custody of cash

CONTROL OVER CASH RECEIPTS

Documents should include:

1. remittance advices
2. cash register tapes
3. 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 RECEIPTS

Daily cash counts and daily comparisons of

total receipts should be made.

All personnel who handle cash receipts
should be bonded (i.e. insured against
misappropriation of assets due to dishonesty
and screened by insurance company) and
required to take vacations (i.e. rotating
employee duties).
An important tool in control of over-thecounter receipts is cash registers that are
visible to customers.

CONTROL OVER
CASH DISBURSEMENTS
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 DISBURSEMENTS
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 DISBURSEMENTS
Each cheque should be compared with the

approved invoice before it is issued.

Following payment, the approved invoice
should be stamped PAID.

PETTY CASH FUND

A

petty cash fund is used to pay relatively

small amounts.
Operation of the fund, often called an
imprest system, involves
1. establishing the fund,
2. making payments from the fund, and
3. replenishing the fund.
Accounting entries are required when
1. the fund is established,
2. the fund is replenished, and
3. the amount of the fund is changed.

ESTABLISHING THE FUND

GENERAL JOURNAL
Date
Mar. 1

Account Titles and Explanation

Petty Cash
Cash
To establish a petty cash fund.

Debit

Credit

100

When the fund is established, a cheque

payable to the petty cash custodian is issued
for the stipulated amount.

100

REPLENISHING THE FUND

(Correct Petty Cash Balance)
GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation

Postage Expense
Freight Out
Miscellaneous Expense
Cash
To replenish petty cash fund.

Debit
44
38
5

Credit

87

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.

REPLENISHING THE FUND

(Short of Petty Cash Balance)
GENERAL JOURNAL
Date
Mar. 15

Account Titles and Explanation

Postage Expense
Freight Out
Miscellaneous Expense
Cash Over and Short
Cash
To replenish petty cash fund/

Debit
44
38
5
1

Credit

88

On March 15 the petty cash custodian requests a

cheque for $88. The fund contains $12 cash ($1
short) and petty cash receipts for postage, $44,
freight out, $38, and miscellaneous expenses, $5.

USE OF A BANK
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.

BANK STATEMENTS
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 days
transactions

ACCOUNT
STATEMENT

W. A. LEE COMPANY
500 QUEEN STREET

Statement Date/Credit
Line Closing Date

FREDERICTON, NB, E3B 5C2

April 30, 2003

457923
ACCOUNT NUMBER

Balance

Deposits and Credits

Last Statement

No.

Total Amount

13,256.90

20

34,805.10

Balance

Cheques and Debits

Total Amount

This Statement

32,154.55

15,907.45

26

DEPOSITS AND
CHEQUES AND DEBITS
CREDITS
DAILY BALANCE
Date No. Amount
Date
Amount Date Amount
4-2
435
644.95
4-5
436 3,260.00
4-4
437 1,185.79
4-3
438
776.65
4-8
439 1,781.70
4-7
440 1,487.90
4-8
441 2,420.00
4-11
442 1,585.60
4-12
443 1,226.00
=================
4-29
NSF
425.60
4-29
459 1,080.30
4-30
DM
30.00
4-30
461
620.15

4-2
4,276.85
4-3
2,137.50
4-5
1,350.47
4-7
982.46
4-8
1,320.28
4-9 CM
1,036.00
4-11
2,720.00
4-12
757.41
4-13
1,218.56
==============
4-27
1,545.57
4-29
2,929.45
4-30
2,128.60

Symbols:

4-2
16,888.80
4-3
18,249.65
4-4
17,063.86
4-5
15,154.33
4-7
14,648.89
4-8
11,767.47
4-9
12,802.47
4-11
13,936.87
4-12
13,468.28
=============
4-27
13,005.45
4-29
14,429.00
4-30
15,907.45

CM

Credit Memo

EC

Error Correction

NSF

Not Sufficient Funds

DM

Debit Memo

INT

Interest Earned

SC

Service Charge

Reconcile Your
Account Promptly

RECONCILING 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.

Terms
Deposits in transit
Deposits recorded by depositor that have

not been recorded by bank

Outstanding cheques
Cheques written (issued) and recorded
by company that have not been presented
to/paid by bank
Adjusted balance
Reconciled or correct cash balance

Terms
Debit memoranda
Charges against depositors account

(e.g. service charges, RC

(returned)/NSF (insufficient funds)
cheques)
Credit memoranda
Amounts that increase depositors
account (e.g., interest earned)

Bank Reconciliation
Procedures
$ 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

Reconciling Journal Entries

Books

Each reconciling item in

determining the adjusted

balance per books MUST be
journalized and posted
Bank
Do NOT journalize any
entries on bank side

REPORTING CASH
Cash reported on the Balance Sheet

includes:
1. Cash on hand
2. Cash in banks
3. Petty cash
Cash is listed first in the balance sheet
because it is the most liquid asset.

CASH EQUIVALENTS
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.

USING THE INFORMATION IN THE

FINANCIAL STATEMENTS

Most important asset

Pervasive impact
Vulnerable to theft or
misuse
Balancing act needed to
ensure sufficient, but not
excess, quantity

USING THE INFORMATION IN THE

FINANCIAL STATEMENTS
Cash Flow Statement :

shows where cash came from and what is

was used for.
Management report:

states managements responsibility for

internal controls.