Chapter 8 Internal Control and Cash Objective:

- Internal Control 1. People 2. Mechanical 3. Documentation - Cash 1. Checking 2. Petty Cash 3. Over/Under account We are now entering into the interesting part of accounting and leaving the less interesting (aka boring) stuff. You will be able to easily relate to these future chapters, because you use them in your normal business environment. This chapter explains Internal Controls that are currently be used in most companies. Internal Control is defined as the plan of organization and all of the related methods and measures adopted within a business to: 1. Safeguard its assets from employee theft, robbery, and unauthorized use. 2. Enhance the accuracy and reliability of its accounting data by reducing the risk of errors and irregularities in the accounting system.

People
Establishment of responsibility is most effective when only one person is responsible for a given task. Example: one person per cash register draw, per shift. Segregation of duties, that is the work of one employee should provide a reliable basis for evaluating the work of another employee. When one employee is responsible for all of the related activities, the potential for errors and fraud is increased. Example: The person receiving the cash payment should not have access to the Cash account in the general ledger. Independent internal verification to review, comparison, and reconciliation of data prepared by one or several employees. Two additional internal controls dealing with people bonding and rotating employees. Bonding employees that handle cash. Rotate employees duties and requiring employees to take vacations deter theft, since they will not be able to permanently conceal their actions.

Mechanical
Mechanical controls will safeguard the accuracy and reliability of your system. Examples: locks on doors, safety deposit boxes, safes, burglar alarms, television monitors, garments sensors, time clocks, etc.

Documentation
Documentation should provide evidence that a transaction and/or event has occurred. Pre-numbered documents permit all documents in a series to be accounted for. Example: Pre-numbered checks and invoices. Cash Cash is the easiest asset to lose for a business. The more effective control over cash disbursement results when payments are made by check. The only exception is for small incidental amounts, paid out of petty cash. a. Checks - By paying liabilities by check, the business has a receipt (the cashed check) that the invoice was paid. The principle behind the checking account is the business gives their money (deposits) to a bank to pay the business bills, when requested by check. At the end of an accounting period, usually a month, the banks balance of your money and your Cash account should be equal. Most of the time they will not be equal. Therefore, you must explain the difference. The key to bank and cash reconciliation is to reconcile the banks balance first. Why? Because you know all the unknowns that effect the bank. There are only two unknowns to the bank; one is outstanding checks and the other is a late deposit. You know what checks have been written, which ones have been cashed and which ones are still outstanding. The total amount of these outstanding checks must be subtracted from the banks balance. When you wrote the check, that amount was immediately subtracted from your Cash account. When you made out the deposit slip you immediately increased our Cash account. However, you may have waited a day or two to actually deposit the money into the bank. The deposit may be in a different accounting period for the bank. Therefore, the late deposit must be added to the banks balance. Now the banks balance is correct. Next you need to reconcile your Cash account for any unknown: to you. VERY IMPORTANT, after you have reconciled your Cash balance, make adjusting entries to increase or decrease your Cash account for these unknowns. b. Petty Cash Small dollar amount expenses, should not be paid by check It cost between $25.00 to 35.00 to generate a check in most businesses. That includes the account payable clerks time to match up the receiving report with the invoice, a supervisors time to review it, maybe a managers time to review it and the computers time to process the check, etc. Therefore, for small amounts of expenses, it is better to pay with cash and make only one monthly check to reimburse the person responsible for the Petty Cash. c. Over/Under - Whenever, a person handles money, there is the probability of giving out

too much or not enough money, during a transaction. We accountants, have create an account called Over/Under account to record giving out too much or not enough money. This account does not have a normal balance of Cr or Dr. If we Dr (like an expense) this account, we have given out too much money. If we Cr (like revenue) this account, we did not give out enough money in change for the transaction. This is a temporary account and will be closed to the Incomes Summary at the end of the accounting period.

Summary
Assets need to be protected and use wisely at all times. Future chapters for Accounting 1A and 1B will deal with using assets wisely. Protection of asset should involve people, mechanical and documentation methods Cash is a very important asset to be protected. It is the easiest to steal (over/under account) and waste (writing a check for a small amount). End of Notes