Chapter 6 SB

Cash Over and Short

Income statement account used to record cash overages and cash shortages arising from errors in cash receipts or payments.

the internal control procedure of insuring assets and bonding key employees

Insuring assets against casualty and bonding employees who handle cash, reduces risk of loss.

Identify the item below that would be added to the book balance.

Interest earned

why are liquid assets are needed in a business?

Liquid assets must be readily available to settle near-term debt or obligations.

At the end of the month, Brown Co.'s petty cash fund contains $4 in cash and receipts for postage of $50 and delivery expenses of $46. It started out with $100 in the fund at the beginning of the month. Demonstrate the journal entry to replenish the account

cash is credited for $96

A good internal control to protect cash is to make cash payments using

checks

services provided by a bank

- A bank account is a record set up by a bank for a customer. - Each bank deposit is supported by a deposit ticket. - To withdraw money from an account, the depositor can use a check.

Cash Over and Short account

- A debit balance reflects an expense. - It is an income statement account. - It records the effects of cash overages and cash shortages.

Preparation of bank reconciliation

- Add deposits in transit to the balance per bank. - Subtract any outstanding checks from the balance per bank. - Compute the adjusted book balance. - Compute the adjusted bank balance.

some of the basic internal control guidelines which should be in place to protect a business's cash

- Cash receipts are promptly deposited in a bank. - Handling cash is separate from recordkeeping of cash. - Cash payments are made by check.

Banking Terms

- Deposit ticket: Lists currency, coins and checks deposited into an account - Check: A document signed by the depositor instructing the bank to pay a specified amount of money - Bank account: Used to deposit money for safekeeping and help control withdrawals. - Remittance advice: Explains the reason for payment - Electronic funds transfer: Electronic transfer of cash from one party to another

what would show up on a monthly bank statement

- End-of-period balance in the account - Checks and other debits decreasing the account during the period - Beginning-of-period balance in the account - Deposits and other credits increasing the account during the period

Limitations of Internal Control Policies and Procedures

- Human error: Can occur from carelessness, misjudgment or confusion - Human fraud: Involves intent by people to defeat internal controls for personal gain - Cost-benefit principle: Dictates that the costs of internal controls must not exceed their benefits - Internal control environment: Management must convey commitment to internal control policies and procedures

Determine which of the items below would appear in the Deposits and Credits column of a bank statement and would cause an increase in the account's balance.

- Interest paid by the bank on the bank account balance - A note collected by the bank on behalf of the account owner - Deposits made during the month

describe a petty cash fund

- It is an asset reported on the balance sheet. - It is used to avoid the time and cost of writing checks for small amounts. - It is established to pay for small payments like postage, shipping fees, etc.

items that would be subtracted from the book balance on a bank reconciliation.

- Monthly check charges assessed by the bank - Monthly bank service charge - NSF customer check

items that would be added to the book balance on a bank reconciliation.

- Note collected by the bank for the depositor - Interest earned on the depositor's account

Identify the factors that cause the bank statement balance to differ from the depositor's book balance

- Outstanding check: A check written by the depositor that has not yet been received by the bank for payment - Deposit in transit: Deposit made and recorded by the depositor, but not yet recorded on the bank statement -NSF check: A check written by a customer who does not have enough money in his account to cover the check - Bank charges: Service fees charged by the bank

The goals and principles of cash management are:

- Plan cash receipts to meet cash payments when due. - Keep a minimum level of cash necessary to operate. - Money should be spent only when it is available. - Encourage quick collection of receivables.

The internal control procedure of maintaining adequate records

- Reliable records are a source of information that managers use to monitor activities. - Keeping detailed records makes it unlikely that assets are lost or stolen without detection.

A cash register tape reflected total sales equaling $100, but the cash in the cash register drawer equaled $105

- The Cash account will be debited for $105. - The Cash Over and Short account will be credited for $5. - The extra $5 collected will be treated as a miscellaneous revenue. - The Sales account will be credited for $100.

what happens if a petty cash account is not replenished at the end of the accounting period

- The balance sheet would show an overstated cash asset. - The income statement would reflect a net income amount that was too high. - Expenses would not be recorded in the period in which they were incurred.

Petty cash receipt

- The petty cashier must present all paid receipts to the company cashier in order to replenish the fund. - A petty cash receipt will have a signature line for the person receiving a disbursement from the fund. - A petty cash receipt is sometimes called a petty cash ticket. - Any person wishing to withdraw funds from a petty cash fund must complete a petty cash receipt- - .

describes how petty cash fund is created and used in a business.

- The sum of all petty cash receipts plus the remaining cash should equal the total of the fund amount at any given time. - A check is drawn by the company cashier to establish the petty cash fund. - The petty cashier is responsible for making payments from the petty cash fund. - The petty cashier is responsible for keeping the cash in the fund safe. - Only the petty cashier is responsible for paying cash from the fund.

how is a petty cash fund created and used in a business?

- The sum of all petty cash receipts plus the remaining cash should equal the total of the fund amount at any given time. - The petty cashier is responsible for making payments from the petty cash fund. - The petty cashier is responsible for keeping the cash in the fund safe. - A check is drawn by the company cashier to establish the petty cash fund.

why management uses internal controls

- Uphold company policies. - Promote efficient operations. - Protect assets. - Ensure reliable accounting.

why is a bank reconciliation used

- We must reconcile the balance of the bank's records and the Cash account in the general ledger and explain or account for any differences in the two. - The bank reconciliation is useful in proving the accuracy of the Cash account in the general ledger. - Timing differences between the bank statement and the depositor's records are reflected in the bank reconciliation.

when is the Petty Cash fund debited or credited

- When the account is increased - When the account is created - When the account is reduced

The triple threat of fraud involves

- rationalization - opportunity - pressure

the steps (in order) to prepare monthly bank reconciliation

1. enter the bank statement balance then add any deposits in transit and subtract any outstanding checks 2. compute the adjusted bank balance 3. enter the company's book balance 4. add any unrecorded cash receipts, interest earned, and errors understating the book balance 5. subtract any unrecorded bank fees, NSF checks, and errors overstating the book balance 6. copout the adjusted book balance and compare it to the adjusted bank balance to verify equality

Principles of Internal Control

1. establish responsibilities 2. maintain adequate records 3. insure assets and bond key employees 4. separate record keeping from custody of assets 5. divide responsibility for related transactions 6. apply technological controls 7. perform regular and independent reviews

what would cause an increase in the monthly bank statement balance.

Cash deposits made by the account owner

Jackson Co. needs to replenish its petty cash fund. Currently, it contains $11 in cash and receipts for supplies of $40 and delivery expenses of $49. The fund was initially established with $100. Demonstrate the journal entry to replenish the account

Cash is credited for $89. Delivery Expense is debited for $49. Supplies Expense is debited for $40.

What is the purpose of internal controls?

Companies create internal controls to protect assets and ensure reliable accounting.

The cash in a cash register equaled $100, but the record of cash receipts/sales equaled $102. what would be the correct entries

Debit Cash $100; debit Cash Over and Short $2; and credit Sales $102.

Identify the item below that would be subtracted from the book balance on a bank reconciliation.

NSF check

Select the items below that would cause the bank statement balance to differ from the depositor's book balance. - Bank Service charges, Deposit in transit, Cleared checks - Cleared checks, Bank service charge, NSF check - NSF check, Outstanding checks, Supplies expenses - NSF check, Deposit in transit, interest paid by ban

NSF check, Deposit in transit, interest paid by bank

XYZ Co. decided to create a petty cash fund. They estimated that $100 would be needed in the fund. Demonstrate the correct journal entry to create the account

Petty Cash is debited for $100.

Jackson Brothers decided to create a petty cash fund. They estimated that $200 would be needed in the fund. Demonstrate the correct journal entry to create the account

Petty Cash is debited for $200; Cash is credited for $200.

liquid assets

Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.

what type of information is on a monthly bank statement

The information on the bank statement reflects the bank's records of the depositor's account.

Bonding employees who handle cash is important because it:

discourages employee theft

Identify the item below that would be added to the book balance. - Outstanding checks - Interest earned - NSF check - Bank service charge

intrest earned

Good recordkeeping helps protect assets and helps managers:

monitor company activities

Responsibility for a task should be clearly established and assigned to:

one person

Liquidity

refers to an asset which can be readily used to pay for liabilities

A bank reconciliation is a(n) ___________________ (entry/charge/report) explaining any differences between the ___________________ (checking/subsidiary/sales) account balance according to the depositor's records and the balance reported on the ___________________ (income/financial/bank) statement.

report, checking , bank

A petty cash fund is used for ____________________ (large/small) payments in order to ____________________ (increase/avoid) the time and cost of writing checks for ___________________ (large/small) amounts.

small, avoid, small

Proper internal control means that responsibility for a _________________ (task/shortage/sale) is clearly _________________ (posted/established/compensated) and assigned to one person.

task, established