Accounting 201 Chapter 6 Terms and Concepts

How is a petty cash fund is created and used in a business

A check is drawn by the company cashier to establish the petty cash fund. The petty cashier is responsible for keeping the cash in the fund safe. 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.

Check

A document signed by the depositor instructing the bank to pay a specified amount of money

Describe a petty cash receipt.

Any person wishing to withdraw funds from a petty cash fund must complete a petty cash receipt. 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. The petty cashier must present all paid receipts to the company cashier in order to replenish the fund.

Human error

Can occur from carelessness, misjudgment or confusion

Jackson Brothers established a petty cash fund of $200 at the beginning of the year, but it decides to reduce the amount in the fund to $130. Demonstrate the correct journal entry to reduce the amount in the account by choosing the correct action from those given below

Cash is debited for $70 and Petty Cash is credited for $70.

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

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

Cost-Benefit Principle

Dictates that the costs of internal controls must not exceed their benefits

Electronic funds transfer

Electronic transfer of cash from one party to another

What are principles of internal control?

Est responsibilities, maintain adequate records, insure assets and bond key employees, separate recordkeeping from custody of assets, divide responsibility for related transactions, and perform regualr, apply technological controls, divide responsibility for related transactions, and independent reviews

Describe the internal control principle of dividing responsibility for related transactions

Examples of transactions with divided responsibility are placing inventory orders and paying vendors. This principle is often called separation of duties. This principle helps to make sure that the work of one individual acts as a check on another individual's work on a related transaction.

Remittance advice

Explains the reason for payment

Describe the internal control procedure of insuring assets and bonding employees

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

human fraud

Involves intent by people to defeat internal controls for personal gain

Describe a Petty Cash fund

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

Describe the goals and principles of cash management

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

What is the internal control procedure of maintaining adequate records?

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

Explain why liquid assets are needed in a business

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

Deposit Ticket

Lists currency, coins and checks deposited into an account

Internal control environment

Management must convey commitment to internal control policies and procedures

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.

Why would management use internal controls?

Promote efficient operations, ensure reliable accounting methods, protect assets, and uphold company policies

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

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

Describe the internal control principle of applying technological controls

Technological controls, such as time clocks and cash registers, improve the effectiveness of controls.

Explain how technology has impacted internal control systems

Technology has encouraged the growth of e-commerce, so there is a higher risk of credit card number theft. Technologically advanced systems can record who made entries, the date and time of the entry and the source of the entry. Technology has reduced the number of processing errors. Technology can be designed to require the use of password before access to the system is granted.

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. Expenses would not be recorded in the period in which they were incurred. The income statement would reflect a net income amount that was too high.

What are good internal control designed to protect over-the-counter cash receipts

The clerk and the cashier have access to cash, but not to the accounting records. Clerks should be required to give the customer a receipt for each sale.

What is the purpose of internal controls?

To help managers know if the business is receiving the assets and services it has paid for, companies create internal controls to protect assets and ensure reliable accounting

True or false: An owner of a small company usually knows if the business is receiving assets and services the company paid for

True

What are examples of internal controls designed to control cash payments?

Use of a petty cash system. All payments should be made by check. Use of a voucher system. Only authorized individuals should be allowed to sign checks

Bank account

Used to deposit money for safekeeping and help control withdrawals.

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

checks

Bonding employees who handle cash is important because it

discourages employee theft

A blockchain ledger is more secure because

it is impossible to modify the ledger without a detailed record of changes. it is continuously updated. it is continuously verified

Good record keeping helps protect assets and helps managers

monitor company activities

What are types of technological impacts related to internal control

more extensive testing of records reduced processing errors new evidence of processing separation of duties

Liquidity refers to a company's ability to pay for its _____ -term obligations

near

A person who has access to an asset must ______ access to that asset's accounting records

not have

Responsibility for a task should be clearly est and assigned to

one person

The internal control of _____ of duties means that responsibility for a transaction should be divided between two or more individuals

separation/segregation

To maintain control of cash payments, all payments should be made by check except

small payments made by petty cash

An ID scanner is a type of ____ control

technological

In addition to the cashier and clerk who have access to the cash a third employee should have access to

the records for cash, but not the actual cash