ASSETS: CASH

When a company receives its bank statement,

it must reconcile the balance shown by the bank with the cash balance in the company's books.

Internal Controls: control environment

reflects the overall attitude, awareness, and actions of the board of directors, management, and stockholders.

1. Segregation of Employee Duties

requires that someone other than the employee responsible for safeguarding an asset must maintain the accounting records for that asset. Also, it may be appropriate for employees to share responsibilities for related transactions so that one employee's work serves as a check on the work of other employees.

What's on a check that most depositors use?

serially numbered checks pre-printed with information about the depositor, such as name, address, and telephone number. Often a business check has an attached remittance advice.

Check transaction involves three parties:

the bank, the payee (party to whom the check is made payable), and the drawer (depositor).

After a time, if the petty cash custodian finds that the petty cash fund is larger than needed,

the excess petty cash should be deposited in the company's checking account. Example: Cash 50 Petty Cash 50 or if the fund is too little then you do the opposite entry.

Companies protect their assets by

(1) segregating employee duties, (2) assigning specific duties to each employee which they can perform or are trained to perform, (3) rotating employee job assignments, and (4) using mechanical devices.

Deposits in transit, outstanding checks, and bank service charges usually account for the difference between the company's Cash account balance and the bank balance.

(These same items can cause a difference between your personal checkbook balance and the balance on your bank statement.)

When the accounting department records a purchase transaction, it should receive copies of the following four documents:

1. A purchase requisition is a written request from an employee inside the company to the purchasing department to purchase certain items. 2. A purchase order is a document sent from the purchasing department to a supplier requesting that merchandise or other items be shipped to the purchaser. 3. An invoice is the statement sent by the supplier to the purchaser requesting payment for the merchandise shipped. 4. A receiving report is a document prepared by the receiving department showing the descriptions and quantities of all items received from a supplier in a particular shipment.

Internal control not only prevents theft and fraud but also serves many purposes:

1. Companies must implement policies requiring compliance with federal law. 2. Personnel must perform their assigned duties to promote efficiency of operations. 3. Correct accounting records must supply accurate and reliable information for the preparation of the financial statements and related reports.

Internal Controls for Computerized Financial Records

1. Control computer access by placing the computer in an easily secured room and allowing only persons authorized to operate the computer to enter the room. 2. Restrict the access of systems specialists (who operate the computer) to software programs and the access of programmers to the computer. This policy prevents the running of unauthorized, altered programs. 3. Require the use of passwords to access sensitive company data and confidential personal data. Change the passwords as necessary.

Five Components of Internal Controls

1. Control environment, 2. Risk assessment, 3. Control activities, information and 4. Communication, monitoring

Bank statements typically include the following data:

1. Deposits made to the checking account during the period. 2. Checks paid out of the depositor's checking account by the bank during the period. These checks have cleared the bank and are canceled. 3. Other deductions from the checking account for service charges, NSF (not sufficient funds) checks, safe-deposit box rent, and check printing fees. 4. Other additions to the checking account from proceeds of a note collected by the bank for the depositor and interest earned on the account.

Paid Checks

1. If canceled checks are returned with the bank statement, or a copy of each cancelled check is included with the bank statement, compare them to the bank statement to be sure both amounts agree. 2. Then, sort the checks in numerical order. 3. Next, determine which checks are outstanding.

Management have the following specific responsibilities regarding the internal control structure:

1. Management holds ultimate responsibility for establishing and maintaining an effective internal control structure. Through leadership and example, management demonstrates ethical behavior and integrity within the company.

Internal Control Pracices

1. Separation of duties 2. Physical asset protection 3. Independent checks 4. Employee vacations

The bank reconciliation has two main sections.

1. The top section begins with the balance on the bank statement. 2. The bottom section begins with the balance on the company's books. After the company makes the required journal entries to the book balance, the bank and book balances for cash should be the same.

Internal Controls

1. control environment, 2. accounting system, and 3. control procedures.

In a personal computer environment, the following controls can be useful:

2. Require computer users to have tight control over storage of programs and data. Just as one person maintains custody over a certain set of records in a manual system, in a computer system one person maintains custody over certain information (such as the accounts receivable subsidiary ledger). Make backup copies that are retained in a different secured location. 3. Require passwords (kept secret) to gain entry into data files maintained on the hard drive. 4. In situations where a local area network (LAN) links the personal computers into one system, permit only certain computers and persons in the network to have access to some data files (the accounting records, for example).

The Bank Checking Account

A checking account is a money balance maintained in the bank; it is subject to withdrawal by the depositor, or owner of the money, on demand.

Errors

A common error by depositors is recording a check in the accounting records at an amount that differs from the actual amount. For example, a $47 check may be recorded as $74. Although the check clears the bank at the amount written on the check ($47), the depositor frequently does not catch the error until reviewing the bank statement or canceled checks.

Often a business check has an attached remittance advice. What is a remittance?

A remittance advice informs the payee why the drawer (or maker) of the check is making this payment. Before cashing or depositing it, the payee detaches the remittance advice from the check.

Wire Transfer

A wire transfer of funds is an interbank transfer of funds by telephone.

Cash Controls

Account for all cash transactions accurately so that correct information is available regarding cash flows and balances. Make certain that enough cash is available to pay bills as they come due. Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest. Prevent loss of cash due to theft or fraud.

2. Risk Assessment:

After the entity sets objectives, the risks (such as theft and waste of assets) from external and internal sources must be assessed. Examining the risks associated with each objective allows management to develop the means to control these risks.

5. Monitoring:

After the internal control structure is in place, the firm should monitor its effectiveness so that it can make changes before serious problems arise. In testing components of the internal control structure, companies base their thoroughness on the risk assigned to those components.

The petty cash custodian presents the vouchers to the employee having authority to order that the fund be reimbursed.

After the vouchers are examined, if all is in order, that employee draws a check to restore the fund to its original amount.

4. Internal Auditing

All companies and nonprofit organizations can benefit from internal auditing. However, internal auditing is especially necessary in large organizations because the owners (stockholders) cannot be involved personally with all aspects of the business.

Both certified checks and cashier's checks are "liabilities" of the issuing bank rather than the depositor.

As a result, payees usually accept these checks without question.

The custodian should prepare a voucher for each disbursement and staple any invoices for expenditures to the petty cash voucher.

At all times, the employee responsible for petty cash is accountable for having cash and petty cash vouchers equal to the total amount set up or established in the petty cash fund.

Auditors have the following specific responsibilities regarding the internal control structure:

Auditors within the organization evaluate the effectiveness of the internal control structure and determine whether company policies and procedures are being followed. All employees are part of a communications network that enables an internal control structure to work effectively.

In the general ledger, a company usually maintains two types of cash accounts which are:

Cash and Petty Cash On the company's balance sheet, it combines the balances of these two accounts into one amount reported as Cash.

4. Use of Mechanical Devices

Companies use several mechanical devices to help protect their assets. Check protectors (machines that perforate the check amount into the check), cash registers, and time clocks make it difficult for employees to alter certain company documents and records.

1. Comparing deposits

Compare the deposits listed on the bank statement with the deposits on the company's books. To make this comparison, place check marks on the bank statement and in the company's books by the deposits that agree.

Petty Cash Rules

Debited to establish Debited to increase Credited to decrease Credited to terminate

Normally, deposits in transit occur only near the end of the period covered by the bank statement.

For example, a deposit made in a bank's night depository on May 31 would be recorded by the company on May 31 and by the bank on June 1. Thus, the deposit does not appear on a bank statement for the month ended May 31.

Checks issued but haven't been returned by the bank are the outstanding checks.

If the bank does not return checks but only lists the cleared checks on the bank statement, determine the outstanding checks by comparing this list with the company's record of checks issued. Some checks written long ago are still outstanding.

Also check the deposits in transit listed in last month's bank reconciliation against the bank statement.

Immediately investigate any deposit made during the month but missing from the bank statement (unless it involves a deposit made at the end of the period).

Computerized accounting systems do not lessen the need for internal control.

In fact, access to a computer by an unauthorized person could result in significant theft in less time than with a manual system.

4. Information and Communication:

Information relevant to decision-making must be collected and reported in a timely manner. The events that yield these data may come from internal or external sources. Communication throughout the entity is important to achieve management's goals. Employees must understand what is expected of them and how their responsibilities relate to the work of others. Communication with external parties such as suppliers and shareholders is also important.

Sarbanes-Oxley Act of 2002

Internal controls in place and verified by auditor

Remember that all items shown on the bank reconciliation as adjustments of the book (ledger) balance require journal entries to adjust the Cash account.

Items appearing as adjustments to the balance per bank statement do not require entries by the depositor. Of course, you should call any bank errors to the bank's attention.

Control Over Cash Disbursements

Make all disbursements by check or from petty cash. Obtain proper approval for all disbursements and create a permanent record of each disbursement. Require all checks to be serially numbered and limit access to checks to employees authorized to write checks. Require two signatures on each check over a material amount so that one person cannot withdraw funds from the bank account. Arrange duties so that the employee who authorizes payment of a bill does not sign checks. Otherwise, the checks could be written to friends in payment of fictitious invoices. Require approved documents to support all checks issued. Instruct the employee authorizing cash disbursements to make certain that payment is for a legitimate purpose and is made out for the exact amount and to the proper party.

Check the bank debit and credit memos with the depositor's books to see if they have already been recorded.

Make journal entries for any items not already recorded in the company's books.

What kind of computers do companies use?

Many smaller companies use microcomputers instead of a mainframe or a minicomputer. Large companies might also supply certain employees with personal computers. The use of personal computers changes the control environment somewhat.

Checks outstanding as of the beginning of the month appear on the prior month's bank reconciliation.

Most of these have cleared during the current month; list those that have not cleared as still outstanding on the current month's reconciliation.

To determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure.

Next, that person stamps or defaces the petty cash vouchers to prevent reuse. The journal entry to record expenditures from the fund would debit the various accounts indicated by the summary and credit Cash.

Source Documents and Internal Controls

One or more business documents support most accounting transactions. These source documents are an integral part of the internal control structure. For optimal control, source documents should be "(serially numbered.)" Since source documents serve as documentation of business transactions, from time to time firms check the validity of these documents.

Petty Cash Funds

Permits small cash disbursements and still maintains adequate control over cash. of a round figure such as $100 or $500.

Petty Cash Entry

Petty Cash 100 Cash 100

Cash Control Principles

Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before a record is made of the receipt. Once a record is made, it is easier to trace a theft. Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on the next business day. Undeposited cash is more susceptible to misappropriation. Arrange duties so that the employee who handles cash receipts does not record the receipts in the accounting records. This control feature follows the general principle of segregation of duties, as does the next principle. Arrange duties so that the employee who receives the cash does not disburse the cash. This control measure is possible in all but the smallest companies.

4. In December 1977, Congress enacted the Foreign Corrupt Practices Act (FCPA).

Publicly held corporations internal control structure must satisfy the requirements of this federal law.

The depositor's bank deducts the amount of the returned check from the depositor's checking account.

Since the customer still owes the depositor money, the depositor restores the amount of the NSF check to the account receivable for that customer in the company's books.

The bank statement example contains examples of debit and credit memos

Some banks no longer mail these documents to the depositor and rely instead on explanations in the bank statements

3. Rotation of Employee Job Assignments

Some companies rotate job assignments to discourage employees from engaging in long-term schemes to steal from them. Employees realize that if they steal from the company, the next employees assigned to their positions may discover the theft. Also frequently companies require employees to take an annual vacation.

Control Over Cash Disbursements part 2

Stamp the supporting documents paid when liabilities are paid and indicate the date and number of the check issued. These procedures lessen the chance of paying the same debt more than once. Arrange duties so that those employees who sign checks neither have access to canceled checks nor prepare the bank reconciliation. This policy makes it more difficult for an employee to conceal a theft. Have an employee who has no other cash duties prepare the bank reconciliation each month, so that errors and shortages can be discovered quickly. Void all checks that are incorrectly prepared. Mark these checks void and retain them to prevent unauthorized use.

Bank statements may show (non-routine) deposits made to the depositor's checking account

Such deposits are made by a third party. For example, the bank may have received a wire transfer of funds for the depositor.

Internal Controls

Systems that ensure a company meets its obligations and that financial reports are accurate

4. Companies should maintain complete and accurate accounting records.

The best method to ensure such accounting records is to hire and train competent and honest individuals. Periodically, supervisors evaluate an employee's performance to make sure the employee is following company policies. Inaccurate or inadequate accounting records serve as an invitation to theft by dishonest employees because theft can be concealed more easily.

Board of Directors have the following specific responsibilities regarding the internal control structure:

The board of directors provides guidance to management. Because board members have a working knowledge of the functions of the company, they help shield the company from managers who try to override some control procedures for dishonest purposes. Often, an efficient board that has access to the company's internal auditors can discover such fraud.

Most companies use checking accounts to handle their cash transactions.

The company deposits its cash receipts in a bank checking account and writes checks to pay its bills. The bank sends the company a statement each month. The company checks this statement against its records to determine if it must make any corrections or adjustments to the cash balance on the books from information obtained from the bank statement.

A business establishes a petty cash fund by writing a check for, say, $100. It is payable to the petty cash custodian.

The petty cash fund should be large enough to make disbursements for a reasonable period, such as a month.

Companies replenish the petty cash fund at the end of the accounting period, or sooner if the petty cash fund becomes low.

The reason for replenishing the fund at the end of the accounting period is that no record of the fund expenditures is in the accounts until the check is written and a journal entry is made.

A copy of the purchase order can serve as a receiving report if the quantity ordered is omitted.

Then, because receiving department personnel do not know what quantity to expect, they will count the quantity received more accurately.

4. Foreign Corrupt Practices Act (FCPA)

This law requires a publicly held corporation to devise and maintain an effective internal control structure and to keep accurate accounting records. This law came about partly because company accounting records covered up bribes and kickbacks made to foreign governments or government officials. The FCPA made this specific type of bribery illegal.

Petty cash fund payments from the fund don't require journal entries at the time of payment

Thus, using a petty cash fund avoids the need for making many individual journal entries for small amounts. Only when the fund is reimbursed, or when the end of the accounting period arrives, does the firm make an entry in the petty cash account.

3. Control Activities:

To address the risks associated with each objective, management establishes control activities. These activities include procedures that employees must follow. Examples include procedures to protect the assets through segregation of employee duties and the other means we discussed earlier.

4. Internal control policies are effective only when employees follow them.

To ensure that they carry out its internal control policies, a company must hire competent and trustworthy employees. Thus, the execution of effective internal control begins with the time and effort a company expends in hiring employees. Once the company hires the employees, it must train those employees and clearly communicate to them company policies, such as obtaining proper authorization before making a cash disbursement. Frequently, written job descriptions establish the responsibilities and duties of employees. The initial training of employees should include a clear explanation of their duties and how to perform them.

Determine the outstanding checks by comparing the check numbers that have cleared the bank with the check numbers issued by the company.

Use check marks in the company's record of checks issued to identify those checks returned by the bank. Checks issued that have not yet been returned by the bank are the outstanding checks.

Bank Debit and Credit Memos

Verify all debit and credit memos on the bank statement.

Cash Short or Over Journal

When the fund is restored to its original amount, the credit to Cash is for the difference between the established amount and the actual cash in the fund. We would debit all vouchered items. Any discrepancy should be debited or credited to an account called Cash Short and Over. The Cash Short and Over account is an expense or a revenue, depending on whether it has a debit or credit balance.

2. Assignment of Specific Duties to Each Employee

When the responsibility for a particular work function is assigned to one employee, that employee is accountable for specific tasks. Should a problem occur, the company can quickly identify the responsible employee. The company can trace lost documents or see how a particular transaction was recorded. Also the employee given that task can provide information on about the task. Giving a task to someone comes with responsibility usually they want to perform well

Five Components of Internal Controls, according to the Committee of Sponsoring Organizations of the Treadway Commission

When these components are linked to the organization's operations, they can quickly respond to shifting conditions. The components are:

If you have a personal checking account, you also should reconcile your bank statement with your checkbook.

You can use the reconciliation form on the back of the bank statement to list your checks that have not yet been paid by the bank and your deposits not yet shown on the bank statement. Some small businesses use this form. Others prepare a separate bank reconciliation, which will be discussed in the next section.

Since cash is the most liquid of all assets,

a business cannot survive and prosper if it does not have adequate control over its cash.

Petty Cash Voucher

a document or form that shows the amount of and reason for a petty cash disbursement. Which should be signed by the person receiving the funds.

Imprest fund

a fund that has been advanced funds and is replenished when it becomes low. (Sometimes we refer to this fund as an imprest fund since it is replenished when it becomes low.)

The depositor's checking account is....

a liability —an account payable—of the bank.

To make sure a check cannot bounce and become an NSF check

a payee may demand a certified or cashier's check from the maker.

Small companies generally do not employ systems specialists and programmers. Instead, (these companies use off-the-shelf programs) such as

accounting, spreadsheet, database management, and word processing packages. The data created by use of these programs are valuable (e.g., the company's accounting records) and often sensitive. Thus, controls are also important.

The company prepares a bank reconciliation to determine its actual cash balance....

and prepare the correcting entry(ies) required to correct the cash balance in the ledger.

Outstanding checks

are those issued by a depositor but not paid by the bank on which they are drawn. The party receiving the check may not have deposited it immediately. Once deposited, checks take only a day or two to clear the banking system.

Common petty cash transactions are typically small in amount

can include purchases of postage, office supplies, and transportation.

n accounting, cash includes:

coins; currency; undeposited negotiable instruments such as checks, bank drafts, and money orders; amounts in checking and savings accounts; and demand certificates of deposit.

4. Internal auditing

consists of investigating and evaluating employees' compliance with the company's policies and procedures. Companies employ internal auditors to perform these audits. The auditors periodically test the effectiveness of controls and procedures throughout the company.

Internal Controls: accounting system

consists of the methods and records that identify, assemble, analyze, classify, record, and report an entity's transactions to provide complete, accurate, and timely financial information.

4. Internal auditors

encourage operating efficiency throughout the company and are alert for breakdowns in the company's internal control structure. They also make recommendations for improvement of the company's internal control structure.

Credit memorandum (credit memo)

explains an addition to the depositor's account

Businesses maintain a petty cash fund to pay for or reimburse employees

for minor expenditures that arise unexpectedly and may require quick access to cash.

Deposits in transit have been recorded in the company's accounting records but.....

have not yet been recorded in the bank's records.

Cashier's Check

is a check made out to either the depositor or a third party and written, or drawn, by a bank after deducting that amount from the depositor's account or receiving cash from the depositor.

Certified check

is a check written, or drawn, by a depositor and taken to the depositor's bank for certification. The bank stamps certified on the face of the check and puts the name of the bank and the date the bank official signs the certification. The bank certifies a check only when the depositor's balance is large enough to cover the check. The bank deducts the amount of the check out of the depositor's account the same time it certifies the check.

An NSF (not sufficient funds) check

is a customer's check returned from the customer's bank to the depositor's bank because the funds in the customer's checking account balance were insufficient to cover the check.

Debit memorandum (debit memo)

is a form used by a bank to explain a deduction from the depositor's account

Bank Reconciliation

is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company's books.

Bank Statement

is a statement issued (usually monthly) by a bank describing the activities in a depositor's checking account during the period.

Certificate of Deposit (CD)

is an interest-bearing deposit that can be withdrawn from a bank at will (demand CD) or at a fixed maturity date (time CD). Only demand CDs that may be withdrawn at any time without prior notice or penalty are included in cash.

Usually one individual, called the petty cash custodian or cashier

is responsible for the control of the petty cash fund and documenting the disbursements made from the fund. By assigning the responsibility for the fund to one individual, the company has internal control over the cash in the fund.

1. Control Environment:

is the basis for all other elements of the internal control structure. It includes many factors such as ethical values, management's philosophy, the integrity of the employees of the corporation, and the guidance provided by management or the board of directors.

The most common deposit in transit

is the cash receipts deposited on the last business day of the month.

The main purpose of a bank reconciliation....

is to explain the differences between the cash balance on the bank statement and the cash balance in the general ledger.

2. Then determine the Deposits in transit

is typically a day's cash receipts recorded in the depositor's books in one period but recorded as a deposit by the bank in the succeeding period.

When a company maintains more than one checking account

it must reconcile each account separately with the balance on the bank statement for that account.

It is important, in general, for assets especially like cash to ensure the following:

no employee has custody of the asset, authorization over the spending or disposal of the asset, or the recording in the accounting records of the transactions for that asset.

Postage, office supplies, and transportation are proper uses of petty cash

not payroll because that is a large amount

Internal Controls: control procedures

of a company are additional policies and procedures that management establishes to provide reasonable assurance that the company achieves its specific objectives.

Companies that operate in many widely scattered locations and have checking accounts with several different local banks

often use interbank transfers of funds. These companies may set up special procedures to avoid accumulating too much idle cash in local bank accounts.

Cash does not include

postage stamps, IOUs, time CDs, or notes receivable.

Internal Control Structures

protect its assets against theft and waste. ensure compliance with company policies and federal law. evaluate the performance of all personnel to promote efficient operations. ensure accurate and reliable operating data and accounting reports.

Credit memos

reflect additions for such items as notes collected for the depositor by the bank and wire transfers of funds from another bank in which the company sends funds to the home office bank.

Debit memos

reflect deductions by the bank for such items as service charges, NSF checks, safe-deposit box rent, and charges for notes paid by the bank for the depositor.