Principles of Accounting Module 6

check

1. a check is a written order to a bank to pay a specific sum of money to the party designated as the payee by the party issuing the check 2. every check transaction involves three parties -the bank, the payee, the drawer 3. sometimes has an attached remittance advice -informs the payee why the drawer (or maker) of the check is making this payment

certified check

1. a check written, or drawn, by a depositor and taken to the depositor's bank for certification

checking account

1. a checking account is a money balance maintained in the bank 2. it is subject to withdrawal by the depositor, or owner of the money on demand 3. a bank requires a new depositor to complete a signature card -provides the signatures of persons authorized to sign checks drawn on an account

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

1. a purchase requisition: a written request from an employee inside the company to purchasing department to purchase certain items 2. a purchase order: a document from the purchase department to the supplier requesting the specific items 3. an invoice: statement from supplier to the purchase requesting payment 4. a receiving report: a document prepared by the receiving department showing the descriptions and quantities of all items received from a supplier in a particular shipment

bank reconciliation

1. 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 2. 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 3. 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. according to AICPA, the internal control structure of a company consist of "the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved"

cash controls should include

1. account for all cash transactions accurately so that correct information is available regarding cash flows and balance 2. make certain that enough cash is available to pay bills as they come due 3. avoid holding too much idle cash because excess cash should be invested to generate income, such as interest 4. prevent loss of cash due to theft or fraud

internal control: control procedures

1. additional policies and procedures that management establishes to provide reasonable assurance that the company achieves its specific objectives -may pertain to proper authorization, segregation of duties, design, and use of adequate documents and records, adequate safeguards over access to assets, and independent checks on performance

internal control structures

1. an effective internal control structure includes a company's plan of organization and all the procedures and actions it takes to: -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

wire transfer

1. bank statements may show non-routine deposits made to the depositor's checking account. such deposits are made by a third party 2. wire transfer: an interbank transfer of funds by telephone

introduction to cash assets

1. cash is the most liquid type of asset 2. in general terms, the purpose of internal control is to ensure the efficient operations of business thus enabling the business to effectively reach its goals 3. management is primarily responsible for establishing and maintaining an effective system of internal controls, which also leads to producing reliable and accurate financial accounting information

cashier's check

1. 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 2. both certified checks and cashier's checks are liabilities of the issuing bank rather than the depositor

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

use of mechanical devices

1. companies use several mechanical devices to help protect their assets: -check protectors: punctures check amount -cash registers -time clocks -hire competent and trustworthy employees ---make it difficult for employees to alter company records

replenish of the petty cash fund

1. company's replenish the petty cash fund at the ending of the accounting period, or soon if the petty cash fund becomes low 2. sometimes called an imprest fund: a fund that has been advanced funds and is replenished when it becomes low

deposits

1. compare the deposits listed on the bank statement with the deposits on the company's books 2. determine the deposits in transit -typically the company has it recorded in one period while the bank in another -most common happen on the last day of the month

internal control: accounting system

1. 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

internal controls for computerized financial records

1. control computer access; secluded area, only authorized people 2. restrict the access of systems specialists (who operate the computer) to software programs and the access of programmers to the computer 3. require the use of passwords to access sensitive company data and confidential personal data

the three elements of an internal control structure are the

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

five components of internal controls according to the Committee of Sponsoring organizations of the Tread way Commission

1. control environment 2. risk assessment 3. control activities 4. information and communication 5. monitoring

establishing a petty cash fund

1. debit petty cash and credit cash 2. one of the conveniences of the petty cash fund is that payments from the fund require no journal entries at the time of payment

petty cash rules

1. debited to establish 2. debited to increase 3. credited to decrease 4. credited to terminate

five components of internal controls: control environment

1. ethical values, management's philosophy, the integrity of the employees in the corporation, and the guidance provided by management or the board of directors

five components of internal controls: risk assessment

1. examining the risks associated with each objective allows management to develop the means to control risks

source documents and internal controls

1. for optimal control, source documents should be serial numbered 2. since source documents serve as documentation of business transactions, from time to time firms check the validity of these documents

the bank statement

1. from the bank describes the activities in a depositor's checking account during the period (usually a month) 2. typically includes: -deposits made to the checking account during the period -checks paid out -deductions from the checking account for service charges, NSF checks, safe-deposit box rent, and check printing fees -other additions to the checking account from proceeds of a note collected by the bank for the depositor and interest earned on the accounts

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. sort checks and determine outstanding checks -issued but haven't been paid by the bank on which they are drawn

five components of internal controls: information and communication

1. information relevant to decision-making must be collected and reported in a timely manner -may come from internal or external sources

internal auditing

1. internal auditing consists of investigating and evaluating employees' compliance with the company's policies and procedures 2. internal auditors periodically test the effectiveness of controls and procedures throughout the company 3. internal auditors encourage operating efficiency throughout the company and are alert for breakdowns in the company's internal control structure 4. make recommendations for improvements of the company's internal control structure 5. companies should maintain complete and accurate accounting records

errors

1. list any errors 2. a common error is differing or mixing up the amount on checks when recording 3. deposits in transit, outstanding checks, and bank service charges usually account for the difference between the company's cash account and the bank balance

the basic control procedures for cash disbursements

1. make all disbursements by check or from petty cash -obtain proper approval for all disbursements and create a permanent record of each disbursement 2. require all checks to be serially numbered and limit access to checks to employees authorized to write checks 3. require two signatures on each check over a material amount -materiality is defined by the company 4. arrange duties so that the employee who authorizes payment of a bill does not sign checks 5. require approved documents to support all checks issued 6. 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 7. stamp supporting documents when liabilities are paid and indicate the date and number of the check issued 8. arrange duties so employees who sign checks neither have access to canceled checks nor prepare the bank reconciliation 9. have an employee who has no other cash duties prepare the bank reconciliation each month, so that errors and shortages can be discovered quickly 10. void all checks that are incorrectly prepared -mark these checks void and retain them to prevent unauthorized use 11. most companies use checking accounts to handle their cash transactions

Management, Board of Directors, and Auditors have specific responsibilities

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 2. the Board of Directors provides guidance to management 3. auditors: evaluate the effectiveness of the internal control structure

five components of internal controls: monitoring

1. monitor the effectiveness of the internal control structure to response well to serious problems

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

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

cash controls

1. of all the company's assets, cash is the most easily mishandled either through theft or carelessness 2. cash controls: control and manage cash

acceptable uses of petty cash

1. pay for or reimburse employees for minor expenditures that arise unexpectedly and may require quick access to cash 2. delivery charges, postage stamps, transportation, supper money for employees working overtime, and other small items

petty cash fund

1. permits small cash disbursements and still maintains adequate control over cash 2. 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

cash control principles

1. prepare a record of all cash receipts as soon as cash is received -most theft is made before a record is made of the receipt -easier to trace a theft when a record is made 2. 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 3. arrange duties so that the employee who handles cash receipts does not record the receipts in the accounting records -principle of segregation of duties 4. arrange duties so that the employee who receives the cash does not disburse the cash

internal control: control environment

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

personal computer environment

1. require computer users to have tight control over storage of programs and data 2. require passwords to gain entry into data files 3. permit only certain computers and persons in the network to have access to some data files

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 4. using mechanical devices

segregation of employee duties

1. segregation of duties requires that someone other than the employee responsible for safeguarding an asset must maintain the accounting records for said asset 2. also, it may be appropriate for employees to share responsibility to check one another 3. when a company segregates the duties of employees, it minimizes the probability of an employee being able to steal assets and cover up theft

control over disbursements

1. since a company spends most of its cash by checks, many of the internal controls for cash disbursements relate to checks and authorizations for cash payments

cash

1. since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have an adequate control over its cash 2. 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 deposits -only (certificates of deposit; an interest bearing deposit that can be withdrawn form a bank at will (demand CD) or at a fixed maturity date (time CD) that may be withdrawn at any time without prior notice or penalty are included in cash 3. cash does not include postage stamps, IOUs, time CDs, or notes receivable 4. in its general ledger, a company usually maintains two cash accounts--cash and petty cash -on the company's balance sheet, it combines the balances of these two accounts into one amount reported as cash

book reconciliation and bank reconciliation

1. since deposit in transit and outstanding checks appear on the bank balance side of the reconciliation, they require no entry in the company's books 2. when a company maintains more than one checking account, it must reconcile these accounts separately

rotation of employee job assignments

1. 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 employee assigned to their position may discover the theft 2. frequently, companies have the policy of requiring an annual vacation

petty cash errors

1. sometimes, the petty cash custodian makes errors in making change from the fund 2. debit all vouchered items 3. any discrepancies should be debited or credited to an account called cash short and over 4. the cash short and over account is an expense or a revenue, depending on whether it has a debit or credit balance

the execution of effective internal control

1. the execution of effective internal control begins with the hiring or employees -training ensures understanding of company policies 2. in publicly held corporations, the company's internal control structure must satisfy the requirements of federal law 3. Dec 1977, Congress enacted the Foreign Corrupt Practices Act that states a publicly held corporation to devise and maintain an effective internal control structure and to keep accurate accounting records 4. many companies use an internal auditing staff

decrease in the petty cash fund

1. the required entry to record a decrease in the petty cash fund debits cash and credits petty cash for the amount returned and deposited

five components of internal controls: control activities

1. to address the risks associated with each objective, management establishes control activities -these activities include procedures that employers must follow

documentations of the petty cash fund

1. to determine which accounts to debit, an employee summarizes the petty cash vouchers according to the reasons for expenditure 2. prevents reuse afterwards

bank reconciliation two sections

1. top that begins with the balance on the bank statement 2. bottom section begins with the balance on the company's books

bank debit and credit memos

1. verify all debit and credit memos on the bank statement

assignments of specific duties to each employee

1. when a company gives each employee specific duties, it can trace lost documents or determine how a particular transaction was recorded 2. the employee will be able to give specific information about that task -being responsible for specific duties gives people a sense of pride and importance that usually makes them want to perform to the best of their ability

debit memo and credit memo

1. when banks debit or credit a depositor's checking account, they prepare debit and credit memoranda (memos) 2. banks may also return these memos with the bank statement 3. debit memo: form used by a bank to explain a deduction from the depositors account 4. credit memo: explains an addition to the depositor's account 5. remember that the depositor's checking account is a liability--an account payable of the bank 6. 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

deposit slip

1. when depositors make a bank deposit they prepare a deposit ticket or slip -shows the date and the items that make up the deposit

petty cash voucher

1. when disbursing cash, the petty cash custodian prepares a petty cash voucher 2. petty cash voucher: a document. or form that shows the amount of and reason for a petty cash disbursement

Module 6

assets: cash