Chapter 7
Internal Control and
Cash
Prepared by:
Debbie Musil
Kwantlen University College
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Control Activities
• Establishment of responsibility
• Specific employees responsible for specific tasks
• Segregation of duties
• Documentation procedures (rules)
• Physical controls
• Over access to and use of assets and records
• Performance reviews
• Internal reviews by independent employees or internal
audit
• Independent external reviews by external auditors
• Other controls
• Bonding, rotation of duties, requiring vacations
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Limitations of Internal Control
• Cost/benefit: a system of internal control
can only give reasonable assurance
• Human element: fatigue, carelessness,
lack of training
• Collusion: two or more employees working
together to overcome segregation control
• Size of business: effective controls are
more difficult in smaller organizations
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Control Over Cash Receipts
• Responsibility
• Segregation of duties
• Documentation procedures:
• Use remittance advices, cash register tapes, deposit slips
• Physical controls:
• Store cash in safes and bank vaults
• Limit access
• Use cash registers
• Performance reviews:
• Daily cash counts and comparisons of receipts
• Other controls:
• Deposit cash daily; bonding; require vacations
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Debit Card Transactions
Mar.
Mar.21
21 Cash
Cash 795
795
Debit
Debitcard
cardExpense
Expense(10
(10xx$0.50)
$0.50) 55
Sales
Sales 800
800
To
Torecord
recorddebit
debitcard
cardsales
sales
Credit Card Transactions
Mar.
Mar.21
21 Cash
Cash 772
772
Credit
Creditcard
cardExpense
Expense($800
($800xx3.5%)
3.5%) 28
28
Sales
Sales 800
800
To
Torecord
recordbank
bankcredit
creditcard
cardsales
sales
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Control Over Cash Disbursements
• Made by cheque, EFT or petty cash
• Responsibility: only designated individuals can sign
cheques
• Segregation of duties:
• Different people approve and make payments
• Documentation procedures:
• pre-numbered cheques and account for numerical continuity
• Supported by approved invoice or similar
• Physical controls:
• Secure blank cheques,restrict access, print cheques
electronically or use writer
• Performance reviews:
• Compare cheques to invoices
• Reconcile bank statement regularly
• Other controls:
• Stamp invoices PAID
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Petty Cash Fund
• Used to pay small amounts
• Establish a petty cash fund:
Mar.
Mar.11 Petty
PettyCash
Cash 100
100
Cash
Cash 100
100
To
Toestablish
establishaapetty
pettycash
cashfund
fund
• Making payments from the fund:
• No accounting entry when payment is made
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Petty Cash Fund 2
Replenishing the fund:
• Prepares a summary of payments, supported
by receipts and other documents
• Used as a basis for accounting entry
Mar.
Mar.15
15 Petty
PettyCash
Cash 25
25
Postage
PostageExpense
Expense 44
44
Merchandise
MerchandiseInventory
Inventory 38
38
Miscellaneous
MiscellaneousExpense
Expense 55
Cash Over and Short
Cash Over and Short 11
Cash
Cash 113
113
To
Toreplenish
replenishpetty
pettycash
cashand
andincrease
increasefund
fundsize
sizeby
by$25
$25
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Reconciling the Bank Account
• Bank balance almost never agrees to
depositor’s balance
• Due to time lags and errors in recording transactions
• The two balances must be reconciled
• Called preparing a bank reconciliation
• Done by an employee who has no responsibilities
related to cash
• Balance per books and per bank are both
reconciled to their adjusted (correct) balance
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Reconciling Items
Balance per bank Balance per books
+ Deposits in transit + Credit memoranda
• Deposits recorded by • Amounts credited to
depositor that have not company by bank, such as
been recorded by bank interest earned
- Outstanding cheques - Debit memoranda
• Cheques issued & • Charges levied by bank
recorded by company against depositor’s account –
that have not been service charges, NSF
presented to bank charges, etc.
± Bank errors ± Company errors
= Adjusted cash balance = Adjusted cash balance per
per bank books
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Entries from Bank Reconciliation
• Each reconciling item required to calculate
adjusted cash balance per books must be
journalized
• To ensure that these are accounted for by
company
• Each reconciling item required to calculate
adjusted cash balance per bank is NOT
journalized
• Will be recorded by bank when received
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
Using Financial Statement
Information
• Management must properly manage cash:
• Too little cash and cannot pay bills when due
• Too much cash is not productive
• Cash flow statement
• Helps assess the management of cash
• Management report
• States management’s responsibility for
internal controls
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
© 2009 John Wiley & Sons Canada, Ltd.