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ACCN 2010 Chapter 7 Notes

by: Tara Watkins

ACCN 2010 Chapter 7 Notes ACCN 2010

Marketplace > Tulane University > Accounting > ACCN 2010 > ACCN 2010 Chapter 7 Notes
Tara Watkins

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About this Document

These notes cover the material from the Chapter 7 lecture
Financial Accounting
Christine Smith
Class Notes
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This 2 page Class Notes was uploaded by Tara Watkins on Monday April 4, 2016. The Class Notes belongs to ACCN 2010 at Tulane University taught by Christine Smith in Spring 2016. Since its upload, it has received 37 views. For similar materials see Financial Accounting in Accounting at Tulane University.


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Date Created: 04/04/16
Accounting 2010 Chapter 7 Notes  Fraud occurs when records are tampered with o To be considered fraud, an act must:  Be committed by an employee  Be beneficial to that employee  Be harmful to the company in some way  Affect the company’s financial statements  Fraud occurs due to weaknesses or deficiencies in the company’s internal controls o Reasons for fraud include:  1. Opportunity – the employee has the time and access to commit these acts  Opportunity is the most important reason  2. Rationalization - the employee feels that he/she is being underpaid and the company owes him/her more compensation  3. Incentive/financial pressure – the reason why an employee might feel the need to commit fraud (ex. could be due to excessive amounts of debt, inability to pay bills, etc)  Under the Sarbanes-Oxley (SOX) Act, Congress requires public companies to have sufficient internal controls to limit fraud as much as possible  Internal controls are the result of all policies and procedures that companies use to: o 1. Protect their assets (ex. locks on doors, security tags) o 2. Enhance the reliability of their accounting records (ex. having separate log-ins for each person, password protecting the files and computer and keeping passwords safe) o 3. Increase operating efficiency (ex. review each step of every process and make sure that it is being done efficiently) o 4. Ensure that the company and its actions comply with all laws and regulations (ex. making sure that everything complies with OSHA and EPA standards)  Internal controls are created and enhanced using the Segregation of Duties o Segregation of Duties is having different people in charge of each area of the business so that the records will be more secure  The four areas addressed are:  Custody  Authorization  Recordkeeping  Technology  One person should not be in charge of more than one of these areas o An exception to the Segregation of Duties is in small businesses where it would cost too much to hire that many employees  The best internal control for small businesses is the owner’s presence  Receipts are also a good method of internal controls in small businesses  The best internal control tool is bank reconciliation o Bank reconciliations are when you take the amount that the bank says is in an account and the amount that your records show and try to make them equal  If the amounts do not equal after a bank reconciliation is correctly executed, fraud is likely occurring  Differences between the bank and book amounts are caused by:  1. Deposits in transit (timing) -  2. Outstanding checks (timing) – a check that was written but hasn’t been deposited into the bank yet  3. Errors (on either the bank or the book side)  4. Bank memorandum (ex. banks crediting interest)  NSF (not sufficient funds) checks get sent back and subtracted o Accounts Receivable balance is reinstated o Checks are all or nothing payments. If the entire amount is not available, none of the amount is paid o Service charges may apply  Expense them or charge them to Accounts Receivable for the customer who wrote the NSF check  When performing a reconciliation, on the bank side: o Add Deposits in Transit o Subtract Outstanding checks o Add or subtract bank errors when applicable  When performing a reconciliation, on the book side: o Add/subtract amount of the differences in recording errors  Subtract when the amount written > the amount recorded (in the journal, debit an expense account and credit Cash)  Add when the amount written < the amount recorded o Add interest earned (in the journal, debit Cash and credit Interest Revenue ) o Subtract NSF checks (in the journal, debit Accounts Receivable and credit Cash) o Subtract Service Charges (in the journal, debit an expense account and credit Cash)  Timing errors (deposits in transit and outstanding checks) never occur on the book side


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