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Accounting Chapter 6, Reporting & Analyzing Cash & Internal Controls, Petty Cash

by: Katie Mulliken

Accounting Chapter 6, Reporting & Analyzing Cash & Internal Controls, Petty Cash ACCT2101

Marketplace > University of Georgia > Accounting > ACCT2101 > Accounting Chapter 6 Reporting Analyzing Cash Internal Controls Petty Cash
Katie Mulliken
GPA 3.91

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Accounting Chapter 6, Reporting & Analyzing Cash & Internal Controls. SOX, 7 principles of internal controls, limitations of internal controls, cash management, voucher system of control, petty ca...
Intro to Accounting 1
Class Notes
Accounting, accounting chapter 6, reporting & analyzing cash, internal controls, principles of internal controls, voucher, petty cash
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This 7 page Class Notes was uploaded by Katie Mulliken on Tuesday April 5, 2016. The Class Notes belongs to ACCT2101 at University of Georgia taught by Bhandarkar in Spring 2016. Since its upload, it has received 28 views. For similar materials see Intro to Accounting 1 in Accounting at University of Georgia.


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Date Created: 04/05/16
Chapter 6 – Reporting & Analyzing Cash & Internal Controls Internal Controls (IC)  Goal: to minimize fraud (fraud is never fully absent)  Used to monitor and control business activities  Help: prevent losses, help plan operations, monitor company and employee performance o Protects assets o Ensures reliable accounting (in accordance with GAAP) o Promote efficient operations o Urge adherence to company policies Sarbanes Oxley Act (SOX)  Requires managers/ auditors of companies whose stock is traded on an exchange (public companies) to document & certify the system of internal controls. Requirements: o Auditors must evaluate internal controls and issue internal controls report o Auditors of a client are restricted as to what consulting services they can provide that client o The person leading an audit can serve no more than 7 years without a 2 year break o Auditors work is overseen by Public Company Accounting Oversight Board (PCAOB) o Harsh penalties (25 years in prison + big fines) for violators  Section 404 requires managers document & asses the effectiveness of all I.C processes that may impact financial reporting 7 Principles of Internal Controls (created by COSO—Committee of Sponsoring Organizations) 1) Establish responsibilities  When specific people are assigned certain jobs, it’s easy to identify the source of error 2) Maintain adequate records 3) Insure assets & bond key employees  Employees are bonded when a company purchases an insurance policy, or a bond against losses from theft from that employee, so they know whose at blame for fraud 4) Separate recordkeeping from custody of assets  So they cannot correspond together to commit fraud 5) Divide responsibility for related transactions  “Separation of duties” 6) Apply technological controls  Cash registers, check protectors, time clocks, personal ID scanners etc. all improve control 7) Perform regular & independent reviews  Control environment and activities, monitoring, risk assessment, info and communication Technology & Internal Controls (technology puts more pressure on internal controls)  Reduces processing errors o Only if the manual data entry is correct!  Limited evidence of processing o Not everyone has access to finances…. & limited paper trails = harder to find fraud  Increased e-commerce o Like Amazon or E-Bay… includes more risk of credit card theft, computer viruses, impersonation  More extensive testing of records o Data can be manipulated into many different forms and statements to analyze  Crucial separation of duties Limitations of Internal Controls arise from… 1) Humans  Human Error  Negligence, fatigue, misjudgments, confusion  Human Fraud  intent to defeat for personal gain (example: management override) o To commit fraud, a person must be presented: opportunity, pressure, rationalization 2) Cost-Benefit-Analysis – dictates that costs of internal controls must not exceed their benefits  Ex: to protect assets, a company hires an armed guard. But cost of hiring/paying a guard to follow each customer around a store outweighs the benefit of preventing small thefts Cash — most desirable asset because other assets must be “fenced” or sold in a secondary market  Currency, coins & amounts on deposit in bank accounts, checking accounts, & some savings accounts. Also customer checks, cashier checks, certified checks, & money orders Cash Equivalents — short-term highly liquid investments that are: **Note** 1) Readily convertible to a known cash amount Liquidity 2) Close to maturity date, not sensitive to interest rate change(90 days/ 3 monthAvailability of a resource to meet short-term cash Ratio of Cash (& cash equivalents)to average daily cash expenses requirements. Cash & similar assets are Indicates # of days a company can operate without additional cash inflows called ‘liquid assets’ as they’re readily Cash Management used Responsibility of Treasurer Goals: Plan cash receipts to meet cash payments when due Keep minimum level of cash needed to operate Effective Cash Management:  Encourage collection of receivables o The quicker customers & others pay the company, the quicker the company can use that money  Delay payments of liabilities o The longer a company delays a payable account, the more time it has to use that money  Keep only the necessary levels of assets o Companies don’t want money tied up in idle assets, more cash to invest with productive assets  Just-In-Time-Inventory— inventory planned to be available/received at same time orders filled  Plan expenditures o Money should only be spent when it is available  Invest excess cash o Excess cash earns no return and should be invested Control of Cash Effective system of internal control that protects cash & cash equivalents should meet 3 guidelines: 1) Handling cash is separated from recordkeeping of cash (2+ people must share responsibilities) 2) Cash receipts are promptly deposited in a bank  Immediate deposits of all cash receipts prove a timely independence record of cash received 3) Cash Disbursements are made by check  To develop an independent bank record of cash disbursements Control of Cash Receipts Over the Counter Cash Receipts  Cash register with locked-in record of transactions  Compare cash register record with cash reported (easily detects fraud)  Should be recorded on a cash register at the time of each sale  Cash Over & Short— end of period, cash in cash register might not = record of cash receipts. Difference reported in cash over & out account (on income statement) recording income effects on cash over average & cash shortage Cash Receipts by Mail (opened by 2+ people)  Person who opened mail enter cash received list (sender name, amount, brief reason why cash sent) st o  1 ndpy sent to cashier (money sent to cashiers office) o  2 copy sent to record keeper in accounting dept. o  3 copy sent to clerk to ope ned the mail (copy of list is filed) Control of Cash Disbursements Where most theft/ fraud occurs Cash is controlled by making sure:  All expenditures should be made by check (only exception for small petty cash payments) o Person who signed check has nothing to do with the accounting transactions  Separate authorization of check signing & recordkeeping (deny access to anyone but owner)  Use a Voucher System (Projected cash receipts & cash disbursements often summarized in a cash budget) Voucher System of Control Voucher—an internal file used to store documents & information to control cash disbursements & to ensure that a transaction is properly authorized and recorded  Trail of documents you must go through before payment is confirmed  If amount is currently due, a check is issued. If not, voucher is filed for payment for its due date Voucher System—set of procedures & approvals designed to control cash disbursements & the acceptance of obligation.  Follows standard procedure for each transaction, even multiple purchases from same supplier  Only approved departments & individuals are authorized to incur such obligations  Voucher system begins when company incurs an obligation that will result in payment of cash It establishes procedures for:  Verifying, approving & recording obligations for eventual cash disbursements (potential payment)  Issuing checks for payment of verified, approved and recorded obligations Petty Cash System of Control Petty Cash—small amounts of cash held by some employees when writing a check is not practical  Used for small costs such as: postage, courier fees, repairs & supplies (business expenses only)  Petty cash activities are part of an imprest system which designates advance money to establish the fund, to withdraw from the fund, and to reimburse the fund  Petty cash account should be reimbursed when the account is nearing 0 Company Cashier decides how much $’s needed Petty Cashier gives $ to employees as needed  When petty cash is running low, petty cashier goes to company cashier & gets reimbursed to = original amount of petty cash in account  Accountant records the journal entries o A check is recorded with debit to petty cash (asset) & credit to cash account o Reducing petty cash fund = credit to petty cash  The person receiving the payment should sign a pre-numbered Petty cash receipt (or ticket)  Under Petty Cash system: Sum of all Receipts + Remaining Cash = Total Fund Amount Examples of Petty Cash:  Establish Fund ~ Oct 1. Company establishes petty cash fund for $400 o Petty Cash $400  Cash $400  Reimburse Fund ~ Oct 31. Petty Cashier decides to reimburse the fund. Following info taken from petty cash vouchers: o Travel Expenses $75 o Customer Lunches $45.50 o Express Mail Postage $55 o Misc. Office Supplies $40 ***If petty cash in box is $177… How much cash was disbursed for Petty Cash?  75 + 45.50 + 55 + 40 = $215.50  Amount of cash required to replenish the petty cash fund:  $400 – $177 = $223 Cash over & short = $7.50 (= the difference)  Journal Entry to Reimburse Fund: o Travel Expense $75 o Entertainment Exp. $45.50 o Postage Expense $55 o Office Supplies Exp. $40 o Cash Over & Short $7.50 ( debit cash over & short when short cash!)  Cash $223  To reimburse, credit cash, NOT petty cash!  If petty cash isn’t refunded (reimbursed) at end of period, financial statement shows: o Overstated cash asset o Understated expenses (or assets) paid out of petty cash *** If petty cash in box is $190… How much cash was disbursed for petty cash?  75 + 45.50 + 55 + 40 = $215.50  Amount of cash required to replenish the petty cash fund:  $400 - $190 = $210 Cash over & short = $5.50  Journal Entry to reimburse Fund: o Travel Expense $75 o Entertainment Exp. $45.50 o Postage Expense $55 o Office Supplies Exp. $40  Cash $210  Cash Over & Short $5.50 ( credit cash over & short when extra cash) Journal Entry to Increase Fund: Nov 1, Company decides to increase petty cash fund to $450  Petty Cash $50 o Cash $50  Journal Entry to Decrease Fund: Nov 1, Company decides to decrease the petty cash fund to $300  Cash $100 o Petty Cash $100 Bank Activities as Controls  Bank Account  Record setup by bank for a customer. It limits access to bank accounts, and all people authorized to write checks for the account must sign a Signature Card so they can verify  Each bank deposit is supported by a Deposit Ticket (form you fill out when depositing $, 1 copy to you, 1 copy to bank)  Checks – considered the same as cash (receive check = debit cash, send check = credit cash) o Negotiable tool with 3 parties: Payer (signer), Payee (receiver), Bank (drawer)  Electronic Funds Transfer—electronic transfer of cash from one party to another (no docs) (ATMs)  Bank Statement – at the end of each month Bank Reconciliation “Bank Statement” Prepared periodically to explain the difference between cash reported on the bank statement & cash balance on company’s books  Bank Debits your account when you Write a Check  Bank Credits your account when you Receive a Check o Basically, the bank records the opposite of what you record bc your $ is bank’s liability Why Bank Balance $ Your Balance May Differ (most likely temporary)  Deposits in Transit – check possibly hasn’t gone through to yet  Outstanding Checks – checks you write but haven’t been cleared by the bank yet  Bank Errors  Collections Made by the Bank – often notes receivable is left with the bank so they add it to your acct before you know about it  Interest Earned on the Checking Account  NSF Check ( bounces )  Service Charges – bank often charges service fees you don’t find out about until later  Book Errors Reconciling the Items Bank Balance Change = B (B+ add to bank, B- subtract from bank) Book/Depositor Balance Change = D (D+ add to book, D- subtract from book)  Deposits in transit B+  Outstanding checks B-  Bank errors B+/B-  Collections made by the bank (credit memos) D+  Interest earned on account (credit memos) D+  Non Sufficient Funds check (debit memos) D-  Service Charges (debit memos) D-  Book Errors D+/D-


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