CashCoin and currency

Checking, savings, and money market accounts

Undeposited, cashier, and certified checks

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Cash Equivalents

Commercial paper U.S. Treasury bills Certain money market funds

Readily convertible to cash Original maturity to investor of

three months or less

Examples:

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Cash Management Necessary to ensure company has

neither too little nor too much cash on hand

Tools• Cash flows statement• Bank reconciliations• Petty cash funds

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Cash balance, beginning of period

= Cash balance, end of period

Bank Statements

+Deposits+Customer notes

and interest collected by bank

+Interest earned

Canceled checks

NSF checks Service charges

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Bank Reconciliation – Step 1

Deposits in transit: Late period deposits not yet reflected on bank statement

•Trace deposits listed on the bank statement to the books. •Identify the deposits in transit. •Add to the bank balance.

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Bank Reconciliation – Step 2

Outstanding checks: Checks written but not yet presented to bank

•Trace checks cleared by the bank to the books. •Identify outstanding checks.• Subtract from the bank balance.

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Bank Reconciliation – Step 3

Credit memoranda: Interest earned, customer notes collected, etc.

List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.

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•List all other subtractions (debit memoranda) shown on the bank statement. •Subtract from the book balance.

Bank Reconciliation – Step 4

Debit memoranda: NSF checks, service charges, etc.

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Example of ReconciliationCash Account Adjustments: Debit Memoranda

Balance per books, June 30

$2,895.82Add: Customer note collected $500.00

Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45

Deduct: NSF check $245.72 Collection fee on note 16.50 Service charge for lockbox 20.00 (282.22)

Adjusted balance, June 30 $3,233.05© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different

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Bank Reconciliation – Step 5

Identify errors made by the bank or the company in recording the transactions during the period.

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Bank Reconciliation – Step 6Use the information collected in steps 1 through 5 to prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$

Adjusted balance $$$

Balance per books $$$

Adjusted balance $$$

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Example of Reconciliation

Balance per statement, June 30 $3,308.59Adjusted balance, June 30 $3,233.05

Bank Statement Adjustments

Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05

Cash Account Adjustments

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Bank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$

Adjusted balance $$$

Balance per books $$$

Adjusted balance $$$

Book adjustments are the basis for adjusting

entries

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Bank Reconciliation Adjusting Entries

Accounts Receivable 245.72Collection Fee Expense 16.50Rent Expense—Lockbox 20.00Cash 337.23

Notes Receivable 500.00 Interest Revenue 65.45 Supplies 54.00

To record bank reconciliation adjustments.

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Petty Cash

A check is writtenJournalize

establishment offund

Disbursementwith proper

documentation

Fund replenished

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Prepare the journal entry to record the petty cash fund replenishment

Petty Cash Transactions for Mickey’s Marathon Sports

Original fund balance $200.00Petty cash expenditures:

U.S. Post Office 55.00Overnight delivery service 69.50Office supply express 45.30

Coin and currency per count 26.50

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Accounting for Petty Cash

*$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 – $196.30 = $3.70 short

Journal Entry to Replenish Fund:

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Internal Control System

Consists of the policies and procedures necessary to ensure:• The safeguarding of an entity’s assets• The reliability of its accounting records• The accomplishment of its overall

objectives

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Sarbanes-Oxley Act of 2002 (SOX)

Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals

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Internal Control

Control Environment

AccountingSystem

InternalControl

Procedures

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The Control EnvironmentManagement’s competence and

operating stylePersonnel policies and practices Influence of board of directors

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The Accounting System

Can be manual, fully computerized, or a combination of both

Use of journals is an integral part of any system

Methods and records used to report transactions and maintain financial

information

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Internal Control Procedures

Segregationof Duties

SafeguardingAssets and

Records

ProperAuthorizations

IndependentVerification

The Design and Use of Business

Documents

IndependentReview and

Appraisal

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Proper AuthorizationsAuthority and responsibility go hand in

hand

Segregation of DutiesSeparate physical custody from the accounting for assets

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Independent Verification

One individual or department acts as a check on the work of another

Safeguarding Assets and RecordsProtect assets and accounting records from loss,

theft, unauthorized use, etc.

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Independent Review and Appraisal

Provide for periodic review and appraisal of the accounting system and the people operating it

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The Design and Use of Business Documents

Capture all relevant information about a transaction and assist in proper recording and classification.

Are properly controlled

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Limitations on Internal ControlNo system is entirely foolproof

• Employees in collusion can override the best controls

• Cost vs. benefit tradeoff

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Computerized Business Documents and Internal

Control

LO5

Cash receipts should be deposited intact in the bank on a daily basis

All cash disbursements should be made by check

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Control over Cash ReceiptsCash received over the counter (e.g., cash

sales)Cash received in the mail (e.g., credit sales)

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Controls over Cash Received over the Counter

Cash registers Locked-in cash register tape Prenumbered customer receipts Investigate recurring discrepancies

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Controls over Cash Received in the Mail

Two employees open mailPrelist preparedMonthly customer statements

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Document Flow for Merchandise

CheckPrepared

PurchaseRequisition

Receiving Report

Purchase Order

Invoice Approval

Purchase Invoice

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End of Chapter 6