Chapter 6: Cash and Control of Cash

1. Cash Controls Bank Reconciliation Chapter 6: Cash and Control of Cash

2. Internal control over cash receipts: Establish responsibility for handling cash. Segregate duties for receiving, recording, reconciling cash receipts. Use mail receipts, cash register tapes, bank deposit slips. Store in safe areas with limited access. Independent verification by supervisor or treasurer. 1.Cash Controls

3. Internal control over cash disbursements: Establish responsibility for authorization. Segregate duties for approving, recording, reconciling cash disbursements. Use pre-numbered checks and match with approved invoice. Store in safe areas with limited access Independent verification by reconciliation. Cash Controls

4. Performed to reconcile the checking account to the bank’s balance. Items found in Bank Statement Deposits – recorded by the bank when deposited by the company. Cancelled checks (checks that have been written by the company and routed through the bank system back to the company) NSF Checks (Not Sufficient Funds) – reductions in the company’s bank balance because a customer’s check was returned NSF (the customer now owes the company again) 2. Bank Reconciliation

5. Items found in bank statement: Service charge – bank charge for monthly activity. Interest earned – bank payment to the company for interest earned by the company. Bank collections for the company – direct deposits by the bank for collection of receivables owed to the company. Items NOT found in bank statement: Outstanding checks (still not cleared the bank) Deposits in transit (not yet recorded by the bank) Other issues in the reconciliation – errors by company or by bank. 2. Bank Reconciliation

6. Process is similar to personal bank reconciliations, except that the company must reconcile, and correct, the general ledger balance. General format is to reconcile to a “true cash” or “correct cash” balance. Start with “Balance from Bank” and “Balance from Books” (or general ledger) at the end of the month. 2. Bank Reconciliation

7. Balance per bank at end of month $ xx Add: Deposits in transit xx Subtract: Outstanding checks xx Add/Subtract errors by the bank not yet reflected in bank balance. xx Correct balance at end of month $ xx Outstanding deposits should show up on the next reconciliation, and are usually posted within a few days of the current reconciliation. Outstanding checks may take longer to “clear” but should be posted within the next two or three bank statements. Reconciliation of Bank Balance

8. Balance per books at end of the month $ xx Add/Subtract errors and postings postings not yet recorded on books (including bank charges) xx Correct balance at end of month $ xx Note: any items included in this page of the reconciliation represent errors in the cash account, and must also be posted to the general ledger (correcting journal entries). Now work Exercise 6-3 and Problem 6-1A Reconciliation of “Book” Balance

9. First: Assume that the balance in the cash account in the general ledger at March 31, 2010 is $5,139.13. c. Outstanding checks? 112 42.92 117 307.00 120 10.58 122 75.67 $ 436.17 Problem 6-1A

10. Bal. per books 5,139.13 Bal. per bank 6,506.10 Problem 6-1A d. Collection of NSF 45.00 b. Dep. in transit 423.00 c. Outstanding cks. (436.17) d. Collection fee (4.50) e. Interest earned 4.30 g. Bank error (81.00) e. Bank charges (22.00) f. Error on deposit 1,250.00 Correct cash 6,411.93 Correct cash 6,411.93

11. Journal entries, to correct the cash account: d. Cash 45.00 A/R –NSF Checks 45.00 d. Bank Charges 4.50 Cash 4.50 e. Cash 4.30 Interest Revenue 4.30 e. Bank Charges 22.00 Cash 22.00 f. Cash 1,250.00 A/R 1,250.00 Problem 6-1A