Chapter 5 –Internal Control and Cash

Internal controls are policies and procedures used to safeguard assets, ensure accurate business information, and ensure compliance with laws and regulations.

To meet the objectives of internal control, management is responsible for designing and applying 5 elements-

  • contol environment
  • risk assessment
  • control procedures
  • monitoring
  • information and communication

Procedures that can be put into place by management to provide reasonable assurance that business goals, including the prevention of fraud, will be achieved include the following

  • Competent personnel, rotating duties, and mandatory vacations
  • Separating responsibilities for related operations
  • Separating operations, custody of assets, and accounting
  • Proofs and securities measures

Businesses use bank accounts as a tool to control cash. For effective control, the reasons for the differences between the cash balance on the bank statement and the cash balance in the accounting records should be determined by preparing a bank reconciliation statement.

Bank Reconciliation Statement

Cash balance according to bank statement
Add: Deposit in transit
Less: Outstanding cheques
+/– Bank errors
Adjusted Balance / Cash balance according to company books
Add: Amounts collected by bank , not recorded by the company
Interest earned (credit memo)
Less: Bank charges
NSF cheques (Not Sufficient Funds)
(anything labeled as Debit Memos)
+/- Bookkeeper errors
Adjusted Balance

Example:

The cash account for Wok Co. at November 30, 2004, indicated a balance of $16,190.95. The bank statement indicated a balance of $21,016.30 on November 30, 2004. Comparing the bank statement and the accompanying cancelled cheques and memoranda with the records revealed the following reconciling items.

a.Cheques outstanding totaled $5,169.75

b.A deposit of $4,189.40, representing receipts of November 30, had been made too late to appear on the bank statement.

c.The bank had collected $4,500 on a note left for collection. The face value of the note was $4000, and the balance represented interest on the note.

d.A cheque for $2,850 returned with the statement had been incorrectly recorded by Wok Co.as $2,580. The cheque was for the payment of an obligation to Kiser & Co. for the purchase of office equipment on account.

e.A check drawn for $1,375 had been erroneously charged by the bank as $1,735.

f.Bank service charges for November amounted to $25.

Instructions

Prepare the bank reconciliation for November 30, 2004.

Balance per bank $21,016.30 Balance as per cash account$16,190.95

Add: Deposit in Transit 4,189.40 Amount Collected by Bank 4,500.00

25,205.70 20,690.95

Less: Outstanding Cheques 5,169.75Less: Bank Charges 25.00

20,035.95 20,665.95

Add back cheque error Less error made by

Made by bank 360.00 bookkeeper 270.00

Adjusted Balance $20,395.95 Adjusted Company balance 20,395.95

Example to work on in class:

William’s Carpet Company received its monthly bank statement for is business bank account, with a balance of $54,620 for the month of March. The balance in the cash account in the company’s accounting system at than date was $59,310. After comparing the cheques written by the company and those deducted from the bank account, William’s accountant determined that all six cheques (totaling $5350) that had been outstanding on February 28 had been processed by the bank in March, and that five cheques written during March, totaling $2,800, were outstanding on March 31. A review of the deposits showed that a deposit on February 28 for $12, 610 was recorded by the bank on March 1, and a March 31 deposit of $10,200 was recorded in the company’s system on that date, but had not been recorded by the bank yet. The March bank statement showed a service fee of $20, a customer’s cheque in the amount of $70 that had been returned NSF, a bank loan payment of $700 that had been deducted automatically by the bank, and a customer’s note for $3500 that was collected by the bank for William’s Carpet and deposited in the account.

Prepare the bank reconciliation statement for March 31.