Acct 230 1st Edition Lecture 14 Outline of Last Lecture I Internal Controls II Cash Outline of Current Lecture III Cash a Cash Cash equivalents b Controls over Cash Receipts and Cash Disbursements Current Lecture IV Cash a Cash Cash Equivalents i Cash 1 includes currency coins and balances in savings and checking accounts as well as items acceptable for deposit in these accounts such as checks received from customers ii Cash equivalents 1 short term investments that have a maturity date no longer than three months from the date of purchase b Controls over Cash Receipts and Cash Disbursements i Cash Controls 1 must safeguard all assets against possible misuse Again because cash is especially susceptible to theft internal control of cash is a key issue ii Cash Receipts 1 most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail iii Internal control over cash receipts could include the following steps 1 Record all cash receipts as soon as possible Theft is more difficult once a record of the cash receipt has been made 2 Open mail each day and make a list of checks received including the amount and payer s name These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 3 Designate an employee to deposit cash and checks into the company s bank account each day different from the person who receives cash and checks 4 Have another employee record cash receipts in the accounting records Verify cash receipts by comparing the bank deposit slip with the accounting records 5 Accept credit cards or debit cards to limit the amount of cash employees handle iv Acceptance of Debit Credit Cards 1 The term credit card is derived from the fact that the issuer such as Visa or MasterCard extends credit lends money to the cardholder each time the cardholder uses the card Cash in the amount of the sale automatically is deposited in the company s bank Credit card companies earn revenues primarily in two ways First the cardholder has a specified grace period before he or she has to pay the credit card balance in full If the balance is not paid by the end of the grace period the issuing company will charge a fee interest Second credit card companies charge the retailer not the customer for the use of the credit card 2 From the seller s perspective the only difference between a cash sale and a credit card sale is that the seller must pay a fee to the credit card company for allowing the customer to use a credit card v Cash Disbursements 1 Managers should design proper control for cash disbursements to prevent any unauthorized payments and ensure proper recording 2 Consistent with our discussion of cash receipts cash disbursements include not only disbursing physical cash but also writing checks and using credit and debit cards 3 All these forms of payment constitute cash disbursement and require formal internal control procedures vi Important elements of a cash disbursement control system include the following steps 1 Make all disbursements other than very small ones by check debit card or credit card This provides a permanent record of all disbursements 2 Authorize all expenditures before purchase and verify the accuracy of the purchase itself The employee who authorizes payment should not also be the employee who prepares the check 3 Make sure checks are serially numbered and signed only by authorized employees Require two signatures for larger checks 4 Periodically check amounts shown in the debit card and credit card statements against purchase receipts The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases 5 Set maximum purchase limits on debit cards and credit cards Give approval to purchase above these amounts only to upperlevel employees 6 Employees responsible for making cash disbursements should not also be in charge of cash receipts c Reconcile a Bank Statement i A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company s own records ii A company s cash balance as recorded in its books rarely equals the cash balance reported in the bank statement iii Differences in these balances occur because of either timing differences or errors iv It is the possibility of these errors or even outright fraudulent activities that make the bank reconciliation a useful cash control tool v Timing differences in cash occur when the company records transactions either before or after the bank records the same transaction vi Errors can be made either by the company or its bank and may be accidental or intentional vii Step 1 Reconciling Bank s Cash Balance 1 Cash transactions recorded by a company but not yet recorded by its bank include deposits outstanding and checks outstanding 2 Deposits outstanding are cash receipts of the company that have not been added to the bank s record of the company s balance 3 Checks outstanding are checks the company has written that have not been subtracted from the bank s record of the company s balance viii Step 2 Reconciling the Company s Cash Balance 1 Few examples of cash transactions recorded by the bank but not yet recorded by the company are items such as interest earned by the company collections made by the bank on the company s behalf service charges and charges for NSF checks 2 NSF checks Checks drawn on nonsufficient funds or bad checks from customers 3 In addition we adjust the company s balance for any company errors ix Step 3 Adjusting the Company s Cash Balance 1 As a final step in the reconciliation process a company must update the balance in its cash account to adjust for the items used to reconcile the company s cash balance We record these adjustments once the bank reconciliation is complete Remember these are amounts the company didn t know until it received the bank statement 2 We record items that increase the company s cash with a debit to cash Similarly we record items that decrease the company s cash by a credit to cash 3 Most of the accounts are easy to understand We credit notes receivable because the note has been received decreasing that asset account 2 800 We recognize interest revenue 220 as earned Cash outflows related to expenses advertising service charge and rent and asset purchases need to be recorded Finally we debit